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The Domino Effect: A spiralling disease of South African businesses escalating culture of non-payment with little or no repercussion

Despite what government says about entrepreneurial spirit being the backbone of the South African economy, a system has been allowed to develop that facilitates an inordinately high level of non-payment. Liberal legislation, dysfunctional courts and the tardiness of certain provincial departments in paying their own suppliers has created an environment where defaulters run rampant and the good guys go down.

Kevin Bloom

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“How did I get here?”

On the list of questions a business owner asks himself when the sheriff arrives to shut down his premises, this has got to be number one.

It’s a question that’s usually asked head in hands, heart rate up near 170 beats per minute, mouth bone dry. It echoes in the brain, mocking and taunting, until it splinters off into the next set of questions.

What will I tell my wife? How will I pay the kids’ school fees? Who’ll help me start again?

Thing is, loaded as it is with so much emotional weight, “How did I get here?” is a question that’s impossible to answer with any real clarity until at least six months after a business has been liquidated. When the truth finally reveals itself, it’s often a combination of inefficient management, difficult market conditions and under-trained staff that’s identified as the source of the bankruptcy. Sometimes a poor choice of business partner is the reason; sometimes it’s just plain bad luck. But if six months down the line the only legitimate explanation for the business going bust is that too many clients decided they could get away without paying…well, that’s a particularly bitter pill to swallow.

Unfortunately, an increasing number of bankrupt South Africans seem to be arriving at just this realisation. Because if you were (or still are) a local business owner, chances are the following scenario is frighteningly familiar:

Your services are supplied to a customer, who’s apparently satisfied. He receives your invoice and no complaints are lodged. Thirty days come and go. At 45 days you put in a gentle phone call, reminding him that the account needs to be settled. He reports a cash flow problem, says he’s waiting for a major payment himself. He asks if he can make the deposit at the end of the month. You understand his dilemma all too well, so you agree. But sixty days come and he starts avoiding your calls. You leave messages, resend invoices. Nothing. Off goes the letter of demand. At 180 days you accept that the guy just isn’t going to pay.

Your next step is to call the lawyers. The case is postponed twice, and then the clerk in the magistrate’s court says that the file has gone missing. You settle the lawyers and cut your losses. You’re a bit nervous about calling in a debt collector, but you do it anyway. Still, as rough and intimidating as he is, the debt collector can’t help. It’s now 18 months later, and your customer’s gone under. That week is the first time in your business career that you extend payment to one of your own suppliers beyond ninety days.

The domino effect of non-payment, as described above, is as inevitable as it is disastrous. Peter doesn’t pay Paul so Paul doesn’t pay Patrick; businesses start shutting down and the economic growth rate slows. Ideally, it’s the function of government to prevent such an outcome – heavy fines for breach of company law and the incarceration of repeat offenders are typical measures a government may take. But what happens when the government itself appears to be short-changing suppliers?

Earlier this year, the John Robbie show on Talk Radio 702 exposed the fact that a number of suppliers to certain Gauteng public enterprises were not being paid for services rendered. It was alleged on the show that the Gauteng Shared Services Centre (GSSC), the department that handles accounts for the province, has a payment backlog running into the hundreds of millions. The GSSC, given the right of reply, refuted the allegations – they accused suppliers of trying to defraud the department by delivering more goods than the provincial government had ordered. In an attempt to unravel the confusion, Entrepreneur magazine managed to persuade one of the callers on Robbie’s show to go on record again.

The caller, Reg Jagger, is a director at Viking Medical, a company that supplies medical goods to three Gauteng hospitals – Joburg Gen, Pretoria Academic and Garankuwa. In this capacity, Jagger tells Entrepreneur, he has been dealing with the three public hospitals for twenty years. It was only when the province’s payment system became centralised, he alleges, that his difficulties arose. “For the last five to six years their accounts have been falling further and further into arrears. It’s a constant situation of two or three payments being missed and then falling off the edge.”

He provides an example. If he invoices for R500 000 per month, he says, the most he can expect to receive is R450 000 over three months. The remaining R50 000 becomes a “query” that’s never dealt with.“I have a credit lady who’s on their backs every two weeks. They keep on asking us to supply proof of delivery and invoicing, and when we do they keep on losing it and asking for it again. So now we leave it all in a central file where we can just photocopy and redeliver.”

Asked if the staff at the GSSC seems keen on helping, Jagger chuckles. “They say they’ll do everything they can, and I think the will is there. But the people in that office are way out of their depth. There’s not nearly enough training.”

In total, Jagger says, according to a survey conducted by SAMED – the body that represents the South African medical device industry – companies like his are out about R100 million. As for Viking Medical itself, the outstanding amount is R3,5 million. “We are fairly fortunate that it doesn’t affect us badly. We’re a very conservative company and we’ve reinvested in ourselves. But I think for small players it’s catastrophic. We’ve had one or two companies fold on us because of this.”

Whatever the merits of the GSSC’s counter-allegations, it’s apparent that on a national level the South African government doesn’t view non-payment in an exceptionally harsh light. A recent edition of Entrepreneur magazine sought the advice of Lindie Engelbrecht, CEO of the Institute of Directors, on certain clauses in the New Companies Act, which was signed into law on 8 April 2009. Asked what the Act says about bad payers, Engelbrecht responded that “once a company is in business rescue, [its] creditors have to continue supplying the company as long as it is on better terms than before business rescue [was] implemented.” Meaning that if you’re an existing supplier to a company, you have to continue doing business with that company regardless of non-payment.

It could be termed “supplier loyalty”, and the point is to give a customer in financial straits enough time to recover. But many local business owners are not fans of what they consider an overly liberal – and, on the grassroots levels, downright dysfunctional – set of legal parameters. One such person is the managing director of a medium-sized media company based in Johannesburg, who agreed to be interviewed for this article on condition of anonymity – let’s call him Burt Baker, and his company Playa Media. Baker has written off R500 000 to bad debt in the current financial year, he says, and in the previous year his write-off was R425 000. He explains the situation in an incredulous tone.

“Logic tells you that if company X owes, say, R900 000, what you do is you sue them and you get your money back. But it doesn’t work like that. What happens is something else entirely. If you’re lucky, you’ll get some money back only 50% of the time.”

Baker’s operational manager, a young woman with a solid background in legal and administrative affairs says that they’ve recouped around R60 000 only of the R925 000 through the legal system but that lawyers’ fees have amounted to over R80 000, a net loss of R20 000. The key issue, it appears, is with the magistrate’s court. “Files go missing,” she says, echoing the hypothetical scenario above. “There are postponements and more postponements.” Of course the condition of the magistrate’s court in South Africa is a matter of public record.

Trainee reporters from the Investigative Journalism Workshop at Wits University, for example, discovered that at the new premises of the Randburg Magistrates’ Court, which was opened in 2005 at a cost of R53 million, courts 11 and 18 were filled to the brim with boxes containing files from prior to 2000. Clerks told the journalists that there’s no archiving system to speak of, that anyone can come in and rifle through the documents, and that hundreds of files are impossible to find.

For Baker, the equation is simple. “If you don’t get your money immediately, the people who owe you will disappear.” What he’s suggesting is that it’s likely the debtors will eventually go into liquidation, which is when you can kiss all hope goodbye. And while on a certain level this is an inevitable fact of business life, it’s only recently that Baker – who’s been at the helm of his company for almost two decades – has noticed things deteriorating. “It seems that in the last two years the amount of defaulting has rocketed beyond previous levels. It preceded the global downturn, which means it’s a specifically South African problem.”

Baker terms the problem our “local culture of non-payment”. It’s a culture endorsed by government, he avers, because there is no system in place for punishing offenders. “In Sweden, it’s illegal to stretch payment beyond thirty days. Here you have big businesses, some of the country’s top brands, putting immense pressure on small to medium-sized enterprises that simply don’t have the cash flow to sustain terms of sixty or 120 days. You also have small to medium-sized companies who stretch their own payment terms to suppliers past 180 and even 240 days, and then go under.”

It’s got to the stage that Baker now ignores any debt under R10 000. His ops manager spends at least three hours of her working day on the matter, he says, time that could be better spent driving new projects and streamlining internal processes. “But she’s gotten so good at overseeing the debtor’s list,” Baker adds, “that she’s reduced the bad debt by around R800 000.”

As for the R500 000 in current debt still on the books, a number that represents 12,5% of a specific industry’s spend with his company, Baker is not optimistic that much of it can be recovered through the courts. To go the debt collector route now would be to prejudice his company’s position – the respondents would be able to convince magistrates that they’d been bullied. Nevertheless, in January this year Baker decided that the time had come to retain the services of a debt collection agency on all debts that hadn’t yet been referred to the lawyers.

It’s not a decision he took lightly. “The problem is the aggression levels,” he says. “In a place like Gauteng, physical harm invites retaliation. You should see the size of these guys. We’ve asked them to please not lay a hand on anyone.”

Ultimately, it seems that South African entrepreneurs have to work out for themselves how to navigate these contradictions. There are challenges in the local business environment that are very tough to comprehend, unanswerable questions abound. Chief amongst the latter: If government genuinely believes that the success of small enterprise is central to the growth of the economy, why have they allowed a system to develop that facilitates such a high rate of non-payment?

Why is there no national register of perpetual defaulters? Why does new legislation appear to make it easier for bad payers instead of more difficult? Why shouldn’t Burt Baker have more faith in the magistrate’s court? Why must Reg Jagger resign himself to the fact that a fixed percentage of his invoices to provincial government will never get paid? Perhaps the only answer is not to ask; to concentrate rather on the things within the business that can be done to reduce debt. “If six months down the line the only legitimate explanation for the business going bust is that too many clients decided they could get away without paying… well, that’s a particularly bitter pill to swallow.”

Kevin Bloom, an award-winning South African journalist, is currently a writing fellow at the Wits Institute of Social and Economic Research (WISER). His first book, Ways of Staying, a narrative non-fiction journey through selected concerns of contemporary South African life, was released by Picador Africa in May 2009.

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Business Landscape

Micro-Entrepreneurs Making An Impact in Less Developed Communities

The study reinforces the fact that we are living in a global world where the power of management technology can be used across the world for the betterment of mankind.

John Roberts

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One might well ask, “What do micro-entrepreneurs in urban and slum neighborhoods across Cape Town, South Africa have to learn from the elite business schools of the world?  It turns out that the answer to this question is: “Plenty.”

I recently had the honour of being Chairman of Judges of the prestigious Gary Lilien Practice Prize given by the INFORMS Society for Marketing Science, in conjunction with the Marketing Science Institute and the European Marketing Academy. The award winning study proves that the tools of marketing science can make a major positive impact in helping to grow disadvantaged economies like the ones in Cape Town.

The award winner was a 2016 study of 850 Cape Town entrepreneurs led by Stephen Anderson-Macdonald of Stanford University, Rajesh Chandy of the London Business School and Bilal Zia of the World Bank.  They tested three interventions when trying to gauge the best way to help small retailers in the slums of South Africa grow their business: The first group was given training in marketing and sales, the second group was given training in finance and accounting, and the third control group was given no assistance, being told that they would receive training on the next round.

The researchers found significant improvements in profitability from both types of business skills training, relative to the control. Monthly profits increased by 30-40% on average for both. However, more interestingly, the way these gains were achieved differed substantially between the two groups.

The small business owners who received marketing training tended to improve and become more profitable through a focus on growth. They increased sales, purchased extra stock and materials, and added more part-time sales staff. These entrepreneurs also implemented more marketing related business practices (e.g., market research, marketing tactics, sales tactics). By contrast, the finance group achieved similar profit gains but through an “efficiency focus” on lower costs and the use of more finance and accounting practices.  While both led to more viable businesses, in terms of employment and business activity, it was marketing that grew the pie.

Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

The study shows that powerful 21st century tools are being used in the townships in South Africa and that they can be extremely effective. Anderson-MacDonald and Chandy’s suggested tools include:

  • Take time out from your day to day activities to think about your business. Don’t let your business be busyness.
  • Look at your business from the point of view of your customers and potential customers. Put yourself in their shoes so that you can feel the reaction that they have to your products and services.  That will help identify where you can meet their needs better and any unmet needs that they might have.
  • Look for leverage points in your business.  That is, where are the points where you can make the greatest change for the least amount of effort?
  • Think of the criteria of success for your business.  For any initiative to succeed, it has to satisfy four criteria.
    • Can I do this?  Understand your capabilities and how you are going to develop them.
    • Do I want to do this? Make sure you think about what you want to achieve and do those things which will get you to where you want to go.
    • Will customers value this? An analysis of the things that your customers value, need, want (such as consistency) and the things that they don’t (such as gold-plating) will help you.
    • Will the market let you do this?  Have a good feel for the size of the market, the competition, your supply and collaborators, the economic climate and other environmental factors.
  • Generate options creatively.  Take time to brain storm with your friends and family around new products and services, new customers and markets, opportunities to grow the value and frequency of purchase of your existing products, etc.  Successful businesses recognise opportunities that others fail to see.
  • When you have done your analysis, generated your options for growth, work out a migration path.  You have your vision, now you need that first step on the path to achieving it.  Undertake little pilot projects, start by picking the low hanging fruit (the easiest opportunity), and don’t be discouraged by early failures but learn from them as much as you can.

The study reinforces the fact that we are living in a global world where the power of management technology can be used across the world for the betterment of mankind.

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Business Landscape

We Need To Unite For A Better Entrepreneurial Future!

Here are my key entrepreneurial tips from The Passport Showcase.

Godfrey Madanhire

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In our modern world, where nationalists walk the street and xenophobic beliefs are on the rise, as a Zimbabwean serial entrepreneur and motivational speaker, I’ve identified that we need to bridge this division and unite us all through celebrating our diversity.

We need to come together not because it’s the right thing to do, but because united, we can work towards a profitable future.  However, before this can happen, we need to change the global mindset. That’s why I transformed my book The Passport into a showcase in which performers from across the continent took part and showed off their talents.

While preparing for the show I noted some important lessons that I learnt along the way. Here are my key entrepreneurial tips from The Passport Showcase.

Success can’t happen in a vacuum!

Setting up The Passport Showcase took a lot of collaboration. As an entrepreneur and a believer in a united Africa, I’ve learned you can’t operate a successful business if you’re not willing to work and deliver services to everyone. It’s for this reason I invited fashion designers, artists, and dancers, to come together and educate us about the dangers of xenophobic beliefs through their art forms.

We need to be able to blend skills and overcome our preconceived notions, in business and the arts, so that we can achieve great things.

Related: As An Entrepreneur, Be A Motivational Leader To Your Staff

Education is the key to every problem

It’s a part of starting any business; educating the public about your company and quickly converting them into consumers. Arguably the same was true of the showcase, creating a truly unique experience to inform the public about celebrating diversity.

Helping individuals understand that acceptance is key for a better future is critical for business expansion. If any of us want to expand our businesses, we need to be able to engage with different markets – who won’t chase away the unknown.

Be different

Identifying a new opportunity is one of the fundamental building blocks for a new business. Finding unique solutions is a truth that echoes across corporate industries and the arts. But change can cause concern and adverse reactions.

On our continent, ideas that disrupt the norm are needed to catapult our brothers and sisters to a brighter future. But this can only be achieved when we celebrate our diversities and collaborate.

Related: 8 Books Every Manager Should Read To Become A Better Leader

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Business Landscape

9 Ways To Elevate Your Small Business To The Next Level

The South African economy is strongly supported by the nation’s entrepreneurial spirit, which encourages a culture of growth and development in communities.

FedEx

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With the unemployment rate currently at 27.71%, people of all ages and backgrounds are looking for an opportunity to work.

Although many entrepreneurs have enjoyed great success on their small business journeys, choosing to start your own business comes with many risks. One of these risks is the financial burden it can bring. While there are various challenges faced by small businesses, it is possible to overcome these and jumpstart your business with these useful tips from FedEx Express, the world’s largest express transportation company.

1. Connect with customers

As a small business owner, it is important to know who your customers are, where they spend their time, what they are looking for and how your business can meet their needs. Times have changed and waiting for customers to come to you is no longer a feasible business strategy. In today’s evolving business environment, entrepreneurs need to be approaching their customers and building strong relationships with them to form a lasting impression. If your small business cannot grow its customer base, it cannot grow profits.

2. Network

Attending networking events will allow you to find professionals and other small business owners who offer services your business may require. Many small business owners get this critical aspect of starting a new business wrong by networking purely to gain customers, not realising that networking with other business can assist you in acquiring the services you need to continue the growth of your business. Small businesses have a lot to gain through networking at the right time and at relevant events.

Related: Licensed To Thrill: Meeting The Global Demand For Merchandised Products

3. Use social media

There are a number of social media networks and social networking platforms that can drastically grow your business, however, it is important to understand your customers and identify the channels they prefer to communicate on. By implementing a comprehensive social media strategy, you can ensure social media works as a driver of new business that positively promotes your service offerings.

4. Build customer loyalty

Building customer loyalty begins with great customer service. Great customer service starts with a positive customer experience and first impressions are vital in this regard. If a customer has an enjoyable experience when using your services, it is likely they will return and use your services on an ongoing basis. By ensuring your business has a user friendly website and informative brand collateral, new business prospects will increase and those who have experienced quality customer service from your business are likely to refer you to friends and colleagues.

5. Ask for help

All small businesses face challenges, particularly in the early operational stage. This is why asking for help from your peers/mentor who may be more experienced than you is critical. Tapping into the mind of someone with more experience and a broader knowledge base will ensure you learn and acquire the skills needed to make a success of your business. The FedEx Small Business portal offers business owners useful advice that will assist you on your small business journey. Visit www.smallbusiness.fedex.com for tips and success stories that will inspire and help you to grow your small business.

6. Hire the right people

Each person that forms part of your business needs to share the same vision with you that will drive growth. Your workforce will be responsible for the success of your business therefore, ensuring your staff remains motivated is important. When hiring a new employee, implement a check list that includes traits that you feel are imperative to the culture of your business.

Asking out-of-the-box questions in the interview will also assist you in determining if the potential employee is a suitable candidate to fill the open position.

7. Manage cash flow well

Many small businesses close due to cash flow problems. Managing money spent versus money earned is critical as it provides you with a clear indication of whether your business is running at a loss or whether you are excelling. If your small business is losing money, you can implement a strategy to iron out the issues that are contributing to this and identify ways that will ensure your business generates profits.

Related: How Online Embroidery Shop Trish Burr Found Business Success With Support From FedEx Express

8. Work to build success

Work to make a success out of your business with your employees by being involved in the everyday activities that are critical to your businesses success. Being involved will ensure employee morale remains high while allowing you to identify areas that need improvement.

9. Find inspiration

There will always be someone who has been in your current position, even if it is a different business to yours. Learning how they made a success of their business during hard times will provide you with the knowledge you need to succeed as a business owner. Starting your own business is a learning experience made easier by speaking to others who inspire you.

A business can safeguard its success if it continues to innovate. For example, e-commerce has changed the way the world conducts business, and the rise in technology has made it easier to interact with customers quickly and across borders. With economies becoming more interconnected, companies large and small are now able to access markets that were previously unattainable. E-commerce will assist small businesses in establishing their territory in the market and as a result, guarantee growth and longevity,” concludes Higley.

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