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.
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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
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.
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