South African SMEs struggling to survive

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The majority of South African small and medium enterprises (SMEs) are struggling to survive, showing a decline in employment and turnover contrary to global trends.

This is according to the 2015 SME Growth Index, supported by independent private sector development and research company SBP with additional funding from the Friedrich Naumann Foundation for Freedom and South Africa’s National Treasury.

The index found just over one in five South African SMEs reported a decline in turnover from the previous year, while a further 20 per cent reported zero growth in turnover during the same period.

“The signs are crystal clear. The business climate for SMEs is becoming ever more hostile. There needs to be a quantum change in government’s thinking if conditions are to become any better for SMEs to grow, employ more people and prosper,” the report said.

Just 56 per cent of companies reported an increase in turnover at an aggregate annual increase of just 11 per cent, which was an improvement on the nine per cent recorded in 2012 but down from an average of 13 percent in 2011.

The comments on the need for governmental intervention were based on the finding that “burdensome regulations” represent the top factor impeding business growth for 40 per cent of firms. Nearly 80 per cent of companies said the business climate is becoming increasingly hostile, the highest percentage since the SME Growth Index base year in 2011.

Lack of skills, local economic conditions and cost of labour were other factors SMEs said inhibited the growth of their firms, while over 75 per cent reported that the amount of red tape has increased, up two percentage points from the previous year.

“South African firms are operating under severe and adverse circumstances, which firms in competitor economies may not have to contend with,” the report said.

“The challenges of the overall business environment appear to be driven mainly by domestic factors, rather than global conditions.”

Over 38 per cent of companies reported a significant cash-flow problem, up two percentage points from the previous year, while a large proportion of these firms attributed this to late payments from their clients and a slowdown in economic activity. Cost increases and bad debts were other factors.

“Customers are dragging their feet; those that usually paid in 30 days are now only paying in 60 days. It puts a huge pressure on the business,” said one panellist.

The number of firms reporting a decrease in staff increased for the first time since the beginning of the index, to 21 per cent from 18 per cent.

“The shrinking role of small firms as job creators in South Africa has a troubling dimension,” the report said.

“Not only could they be sources of dynamism and economic growth for the country – as they are in other economies – but as previous findings from the SME Growth Index show, smaller firms employ the type of people whose labour market characteristics mirror those of the unemployed and most marginalised in our labour force.”

Disrupt Africa reported last week now is the time for South African SMEs to capitalise on the country’s “gloomy” economy and business environment, finding gaps in the market larger corporations are unable to exploit.

This is the view of Christo Botes, executive director at South African risk finance firm Business Partners, who says the tighter internal structures of larger corporations hinders their ability to adapt timeously to changes in the market.

This creates gaps for smaller businesses to fill, with Botes using an analogy he says is fitting to describe the situation: “Big ships take long to turn, whereas smaller ones are able to turn quicker and move swiftly along.”

“Smaller businesses are agile and have the ability to quickly overcome various obstacles to establish and attain longevity. Compared to bigger corporations, smaller businesses are easily adaptable to movements in the market due to their size,” he said.

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Passionate about the vibrant tech startups scene in Africa, Tom can usually be found sniffing out the continent's most exciting new companies and entrepreneurs, funding rounds and any other developments within the growing ecosystem.

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