SA managed to avoid falling back into a recession when it eked out a meagre 0.6% expansion in the second quarter of 2014, thereby avoiding two consecutive quarters of negative growth. SA’s small and medium-sized enterprises (SME) sector, which comprises an estimated 34% of GDP, is seen as key to economic growth and future prosperity.

The sector is also critically important in terms of job creation. Increasing the number of SMEs and growing the size of these businesses are vital objectives to ensure that SA remains prosperous.

Recent research into the SME landscape and performance, titled SBP’s SME Growth Index for 2013, states that 71% of respondents said it had become more difficult to operate a business in SA in 2013. While firms’ competitiveness and performance are linked to their operating environment, it is also a measure of how effectively they can adapt to challenges and changes within those environments, and how successfully they formulate strategies to seize opportunities.

SBP’s index tracks the dynamics of SA SMEs with a particular focus on their ability to grow. It looks at a random sample of 500 SMEs operating in the business services, manufacturing and tourism sectors of the economy.

While older firms showed a greater ability to take on new staff in larger numbers than those that have existed for shorter periods, it was encouraging to see that two-thirds of the businesses managed to increase their average turnover in 2013 compared with just over 50% the year before.

According to SBP’s report, 2013’s average annual turnover across all three sectors was 13%, denoting a small measure of real, above-inflation growth of about 7%. This was generally a result of SMEs devising their own strategies, such as seeking more work and reducing wastage.

However, despite growth in turnover remaining on a moderate upward track, employment expansion was disappointing: 48% of respondents said their staff numbers remained constant, a third had increased staff and 18% had implemented cutbacks. Firms that had been in operation for between five and 10 years employed an average of four new staff, while businesses aged between 10 and 20 years grew staff by an average of five people. Firms older than 20 years expanded by just under six new staff members. Demand for permanent employees also rose with older firms.

The report also found that in the manufacturing sector, currency volatility had a direct and severe impact. Sentiment regarding the business environment was negative but marginally better than in 2012: 71% of respondents felt it had become harder to operate a business, one in five felt it hadn’t changed, and 9% said it had become easier.

Each respondent spent about 75 hours a month dealing with red tape – the equivalent of eight working days. Lastly, the chief impediments to growth were a shortage of skilled staff, local economic conditions, a lack of finance, burdensome regulations and the cost of labour.

Increasing the number of SMEs and growing the size of these businesses are vital objectives to ensure that SA remains prosperous

So what exactly is being done to stimulate SME growth? SA has an array of local and international corporations that offer mentorship and support programmes by way of business development services (BDS) to strengthen SMEs and upskill business owners and directors. This usually forms part of the enterprise development element of SA’s BBBEE policy that aims to ensure economic participation by black and other previously disadvantaged groups.

One such BDS-related support programme is the Hope Factory in Johannesburg. Governed by the Institute for Chartered Accountants of Southern Africa (SAICA), it focuses solely on the financial acumen of SMEs and offers training programmes that last for up to four years, depending on the individual needs of the SMEs that participate.

This is the latest in a series of business support programmes being held around the country, and consists of regular workshops and mentorships for entrepreneurs.

According to Sipho Pilime, Hope Factory business mentor, in 2013 about 80 people from Gauteng SMEs participated. This number is expected to increase significantly as the programme expands.

‘Qualifying entrepreneurs are able to access a network of industry and professional service experts with many years of experience, with whom they are able to consult on industry and professional specific aspects of the business,’ he says.

‘The key to successfully running a business, irrespective of the sector that it operates in, is to be able to plan and implement strategies that must be measured on an ongoing basis. This is only possible if the entrepreneur has an understanding of financial statements and is able to interpret them. Financial management excellence is promoted through practical financial workshops, mentoring and coaching.’

Bridgitte Kriel, SAICA small and medium practices project director, supports this view. She says that the longevity of a business also has a strong correlation to the size of its turnover. ‘Only 33% of businesses who have a turnover of less than R2 million have been in business for longer than 10 years, compared to 58% of businesses between R2 million and R20 million turnover, and 73% of businesses between R20 million and R100 million turnover.’

She says SAICA recently conducted a survey among 878 SMEs that showed that the number of people employed grows rapidly with the turnover and length of a business. Some 94% of firms with a turnover of less than R2 million employ less than 10 people, while 51% of companies with a turnover of R2 million to R20 million employ more than 10 employees. Some 30% of firms with a turnover of R20 million to R100 million employ between 20 and 50 employees – 47% of these employ in excess of 50 employees.

‘It shows that if South Africa wishes to create jobs and stimulate the economy, one of the key drivers must be to encourage growth of small businesses into medium or large businesses.’

‘The key drivers must encourage  growth of small businesses into medium or large businesses’

BRIDGITTE KRIEL, SMALL AND MEDIUM PRACTICES PROJECT DIRECTOR, SAICA

JP Morgan Chase Foundation is another BDS operator in SA, in conjunction with SME service providers Raizcorp and Aurik. They offer a two-year education and mentorship programme for SMEs through business incubator models. Anglo American has also joined the programme through its Zimele entrepreneur training programme. 

According to a recent JP Morgan report, titled Catalyst for Growth Initiative in SA, entrepreneurial companies have seen an overall median revenue increase of 27%, well above the 10% threshold that SBP’s index classifies as high growth, and 50% increased their staff by an average of one employee per SME. Successful applications for finance increased by 14%. The programme also established a BDS analytics platform.

In a statement on their website, JP Morgan says that, historically, the inability to assess or compare different types of BDS has been a major hurdle for SMEs in terms of growth.

‘The BDS analytics platform being built by the C4G Programme will address this knowledge gap by providing performance data on BDS providers. The platform combines both objective measures of SME and BDS provider success with qualitative evidence related to SMEs’ experience of BDS,’ it states.

The Financial Sector Charter states its commitment to ‘actively promote a transformed, vibrant, and globally competitive financial sector’. But as the Banking Association of South Africa (BASA) points out, in SA ‘only 13 banks operate in the SME space in an industry that consists of 19 registered banks, two mutual banks, 13 foreign banks with local branches and 41 foreign banks with approved local representative offices’. The state of BDS for SMEs by the banking sector has room for further development.

As banks themselves stand to benefit from SMEs having a greater understanding of financial literacy, BASA says the sector is considering developing a ‘comprehensive framework for SME financial literacy development in South Africa’.

BASA says that for an SME to be financially literate, it must have an ‘adequate level of personal entrepreneurial competencies; personal finance and business management skills; and an appropriate level of understanding of functional financial management systems’. It also needs to have an ‘appropriate understanding of SME life-cycle funding and other financial-services needs and options; and know where and how to source and negotiate those funding and service requirements’.

Finally, BASA says that an SME must know where to find the best advice in terms of managing risk and understanding legal, tax and regulatory requirements, which could well be its saving grace when it faces challenges typical of an SME.

By Louise Brougham-Cook
Image: Fredrik Broden/reneerhyner.com