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
Be 1 Of 3 High Growth Scale Ups Sponsored By FNB & Vumela To Participate For FREE In 10X Accelerator Program (Value Of R650 000)
FNB and Vumela are sponsoring 3 high growth Scale Ups on the 10X Accelerator Program, kicking off in February 2018.
The 10X Program has received amazing reviews and huge interest, because of its unique approach:
- Focused on businesses that are Scaling Up (past the start-up / typical Accelerator phase)
- Business Scale Up focus, not capital raising / exit focused
- Broad company-building focus, not a narrow technology commercialisation focus
- Addressing the gnarly and complex issues that come with growth, like hiring, firing, performance managing, management systems, Boards, etc
- 18 months of intensive, hands on support
- Working with seasoned Scale Up leaders
Here’s what delegates are saying:
“We’ve grown really fast, but without the 10X Program we probably wouldn’t exist anymore because things were starting to break… It’s a game changer… Unlike most other workshops like this I have experienced, 10X-e combines theoretical concepts with real world applications so that I can make immediate changes to my business. The tools are easy to execute throughout my organisation and get the needed buy in from my management team. We now have every staff member fully aligned to the company’s strategy… we’re now scaling much faster and with less resources than we would have normally required without the 10x process…. – James Wilkinson, Founder, Sonic Telecoms
“Within 1 month I doubled sales revenue, because it became so clear I had 2 people in the wrong roles. We swapped their roles and doubled revenue immediately.” – Richard Rayne, Founder, iLearn
“I used to feel like I was sprinting up a sand-dune. If I stopped sprinting for a moment, the business would slide downhill. But since the program, we have much more momentum and its not all up to me because the entire team is pulling together in the same direction. Things won’t grind to a halt if I am away for 2 weeks” – Andrew Cook, Founder, Smoke Customer Intelligence
‘The [10X Strategy Workshop] process gave us the framework to focus and say no to distractions … [key] part of our journey to drive relentless focus. The Workshop catalysed us working on our business and not just in it… [and] supported a period of advancement… and scale’. – Brad McGrath, co-Founder, Zoona
‘The upfront Path To Scale Boot Camp… got us all thinking the same way and on the same page about how to Scale. It is something we have carried with us and that has guided us ever since.’. – Aisha Pandor, co-Founder, SweepSouth
The Program is worth R650k. FNB & Vumela are sponsoring 3 qualifying Companies. Seats will be awarded to businesses with the greatest Scale Up potential.
- Application deadline:12th Jan.
- More info on the Program & the Application Form: https://goo.gl/forms/dobVI6N2FY7tKiJK2
R33 Million Boost For Job Creation And Innovation In SA
The Craft + Design Institute (CDI) has launched R33 Million in funding to boost SME growth, job creation and innovation.
The CDI has raised the R33m to establish three funds – a Growth Fund, an Innovation Fund and a Loan Book – these funds will be managed by its investment arm, CDI Capital.
The funding will be for developing 60 growth oriented SME’s and 20 innovative technological solutions – and to create 600 permanent jobs in the process over three years.
This funding has been enabled by the National Treasury’s Jobs Fund through the Government Technical Advisory Centre (GTAC), the Technology Innovation Agency (TIA), and the Western Cape Department of Economic Development and Tourism (DEDAT).
CDI Capital was specifically incorporated as a CDI subsidiary in 2016 to catalyse funding for SMEs. A level 1 B-BBEE company, it aims to combine government grants with corporate Enterprise Development spend and private funds to de-risk investments in SME’s to stimulate growth and returns.
The Growth Fund is open to businesses with turnover or assets of more than R1m with the ability to create permanent jobs. Applications open on the 27th of November and close on the 31st of December 2017. For specific criteria and more information on the grant please visit www.cdicapital.co.za/GrowthFund
The Design Innovation Seed Fund (DISF) is open to inventors who believe they have protectable innovative technological solutions that could impact on specific sectors and could create permanent jobs. This is the third round of this fund. Applications open on the 27th of November and close on the 31st of December 2017. For specific criteria and more information on the grant please visit www.cdicapital.co.za/DISF
In addition to the grant funding products, CDI Capital will also launch a R3.5m working capital and term loan facility at reduced rates for the duration of the three-year project to provide access to cash flow during the growth stage of these, and other qualifying SME’s.
The CDI has 16 years of experience in SME development and started supporting development in the craft and design sectors nationally in 2015. Signaling this change, the organisation changed its name in September from the Cape Craft + Design Institute to The Craft + Design Institute.
According to Erica Elk, Executive Director of the CDI, it was a landmark moment in the organisation’s history.
“Over the past few years our team has successfully taken our services across the country – we have conducted a business and product development workshop series in every single province and received incredibly positive feedback. The message clearly is ‘more please’.”
Elk said that there is a consensus in South Africa today that SMEs hold the solution to our intractable problems of a sluggish economy and high unemployment rates.
“In most countries, SMEs play a vital role as drivers of economic growth, innovation and job creation, but, in South Africa, this value is yet to be properly realised. To achieve this, the challenges experienced by SMEs need to be addressed. Namely access to markets, finance and credit, infrastructure, resources for R&D, and access to adequately skilled and work ready labour.”
She added that the CDI, through its specialised investment arm CDI Capital, is gearing up to provide solutions to some of these challenges, particularly in the craft and design sector and related sectors where design and innovation can catalyse growth.
“Our first Jobs Fund project, completed successfully in December 2015, had 45 participating companies creating 464 jobs off an investment of R14.5m. This was 105% of the target of jobs to be created. Participating SMEs grew their combined annual revenue by 73% over three years – from R60m to R104m. Funds were used to improve their products, processes and competitiveness through the acquisition of new machinery or specialist staff, and to expand local and international market reach.”
“We also completed a first round of DISF grants in 2016, and are currently working with seven innovative SMEs in round two – round one attracted private funding of over R10m in equity funding into some of the high-potential innovators. The DISF gives innovators and entrepreneurs in the Western Cape an opportunity to get the finance and support needed to get their ideas to the next stages.”
“We have put a significant amount of work into developing these offerings, not only ensuring good governance and appropriate monitoring and evaluation measures, but realising real and sustainable impact with the businesses we support. We are excited to have raised R33m to launch this new funding for SMEs, and we thank our funders and supporters – we look forward to making meaningful investments.”
“Now – having led the way with investment from the public sector – we would like to partner with the private sector to support and strengthen this initiative. We believe this project – which aims to catalyse innovation, support growth orientated SME’s and create 600 jobs – would be an ideal Enterprise Development spend opportunity. CDI would gladly partner with corporate growth orientated accelerators and mentorship programmes to further strengthen the support offered to the participating SMEs.”
Najwah Allie-Edries, Deputy Director General: Employment Facilitation within the Jobs Fund:
“The Jobs Fund supports this initiative in recognition of the critical role that SMEs play in creating a more inclusive economy and job creation and also because it will contribute toward CDI becoming a more self-sustaining entity. The aim of this initiative is to provide appropriate financing options to SMEs in the craft and design sector in order to catalyse sustainable growth which will result in attracting further investment into a sector that has often been neglected. The introduction of a revolving loan facility will not only ensure that over time more SMEs can benefit from access to finance, the enhanced revenue streams will also contribute to the CDI’s goal of becoming a sustainable entity in its own right.”
Mr Vusi Skosana, Head: Technology Stations & IATs (TSP) at TIA, said that the Technology Innovation Agency (TIA), an agency of the Department of Science and Technology, was established with an objective to support the State in stimulating and intensifying technological innovation in order to improve economic growth and the quality of life of all South Africans by developing and exploiting technological innovations.
Solly Fourie, Head of Department, Department of Economic Development and Tourism, Western Cape Government:
“We know that there is a strong need to develop and improve the socio-economic conditions of the citizens in our region. To this end, the creation of a healthy and vibrant regional innovation system can be a catalytic driver of sustainable economic growth and development. But neither DEDAT, nor the WCG, are able to tackle this alone. The partnerships created through the Seed Fund and Jobs Fund; and initiatives like it, go a long way to creating an enabling regional innovation system in which we collectively draw on the Quad helix’s expertise and resources; promote local industry and attract and grow innovative businesses. By doing this, we are crafting the best possible conditions for businesses to develop in this region.”
Start-ups Require A Strong Legal Foundation Webber Wentzel Ignite
Entrepreneurs, start-ups and scale-ups are a lifeline to South Africa’s economy.
Entrepreneurs, start-ups and scale-ups are a lifeline to South Africa’s economy. It is however a harsh environment and many entrepreneurs find themselves in a situation where they are wearing many hats and navigating potential pitfalls without the knowledge that many professionals have from years of experience.
This is especially true from a legal point of view where entrepreneurs are faced with real world regulatory challenges that could have far-reaching consequences on their fledgling business, such as financial regulatory, tax, exchange control and intellectual property.
A common example is that start-ups often forget to secure the rights and licenses they need to operate. For example, would you invest or partner with a company that:
- doesn’t have a legal right to use their brand
- doesn’t have proprietary technology; and/or
- is reliant on a third party agreement that doesn’t permit commercial use?
Related: How To Raise Working Capital Finance
These avoidable shortcomings often result in failures at critical junctures. The specialist legal services needed to avoid these problems are typically not easily accessible to start-ups.
With this in mind, Webber Wentzel has launched a project called ‘Webber Wentzel Ignite’ – a legal incubation programme that will provide selected entrepreneurs and innovators from any sector with:
- tailored legal services valued at up to ZAR 100,000;
- bespoke mentoring and training support – focused on legal knowledge and developing key legal skills relevant to start-up businesses; and
- targeted networking and profile-raising opportunities.
Video about Ignite
Webber Wentzel is not asking for equity or exclusivity; only an opportunity to connect and make a difference as a trusted advisor over the long-term. It is a wonderful opportunity that will set the selected entrepreneurs apart in the marketplace. Applications close on 15 January 2018
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