A lack of adequate financial management and company administration is the cause of most startup failures in South Africa, though lack of funding and support also plays a part, according to Darlene Menzies, chief executive officer (CEO) of developed business software product SMEasy.
Menzies said though the small business sector in South Africa is growing rapidly, research has shown 86 per cent of new businesses in the country fail, with very few companies making it beyond their first year and only 50 per cent surviving past year three.
“This is a concerning situation that must be more proactively addressed as the country is relying on the SMME sector. As the engine room of the economy – it has the potential to significantly reduce our high levels of unemployment,” Menzies said.
She said startups should acknowledge and understand the reasons for these failures in order to address them, with failures often caused by a lack of awareness of the multitude of things necessary when building a business, including regulatory requirements and branding and marketing administration.
“Compliance requirements are onerous, such as those for our tax system; few entrepreneurs have the know-how to meet them all with ease,” she said. “Often business owners find out too late about the required registrations or thresholds and have utilised their available money for operations, later finding out they have tax incurred liabilities they haven’t budgeted for. This issue alone is causing many small businesses to liquidate.”
Menzies admitted much of this apparent ignorance was due to a lack of support and assistance afforded to new businesses, with little easily accessible information and effective support available to assist entrepreneurs in the early phases of business.
“Entrepreneurs across the country are running from pillar to post re-inventing the wheel on the basic essentials; this is a waste of valuable time, money and energy during the crucial early years,” she said. “Entrepreneurs need one place to go to get a comprehensive list, complete with tips and advice, of what they should be addressing in the setting up of their business.”
She said small businesses were also struggling when it comes to accessing credit or finance, especially seed funding or bridging finance.
“Banks seldom extend credit to startup and early stage businesses. Owners often have no proven managerial skills and they can’t provide financial records to prove their liquidity. Banks don’t lend based on the future potential of the business they want to see the historical track record,” Menzie said.
“Where funding is available red tape and vetting processes make it virtually impossible to actually get the money. That’s if the business owner is even aware of where and how to access the funds in the first place.”
Yet she said entrepreneurs should help themselves by making sure their business administration was up to scratch.
“If you examine the startups that have failed, you’ll likely find they were good at doing business but not so good at the business administration side in addition to the issues outlined above. The reality is that most entrepreneurs have limited accounting or financial know-how and subsequently struggle to keep proper financial records,” she said, adding that research shows that on average a small business runs four to six months behind the current month in its record keeping.
“If you took a closer look at many a failed business you’d probably also see that the business didn’t have a reliable system for creating and tracking customer quotes and invoices and didn’t produce staff payslips. Often, the business “filing system” involved piles of papers stored haphazardly on a desk or ‘stored’ in a box somewhere waiting to be given to a bookkeeper or accountant,” Menzies said.
“You’ll likely find that the business owner didn’t keep track of the use of their personal cash within the business or it wasn’t properly recorded and they didn’t manage their cash flow. Consequently the business would have struggled to produce monthly management accounts and didn’t have annual financial statements.
“Without financial statements, securing finance from a bank or an investor is virtually impossible. Poor financial management impacts on the company’s ability to obtain a tax clearance certificate and a BEE certificate, which further hampers efforts to secure business.”