Theory vs. Reality of Creating Sustainable SMEs

Theory vs. Reality of Creating Sustainable SMEs

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South Africa has an extremely high failure rate where business start-ups are concerned. Why?

There are several contributing factors. One is that there is a gap between the theory and reality involved in starting a business and making it survive. Business theory is great in a business school, but is a far cry from the reality that an entrepreneur experiences on the ground.

A high attrition rate has to be expected and accepted, as experience dictates that out of 1000 opportunities, about 100 are worth considering. Of this 100, ten are worth investigating, and ultimately one is worth investing in.

You have a rather controversial view on how the failure rate can be reduced. Would you like to share it?

We need structures that help people fail quickly.  A person with a business idea should have it examined by people with the necessary skills to give guidance on what market segments need to be addressed, costs, pricing models and other essential basics. If the essential elements are missing, they can advise the potential entrepreneur to either abandon or continue with planning.

This means that reality will be addressed before a person has committed their life savings, house and other assets to finance a business that could be fatally flawed from the start.

This would save individuals from making costly mistakes, and would also help address a feeling held by many potential entrepreneurs that there is no money available for small businesses. Money is available – it is the business plans that don’t meet requirements.

 

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If the money is available, why do entrepreneurs battle to find appropriate funding from bodies that have been set up for this purpose?

Resources are disjointed. Policymakers are often naïve when assessing needs and putting policies into action.  This is because they often have no experience in running or starting businesses of their own, whether in the private or public sector.

Again, theory and reality do not correlate. 

Cash flow management is often cited as a major problem for SMEs. Are there other important financial factors that entrepreneurs should pay attention to?

Working capital is equally important. There is a strong culture of BEE enterprise development in South Africa that is very effective. SMEs often become part of the supply chains of major corporations and government departments, and are asked to structure their enterprises so that they can be awarded contracts for specific services.

Unfortunately, the small business is left to finance all elements of the deal to the point where service delivery takes place. The promise is that payment will be made within 90 days. In several instances, this doesn’t happen and the SME is left having made capital inputs that need to be funded.

For many, this spells the end of their small business, as they do not plan for this, or have the ability to access the necessary funding.

Ironically, when a small business fails the system is wrongly blamed.  In many cases, the fault lies with the awarder of the contract that has the money but holds it back for 120 days or more to bolster its balance sheets.

Is there a way out of this ‘catch 22’?

Payment terms and credit need to be viewed differently.

In Mexico, they’ve tackled this problem by establishing a body called ‘Nafin’. The equivalent of South Africa’s IDC, it has a section that offers reverse factoring or discounting.

When an SME is given a government contract, information regarding the deal is placed on an electronic noticeboard. Banks access the system, choose an applicable contract and discount the invoice, providing the SME with cash. The full invoiced amount is ceded to the bank. It’s simple and effective. 

What are your thoughts regarding the announcement earlier this year of South Africa’s Ministry of Small Business?

The minister chosen for the task, Lindiwe Zulu, has a reputation for getting things done. She appears to be speaking to the right people, and many share the view that her plans for the ministry are positive.

It is import to note though that SMEs tend to thrive in fast-moving, fairly unregulated environments. If the new ministry embraces this mind-set, it will be a massive success.

While the ‘Think Big’ series has concluded on TV screens, episodes can still be viewed online by visiting www.standardbank.co.za/thinkbig. For an array of additional tips and tools on how to start, manage or grow a business, visit bizconnect.standardbank.co.za.

Kevin Fleischer
Kevin Fleischer holds a BA in Economics from Wits, an M.Phil (Finance) from Oxford, and has extensive experience in the small business sector. Described in his own words as a ‘maverick angel investor’, he is a founder member and former CEO of Blue Catalyst, established by the Gauteng government as a venture capital support network. In the late 90s, he founded Letsema Investments and as MD was involved in early BEE policy formulation, the setting up of labour union investment groups and the structuring of leveraged investments in listed companies