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Theory vs. Reality of Creating Sustainable SMEs

This doesn’t mean that people should be intimidated. The key is to examine millions of opportunities which means that thousands of new businesses would result.

Kevin Fleischer

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Reality

South Africa has an extremely high failure rate where business start-ups are concerned. Why?

There are several contributing factors. One is that there is a gap between the theory and reality involved in starting a business and making it survive. Business theory is great in a business school, but is a far cry from the reality that an entrepreneur experiences on the ground.

A high attrition rate has to be expected and accepted, as experience dictates that out of 1000 opportunities, about 100 are worth considering. Of this 100, ten are worth investigating, and ultimately one is worth investing in.

You have a rather controversial view on how the failure rate can be reduced. Would you like to share it?

We need structures that help people fail quickly.  A person with a business idea should have it examined by people with the necessary skills to give guidance on what market segments need to be addressed, costs, pricing models and other essential basics. If the essential elements are missing, they can advise the potential entrepreneur to either abandon or continue with planning.

This means that reality will be addressed before a person has committed their life savings, house and other assets to finance a business that could be fatally flawed from the start.

This would save individuals from making costly mistakes, and would also help address a feeling held by many potential entrepreneurs that there is no money available for small businesses. Money is available – it is the business plans that don’t meet requirements.

If the money is available, why do entrepreneurs battle to find appropriate funding from bodies that have been set up for this purpose?

Resources are disjointed. Policymakers are often naïve when assessing needs and putting policies into action.  This is because they often have no experience in running or starting businesses of their own, whether in the private or public sector.

Again, theory and reality do not correlate. 

Cash flow management is often cited as a major problem for SMEs. Are there other important financial factors that entrepreneurs should pay attention to?

Working capital is equally important. There is a strong culture of BEE enterprise development in South Africa that is very effective. SMEs often become part of the supply chains of major corporations and government departments, and are asked to structure their enterprises so that they can be awarded contracts for specific services.

Unfortunately, the small business is left to finance all elements of the deal to the point where service delivery takes place. The promise is that payment will be made within 90 days. In several instances, this doesn’t happen and the SME is left having made capital inputs that need to be funded.

For many, this spells the end of their small business, as they do not plan for this, or have the ability to access the necessary funding.

Ironically, when a small business fails the system is wrongly blamed.  In many cases, the fault lies with the awarder of the contract that has the money but holds it back for 120 days or more to bolster its balance sheets.

Is there a way out of this ‘catch 22’?

Payment terms and credit need to be viewed differently.

In Mexico, they’ve tackled this problem by establishing a body called ‘Nafin’. The equivalent of South Africa’s IDC, it has a section that offers reverse factoring or discounting.

When an SME is given a government contract, information regarding the deal is placed on an electronic noticeboard. Banks access the system, choose an applicable contract and discount the invoice, providing the SME with cash. The full invoiced amount is ceded to the bank. It’s simple and effective. 

What are your thoughts regarding the announcement earlier this year of South Africa’s Ministry of Small Business?

The minister chosen for the task, Lindiwe Zulu, has a reputation for getting things done. She appears to be speaking to the right people, and many share the view that her plans for the ministry are positive.

It is import to note though that SMEs tend to thrive in fast-moving, fairly unregulated environments. If the new ministry embraces this mind-set, it will be a massive success.

While the ‘Think Big’ series has concluded on TV screens, episodes can still be viewed online by visiting www.standardbank.co.za/thinkbig. For an array of additional tips and tools on how to start, manage or grow a business, visit bizconnect.standardbank.co.za.

Kevin Fleischer holds a BA in Economics from Wits, an M.Phil (Finance) from Oxford, and has extensive experience in the small business sector. Described in his own words as a ‘maverick angel investor’, he is a founder member and former CEO of Blue Catalyst, established by the Gauteng government as a venture capital support network. In the late 90s, he founded Letsema Investments and as MD was involved in early BEE policy formulation, the setting up of labour union investment groups and the structuring of leveraged investments in listed companies

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Start-up Advice

Put On Your Wellies: It’s Time To Wade Into Risk

Entrepreneurs aren’t all leaping into the unknown like lemmings off a cliff, but they do need to consider it…

Chris Ogden

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You’ve had a great idea. You’ve looked into its development. You’ve recognised that it has potential beyond just what Auntie Mabel and Mike From The Grocer think. And you’ve clearly nailed a pain point that can make money. Now it is time to take the risk of running with it.

Every big idea comes with risk. You can’t step out into the world of entrepreneurial thinking and business development without it. Your idea may fail. It will also be time consuming, demanding, hungry for money, and hard work. It is unrealistic to expect that your project will leap out into the world and be an unmitigated success.

It is also unrealistic to assume that it isn’t worth taking this risk.

There are steps that you can follow to ensure that your risk is managed so you aren’t blindly leaping off that cliff…

Step 01: Do your research

No, canvassing your neighbours, friends and family is not doing research. You need to know that your idea will appeal to a broad market and that it will have significant legs. This may sound like daft advice, but you would be surprised how many people think an idea will take off just because Susan in Accounting said so.

Step 02: Understand the costs

Projects are hungry for money and investment. Realistically work out your budgets and how much it will cost to take your project off the ground and then stick to it.

A calculated risk is a far better bet than one that shoots from the hip and hopes for the best. You can also use this as an opportunity to draw a clear line under where you will stop investing and end the project. If it keeps eating money and isn’t getting anywhere with results you need to be able to walk away.

Step 03: Know when to walk away

As mentioned before, this can be defined by a line you’ve drawn in the proverbial sand (and budget) but no matter where you draw this line, you have to stick to it. Often, when time, money and energy have been poured into a project it can be incredibly hard to walk away.

You think ‘but I have put so much into this, just one more’ and then it gets to a point where the ‘just one more’ has taken you so far down the line that walking away feels impossible. Leave. Learn the lessons. Apply them to your next project.

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Start-up Advice

Mind The Gap

The entrepreneur’s guide to finding the gaps and building the right solutions.

Chris Ogden

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entrepreneurship-gap

Innovation may very well be the key to business success but finding the gap into which your innovative thinking can fit is often a lot harder than people realise. Some may be struck by inspiration in the shower, others by that moment of blinding insight in a meeting, however, for most people finding that big idea isn’t that simple. They want to be an entrepreneur and start their own high-growth business, but they need some ideas on how to find that big idea.

Here are five…

1. Network

It sounds trite but networking is actually an excellent way of picking up on patterns and trends in conversation and business problems. The trick is to note them down and pay attention. Soon, you will find patterns emerging and ideas forming.

2. Look for pain

Just as networking can reveal trends in the market, so can spending time reading. The latter will also help you find common business pain points. These are the touchpoints that frustrate people, annoy business owners, affect productivity, or impact employee engagement.

Be the Panado that fixes these pains.

3. Luck

luck

This is probably the most annoying of the ideas, but it is unfortunately (or fortunately) very true. Luck does play a role in helping you capture that big idea. However, luck isn’t just standing around and random people offering you opportunities. Luck is found at networking events, it is found in research and it is found in conversations with other entrepreneurs.

4. Luck needs courage

You may have found the big idea through your network, a pain point or pure blind luck, but if you don’t have the courage to take it and run with it, you will lose it to someone else.

Being bold in business is highly underrated because most people assume that everyone is bold and prepared to take big leaps into the unknown. However, not all brilliant entrepreneurs were ready to throw their family funds to the wind and leap into an idea – they were courageous enough to figure out a way of harnessing their ideas realistically.

5. Pay attention

This is probably one of the most vital ways of finding a gap in the market. Often, people are so busy that they don’t really pay attention to that niggling issue that always bothers them on a commute, or in a mall, or at a meeting. This niggling issue could very well be the next big business opportunity. Pay attention to it and find out if that issue can be solved with your innovative thinking.

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Start-up Advice

5 Things To Know About Your “Toddler” Business

As you navigate this new toddler phase of your business, here are five things to bear in mind.

Catherine Black

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Ah, toddlers. Those irresistible bundles of joy bring a huge amount of energy, curiosity and fun to any family – but there’s also frustration and worry that comes with their unpredictability, as they grow and start to become more independent. If you own a business and it’s successfully past its “infancy” of the first year or so, it’s likely it will also go through a toddler stage of its lifecycle.

Pete Hammond, founder of luxury safari company SafariScapes, agrees with this. “Our business is now three and a half years old, and we’ve found that we’re not yet big enough to justify employing a large team of people to handle the day-to-day admin tasks, yet we still need to grow the business as well,” he says. “As a result, our main challenge is finding the time to step back and see the bigger picture. Kind of like when you are raising a busy toddler and you spend most of your time running after them!”

As you navigate this new toddler phase of your business, here are five things to bear in mind:

1. This too shall pass

Everything in life is temporary – and that goes for both the good and the bad. It’s as helpful to remember this when you’re facing the might of a toddler temper tantrum, as it is when you’re facing throws of uncertainty in your business. If your new(ish) venture is going through a rough patch in its first few years, it can be easy to think about giving up – but don’t. As long as you have an overall big idea that you believe can add value to your customers, keep pushing through the rough parts until you come out the other side.

2. Appreciate what this phase brings

The toddler years mean that the initial newborn joy is officially behind you. But these small humans also bring their own kinds of joy, as you watch them learn new skills, say funny things, and give affection back to you. While your two-year-old business may not hold the same exhilaration for you as it did during those first few months, there are now different things to appreciate about it: Maybe you’re expanding your product range, or employing new people who can take the workload off you.

3. Establish boundaries

Toddlers thrive on boundary and routine – and your toddler business will too. As it grows into a new phase, try and establish limits in terms of the type of clients you want to work with and the type of work you’ll do. It’s also a good idea to make a decision about the hours you’ll work and when you’ll switch off, which will help you establish a good work-life balance.

4. Take a break

Every parent with a toddler needs a break every now and then, even if that means a walk around the block (on your own!), a dinner out with friends, or even a few days away. The same is true for a demanding small business: every so often, remember to take time out to rest properly, where you switch off your laptop and completely unplug. You’ll return much more inspired and resilient to deal with the everyday uncertainty that it brings.

5. Give it space to make mistakes

While the unpredictability of a young business can be stressful and tiring, it’s also a time for trying new things without the risk of huge consequences if they don’t quite work. After all, it’s much simpler to change your USP if you’re a small business employing a few people, rather than a big company where 50 people are relying on you for their salary, or where you’ve received a huge amount of investment capital. While you may fail in some of the things you try with your business (in fact, this is almost guaranteed), see it as a toddler that’s resilient enough to pick itself up, dust its knees and keep moving forward.

During this phase of business growth it’s also essential to have the right type of medical aid cover. There are medical schemes such as Fedhealth which has a number of medical aid options and value-added benefits to ensure that your health and wellness is taken care of too. After all, the healthier you and your staff are, the more productive your business will be – during the toddler (business) stage and beyond.

While this phase can be frustrating, it’s a sign that your business is growing and adapting, rather than remaining in its infancy, and that can only be a good thing! So embrace the difficulties, learn from them, and watch as your business strides forward confidently into the next exciting phase.

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