Analysing the state of SMMEs in a stagnant economy

Small businesses could breathe life into the South African economy. Picture: iStock
Small businesses could breathe life into the South African economy. Picture: iStock

Relatively little credible data is available about small, micro and medium enterprises (SMMEs) in South Africa, and the available stats look dismal. 

A 2018 study by the Small Business Institute (SBI) showed that the number of micro firms in SA increased from 169 986 in 2011 to 176 333 in 2016, whereas the number of small firms increased from 63 864 to 68 494 and medium firms from 15 257 to 17 397.

SMMEs, in effect, are not growing fast enough to meet the National Development Plan (NDP) targets, which envisioned that the segment would contribute up to 80% of GDP growth and generate 90% of an estimated 11m new jobs by 2030. 

“The segment would have to grow at a rate of at least 20% a year to achieve the NDP goals,” says John Dludlu, CEO of the SBI.The odds of success are also low.

According to the Global Entrepreneurship Monitor, SA has one of the highest business start-up failure rates in the world. 

The Enterprise Observatory of SA estimates that 31 companies with a taxable income under R10m shut their doors each week and former minister of trade and industry, Rob Davies, claimed that over 70% of businesses failed in less than two years.  

Whereas SMMEs account for 98% of the formal economy across all sectors in SA, the segment only accounts for 28% of formal jobs. Medium firms, according to the SBI study, account for 12%, whereas small firms account for 11% and micro firms for 5%. 

A thousand large employers, including the government, state-owned companies and civil services, in contrast, contribute 56% of these jobs.

The number of employees in micro firms increased by 4% from 658 333 in 2011 to 685?264 in 2016, whereas those in small firms increased by 8% from 1 434 918 to 1 549 411. 

Those in medium-sized firms increased by 14% from 1 426 006 to 1 628 429, and employees at large firms increased by 15% from 8 453 986 to 9 702 416.

The number of formal, employing SMMEs is also much smaller than initially anticipated, totalling roughly 250 000 firms. 

“The stats show that SA is an outlier in both the developed and developing world, where the general trend is for SMEs to contribute between 60% and 70% of jobs,” says Dludlu.

The situation looks better when informal employment is also considered. Ernest Boateng, CEO of the SA Institute for Entrepreneurship, estimates the sector’s contribution to employment to be between 55% and 60%: “People tend to overlook the importance of the informal job market, but it actually has a huge potential to alleviate poverty.” 

Obstacles to growth

There are various reasons why SMMEs are struggling to fulfil their potential. Dludlu identifies red tape and late payments as the biggest constraints.

The Burden of Government Regulations ranking measurements in the 2015 Global Competitiveness Index placed SA 117th out of 144 countries. Dludlu says SBI research shows that a small business owner on average spends up to nine working days a month dealing with red tape. 

For businesses with a turnover of R5m, that equates to 4% of revenue and up to 8% for those with lower sales.Also, it takes up to 40 days to register a business, compared with a week in Turkey, 18 days in Brazil, 13 in Malaysia and three in Estonia. 

Besides this, only 7% of SA’s municipalities are well-functioning, which can put all kinds of burdens on small businesses ranging from infrastructure to service delivery (also see p.6).

“Red tape strangles growth and competitiveness. The compliance burden not only relates to the volume of regulatory requirements and poor administration, but extends to the frequency of regulatory change,” Dludlu says.

As far as payments are concerned, he proposes that government and big businesses pay SMME suppliers within seven to 30 days after the submission of an invoice. Payment terms should also become more transparent and invoicing easier. 

Boateng identifies entrepreneurial skills as the biggest constraint: “The success of a business is dependent on the entrepreneurial, business and technical skills of an entrepreneur as well as the ecosystem in which he or she operates, relating to factors that are out of the entrepreneur’s control, such as financing, legislation, economic growth, support and so forth.”

The ecosystem will have an impact on the success of a business, but a true entrepreneur will always find a way to overcome these obstacles, no matter the circumstances, according to Boateng.

He says that people tend to overemphasise the importance of technical and business skills, but the truth is that these can be brought in once a business is operational. 

True entrepreneurial skills, however, are difficult to come by. Boateng explains that people are either socially prepared to become an entrepreneur, for example when they come from a family or community of entrepreneurs; or born of necessity, when the person has no choice but to make the business work. 

“The number of entrepreneurs coming from MBA and other schools or tertiary business programmes are, however, very few, which shows that there is something wrong with the way in which entrepreneurs are trained. There needs to be less theory and more practice,” Boateng says.  

Growth opportunities

Dludlu identifies manufacturing, tourism, services and agriculture as the industries representing the biggest opportunities for SMME growth and job creation, especially if government created special economic zones to stimulate economic activity. 

“Support for medium-sized enterprises is vitally important, given their better-than-average potential for job creation. Evidence suggests that large enterprises might have reached their peak of job creation, especially in this tough economic environment,” Dludlu says.

Boateng says that each industry has its gaps, and the trick for an entrepreneur is to find something that he or she is passionate about within those gaps. “You will lose steam if you merely start something to make money.”

The biggest potential, according to Boateng, lies in solutions that address future needs. Agriculture and the environment are at the top of this list, as they speak to the very essence of human existence, by relating to food production as well as resource management. 

Technology also presents good opportunities. “Many tech start-ups fail because they are not making a meaningful contribution.

The innovations we need are things that help to improve societies, for example through better educational or health solutions, renewable energies solutions or solutions that reduce wastage,” Boateng says. 

Entrepreneurs should also take note of how the business environment is changing. Boateng explains that competition used to be one of the main concerns during the 19th to 20th century, but today the in-thing is collaboration: “The result is an increasing number of businesses joining forces to complement or strengthen each other’s position.”

While large corporates also have the benefits of economies of scale, smaller businesses can adapt more quickly to change and have a closer relationship with their customers – something that is becoming more and more important.  Entrepreneurs are also becoming more environmentally and socially conscious. 

“Social entrepreneurs do not see money as the main driver for starting a business. Entrepreneurs, instead, are finding fulfilment in being in charge of their own time and doing the things they like.

Employees are also no longer just seen as people who work for them, but as part of a team that helps to take the business higher,” Boateng says. 

This article originally appeared in the 5 March edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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