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Be an SME, But Have Big Corporate Success

Make corporate governance work for your business.

Belinda Doveston

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Despite the fact that SMEs make up approximately 50% of the gross domestic product in South Africa, have a higher production output than large companies, greater capacity to innovate, a more direct impact on cultural and social issues, and a greater role to play in the future growth of an economy, many of them also have a high rate of failure. Although figures available vary, it is commonly thought that 50% to 75% of SMEs fail after five years.

In a study conducted by Grofin founder and MD, Jurie Willemse, these high failure rates are due to a poor quality of management and decision-making, lack of access to finance, and inadequate planning.

Sirdar South Africa’s Carl Bates explains in his book, The Laws of Extreme Business Success, that SME business owners simply fail to treat their business as they would if it were a large corporate.

Perhaps the future improved success of the SME sector requires the application of the same governance principles that are the cornerstone of the corporate environment. A 2008 study by the Rotman School of Business indicated that governance practices in Canadian SMEs lag five years behind larger companies.

Following big business lessons

With South Africa’s progressive King Code guiding governance in large corporates, there are important lessons to be learnt from these principles as SME business owners seek to ensure they do not become another failure statistic.

Corporate governance is a set of rules, practices and structures which aim to drive an organisation to achieve its goals, build sustainable growth and fulfil the investment objectives of its shareholders, while playing a positive role in the greater community.

According to the King Code of Governance Principles (King III), good governance requires leadership that focuses on ethics, responsibility, accountability, fairness, sustainability, and the moral duties found in the spirit of Ubuntu. You can begin to implement concepts of King III by focusing on the following areas:

1. Implement a formal board process 

This means a lot more than your monthly management meeting. Get independent directors not involved in the business to challenge your thinking on a regular basis with accountability and formal reporting. If your vision is exciting, you will find directors who are willing to support you with their time and experience. Be creative in how you compensate them, especially for the liability carried for being a director on your board. Avoid using family members on your board as independent directors.

2. Keep your roles separated

Recognise that there are differences between your roles as shareholder, director and manager and, as such, they require different decision-making processes.

Bates describes this principle in The Laws of Extreme Business Success as the Law of Three Hats – a shareholder focuses on their investment return, a director focuses on setting strategy and ensuring performance, and a manager ensures the job gets done.

Most SME owners get stuck in working in their businesses and forget their strategic responsibilities as a director and their investment goals as a shareholder.

3. Be prepared to be performance managed

As a business owner running your business, there is often no-one to hold you accountable for your actions. Who is watching that your personal expenses are not paid from cash in the till, or that you do not take Fridays off?

Good governance requires that even though you are the owner, manager or director of the company, you are willing to be performance managed just as you would expect of any other member of staff. That includes the risk of being fired should your conduct warrant it. Your board makes the decision whether you are capable of fulfilling your role as managing director or
general manager.

4. Keep your eye on sustainability

While many SMEs struggle to lift their view out of survival mode, King III requires that a business focuses on its long-term sustainability. This includes profitability, solvency, returns to shareholders, business practices that ensure the business endures in the long term, and that the business can run without you. If your business only pays its bills and your salary, then it is in no way geared for future sustainability.

Use the strategic focus and long-term view of your board to keep the business geared towards delivering the results required, and take action where necessary. This may include rethinking your business model, getting tougher with yourself and your team, cutting personal expenses out of the business’s overheads, setting clear targets and getting realistic about
your budget.

5. Get on top of your financials

The Achilles’ heel of the SME is the availability of accurate and timely financial accounts. This fundamental business practice is essential in staying on top of where you are and enabling you to make good decisions when you need to.

If this is not your strength, outsourcing this function may be the best decision you could ever make. If you are a (Pty) Ltd, then your fiduciary duties as a director are to understand your financials and make good decisions with accurate information.

While running two sets of books may seem like a good idea to put money into your own pocket, it does not create real and sustainable value in your business or promote trust for investors.

6. Manage your risk

Risk management plays a key part in good governance, and large companies have teams dedicated to it. Having a realistic view of the risks your business faces and their potential impact is essential. This allows you to plan accordingly and mitigate risks before they cripple you.

With the amended Companies Act coming into effect, directors carry a heavier responsibility for not taking action on risks that threaten a business’s solvency, legal status and operational ability. In order for SMEs to increase their positive impact on economies, business owners need to think differently about what ‘business as usual’ means. To create long-term growth and sustainability, applying the principles of governance is essential business practice.

If there is only one action step you take, it should be the recognition that a board of directors operating under the principles of governance, and including at least as many independents as there are executive directors, will take your mindset and your business to a new level of strategic thought, challenging debate, and improved decision-making.

Belinda Doveston is a business architect with extensive experience in both the theoretical aspects and practical aspects of SMEs. Along with lecturing on business topics, Belinda supports specialists to turn their knowledge into books. Contact her at belindadoveston@gmail.com.

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Business Landscape

5 Thoughts To Give You The Courage To Make Change

The only constant is change. If you can’t learn to embrace it, you’ll be left behind.

Allon Raiz

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In my experience, change is harder for those who perceive themselves to be succeeding than those who perceive themselves to be failing. Failure produces an irresistible motivation to reflect and to seek changes that will eliminate the pain you are feeling. It is those who perceive themselves to be successful who are most likely to stick to the status quo in a sea of change.

Change always happens: Contexts change, markets change, competitors change and so on. So, reinforcing a strategy and recipe for success seems the logical thing to do, right? If it ain’t broke, don’t fix it, goes the mantra. Why on earth would you mess with a winning formula?

The problem is that these winds of change are numerous and subtle, moving slowly and in different directions, making them invisible to the ‘successful’ eye. Business books are filled with case studies like Kodak who, despite acknowledging the threat of digital, were so entrenched in their current thinking that they sailed their ship right off the end of their flat earth.

Related: Successful SA Entreps Share Their Most Valuable Business Advice Ever Received

Here are five thoughts to provoke you and guide you in finding the courage to change.

1. This too will pass

Live by the law of impermanence that says that nothing remains permanent; neither failure nor success. This should create a level of healthy paranoia in successful entrepreneurs that drives them to anticipate what will change and when it will change, and to constantly live in a start-up mindset. Being aware, self-reflective and conscious of your bias is the best remedy for the allure of a permanent reality mindset.

2. Use what you have

One of the most common reasons that we do not want to change is having to admit that the resources we have so painstakingly and expensively built and maintained are not as useful anymore. The now popular and commonly-used terms of ‘radical’ and ‘disruptive’ conjure up scenarios of throwing away everything we have.

In most instances where change is required, the most successful way to change is to use the resources currently available in your business in a reconfigured manner. My rule of thumb is that any new strategic direction should incorporate no more than 20% of new resources, know-how or processes. This approach might not be radical or disruptive, but it ensures that there is a higher appetite for change in the organisation and a higher probability of it succeeding.

Related: Raizcorp: Business ‘Think’ has to come before the Business ‘Plan’

3. Focus on the positive energy change creates

Change is terrifying for many, but it creates a positive energy in a business. We often spend too much time trying to pacify employees who are fearful of change. In my opinion, you should rather be weeding these people out of your business as it grows.

They slow down progress and redirect valuable time and energy from focusing on the future and building towards that. It is important to focus your energy on the positive energy that is being released when change happens, such as excitement, new possibilities, and new growth opportunities for people and the business.

4. Plan your change, but also expect the unplanned

Effective change is ideally planned. Thought-through, documented and communicated phases are always better than a chaotic laissez-faire approach. But as Mike Tyson once said,

“Everybody has a plan until they get punched in the face.”

Life happens, the unexpected is ever-present in our lives, and we need to plan for this. Allowing a 10% to 20% tolerance for the unknown is a wise thing to do to ensure your expectations are catered for. Accepting the potential of random change in your planning will make it easier to accept and manage.

5. Expect Magic

After the dust has settled following a recent change or upheaval, and nerves and emotions have normalised, there will inevitably be an unforeseen positive outcome from the change. When you expect to find this outcome and appreciate the chemistry of time, resources and random events that created it, you will see change as the unavoidable path to these magical events.

It makes going through the change so much more tolerable when you know that when this phase of change is completed, there will be an outcome that will make it worthwhile. This expectation has never failed to deliver for me.

Entrepreneurs do not have the luxury of remaining still and constant, even for a short while. Mighty corporates are also  susceptible to the devastation of the law of impermanence. But, there is a different lens on this that I prefer; every day and every moment brings the gift of change to us which is always a door to a better, more fulfilled future.

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Business Landscape

5 Steps To Cutting The Fraud Of A Cash-Driven Society In Africa

African consumers still prefer cash transactions – here’s how to stop this from impacting on your business bottom line.

Chris Ogden

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There is an issue when it comes to transactions in Africa. That issue is cash. There are plenty of reports that point to the percentage of people who remain unbanked on the continent – it’s high. There are also reports that talk about how those who are banked use their accounts as little more than cash repositories – money in on payday, money out on payday. Why?

The African consumer doesn’t trust the system. They also face significant difficulties in rural areas that have limited card-based services and access to cashless transactions. And bank charges are hefty, eating into their pockets.

Pay attention: Cash is king

Your consumer isn’t banking savvy. They have a bank account because their employer wants to pay via EFT or because a sales rep got them enrolled, but didn’t explain exactly how the banking system could work to their benefit. They don’t trust banks, they don’t like the transaction fees and cash remains the currency of choice. In this world, cash is king. For the entrepreneur this cash-based society has both challenges and opportunities.

Related: Strong Company Culture Fattens The Bottom Line

The challenge: Cash is easy to lose

If the majority of your business transactions are carried out with cash, you run a big risk. Cash is easy to steal as transactions are rarely audited and accounted for. Unethical employees can put half in their pocket and half on the books, directly impacting on your income.  Paper money is hard to audit and track, it is expensive to bank, and often undeclared.

The challenges lie in the land where you are the entrepreneur receiving the cash, but the opportunities lie in helping other people to manage their cash.

The solution: find ways of tracking cash

The business has to be smart. Allow cash transactions to remain a part of the process, but use services that facilitate some of the collections and ease those headaches. Companies often use cash management companies, but their price tag makes handling of cash even more expensive.  Fraud is rife in the cash market. There are many ways to skin a cat, but handling cash in without technology to track it can be dangerous. Any mismatch of manual records and payments needs to be carefully analysed to pick up any discrepancies.

An alternative is to employ a service provider who can manage the cash transactions for you, but this will also be a cost to the business, Retail stores can collect on your behalf, but they want you to pay a service fee.  Understandable costs, but ultimately each one impacts on the bottom line.

The technology opportunity

One opportunity which has already started to edge into the mainstream is the use of eWallets and digital cryptocurrencies. Cash carrying individuals can swap these out for virtual monies that they can use to manage their payments. M-PESA in Kenya is a superb example, even if it never really got a foothold in South Africa.  For the entrepreneur that wants to engage with the cash empowered customer, these solutions could potentially help overcome the hurdles of trust and cost and ensure security on both sides of the fence.

Related: Your To-Do List Can Boost Your Bottom Line

The final countdown

What it boils down to is this – cash exists and cash-based transactions and attitudes are unlikely to change overnight so the entrepreneur needs to invest in solutions and systems that manage and audit transactions carefully. Ensure there are various control measures that can pick up anomalies, give people the opportunity to unpack these anomalies and then identify any issues.

Ultimately, if your business is to successfully avoid the multiple opportunities for fraud in the cash transaction society, then you have to invest in tools that will ensure your cash is properly managed and that you’ve chosen a well-known service provider to do so. Otherwise you’re just swapping cash fraud for technical fraud…

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Business Landscape

Are You Forgetting To Think About Your Business Strategy?

If you want to make money, save money and improve your efficiencies in 2018, you need to keep reviewing your strategy.

Ed Hatton

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It’s hard to keep upwith the pace of change. Economic uncertainty, disruptive technologies, fast-changing consumer needs and complex digital marketing means entrepreneurs have to move fast just to stand still. While managing constant change this is easy, but dangerous to forget about strategy. A couple of pertinent questions: What are your business and marketing strategies? Who owns them? How many people in your organisation understand them? When last did you review them to see if they are appropriate now, and likely to be appropriate in the next year or two?

Every organisation, from tiny businesses, clubs, NGOs and start-ups to much larger companies would benefit by taking time out to review key strategy issues. I suggest you examine whether your target markets are the right ones, and are still buying enough to meet your sales targets. You should ask if your sales channels, pricing policies, promotional messages and the media used are right for the times.

  • Do you really know what your target market needs and how those needs are changing?
  • Are your products and services providing solutions to those changing needs?
  • Does everyone in your organisation know what differentiates you from your competitors?
  • Do you have the right people?
  • Is your financial strategy still sound?
  • What about purchasing or manufacturing — is it still as cost-effective as it could be?
  • What are your competitors doing now?
  • What are they likely to be doing in future?

Related: Guru Ed Hatton on Marketing On A Tiny Budget

Get out of your comfort zone

These are tough questions, but if you ignore them, your organisation may drift along in its comfort zone in the hope that everything will work out. A company that continues to try to sell familiar products to anyone who will buy, and does not know what its competitors are doing is taking very high risks in a changing environment.

The risk increases if your prices reflect your efficiency or otherwise at product procurement rather than the value they deliver to customers. Risk rises to danger levels if few people actually know and understand the strategy, because they will usually keep their heads down and do the same old things.

Start the journey

Strategy development is like a journey. You know the starting point, you decide on your destination (your goals) and then you map out how to get there, which is your strategy. You have to consider the time it will take, the resources you will need, especially money and skills, and how you will know you are still on track (your milestones). Start at the beginning; ‘we know where we are’.

Do not assume everyone has the same idea of where you are, especially your management team; you may be surprised at the distance between perceptions of where you are now. Then set the goals and recognise that the future may not be what you envisage. You will have to be flexible to cater for change in a different economy.

Using questions like those in this article, map out the strategy of how to get there. An outside facilitator is a good idea for a strategy session but if you choose to run it yourself be careful that your management team does not only tell you what you want to hear.

Related: What Should You Cut First When Times Are Tough?

What great strategies are made of

Keys to good strategy in these turbulent times are to really understand your target market needs and provide solutions at a price that the customer regards as fair value. Two other ideals are to provide the products or services in a manner convenient to the customer rather than to you, and to inform the customer of the advantages of your solution in a manner and in media that the customer trusts. You may recognise the venerable 4Ps of marketing in a new guise; outwardly focused, concentrating on the customer.

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