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Three key challenges for South Africa’s small businesses

By Colin Timmis, SA Head of Accounting, Xero - Jun 20, 2017
Three key challenges for South Africa’s small businesses

South Africa’s prosperity is, to a significant extent, built on small businesses. This makes the country’s current economic troubles especially concerning for the SME community. By the end of Q4 2016, GDP had declined by 0.3%.

The government has responded by allocating some R3.9bn in funding to stimulate the sector. It’s a fine gesture, but until South Africa’s small businesses know how to access it and put it to good use, it won’t be much more.

Happily, despite the current uncertainty, South Africa’s small businesses remain confident: according to Xero’s 2016 State of SA Small Business Report, some 58% anticipate growth by the end of 2017.

To make this expectation a reality, however, businesses must take it upon themselves to overcome the obstacles standing between them and meaningful,sustainable success. Here are three of the key challenges – and what they can do to overcome them.

  1. Regulation irritation

An overcomplicated set of rules and regulations hamstring South Africa’s small businesses. In Rwanda, for example, a company can be registered in four days. In South Africa, it takes 43 days – more than ten times as long.

Navigating the country’s complex web of laws and regulations takes considerable effort, and all the SME community can rely on is websites and organisations like the Department of Trade and Industry’s Companies and Intellectual Property Commission – an imperfect support system, and one that lets down many businesses in dire need of advice.

It’s very difficult to perform even basic operational tasks if your time is tied up examining laws, directives, and regulations. If you’re hoping to start (and expand) a business, third party help might seem like the only way to avoid the dreaded red tape. This may be, on some level, why a study from the Small Enterprise Development Agency found that 75% of South Africa’s new businesses fail.

Overcoming this challenge will partially be a matter of the government relaxing its compliance requirements, or at the very least communicating them more clearly. That President Zuma has criticized ‘unnecessary red tape’ is also heartening. But in the meantime, businesses should take matters into their own hands.

Practically speaking, this means making room for more critical tasks by automating compliance-sensitive processes with technology. In finance, this can often be done with accounting software, but hiring an accountant to help craft a regulatory strategy can also be a wise move. Whatever you do, it’s much easier to handle this before you unwittingly break the law than afterwards – so be prepared.

  1. Funding and finance

Another consequence of an ailing economy is that finance and funding become harder to come by. Xero’s report suggests that some 63% of entrepreneurs started their business with personal savings, and that 20% started theirs with investment from a family member. Conventional sources of SME finance such as banks aren’t anywhere near as willing to lend as they once were.

So if you’re a would-be entrepreneur with a great idea and you don’t have access to the necessary start-up capital, the choice before you seems stark: apply for bank finance, and endure a significant waiting period before a likely rejection – or let your dream die.

Instead, depending on your business model, it might be worth adopting a leaner approach and bootstrapping your business without the need for funding. Just make sure your financial records are in order – if you hope to secure investment in the future, or just plan for growth, you’ll need to ensure that everything’s accounted for.

Managing these financial records, as well as other functions such as HR and payroll, can be made significantly easier with the use of cloud services, which are typically available at a fraction of the cost of traditional enterprise solutions.

  1. Getting paid on time

Getting paid on time should be a simple matter of adhering to contracts and agreements, but practically speaking, it often isn’t: Xero’s research indicates that late payments are the single most pressing financial issue for half of SA’s small businesses, and that these companies spend 10.4 hours a month on average chasing them.

It’s not hard to see why it causes problems. Many businesses live payment to payment. A single delay can have ripple effects beyond the obvious financial instability. When you don’t get paid, it can also mean that your suppliers don’t get paid – and that can damage important relationships. The time you expend on late payments can also often be better spent on business-critical tasks.

The government has made noises about the issue of late payments, but it’s worth remembering that it also paid 23,000 invoices late in 2016 – to a total value of R2bn. In his 2017 Budget Speech, Finance Minister Pravin Gordhan restated the government’s commitment to paying SMEs within 30 days, but it is an issue that small businesses can also take into their own hands.

Software can make online invoicing as painless as possible with a ‘pay now’ button that allows customers to pay instantly, and it can also automate the invoice chasing process. Small businesses should also ensure that they invoice promptly, align their payment terms with their suppliers, and where necessary shorten their payment terms to provide more leeway.

The government’s National Development Plan aims for SMEs to create 90% of jobs by 2030. This target will be more easily achievable if the challenges facing SMEs are overcome. This won’t be a simple task, but overcoming these issues is key to the process of launching and scaling a business.

With the right initiative, the right tools, and the right strategy, South Africa’s SME community can prove their confidence well-placed, prosper in their own right, and help get the economy back on its feet.