Small businesses are a critical component of the South African economy. They account for 52% of the country’s GDP, contribute millions in tax revenue and help address the nation-wide unemployment problem by creating more jobs. The government does acknowledge this to some extent and has made some effort to support their growth – but more needs to be done.
The Department of Small Business Development launched in 2014. Its aim is to support South Africa’s entrepreneurial community. However, the initiative hasn’t quite achieved its objectives and, according to Xero’s 2017 State of Small Business report, only 4% of small businesses feel that the department has helped their organisation. A surprising 89% say it is has not helped their businesses in any way.
The reality is, the current national and global economic climate is putting South Africa’s small businesses under immense pressure. They require specific attention and support. The Xero report has gathered the top five priorities – as identified by South Africa’s small business owners.
1More funding options
Almost half (48%) of small businesses would like to see more help from the government with regards to funding. Currently, 85% of South African start-ups are self-funded. This route requires personal resources that are out of reach for many would-be entrepreneurs. And even those who do manage to fund their own companies, won’t necessarily have enough to grow their businesses to their full potential.
Related: Smart Money For Small Businesses
Access to outside funding options is thus crucial. If the government makes more money available to small businesses through subsidies and grants, then more new companies will be able to launch – and grow.
To limit the number of South Africa’s successful entrepreneurs to those with enough money to fund their own companies, perpetuates economic inequalities, frustrates individual ambitions and does little to help the country’s progress.
South Africa is a country of rules. Our regulatory environment is notoriously restrictive and 44% of entrepreneurs would like to see less red-tape. It’s not necessarily the regulations themselves that are the problem – but rather the level of bureaucracy. The government expects full compliance, yet offers little official assistance to help businesses navigate the corridors of power.
Small business owners, who typically don’t have much time to spare, have to spend valuable hours travelling to and from various government agencies and departments. The issue is the current lack of co-ordination between these offices and their individual legislative interpretations. Entrepreneurs are often shunted from one to the other, seeking a signature here and a stamp there – only to be told that they’ve missed a step and have to start at the beginning.
Compliance is of course, crucial. However, small business growth should not be interrupted by unnecessarily obstructive rules and regulations. If the government would like to boost the economy even further, it needs to create a legislative environment in which small businesses can thrive.
3Offer tax breaks
High taxes keep 16% of South Africa’s entrepreneurs up at night and 42% would like the government to offer tax breaks. Prohibitively high taxes can hurt the country’s economy: Businesses move overseas to more tax-friendly locations and take jobs and revenue with them.
Tax breaks benefit both the small business community and the government. They make it more affordable for would-be entrepreneurs to start a business. And, as more companies launch, tax revenue increases.
4Improve access to finance
Access to finance is a recurring issue. With so few subsidies and grants available, small businesses battle to secure the funding they need to grow. Banks are hesitant lenders, especially when it comes to start-ups – and 35% of entrepreneurs look to the government to help them access the financial solutions they need.
The good news is, the government can help. The Department of Trade and Industry, along with its various satellite organisations, offers loans with flexible repayment terms and lower interest rates. Of course, this doesn’t meet the growing demand, and more finance options need to be made available to help entrepreneurs get their businesses up and running.
The high unemployment rate in South Africa is compounded by a severe skills shortage. Small businesses need very specific skills and have to hire carefully – the wrong recruit can become an expensive mistake. Too many entrepreneurs struggle to find the right people with the experience and skills that they need – which limits their growth potential.
Almost a quarter (22%) of small businesses believe that the government needs to invest more in education. While this is no short-term solution, it is a necessary step towards building South Africa’s talent pool and safeguarding its economic future. If this doesn’t happen, neither the companies nor the country will be able to function at maximum efficiency.
The government has much to gain from working in the best interests of the small business community. The sooner the two parties are on the same page, the better for the economy.
The Rising Cost Of Small Business
Many of the hidden costs that tend to surprise small business owners are related to the employment of people. However, the silver lining is that there are ways to mitigate the risks associated with scaling a business and several tools available to streamline HR processes.
A small business starts with a visionary dream fueled by energy and grit. Founders build on that and attract a small team of people who can help breathe life into the business. But not very long after setting out on course, the harsh realisation of rising costs like insurance, permits, licenses, equipment, maintenance, taxes, shrinkage and utilities suddenly appear.
Poor Labour Relations Management
Extensive labour laws in South Africa require dedicated overseeing and management, which generally lead to additional costs of employing labour consultants or hiring human resources managers that are not entirely relate to the core of your business. However, left unattended, labour relations issues can and will shut down your shop.
Labour relations issues cost South African companies R14 billion annually. Many companies have costly compensation orders from the CCMA due to Line Managers and HR employees not complying with legislation regarding disciplinary matters.
A surprising statistic from SEFA suggested that of the small businesses that fail, 40% of them can be attributed to poor labour relations management, therefore managing disciplinary processes by the book is critical. There are useful templates as well as step by step guides available online to help managers through disciplinary processes and to avoid incurring penalties from the CCMA.
By law employees are entitled to at least 15 working days’ vacation leave in every leave cycle. Employers could face substantial penalties from the Department of Labour if they do not allow employees to take leave. Planning for peak and off peak periods in businesses is a critical part of drafting job specs and these conditions must be communicated to staff early on.
The cost of poor leave management will contribute to the company’s leave liability i.e. the amount of leave an employee is owed is noted as a liability in the general ledger. Annual leave that employees do not take is a hidden expense for a business that if left unattended, will accrue and create cash flow problems for the business.
Employers are advised to make use of a leave management tool that enables both the employer as well as their employees to keep track of leave days owed to employees and brings some automation in to the process.
The Basic Conditions of Employment Act ensures that all employees are “entitled” to a minimum of 30 days (for a 5 day workweek) and 36 days (for a 6 day workweek) paid sick leave.
According to Occupational Care South Africa (OCSA), absenteeism costs the South African economy around R12 -R16 billion per year. This equates to around 15% of employees being absent on any given day. The answer isn’t to go on a witch hunt throwing policy at employees and demanding doctor’s notes for even a few hours off work (employers are not allowed to breach medical confidentiality by requesting a diagnosis on a sick leave note).
Alternatively, employers can be proactive in managing absenteeism by monitoring leave reports monthly and quarterly taking regular health interventions (e.g. flu shots) before a peak sick leave season e.g. before winter. Maintaining a positive work environment where employees feel acknowledged and are encouraged to perform goes a long way in keep workers present and absenteeism on the low.
Is Unmanaged Stress Killing Off Our SMMEs?
Most SMMEs don’t make it past their first year. This is worrying for an economy in which SMMEs are a vital part of growth. A range of reasons are given for what is stifling these businesses, from financing to access to markets, but one factor has been completely overlooked: Stress.
It is now widely understood that Small Medium and Micro Enterprises (SMMEs) are key to a country’s economic- and employment growth, but something is amiss in South Africa. Our SMMEs are just not doing what they should and understanding why this is – and fixing it – will be critical to the future success and sustainability of the economy.
The common conversations around SMME failure rates point at six main culprits: (1) access to funding, (2) access to markets, (3) infrastructure challenges, (4) scalability, (5) tough regulations, and (6) skills/education. The problem is that we have known about these for years, and for all the efforts to address them, we are unfortunately not seeing the growth in the sector that is needed.
A recent survey by the Small Business Institute (SBI) and the Small Business Project (SBP) put the number of formal SMMEs in South Africa currently at just 250,000. These numbers are alarmingly low – especially when compared with international benchmarks. SMMEs in Organisation for Economic Co-operation and Development (OECD) countries, make up 95% of businesses, and employ between 60%–70% of the working population, contributing up to 60% to GDP. In South Africa, while SMMEs make up 98% of the business population, they only employ 28% of the nation’s workforce, according to Chris Darroll, CEO of the SBP.
And yet the government continues to pin its hopes on the SMME sector. Initiatives like the DTI’s Invest SA and the South African Investment Conference this October, that claims to have attracted billions in foreign investment to the country, have foregrounded the role of SMMEs in economic revival. And the Government’s National Development Plan aims to have SMMEs contributing 90% of job growth by 2030. It is likely that more money will be channelled into support for the sector, to join the billions that have already been spent on incubators and initiatives to help small businesses.
This is a good thing, but it is not enough. The numbers speak for themselves. To date, none of these initiatives has borne much fruit and this signals that we may be overlooking something fundamental. Our collaborative research at the UCT Graduate School of Business suggests that what is being overlooked is something that most of us find difficult to define, or even talk about: Stress.
Stress is under-acknowledged by most people, personally and professionally, and for varied reasons. And this can have devastating effects. If ignored in business, the human devastation is likely to have larger scale effects on job loss, workforce disengagement, health-related days off, impaired teamwork, sub-optimal decision-making, lowering of productivity, and ultimately fuelling a declining economy.
While access to finance and markets, infrastructure and scalability challenges, tough regulations, and not enough educated and skilled employees are all valid hurdles tripping up SMMEs, the fact is that they are perfectly normal hurdles to have in a competitive, emerging economy. Our research reveals that good leaders, who are able to get their businesses over each encountered hurdle, are also able to manage their personal negative stress and harness their positive stress.
Stress can, generally, be quite motivating, however it is generally accepted that there are three kinds of stress: (1) positive stress, which is chosen and does not last very long (like writing an exam), (2) tolerable stress, which is unexpected and lasts a little longer, but then stops and there is time to process, and (3) toxic stress or distress. Toxic stress is tolerable stress left to run on and on without end, without rest and without time for healing and processing. It is this third and debilitating kind of stress that business leaders are likely to experience, and in SMMEs it can be even more severe.
Our research suggests that SMME owners tend to set very high, and often lofty, goals for themselves when setting up their SMMEs. And then they are constantly feeling stretched in either striving for these goals or ‘maintaining the course’. This can mean maintaining good business results, maintaining the customer base, where often 20% of the customer base accounts for 80% of the revenue, maintaining employment levels in changing political and economic conditions, maintaining pricing when squeezed for ever-lower prices while delivering good quality products and services, having their integrity challenged, and dealing with clients/customers who are not averse to replacing their products/services.
Another cause of stress for SMME business owners is that they mostly have internal loci of control, meaning that they take personal responsibility for outcomes and results and therefore blame themselves for every failure, and find it difficult to forgive themselves for deviations from intended results. In addition, an innate sense of accountability to their staff and their staffs’ families reportedly weighs heavily on business owners. Many feel similar accountability toward the broader stakeholder groups that their businesses serve.
All of these factors, which many argue are innate to the nature of business, place undue, long-term pressure (toxic stress/distress) on the cognitive, emotional, psychological and spiritual resources of individual business owners. This reportedly leads to drops in productive activity and motivation, withdrawal from relationships both personal and professional, low energy, impaired decision-making and ill health. And it also destroys resilience – leaving business leaders unable to ‘bounce back’ from personal- or business-setbacks, which is part and parcel of life and business. With a debilitated leader, the business is almost always likely to suffer, on a day-to-day basis and also in the long run. Like a virus, stress transfers to others.
An SMME’s success is inextricably linked to having an effective leader. And effective leadership is inextricably linked to effective stress management and self-care. It stands to reason, therefore, that improving the way SMME business owners manage their stress and boundaries could have a significant impact on improving business survival rates.
Along with offering business advice, funding incubators, opening up markets, attracting foreign investors, educating consumers, subsidising and improving infrastructure, the government should be looking at ways to encourage stress management and self-care into the daily operations of small to medium-sized businesses.
We need to get business owners educated about stress and self-care: about how exercise, sleep, diet, meditation, life-balance, self-forgiveness, and other-forgiveness affect them, their staff and their businesses. Effective self-care, of which stress management is a part, will enable business owners to courageously stay resilient in the ongoing stressful situations they will naturally encounter. This may, in turn, help to turn the tide in South Africa’s SMME sector so that it can drive the country’s economic revival like everyone hopes it will.
Many SMEs Start With Great Plans But Fail To Take The Big Leap
Most small-to-medium sized enterprises (SMEs) are aware of the benefits of good governance practice but, faced with limited time and resources, which could be costly in supporting growth ambitions.
- 27% of SMEs don’t have a vision that covers more than the next 12 months
- 45% of SMEs either don’t have a strategy, or one which covers only the next 12 months or less.
The latest global research, inclusive of Africa in supporting small business growth from ACCA, outlines the governance needs of SMEs. It highlights simple but effective practice over vision, strategy and human capital can provide them with greater flexibility, adaptability and resilience as they grow. This a huge factor in the long-term sustainability of the business, if put in practise.
“If you incorporate good practice for running your business from an early stage, your company is more likely to be resilient and is more likely to appeal to external investment,” explains Jo Iwasaki, head of corporate governance at ACCA. It is about leadership directing the company and being aware of factors both within and beyond their enterprise and build resilient organisations in the face pf the changing world.
The research also found that half (49%) of SMEs do not involve anyone external in their strategy discussions, despite the benefits experienced by those that do, which include additional experience and knowledge of the industry/sector (according to 46%), an independent perspective / constructive criticism (44%) and advice on their growth strategy (39%).
“There are a lot of daily concerns for the leaders of a small business, and often the biggest challenge is meeting day-to-day operations and cash management needs while thinking about the long-term future of the company. And while many leaders are keenly aware of the importance of resilience in the rapidly changing business environment and of buy-in from stakeholders, for example funders and employees, there often may not be the time to think or do much about it,” added Iwasaki.
“I hope that this research helps SMEs in focusing on some of the most crucial issues, and can be a resource not just to SMEs themselves but also to policymakers,” concluded Iwasaki.
How vision and strategy helps small business succeed is available at ACCA Global.