Battle tactics for the small business owner
The South African economy is largely driven by small businesses, with research indicating that Small and Medium-sized Enterprises (SMEs) make up approximately 91% of formalised businesses. Further research shows that the sector employs about 60% of the labour force, and contributes roughly 34% to the country’s Gross Domestic Product (GDP).
Predictions for 2016 are not too optimistic optimistic and SME’s will have many challenges to navigate as they are operating in an interesting regulatory, political and economic climate.
Vast and overbearing
Recent issues that are contributing to the instability and complicating the local operating landscape include the chopping and changing of Finance Ministers in December 2015 which, among other factors, contributed to the depreciation of the Rand by approximately 30%, while destabilising investor confidence.
Add to this the fact that the country is being negatively affected by the worst drought in almost 100 years with maize yields insufficient to meet local demand.The decelerating growth in China, proposed electricity price hikes, and the increase of local interest rates, are yet further factors which are effecting local businesses, trade, the economy and consumers; and not for the better.
Criminals on the rise
In times like these, the likelihood of small businesses falling victim to crime and corruption radically increases.
Unlike larger corporates, which may be able to absorb such losses, SMEs are seldom in such a position. Losses relating to crime and fraud may have detrimental implications - including the retrenchment of staff, downscaling, or even threatening the entity as a going concern.
Manage your client’s risk
Every SME should have a risk management strategy that includes commercial crime insurance. This cover insures against losses to the insured business as a result of employee dishonesty, computer fraud, fraudulent transfer instructions, extortion and contractual penalties.
Business owners, managers and officers make critical decisions on behalf of the business and its stakeholders every day. Should it be alleged that the management team (or certain individuals thereof) has not adequately exercised its fiduciary duties to the business, the members could all be held personally liable, regardless of whether there has been any wrongdoing.
Scenarios that could play out include that the business has not settled its tax debt and it is the receiver of revenue services that initiates an action. As soon as anyone alleges anything against management, they are obliged to defend themselves and in so doing will incur the inherent legal defence costs.
Protect assets
It is therefore imperative that small business owners and managers address this risk to protect their own assets and reputation by making sure they have Directors and Officers (D&O) Liability Insurance in the event they are faced with a legal suit pertaining to their failure to perform duties as they relate to the company.
Section 78 (3) of the new Companies Act also allows for the indemnification of Directors and the purchase of D&O liability insurance. One may think of a D&O policy as a management Errors and Omissions policy.
Labour matters
A further critical issue facing SME’s is labour matters. Annually, there are over 200 000 unfair dismissal disputes heard at the Commission for Conciliation, Mediation and Arbitration (CCMA). t There are no costs for an employee to take an employer to the CCMA, and the average award made is 3.9 months’ pay or 3.7 months’ back-pay. An average loss of R25 000 is suffered per employer, per case, and a matter consumes an average of 20 productive hours.
This is notwithstanding other direct and consequential losses, such as productive hours lost while the business owner/manager is spending time defending him/herself.
For the small business owner, such labour challenges could pose detrimental consequences to the business should this risk not be managed on a continual basis.
It is important that business owners and managers identify the risks (and potential losses) facing their specific business and industry on a daily basis to ensure that they adopt a proactive and holistic strategy in managing, mitigating and migrating such exposures.
