For many would-be entrepreneurs, information about starting and running a small business can give mixed messages: It’s the backbone of the economy, the solution to unemployment, but the statistics of small business survival and success aren’t very encouraging either. Then there’s the question of funding.
It’s easy to become discouraged before you even start. But read on and see it’s possible to overcome many of the initial challenges.
What is considered to be a small business?
A small business is one that is privately owned by an individual or with a partner or two on board. It is for-profit and its actions, whether selling a product or service, are designed to generate income.
A small business can employ a handful of staff, or it may be a sole proprietorship in which case everything that goes down is through you. From a financial perspective, a South African small business has turnover of less than R1 million a year.
Related: Do You Speak Start-up?
Stats on small business
Latest statistics of small businesses in South Africa are enough to make anyone want to give up before they start.
Trade and Industry Minister, Rob Davies, said in May 2013, that five out of seven new small businesses fail within the first year.
That’s a scary statistic especially when 68% of South African workers are employed by businesses that have less than 50 staff, and 43% are employed by businesses that hire less than five staff, according to the Minister.
Adcorp Analytics (2012) also paint a gloomy picture: The growth of local small businesses has stagnated between 2003 and 2012. Despite the economic boom of ‘04-‘06 that saw small businesses increase from two million to 2,4 million, since then the number hasn’t increased as hoped but shrunk on average 100 000 a year, meaning 440 000 small businesses have closed their doors in the subsequent five years.
This is a worrying trend, especially since the number of would-be entrepreneurs starting their own business is also at an all-time low. According to Adcorp Analytics (2012), in 2001 approximately 250 000 individuals were engaged in some kind of activity to start their own business. But by 2011 that number had dropped to 58 000.
The glimmer of hope is that this isn’t a global phenomenon. While recession has influenced some prospective entrepreneurs to stay in their secure, salaried jobs, developing economies like Brazil and India have thriving entrepreneurial communities.
The difference lies in the fear of failure. According to the Global Entrepreneurship Monitor (GEM) 2011 report, South African’s aren’t afraid of a challenge: Approximately 64% of SA entrepreneurs are driven by a sense of opportunity rather than necessity, and nearly 73% of South Africans believe entrepreneurship is a good career choice with high social status, so the key to improving entrepreneurship is to improve success rates through business and entrepreneurial education.
Small business as the backbone of the economy
Even with these poor statistics, small businesses remain the backbone of the economy:
- In 2011 South Africa had 5,579,767 small business owners – that’s roughly 10% of the total population involved in entrepreneurship.
- The total number of small businesses was slightly higher, owing to some entrepreneurs having more than one business.
- Of these 5,5 million businesses, nearly 80% were retailers – selling something in the same form it was bought in – while a little more than 20% were service providers – providing a skilled service like hairdressing or accounting for example.
- Nearly two thirds of these businesses were run from home and accounted for nearly 12 million jobs.
The government is acutely aware that small businesses are the key to addressing high unemployment and developing the economy – with an average of seven individuals benefitting for every one person employed. To this end, great emphasis is being placed on mentorship programmes, micro and small business finance and non-financial support, and making the red-tape associated with registering a new business as streamlined and easy as possible.
Are small businesses sustainable?
The high failure rate of small businesses suggests that something fundamental is going wrong. The key to small business success lies firstly lies in hard work and dedication to the business, and secondly in sustainability.
Many an entrepreneur has been blinded by the excitement of starting a business and initial success, that a solid foundation in the form of a business plan and cash flow management has been ignored.
Related: 5 Small Business Loan Ideas
Here is a list of some top reasons small businesses fail:
- In it for the wrong reasons. If you want to start a business to get filthy rich, it won’t be a good enough reason to keep you motivated when times are seriously tough.
- Poor money management. Without basic financial and business knowledge, an entrepreneur might not distinguish profit from cash in the bank. They start living the high life, and then realise there’s no money to pay suppliers, staff, and creditors at the end of the month. Profits should be re-invested into the business while it builds equity.
- Microscope/telescope mentality. While a small business may kick off with a niche idea, entrepreneurs need to pay attention to their market. If the market is too small it will fail to generate enough consistent income throughout the year. Similarly, if the business is trying to be too much to too many, the business can lose focus.
- No business or marketing plan. Some businesses emerge from a spontaneous gap in the market and may enjoy success growing organically. But unless there is a comprehensive business plan and marketing strategy in place, the business’ growth can be unsustainable.
- Lack of brand awareness. Thanks to today’s technology, building a brand is easier and more affordable than ever. Without access to a good and informative website, consumers will be less likely to engage you. Build an online presence through blogging, online advertising and social media, and don’t ignore poor reviews – building a reputable brand is critical to success.
- Wearing too many hats. Some businesses have to start off with just you running all aspects of it, but it’s a balancing act. If an entrepreneur gets too involved in the daily operations of a business, they don’t have the time or energy to work on developing the business, managing it, and strategising growth. Conversely, if an entrepreneur is too involved in business strategising, they won’t be devoting time and energy to sales. Business owners should spend their energy in areas of personal strength and recruit skilled people to fill in the gaps.
- Uncontrolled growth. While hyper-growth might seem fantastic at first, growing too quickly for business resources, infrastructure and skills to keep up with is a recipe for disaster. Businesses mustn’t over-gear either, and strategy is essential to sustainable growth.
Small on purpose or small because owners are unable to grow it?
When starting a business, a small business owner needs to determine their reasons for starting a business. Is it because you want a change from the nine to five rat-race? Want to be at home more for the family, because you want to be your own boss, or because you have spotted a gap in the market and believe it’s a gold mine, because you want to harness your skills better?
One of the main reasons for a business being stunted is because of the owners themselves. Without systems, a business owner may find themselves in a position where only they can complete the required tasks – either because of specialised knowledge, reluctance to delegate, or because of lack of systems.
Another reason for limited growth may be an issue of money. As the saying goes: You need to spend money, to make money.
This may require the business owner to take out a loan to increase their business’s capacity through equipment, for example, or by spending money on hiring an administration assistant, manager or accountant.
Pros and cons of small business
Starting and running a small business comes with its fair share of benefits and drawbacks. Here’s a list of the most common pros and cons:
- You get to be your own boss, meaning any success you experience in a business is your success too.
- You have the potential to exceed your current income and control your future wealth.
- You can take your skills and personal interests and turn them into your own business that your employer might not be interested in pursuing.
- A small business has the potential to positively impact your surrounding community with jobs and skills development.
- Until a small business is sustainable, income will be unstable. In fact, many small business owners need to forfeit a salary for a long time.
- You may need to take significant financial risk to get the business off the ground – taking a bond on the house or cashing in a pension fund, for example.
- A small business will take up significant amounts of time and energy that can result in neglecting family responsibility and sacrificing personal time.
- Until you can afford additional staff, you may have to perform tasks that don’t align with personal strengths.
Growing a small business
For small businesses that have survived the first year failure-hurdles, sustainable growth is the next goal.
Depending on the kind of business you own, there are a number of courses you can take, some on their own, some simultaneously.
Here is a list of some ideas for growing your business.
- If your business is operating at full capacity, investigate opening another branch, but plan your strategy and financials carefully. Ensure that your current business has consistent bottom-line numbers, examine the market for demand, prepare a complete business plan for the new branch (don’t assume that what works in one location will work exactly the same in the new location), and figure out how you will finance the new location – a loan, bootstrapping, using the existing business to fund the second – each option having its own pros and cons.
- Consider franchising if the business is thoroughly systematised. While converting to a franchise can be a costly exercise, the benefits include expanding in a less capital intensive manner as franchisees foot the bill new locations. You will have to be absolutely certain, however, that the business is replicable and has all the operational kinks ironed out of it.
- Seek an investor. Provided your business is in demand and well run, you can approach angel investors, venture capitalists or banks for funding to expand. Make sure your books are in order, that your research and projections are realistic (and conservative), and that expansion is what you really want.
- You can expand your business by diversifying your product or service portfolio and by targeting other markets. Both strategies require intensive market research, time and energy.
- You can negotiate a merge or acquisition with another small business, taking on board skilled staff and better resources, but at the risk of losing control of your original business goals, vision and culture.
Support for small business
Entrepreneurship can seem like a lonely and isolating experience for some. Networking is important to your confidence and providing opportunities to learn from others.
Networking also allows you to develop your reputation as a subject expert and bring in new business through referrals.
No new business owner is expected to know all the answers all the time and it’s a good thing to learn from those who have different ideas and perspectives.
Having an experienced business person to mentor you can provide a sounding board for ideas, a channel to offer advice and caution, holding you accountable to your decisions and actions, and guide you on a path to success.
There are also numerous private and public organisations dedicated to improving the skills of small business owners. Don’t fall into the trap of believing you can be great in all areas of running a business.
If you have a weakness in finance, try self-study, short courses, part-time courses, or ask someone with the right skills to teach you what you need to know.
All great entrepreneurs eat, live and breathe the philosophy of never stopping learning and being curious about things they don’t know much about.
Small business resources
New Fund For Small Businesses To Be Developed
Government has allocated R2.1-billion toward the development of small- and medium-sized businesses.
Driven by the Departments of Small Business, Science and Technology and the National Treasury, it was announced during the 2018 budget speech that entrepreneurs could unlocking funding for their businesses through a new funding initiative.
What is the new Fund?
Minister of Small Business Development, Lindiwe Zulu, explains where the fund stands and how it will work:
“The Fund will be operational during 2018/19 financial year but the planned disbursement of the funding will be the beginning of 2019/2020 financial year.”
She says R1 billion has already been transferred to the Department of Small Business Development from the national fiscus.
“The Department of Small Business Development together with National Treasury and Department of Science and Technology are working with the Government Technical Advisory Centre (GTAC) to develop the architecture of the Fund where issues around the management of the Fund will be considered,” she explains.
Who will the Fund be for?
“The Fund is targeting high growth businesses as our research on the ecosystem shows that there is a lack of funding of enterprises that are at an ideation and early start-up phase,” Zulu explains.
Her department together with the other participating arms of government, will identify areas of collaboration across research, mentorship and training of enterprises on financial management.
“The work that is being undertaken now will assist government to decide on how the fund will operate, but the government is conscious of the economic environment and would not look at setting up a completely new structure that will add to operational costs,” she says.
Addressing parliament on the fund, the minister said the financial mandate of the fund will be informed by the exercise that is being conducted through GTAC.
“Government is looking at having this fund as a soft loan which will provide affordable finance to small businesses and the emphasis will be more on ensuring that the Fund is sustainable rather than profit maximisation,” she explains.
How to apply for funding
Contact the following departments if you would like to access a portion of R2.1 billion:
Department of Small Business Development
- Address: 77 Meintjies Street, Sunnyside, Pretoria
- Tel: (+27) 861 843 384
- Email: email@example.com for information on the department and its services.
Department of Science & Technology
- Address: DST Building (Building no. 53) (CSIR South Gate Entrance) Meiring Naude Road, Brummeria
- Tel: (+27) 12 843 6300
- Email: Isaac.Ramovha@dst.gov.za or firstname.lastname@example.org for information and brochures about the department’s scope and funding.
National Treasury (GTAC unit)
- Address: 40 Church Square, Pretoria
- Tel: (+27) 012 315 5944 or (+27) 012 315 5645
- Email: email@example.com for information from the Government Technical Advisory Centre who will manage the small business fund for National Treasury.
7 Ingredients Of Small Business Success Online
Building your future requires equal measures of passion and hard work.
Building a small business online is scary. Big businesses can easily outspend you with PPC, SEO, SMM and inbound marketing campaigns.
However, smart startup founders grimly pass around business battles on the blogosphere, charging low prices for quality product, reversing their vision, failing to voice their opinion on their podcasts, showing contempt for our product, and disrespect for our craft.
And yet, look around at the World Wide Web jungle. It’s watered by the services offered by small businesses. The technology to produce product and convert customers exists because we create codes, design services, and write web pages, blog posts, and marketing materials that generate leads and close sales. And every 350-pound gorilla company uses our products or services to thrive.
If you’re a small online business owner, you can chicken out and quit when you face your competitor in the marketing arena, or you can choose something better. Because there is something better.
In the time since I began building my content marketing business online, I’ve noticed some mindsets, traits, and abilities that make the difference between businesses that want to accelerate their sales, make a profit, and survive, and businesses that want to sell more and increase their ROI but don’t seem to have the ability to do so.
Based on my observations, here are the seven most important things small businesses need to succeed online.
This might sound too simple, but if you’re a small business owner, you know what I mean.
There’s no substitute for the love you have for your products or services. There’s no substitute for the commitment of showing up every day. There’s no substitute for the excitement of receiving an order or for the burning desire to work extra hours, to reach your prospect, to ship an order, and to make more money.
If you don’t love entrepreneurship, your product or service, and the process of getting things done, none of the rest of this really means anything.
I could have just as easily dreamed of building another Moz, Kissmetrics, or Shopify, but I chose what I loved most. Whichever business idea you dream of, it’s about refusing to do it just for the money. It’s not only about making money; it’s about changing your customer’s life for the better.
If you want to achieve that, you have to dominate your industry. You have to be the go-to person for your products or services. Be super professional at your offerings so that your customers won’t want to leave you for your competitor.
2. Attitude of service
Making money can be a tempting proposition, pursued for the sake of your own interest of becoming rich and dominating the headlines.
However, as soon as the customer clicks to order your product – the vitamin C pills, the Smartphone cover, the SEO or PR services you sell – the product becomes the focus.
Professional founders work with an attitude of serving their customers great value, yes, serving them with beautiful, durable, quality products. They also work to provide excellent customer experiences that exceed their expectations, that gratify rather than aggravate, and that are born out of the genuine attitude of serving the buyer.
Successful consultants, bloggers, and content marketers all live in service to our clients. No matter how stunning or super sexy we may find an idea, if it doesn’t serve our client, out it goes.
Why? Because we have deep love and obsession for our customers.
3. Obsession for the customer
It has always struck me as odd that many of the most serious startup founders pay more attention to selling than to their customers.
It shouldn’t be that way. Customer obsession comes first. It’s like the engine that pumps cash into your corporate account. It comes from your company’s culture, value proposition, mission, and overall vision to change your customer’s world with your product or service.
Serious visionaries are obsessed with their customers. “If you’re truly obsessed about your customers,” Jeff Bezos, Amazon founder and CEO says. “It will cover a lot of your other mistakes.”
You can’t just sell your products. You can’t just sell your services. You can’t just advertise your brand.
You need to appeal to your customers first, because they are your buyers. And you can’t see a spike in your revenue unless you’re obsessive about charming them with your brand and building quality products that will ease their lives.
4. Obsession for quality
Many small-business owners imagine that if you have a great business idea and a great vision, you’re qualified to be called an entrepreneur.
Not so fast.
Successful CEOs and entrepreneurs are not just creative; they’re producers of quality products. They understand what type of products to create in the first place, based on the feedback they get from their customers.
They also understand that their products must solve their customers’ pain points. Their products must add value to their customers’ lives and must provide great experiences for them. You can learn more about how to build a solid product by looking at how great companies like Apple, Amazon, and Starbucks did it.
If you are obsessed with quality, you can incorporate what you learn from these companies into your business culture. Beyond your product or service, you can internalise quality packaging, simple usability, prompt responsiveness to customer queries, and even quality, compelling content on your company blog.
Because in today’s digitally driven marketing world, quality blog content is king. It’s crucial for your traffic, sales, and revenue.
5. Compelling content
You may have a brilliant idea. You may have gotten the perfect product/market fit. But, if you don’t devote yourself to the butt-in-chair time needed to produce a significant quantity of compelling content on your company blog, you won’t get where you want to go.
To a great degree, writing compelling content is a skill that can be cultivated. As a small business owner, you can devote some time to practice the art, ingrain writing into your schedule, and write every day to master the craft, or dig deep into freelance marketplaces to find a superb content creator.
Compelling content does more than just amuse your clients. Compelling content can change your life. After writing this viral post on this amazing platform, I received a dozen praises from readers across the globe. I also got a couple of writing gigs.
The blog post went viral not only because the story appealed to its intended audience, but also because the conversational tone and writing style are so engaging and entertaining … the reader feels compelled to share it.
Writing compelling posts has nothing to do with your degree, your experience, or whether or not you’re a native English speaker. It’s about how you make readers feel. That’s why every writer – just like every entrepreneur – must be creative, imaginative, and innovative.
Innovation is critical for your business growth for a number of reasons.
First, innovation develops customer value. Your customers are always in need of a product that will ease their lives, and once they get it, they move on to something else – something easier, newer, or simpler. As Steve Jobs put it, “You can’t just ask customers what they want and then try to give that to them,” the Apple founder opined. “By the time you get it built, they’ll want something new.”
Second, innovation is vital for your traffic, sales, and revenue. New ideas, new products, and new stories are what always get the most attention. “The arrogance of success,” according to William Pollard, “is to think that what you did yesterday will be sufficient for tomorrow.”
Third, innovation-active businesses are more productive and generate more jobs than non-innovation-active businesses, according to a recent data by Australian Bureau of Statistics (ABS).
But, building new products from your new ideas is risky. There’s a good chance that you’ll fail. Still, you must do it. You must double up on your experimentation. Bezos says, “If you double the number of experiments you do per year, you’re going to double your inventiveness.”
You’ll see wonders if you consistently innovate.
One of the tough things about growing a startup is that the path you walk is one you make yourself.
There’s no one to tell you how you should work, no one to tell you which direction to go, no one to tell you when to go for a break, no one to tell you when to work extra hours, and no one to tell you when to say no and when you need to be where.
That’s one of the fantastic things about running your own business. But, sometimes Fantastic is also Difficult. You might open your e-commerce shop today, work for an hour, check your email, and retreat for the day.
But, can you come back to do exactly the same thing tomorrow? Can you do it again the day after tomorrow, and again the day after that, and again, and again? Consistently?
That’s the difficult part. And that’s where many entrepreneurs are getting it all wrong. Building a thriving business is not about working for extra hours today and not working the next day.
It’s about doing the work that matters consistently. It’s about showing up every day. It’s about minimalism, not complexity.
So roll up your sleeves and keep working. “For the future,” as Paul Wellstone puts it, “belongs to those who are passionate and work hard.”
This article was originally posted here on Entrepreneur.com.
Capitalising On (Ad)venture – A Look At Section 12J
Due to a multitude of factors, such as slow economic growth coupled with a some-what uncertain political climate, small and medium-sized enterprises (“SMEs”) often face challenges with regard to obtaining equity funding.
In an attempt to encourage investment of equity into SMEs and junior mining companies, the Venture Capital Company (“VCC”) tax regime was introduced into the Income Tax Act 58 of 1962 (“Act”) in 2009.
Section 12J of the Act encompasses the relevant legislation governing VCCs and provides for the formation of an investment holding company, described as a VCC, through which investors can provide equity funding to a portfolio of SMEs. More specifically, investors subscribe for shares in the VCC and claim an income tax deduction for the subscription price incurred. The VCC, in turn, invests in “qualifying companies”.
Various legislative amendments to section 12J have given rise to an increased participation in the asset class, evidenced by the increasing number of approved VCCs. As at 24 January 2018, the South African Revenue Service (“SARS”) website indicates that 90 companies have been approved as VCCs, while 2 have had their VCC status withdrawn.
Related: Is Venture Capital Right For You?
This article provides a high-level overview of specific aspects of section 12J. It is advisable for SMEs and investors to obtain independent tax advice when considering utilising this investment vehicle.
Requirements for qualifying companies
The sole object of an approved VCC must be the management of investments in “qualifying companies”. The question of whether a potential investee company constitutes a “qualifying company” is a factual one and must be considered in light of the specific circumstances of that entity.
A “qualifying company” must comply with several requirements, some of which include:
- the company must not be a “controlled group company” in relation to a group of companies; and
- the company must not carry on an “impermissible trade”.
A “controlled group company” is a company that has a corporate shareholder that holds, directly or indirectly, at least 70% of the shares in that company. Accordingly, this requirement limits the share investment that a VCC can make in a “qualifying company” to a maximum of 69%. This means that at least 31% of the shares in a “qualifying company” must be held by persons other than the VCC.
The definition of “impermissible trade” encompasses a number of trades, such as trades in respect of immovable property (other than hotel keeping), financial or advisory services, gambling and trades carried on mainly outside of South Africa. It must be noted that a number of these trades are defined with reference to other pieces of legislation and due consideration should be given to those Acts. Again, the question of whether a “qualifying company” conducts an “impermissible trade” is a factual one which should be determined on a case-by-case basis.
Tax benefit for investors
The upfront income tax deduction, which lessens some of the investment risk for investors, is available for share subscriptions only. The deduction is only available in the year of assessment during which it is incurred and no deduction will be allowed in respect of shares acquired after 30 June 2021.
Any South African taxpayer (i.e. natural persons, companies, trusts and partnerships) can benefit from the tax deduction, however, the deduction is subject to anti-avoidance provisions, such as:
- where an investor has used any loan or credit to finance the expenditure incurred to acquire shares in the VCC, the amount of the deduction is limited to the amount for which the investor is deemed to be at risk on the last day of the year of assessment; and
- no investor can be a “connected person”  in relation to the VCC after the expiry of a period of 36 months commencing on the first date of the issue of the venture capital shares.
In addition to the above anti-avoidance provisions, investors need to be aware of the restrictive framework offered by section 12J. For example, to the extent that the investment is realised (i.e. disposal of shares in the VCC or a return of capital) before the end of a five-year period, the deduction previously allowed must be included in the income of the investor in the year of assessment during which the investment was realised.
In addition, there are some shortcomings in the VCC regime, which National Treasury will hopefully address in due course. For example, it is more tax efficient for a natural person to subscribe for shares directly in a “qualifying company” rather than the VCC, for the following reasons:
- capital gains tax (“CGT”), at the effective rate of 22.4%, is paid by a VCC on gains realised upon the sale of shares in a “qualifying company”. In addition, dividends tax at the rate of 20% is incurred when the VCC declares a dividend to a shareholder who is a natural person.
- should the natural person
- subscribe for the shares in the qualifying company directly, the natural person will only incur CGT at the rate of 18%. The benefit of the upfront deduction may therefore be ‘tainted’ by this ‘double tax’.
National Treasury has acknowledged the need to make further changes to section 12J which will assist SMEs in achieving profitable growth.
 Please note that there are other requirements which have not been addressed in this article.
 As a rule, natural persons are “connected persons” in relation to a company to the extent that they individually or together with any “connected person” in relation to themselves, hold at least 20% of the equity shares or voting rights in the company. A corporate investor will be a “connected person” to the extent that –
- it holds at least 50% of the equity shares or voting rights in the VCC;
- it holds at least 20% of the equity shares or voting rights and no other person holds the majority of the voting rights; or
- any other company is managed or controlled by any person who is a “connected person” to the corporate investor.
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