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Stimulating The SME Sector: What Can Government Do Differently?

A number of SME surveys and reports have identified key barriers to entrepreneurs wanting to start new SMEs or expand their existing businesses. In several instances, changes in policy by government could reduce these barriers significantly, in others they have already taken action.

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The South African Institute of Chartered Accountants (SAICA) commissions an annual Small and Medium Enterprises (SME) Insights Survey with several objectives: To canvass SMEs’ opinions and perceptions, to help SAICA members in small and medium practices (SMPs) to understand ways to better serve the small business community, and to assemble data that will be of use to government policymakers in their quest to enable SMEs as the primary driver of job creation, as outlined in the National Development Plan (NDP).

More than 1 300 small and medium enterprises (SMEs) were canvassed in the 2015 survey, a significant increase on the 800 respondents who participated in 2014. SAICA are calling for SMEs to participate in the 2016 survey and to keep the pressure up on law makers. The link to the 2016 survey is: SMME Survey 2016.

One of the findings in the 2015 survey report indicates that if government wants to achieve NDP targets of 10 million new jobs, with the SME sector responsible for 90% of new employment by 2030, it should be prepared to accept that some things have to be done differently.

The survey results show unequivocally that the SMEs that have been in business the longest generally have the highest turnover, and employ the most people. So although the creation of new SMEs is very important, it is equally important to acknowledge that meaningful job creation only begins when SMEs are achieving annual turnover of R2-million or more.

Related: How SMEs Can Defeat The Red-Tape Bugbear

Given that over 60% of SME start-ups fail within two years, and only 20% achieve long-term stability, the research findings suggest a two-pronged approach by government may be required: To encourage more SME start-ups and to provide them with strong financial access and technical support, and actively to encourage growth in established SMEs that have survived the critical first few years.

Longevity vs turnover for SMMEs

Longevity vs employment in SMMEs

Top reasons for SME failure

Asked what they saw as the main factors behind the failure of SMEs, the survey respondents’ three top factors are revealing: Their debtors pay them late, they are not good at managing cash flow and they do business with clients who don’t pay them.

From all three top responses, it is clear that unreliable cash flow is one of the primary reasons why businesses fail. In a July 2015 report on levels of optimism among South African SMEs, the CFO of specialist SME lender Business Partners, Ben Bierman, said: ‘Cash flow is a constant challenge for SMEs, and late payments or non-payment is one of the largest risk factors impacting a small business’ sustainability.

‘Late payment can be disastrous for an SME’s cash flow – as they are unable to absorb these payment delays as effectively as larger companies do – and can potentially lead to the failure of an otherwise sound company.’

The perception that government at all levels pays late is unsurprisingly then, one of the major reasons why 72% of the survey sample does no business with government at all.

If government is to support and develop SMEs – particularly those that achieve B-BBEE compliance and are majority or wholly black-owned – by channelling its procurement spending to qualifying SMEs, it needs to create a culture of swift payment by government at national, provincial, municipal and parastatal level.

The KPI announced by former Finance Minister Nhlanhla Nene in the 2015 Budget, which will oblige financial officers at all levels of government to ensure payment for services to SMEs within 30 days, could go a long way to removing this obstacle to SME development – as long as it is properly implemented, monitored and enforced by the Treasury.

The fourth factor named as a reason for SME failure in the 2015 SME Insights Survey is that they start with less capital than they need.

Related: Making Government Business More Attractive To SMEs

Combined with cash flow instability, insufficient start-up capital can quickly prove fatal to SMEs. Although government does provide a substantial amount of finance and support for start-ups through entities such as SEFA, the Department of Trade and Industry and the Black Business Supplier Development Programme, another survey by online payroll and accounting provider Sage earlier in 2015 revealed that 96% of South African start-ups receive no assistance, financial or otherwise, from government.

The problem appears to be mainly a lack of awareness of the available government and private sector funding, so a proactive step would be for government and big business to collaborate on educating more SMEs on their capital funding options.

As Ivan Epstein, President for Sage International and Chairman of Sage Foundation said: ‘One of the biggest barriers to the success of SMEs in South Africa is education. It would be a wonderful, positive opportunity to work with government to help SMEs face challenges like regulatory compliance, access to finance, skills development and mentoring.’

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5 Businesses You Should Start in 2019

Here’s the lowdown on consumer and technology opportunities in 2019 and beyond.

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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.

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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.

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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.

National Health Insurance (NHI)

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 Employment Tax Incentive (ETI)

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.

Tax hikes

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

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Top SA Entrepreneurial Competition Praises Sector Optimism And Calls For 2019 Entries

Entrepreneurs interested in entering the competition can enter online here.

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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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