The South African government’s National Development Plan (NDP) identifies SMEs as primary drivers of job creation, and has set a target of 90% of new employment being created in the SME sector by 2030. Many economists agree that rapid SME growth is the only sustainable way to reduce unemployment and expand the middle class.
One would have thought that this was great news for SMEs – most South African small, medium and micro-business owners are unlikely to disagree with the policy. In practice, however, there are certain obstacles to be overcome before the majority of our SMEs will commit themselves to growth as a deliberate contribution to job creation, alongside each company’s primary aim of improved profitability.
A poll of more than 1 300 South African companies, the 2015 SME Insights Survey commissioned by the South African Institute of Chartered Accountants (SAICA), revealed that 76% of the respondents employ fewer than 20 people, and 46% have fewer than five employees.
There was also a very interesting correlation between SME longevity, turnover and staff size. By and large, the 25% of SMEs that report turnover above R10-million per annum are also those who have been in business 5 years or longer, and furthermore they are the firms likely to be employing more staff. Only 1% of the sample claimed a turnover above R500-million per annum, and 1% also employ more than 1 000 people.
The implication is clear: If SMEs are to be engines of job creation, the task will be accomplished by SMEs that have survived long enough to achieve substantial annual turnovers on a sustained basis. The government is to be commended for supporting micro enterprises, but their job creation goals will need a new focus.
Barriers to SME growth
These statistics make sense. Most small and medium enterprises actually begin as micro enterprises, with just one out of two entrepreneurs forming their own company. For the first two or three years, they will be totally focussed on the challenges of creating a sustainable business: Funding, production, distribution, cash flow, and market penetration. In many cases, entrepreneurs are also breadwinners, so their immediate priority is providing for their dependants.
This is not to say that they cannot also perform a socially conscious job creation role, and be committed to the NDP vision; but the harsh economic reality is that they cannot afford to focus on providing jobs for others until they are sure that their business will be able to continue supporting them and their families. And they will not be turned into job creation machines until government provides compelling incentives for them to do this.
More than 60% of SMEs fail within their first three years. A rational conclusion from all this data is that supporting and mentoring existing SMEs who have survived three or more years, so that they can achieve the longevity and turnover that allows them to employ more staff, would be an important policy direction, and possibly a more rapid road to the achievement of the NDP goals than a concentration of funding on thousands of new micro-enterprises.
Asked to identify the biggest barrier to entry when starting a business, respondents said the three primary obstacles were government red tape, access to funding and red tape when dealing with big business. If these factors make starting a business harder, it is logical to infer that they remain a deterrent as a business grows, bringing with it more red tape and the need to fund further expansion.
It is hoped that policymakers will take the findings of the 2015 SME Insights Survey into account when trying to formulate policy that will help SMEs address these obstacles, but at the same time, SMEs themselves can take proactive steps to lessen their impact.
By engaging the services of a Chartered Accountant (South Africa) [CA(SA)], an SME owner can lighten the dual burdens of dealing with red tape and the acquisition of funding, while at the same time getting sound business advice that will increase their chances of long-term success.
Related: Getting Your Growth On
SMPs offer multiple benefits
A significant number of CAs(SA) work in small and medium practices (SMPs), providing financial and accounting services to other SMEs. But the value they can offer to these SMEs goes beyond the bookkeeping and tax consulting that most small business owners see as their primary function.
As successful South African entrepreneur Alan Knott-Craig Jr put it when asked about the value of his CA(SA) qualification: ‘There’s a lot of admin that isn’t fun when you’re setting up a business: Registering a company, getting a trademark, doing legal agreements, cash-flow management, accounting, etcetera. All of that gets taught to CAs(SA) – you get so comfortable with statutory company secretarial and regulatory accounting work. It’s something non-CAs(SA) don’t pay much attention to when they get their own small businesses off the ground. And then one day they forget to pay VAT, and SARS comes and takes out their business. A CA(SA) is not going to drop the ball in those areas.’
For many entrepreneurs, the first problem when dealing with red tape is knowing what red tape is even relevant; a consulting CA(SA) will have all that information at their fingertips, whether dealing with government or big business contracts. For example, 55% of the companies in the 2015 SME Insights Survey either do not know how they will be ranked under the latest Broad-Based Black Economic Empowerment (B-BBEE) codes, or presume they will be non-compliant.
Another 12% are unsure if their status will even change. Yet under the new B-BBEE codes, any SME with a turnover less than R10-million per annum qualifies as an Exempt Micro Enterprise (EME), and as such receives an automatic B-BBEE Level 4 or better rating, allowing it to bid for contracts with government and big business. A full 75% of the businesses surveyed qualify as EMEs, and any CA(SA) would be able to tell their owners that they can achieve Level 4 status simply by submitting an affidavit about their turnover.
Business and funding assistance
Apart from the ability of CAs(SA) to deal with red tape, South Africa’s small business bankers agree they can be a great help in mentoring and advising small businesses with an outside perspective – and even in helping to prepare them to be attractive prospects for bank funding.
Thakhani Makhuvha, CEO of the Small Enterprises Finance Agency, thinks that SMEs could consider contracting SMPs to perform the functions of a non-executive director, without a formal appointment to the role. ‘It would be a significant value-add,’ he says. ‘
A small company might not be able to understand the risks that they are facing – it might be in invoicing, creditors, filing, following up with the debtors, etcetera. An audit firm that will provide that insight will definitely be adding value to the small business – if those risks are identified and mitigated, it gives us a firm degree of confidence. You don’t have to be appointed a director – just an independent person who is behaving like a director, questioning the strategy and viability of the business on an on-going basis.’
As Makhuvu’s remarks illustrate, advice and mentorship from a CA(SA) can also help SMEs overcome another barrier: Finding funding. A 2014 survey of all the major SME funders in South Africa revealed that the input of a CA(SA) was seen as a positive advantage, and that lenders felt more secure about providing finance to SME owners who were prepared to rely on qualified guidance and expert financial oversight.
‘If a lender knows you’re a CA(SA), they talk to you differently; it’s just a fact,’ says Alan Knott-Craig Jr. ‘The CA(SA) designation provides instant business credibility.’
The conclusion is readily apparent: entrepreneurs, who want to build long-running, profitable SMEs that can eventually turn into large enterprises and employ significant numbers of people, need to be able to handle red tape and applications for funding along with all the other financial and strategic minutiae of business, both on a day-to-day basis and within a long-term strategy. They would do well to consider consulting a CA(SA) to provide value advice and expertise in all these areas.
If you’re an SME and would like to participate in the 2016 SMME Insights Survey commissioned by SAICA, click here: 2016 SMME Insights Survey
5 Businesses You Should Start in 2019
Here’s the lowdown on consumer and technology opportunities in 2019 and beyond.
Savvy entrepreneurs should keep a close watch on consumer and technology trends in 2019. This, according to Silvertree Internet Holdings Co-founder and MD, Manuel Koser. Having invested in and grown a number of highly successful South African brands (among them Faithful-to-Nature.co.za, UCOOK.co.za, Pricecheck.co.za, CompareGuru.co.za, Petheaven.co.za, Cybercellar.com, and CarZar.co.za). Silvertree’s management team sees several business opportunities set to grow exponentially over the coming decade.
Here’s the lowdown on consumer and technology opportunities in 2019 and beyond.
1. Indigenous and ethical: Personal and home care products
2019 Sees growing potential for personal care products – ‘Those with local and indigenous ingredients, ethical sourcing which is kind to nature and the body,’ Koser explains. ‘There is a lot of room to play in the African haircare market particularly, as it’s often overlooked by the major FMCG companies.’
The Silvertree MD also sees increasing room for innovative natural home cleaners as consumers become increasingly environmentally conscious. ‘Until now, it was all about the well-known cleaning products the major chemical manufacturers put on the shelves. Now, there’s increasing space for new, exciting entrants.’
2. New beverages
‘Locally-sourced ingredients and an earth-first mindset will also play an increasing role in the consumer beverage market. Add to this the fact that major soft drink manufacturers will struggle to produce drinks for increasingly health-conscious consumers. They’re often just not quick enough to adjust to changing consumer tastes – particularly the tastes of millennials. Think less about a standard fizzy drink, but rather one that’s kind to the body, with natural ingredients. Non-alcoholic: water plus, say, cucumber, or another indigenous ingredient. The market for this will grow.’
3. Ethical snacking
Plant-based, vegan, ancient grains, ethical, protein-rich snacks – these are just some of the trends Koser sees dominating in the snack segment in 2019 and beyond. It’s about unique, tasty, functional foods that cater to the modern, time-starved consumer, Koser explains.
4. Buy, sell and compare online
In the technology space, marketplaces, e-commerce sites and classifieds will all gain momentum in 2019 and beyond. This encompasses aggregators as well as more unusual online businesses, which are increasingly able to find and reach consumers interested in niche products and services.
‘Consider an online ice-cream business. Once, something like that would have been unthinkable,’ Koser explains. ‘But as consumers demand greater choice, room for niche products like this grows.’
Yet, dabble online and seamless execution and delivery become make-or-break factors. ‘Many South African consumers use services such as Google, Amazon, Uber and Spotify daily – world-class products that function on a global scale. You can call an Uber and wait for just two minutes before getting a ride,’ Koser explains. ‘It’s quick and totally seamless. Consumers have come to expect that level of service across the board. Aligned to this is the fact that the millennial wave is currently hitting Cape Town right now, and Joburg secondarily, meaning a number of opportunities are opening up. Go after products and services in the right space and consumers will follow.’
5. Reinvent the wheel – and make it better
The final type of business entrepreneurs should keep an eye on is those that currently have low Net Promoter Scores. ‘This means that very few people like them, or the services they provide are of very poor quality,’ Koser explains. ‘Think of postal service providers or telecoms companies. With any monopolistic or oligopolistic structures, the service is often terrible because the heavyweights hold so much power. There’s a huge gap here.’
An allied approach for entrepreneurs is to assess opportunities for automation, or cutting out the middleman with technology. ‘Once, many markets – such as real estate were opaque, meaning you needed a middleman to help you transact. However, as the capabilities of technology have grown, markets have become far more transparent – making it easier for buyers to match with sellers safely. Today, a lot of this is easy to automate services – think about connecting a homeowner to a prospective renter through a digital solution where renters can be qualified, for example, in terms of their finances, personal information and criminal records. Quick and simple. And no middleman.’
The biggest opportunities here centre around where consumers spend the greatest amounts of time and money, Koser notes. ‘Housing and rent are always major costs. In terms of where consumers spend their time, on the other hand, much of it is, on a mobile phone, or PC.’
However, entrepreneurial success is never down to any one magic formula, Koser emphasises. Nor does Silvertree invest in prospective entrepreneurs solely on the basis of the product or service they offer. ‘It’s about passion, perseverance and tenacity as much as it is about the quality of the product.’
Silvertree Internet Holdings is an investment growth partner who aims to understand, grow and scale business, consumer and digital brands to unlock the brands’ exponential growth.
What To Watch For In Tito Mboweni’s First Budget Speech
By Rob Cooper, tax expert at Sage, and chairman of the Payroll Authors Group of South Africa.
Finance Minister, Tito Mboweni, delivers his first Budget Speech on 20 February at a difficult time for the South African economy. Even though President Cyril Ramaphosa has done much to restore business confidence in his first year in office, GDP growth remains weak, government finances are in relatively poor shape, and renewed load shedding is hurting business confidence.
Judging from his Medium-Term Budget Policy Statement in October last year, I expect Minister Mboweni — backed by the team in the National Treasury—to deliver a relatively cautious budget. Much of the focus will be on refinancing the state-owned enterprises and putting them back on to a sustainable footing.
We probably won’t see much in the way of radical thinking since the room for manoeuvre is so limited. Click each header below for an indepth video on the upcoming topics.
Renewal of the country’s public healthcare system with a mandatory health insurance fund and free healthcare at the point of need has been the ANC government’s policy for years, but progress has been slow to date. There isn’t much money in the country’s coffers to fund something as ambitious as NHI, yet the government will want to show that it is advancing the concept ahead of the elections.
With an NHI bill to be tabled in Parliament soon, we could learn more about how NHI will be funded in this year’s Budget Speech — it’s still not clear whether we will pay for it through payroll taxes, VAT increases or other fundraising measures. As an initial step, we could see medical aid tax credits reduced (or at least not adjusted for inflation) to free up some funding for the NHI.
The ETI Act came into effect on 1 January 2014; as a fan of this incentive, I was delighted that President Ramaphosa announced that it will be extended for 10 years another decade in his state of the nation address. However, I have also long argued that the scheme is not performing to its true potential because it is so complex for payroll managers to administer.
The introduction of the national minimum wage adds even more complexity— until and unless the ETI Act is amended, SARS is of the opinion that the National Minimum Wage will not qualify as a “wage regulating measure”. I hope the Budget Speech will announce steps to align the ETI with the national minimum wage and take other measures to simplify administration.
I don’t expect any major increases to corporate or personal income tax this year since the taxpayer doesn’t have much more to give. I think the top 45% rate will remain unchanged, while tax bracket creep relief (to compensate for inflation) will be limited to lower income earners. It seems unlikely that the Minister will increase VAT again this year, given last year’s increase.
That means the Minister is likely to look at ‘moral’ taxes (sin and sugar taxes) to raise more money; we can expect another steep increase in the fuel levy. Perhaps we’ll also hear about efforts to improve SARS’ revenue collection after several years of under-performance. The agency seems ripe for a turnaround strategy, with high-powered team looking for a permanent chief to take the reins at SARS.
Follow us on @SageGroupZA on 20 February 2019 for LIVE expert insights from the annual Budget Speech.
For more information about Sage’s annual tax seminars, please visit: https://get.sage.com/PRL_19Q1_C4L_ZA_EVCU_NPS_AnnualPayrollTaxSeminar2019
Top SA Entrepreneurial Competition Praises Sector Optimism And Calls For 2019 Entries
Entrepreneurs interested in entering the competition can enter online here.
Even in the face of ongoing sluggish growth, exacerbated by widespread allegations of corruption and muted domestic economic activity, South African entrepreneurs remain overwhelmingly optimistic. This was revealed in the Real State of Entrepreneurship Survey 2018, which found that the vast majority of over 1000 business owners surveyed feel very positive about the business climate and outlook for the 12 months ahead.
It is these resilient individuals who will have their deserved time to shine in the 2019 Entrepreneur of the Year® competition sponsored by Sanlam and BUSINESS/PARTNERS, says Kobus Engelbrecht, spokesperson for the competition, who says entries for the renowned competition – now in its 31st year – are officially open.
Entrepreneurial competitions of this nature, however, serve a greater purpose than just celebrating South Africa’s spirited self-starters, notes Engelbrecht.
“Credible platforms such as the Entrepreneur of the Year® competition also act to inspire the next generation of budding entrepreneurs, who have the potential to drive real economic growth at a time where the country needs it most.”
Engelbrecht refers to the World Bank’s recent downward revision of South Africa’s projections for economic growth in 2019 to just 1.3% – 0.6% lower than the South African Reserve Bank’s earlier prediction of 1.9% in November.
“Despite these challenging economic conditions, year on year we still find exceptional entrepreneurs who continue to identify gaps in the market and transform these into viable businesses.
“It is our aim, through this long-standing competition platform, to continually recognise, encourage and support the hard-working entrepreneurs who continue to do well despite the challenges they are faced with. We use the competition to convey our appreciation for the role they play in inspiring others to venture into the world of business,” he says.
In addition to offering valuable mentorship support, networking opportunities and national media exposure, Engelbrecht says that the2019 Entrepreneur of the Year® competition, sponsored by Sanlam and BUSINESS/PARTNERS, offers prizes valued at over R 2 million, which includes cash prizes of R 70 000 for each main category winner, and R200 000 for the overall winner.
“All South African businesses are eligible to enter this competition, and prizes will be awarded across six categories, namely: Overall Entrepreneur of the Year®; Emerging Business Entrepreneur of the Year®; Small Business Entrepreneur of the Year®; Medium Business Entrepreneur of the Year®; Job Creator of the Year; and Innovator of the Year.”
Entrepreneurs interested in entering the competition can download entry forms online at www.eoy.co.za as well as interact with fellow entrepreneurs and entrants on the competition’s social media platforms www.twitter.com/@EOY_SA and www.facebook.com/EOY.SA. The closing date for the competition is 31 May 2019.
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