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
Simple Strategies For Financing Your Small Business
Below is some useful information on simple strategies to finance your small business.
So, you have found your passion and now want to start a small business? One of the first steps to fiscal success is to look for simple ways to finance your new venture. This might sound difficult and you might not know exactly where to start, but it can be done with the right know-how and tips.
You could start by looking for small business funding online. There is also the option of attracting an “angel investor” or crowdfunding, but if you are just starting out it is best to keep things simple. Below is some useful information on simple strategies to finance your small business.
Look for small business-specific loans
There are financial companies in South Africa that are geared specifically towards helping small businesses. They believe that small businesses are making a difference in the country and are building a better solution by striving for excellence. Simply put, these financial companies want to help you reach your goals of success.
You will have to meet certain criteria for some of these companies, such as having at least three of the most recent months of bank statements for the company to scrutinise. You will be scored according to the performance of your company, but if you are just starting out, the process will be slightly different. If you look for small business funding online, you will need to find out the stipulations, such as having been in business for at least a year, earning R500 000 annually and being based in South Africa.
Try out crowdfunding
Through crowdfunding sites such as Indiegogo or the South African version Candystick, you will have access to thousands of investors who could help fund your business. One of the benefits of crowdfunding is that many of the contributors are not necessarily interested in acquiring equity in your company but simply want to get their hands on your product.
You will need to ensure that your crowdfunding campaign will attract investors and contributors. An effective way to draw the attention of investors is to offer an incentive, such as sending the first 100 people to contribute funds a sample of the product you are planning to make in your small business.
Be sure to read all the terms and conditions to find out if you have to pay any fees to the crowdfunding website to join or maintain your campaign.
Run a pre-sale campaign
If you already have a product, you can run a pre-sale campaign to earn funds to finance your small business. This way, you can keep the entirety of the money you earn and use it to build your business and make more of your product for new and returning customers.
A pre-sale campaign means that you will sell prototypes or early versions of your product through a PR (public relations) campaign, attracting new customers and benefitting from the traffic that it will draw to your website. You might end up selling all of your prototype products, which is fantastic as this revenue will allow you to build more and improve your profits. Be sure that you have enough product for the sale or you could arrange an exclusive event for a select few customers before you the official release of your product.
Ask friends and family
This might not sound like the best idea, but asking friends and family to invest in your business can often lead to success. You could ask a close friend or a family member who supports your vision to provide a percentage of money to help fund your business, with strict plans in place to repay them with interest.
Before you approach anyone asking for a loan, you will need to have a sound business plan in place, as well as a legally drawn up contract stating how and when you plan to repay the loan. This will reduce the likelihood of unpleasant surprises and shows your investors that you take their money and trust seriously.
You will need to seriously consider how the arrangement will be structured. Are you offering them an investment in your small business or is it a loan? This will affect the repayment options as well as the risk involved for them.
Explore all options
As a small business, start by looking for small business funding online and for small business loans in South Africa, then move onto the more creative outlets. If you explore all of your options, you will soon find the perfect solution to build your small business.
The best way to start is with a small business loan, as this is the most reliable way to gain funding and use other ways as secondary sources when the time comes to grow your venture. Remember to have a business plan in place first before you apply for any loans, whether it is from friends, family or a financial institution.
How Small Businesses Can Give Back Without Breaking The Bank
If you are not sure how to start giving back, below are some top tips on how to do just that… without breaking the bank.
As a small business owner, you might think that charitable giving is impossible on your small budget. But, this is not true. You can donate to a charity or contribute to a fundraiser, even if you have a startup or small business budget. You just have to be creative about it.
In today’s world, more and more consumers care deeply about social causes, which means that you need to seek ways to incorporate giving back into your business strategy. If you are not sure how to start giving back, below are some top tips on how to do just that… without breaking the bank.
Encourage your team to volunteer
You will see many calls from charities, such as MSF, to donate time and resources. One way to give back without breaking the bank is by encouraging your team to volunteer and offering paid time off as an incentive for them to volunteer at a charity.
You can give your employees a specific amount of time each month or quarter for volunteer work, and you will soon notice morale improving. It will also increase your community involvement and visibility in your community. You will have to ask your team which days they would prefer to volunteer, as many people might prefer the weekend over a Monday or other weekday.
Use your talents
Giving back does not always have to mean making a monetary donation. You can use the talents of the people in your business to give back to clients, or you can offer your services pro bono to charities that could use them.
For example, if you are a marketing agency, you can offer to upgrade a charity’s website or write content for their social media pages. If you are a financial business, offer a free day of accounting services to a charity that desperately needs some bookkeeping help.
Using your talents costs you nothing but can help to make a significant impact on the cause that is closest to your heart.
Set up a collection jar in the office
If you have chosen a charity, such as MSF to donate to, it can be difficult to find the funds in a small business. A simple but effective way to collect some funds is to set up a collection jar in the office for employees to contribute to.
Be sure that your collection jar is placed in a high traffic area of the office, such as in the kitchen or on the way to the coffee machine. You can make it fun by running a competition of who can donate the most and offering a prize, or you could ask those who bring in their own lunches to donate what they would have spent on purchasing a lunch that day. Be sure that your staff never feel forced into giving a large amount of money, but remind them the jar is for a good cause.
Launch a charity drive
If money and time are in short supply in your small business, you can still give back by launching a charity drive. You can collect anything from books and clothes for children, tinned food and bedding for an animal shelter or even tinned goods for a soup kitchen.
Be sure to choose a charity that everyone in your office agrees with supporting, otherwise it will be difficult to encourage everyone to take part. Take it one step further and ask your local community to contribute to your charity drive. Set up a place in your office where people can drop items off and offer them a thank you card or note so that they feel appreciated. Make posts on your social media platforms before, during and after the drive, and ensure that you share photographs of your company donating the goods to your chosen charity.
Use your voice
If you know about a cause, such as the outbreak of Ebola in the DRC in 2017, then as a business you can use your voice to make people aware of it. You can create a social media campaign for a charity or join in their advocacy, lobbying, letter writing, and other efforts.
By adding your voice to theirs, their cause becomes louder and it is likely that more people will be interested in donating to them. For example, you could set up a Facebook page for your local animal shelter and create informative posts about pet health for their followers to share. Or you could post blogs to your company website detailing the needs of a local homeless shelter and how people can help them.
You do not have to stick with monetary donations when helping a charity, although these are much appreciated. You can look for creative ways to give back without breaking the bank. As a small business, it is important to build your presence with consumers, and helping a charity is an effective way to do so.
You can encourage your team to volunteer, use your skills to help your chosen cause or you could set up a collection jar in the office. Whatever you choose to do, make sure it is creative and in line with what your employees can achieve.
The Importance Of Training In A Small Business
Having happy and satisfied employees is great for business and will put you two steps ahead of your competition.
As a small business owner, you might not think that training your staff is as important as it would be in a larger company. This is where you are wrong. A small business is still a business and, in order to be successful, you will need to have staff that understand their roles and their responsibilities completely.
They should also be trained in other aspects that do not relate to their position, such as computer literacy and general administrative duties. Skills development facilitation is an effective way to ensure that your employees perform to their highest levels and feel appreciated and valued in your company.
It can help to address weaknesses
While you are not trying to make your employees feel bad about their performances, training programmes can help them (and yourself as the business owner) to address any weaknesses they might have.
By addressing these weaknesses, you can find ways to improve their skills, such as sending them on computer courses or communication courses. Training your staff also allows everyone to be elevated to the same level of competency, making for a more productive and proficient business. Any employees who feel they have weaknesses will be able to improve their skills and reach the same level as the other employees.
Employee performance will improve
If weaknesses and shortcomings are addressed during skills development facilitation courses, this will obviously help to improve your employees’ overall performance levels. You should be sure to send employees on relevant courses that are targeted to their roles and responsibilities so their departments can improve too.
Your staff might be feeling unmotivated or overwhelmed, and a training programme can help to improve their confidence and performance. Improved employee performance is a huge positive for a small business, as it will mean a faster turn-around time and projects being met on-time and within the client budget. Training your staff in their areas of expertise is a sure-fire way to boost their confidence and performance levels.
It can provide direction
If you have a department that is not operating at its full capacity, then a training programme might be the perfect tool to help this department reach its full potential and find direction. Having direction when working in a small business is vital to any employee, as it helps them to be productive and reach business goals.
You can choose from a range of skills to train your staff in, such as computer skills or office administration skills, targeting a certain department that might help with direction in their work. Skills development facilitation can also help those employees who are not sure of their roles or whose skills are too “general” to fit into one department.
If you only have a few employees, sending them on training courses can help to show them what roles and responsibilities in the company are.
Training provides consistency
Sending your employees on skills programmes will ensure that everyone who works in your business has the same level of experience and expertise. This consistency is particularly important when it comes to policies and procedures, as all employees need to be aware of the expectations and procedures within the company.
Putting all staff members through the same basic training will ensure that everyone has the same exposure to every department, which can help the office run smoothly and improve employee relations. Having consistency in your office means that everyone is operating at the same levels and that your business is able to finish projects at a much quicker rate than before the training. Be sure that you also look into more targeted courses for your different departments.
It gives you an edge on the competition
Human capital and skills can help a small business to get an edge on the competition. This is especially true if your entire workforce has been trained in their fields and has received the same training across the board.
Having an edge on the competition is not only beneficial to you as the business owner, but will help your staff to have a sense of pride in their work and can even help to retain your talented employees. Being able to outdo your competitors relies heavily on the abilities of your employees, which means that you should take your training programmes seriously. If you want to be a success, put the needs of your staff first and see how quickly your business improves.
Happy employees means better business
Sending your employees on training programmes can help immensely with job performance, employee retention, office consistency and addressing any weaknesses there might be. Your employees will feel valued and respected, which, in turn, will improve their loyalty to your company and help with quicker turnaround times.
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