Business failures and job losses

Financial distress caused by the effects of the Covid-19 pandemic has seen the majority of Small, Medium and Micro-Sized Enterprises (SMMEs) come under severe strain, with their future survival uncertain.

SMMEs make a significant contribution to the South African GDP and are estimated to employ 10 million people. However, this important sector has been the hardest hit by Covid-19.

In a COBRA webinar, TransUnion's Hans Zachar, VP of Emerging Markets, and Priven Moodley, Head of Consulting took us through the latest SMME data to understand the level of damage that has been done and what the projected defaults and job losses could look like.

The data provided insights into where the whitespace and growth opportunities might lie, as lockdown continues to ease.

Three key scenarios

“We have been doing a lot in trying to understand the economic impact of Covid-19 on the economy, particularly the SMME market. Small businesses face an uncertain future,” said Zachar.

“We followed a data-driven approach by baselining the trajectory of SMMEs to a pre-Covid-19 world with a view of how macroeconomic and new business activity would influence these businesses,” he added.

“This led us to three scenarios: the Rocky scenario is an underdog story that links to South Africa being in a tough spot but bouncing back from this crisis. The Lemonade scenario is about coming to terms with the impacts of Covid-19 and businesses managing it as part of their BAU strategies. The I am Legend scenario refers to a worst-case scenario likely worse than ever experienced, where the repercussions will be significant and long standing,” continued Zachar.

“As Covid-19 started, we thought we were in the Lemonade phase, but we are starting to pivot from the Lemonade phase to the I am Legend phase, even with lockdown easing,” he stated.

Cause for concern

SMMEs represent a significant portion of the formal market, while the informal SMMEs make up a larger (1.7 to 2.5 million) but somewhat unseen proportion of economic activity.

Research by TransUnion shows that nine in ten (90%) small businesses in South Africa are struggling or temporarily closed as a result of the impact of the Covid-19 pandemic. Just 9% report that they are operating as normal and less than 1% of businesses say they are thriving. Ninety six percent of small business owners reported a decrease in revenue, with 78% saying they have seen a significant decrease in their business revenues since the start of the Covid-19 pandemic.

One in three (32%) small businesses report that they will be able to operate for less than three months at the current rate, and one in two (50%) reported extreme concerns with being able to fulfill critical payment obligations. Nearly two thirds (59%) said they will have to cut staff salaries, 44% said they will be unable to pay rent, and 33% said they will have to start downscaling monthly services such as telecommunications and insurance in the next two months. Nonetheless, small business owners remain optimistic about their ability to continue, with 53% indicating that it is likely that they will recover from the impact of the pandemic.

Small and medium businesses have seen significant increase in risk as the effect of Covid-19 and lockdown have eroded services. The SMME business failures and job losses are expected to rise as risk is realised.

Although the financial impact of Covid-19 is widespread, the effects are particulary felt by the most vulnerable consumers and in particular, consumers that are employed by SMMEs with 60% of consumers who have been hardest hit being employeed by SMMEs.

Survival tactics                    

In a press release issued earlier, Lee Naik, CEO of TransUnion Africa said, “The current global crisis has caused major economic and financial distress for consumers and businesses everywhere. For the estimated 2.5 million SMMEs that form the backbone of the South African economy and represent our best hope for economic growth, many jobs have already been impacted as consumers rein in spending. Coupled with government funding and grants from the business community and private individuals, the SMME community has avoided mass liquidations thus far. But with almost half of all SMMEs uncertain if they will survive for longer than six months, it suggests that cracks are starting to form.”

Moodley said smart decision-making is helping small businesses adjust to a new normal. To adjust to the current environment, small businesses report that they have had to increase their efforts around work-from-home (WFH) technology, marketing, business IT/infrastructure, innovation and other online capabilities – 44% increase in WFH technology, 27% increase in marketing and 23% increase in business IT/infrastructure.

“Those geared for sustainable survival are employing sound business principles and strict credit management controls,” said Moodley.

“Businesses that report they are operating normally (9%) despite a drop in revenue have been preparing for longer-term sustainability to adapt to the shifting economic dynamics. They are employing sound business principles and enforcing stricter credit management controls. When compared to the struggling businesses (90%), these businesses reported being twice as likely to invest in research and development, three times more likely to invest in equipment and machinery, and five times more likely to invest in stock and inventory, three times less likely to agree to payment holidays and almost half as likely to offer discounts. Small businesses that were primarily operating on digital/online platforms before Covid-19 also appear to be less affected by office/facility closures,” said Naik.

Survive or die

Government, business and private-relief funding have proven relatively successful, with only 27% of businesses not receiving some form of relief – primarily as a result of not applying, or receiving a response and not meeting required criteria for government-funded relief.

Looking to the future to understand what support these small businesses need to survive, most owners cited access to funding, cash flow and new revenue generating customers as their key needs. “Revenue generating customers and secure cash flow are, however, in very short supply with consumers under severe strain and delinquencies on the rise. This potentially places an unsustainable reliance on external funding sources to support the SMME community,” said Naik.

The study, according to TransUnion, suggests it is inevitable that liquidations will become more widespread and that SMMEs will continue to operate in a very difficult environment for the foreseeable future. It suggests that in order to survive, small businesses will need to be extremely vigilant in their credit management practices. Each customer, whether existing or new, should be approached with heightened levels of scrutiny before credit is extended. In the SMME market, which has traditionally relied on trust-based relationships, this will require a very different customer engagement strategy.

Writer’s thoughts:
Financial distress caused by the effects of the Covid-19 pandemic has seen the majority of SMMEs come under severe strain. As lockdown eases, do you believe SMME business failures and job losses will rise as risk is realised? If you have any questions please comment below, interact with us on Twitter at @fanews_online or email me - myra@fanews.co.za