Stimulating The SME Sector: What Can Government Do Differently?

Stimulating The SME Sector: What Can Government Do Differently?

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The South African Institute of Chartered Accountants (SAICA) commissions an annual Small and Medium Enterprises (SME) Insights Survey with several objectives: To canvass SMEs’ opinions and perceptions, to help SAICA members in small and medium practices (SMPs) to understand ways to better serve the small business community, and to assemble data that will be of use to government policymakers in their quest to enable SMEs as the primary driver of job creation, as outlined in the National Development Plan (NDP).

More than 1 300 small and medium enterprises (SMEs) were canvassed in the 2015 survey, a significant increase on the 800 respondents who participated in 2014. SAICA are calling for SMEs to participate in the 2016 survey and to keep the pressure up on law makers. The link to the 2016 survey is: SMME Survey 2016.

One of the findings in the 2015 survey report indicates that if government wants to achieve NDP targets of 10 million new jobs, with the SME sector responsible for 90% of new employment by 2030, it should be prepared to accept that some things have to be done differently.

The survey results show unequivocally that the SMEs that have been in business the longest generally have the highest turnover, and employ the most people. So although the creation of new SMEs is very important, it is equally important to acknowledge that meaningful job creation only begins when SMEs are achieving annual turnover of R2-million or more.

Related: How SMEs Can Defeat The Red-Tape Bugbear

Given that over 60% of SME start-ups fail within two years, and only 20% achieve long-term stability, the research findings suggest a two-pronged approach by government may be required: To encourage more SME start-ups and to provide them with strong financial access and technical support, and actively to encourage growth in established SMEs that have survived the critical first few years.

 

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Longevity vs turnover for SMMEs

Longevity vs employment in SMMEs

Top reasons for SME failure

Asked what they saw as the main factors behind the failure of SMEs, the survey respondents’ three top factors are revealing: Their debtors pay them late, they are not good at managing cash flow and they do business with clients who don’t pay them.

From all three top responses, it is clear that unreliable cash flow is one of the primary reasons why businesses fail. In a July 2015 report on levels of optimism among South African SMEs, the CFO of specialist SME lender Business Partners, Ben Bierman, said: ‘Cash flow is a constant challenge for SMEs, and late payments or non-payment is one of the largest risk factors impacting a small business’ sustainability.

‘Late payment can be disastrous for an SME’s cash flow – as they are unable to absorb these payment delays as effectively as larger companies do – and can potentially lead to the failure of an otherwise sound company.’

The perception that government at all levels pays late is unsurprisingly then, one of the major reasons why 72% of the survey sample does no business with government at all.

If government is to support and develop SMEs – particularly those that achieve B-BBEE compliance and are majority or wholly black-owned – by channelling its procurement spending to qualifying SMEs, it needs to create a culture of swift payment by government at national, provincial, municipal and parastatal level.

The KPI announced by former Finance Minister Nhlanhla Nene in the 2015 Budget, which will oblige financial officers at all levels of government to ensure payment for services to SMEs within 30 days, could go a long way to removing this obstacle to SME development – as long as it is properly implemented, monitored and enforced by the Treasury.

The fourth factor named as a reason for SME failure in the 2015 SME Insights Survey is that they start with less capital than they need.

Related: Making Government Business More Attractive To SMEs

Combined with cash flow instability, insufficient start-up capital can quickly prove fatal to SMEs. Although government does provide a substantial amount of finance and support for start-ups through entities such as SEFA, the Department of Trade and Industry and the Black Business Supplier Development Programme, another survey by online payroll and accounting provider Sage earlier in 2015 revealed that 96% of South African start-ups receive no assistance, financial or otherwise, from government.

The problem appears to be mainly a lack of awareness of the available government and private sector funding, so a proactive step would be for government and big business to collaborate on educating more SMEs on their capital funding options.

As Ivan Epstein, President for Sage International and Chairman of Sage Foundation said: ‘One of the biggest barriers to the success of SMEs in South Africa is education. It would be a wonderful, positive opportunity to work with government to help SMEs face challenges like regulatory compliance, access to finance, skills development and mentoring.’

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