SMEs and the turbulent economic climate

Small and Medium Enterprises (SMEs) play a pivotal role in developing South Africa’s second economy which ultimately contributes to the country’s GDP. In South Africa, these enterprises are thought to exceed corporates by a large margin and create more employment.

SMEs provide employment and a livelihood for many South Africans and should be the catalyst for reducing the high unemployment rate in South Africa and also expanding our economy and wealth to the broader community. It is therefore in the country’s best interest to create a conducive environment for SMEs to operate in.

However, the current tough economic environment, exacerbated by higher fuel prices, power outages and rising interest rates, has put many SMEs in a quandary.

Recent surveys have found that the high levels of crime in the country have been a major Achilles heel for SMEs. It is believed that a significant percentage of SMEs profits are being lost to crime either through direct or indirect theft or vandalism (e.g. indirectly through cable theft). One in four small businesses in South Africa has been a victim of crime more than once in the past year, according to the interim findings of SME Survey 2008, the latest edition of South Africa's largest annual survey of small, medium and micro enterprises. The survey has found that 15 percent of SMEs have lost more than one percent of annual turnover to physical crime, while 71 percent have lost up to one percent of turnover. Only seven percent have lost more than one percent to fraud

Factories are regularly broken into, businesses held up, or assets misappropriated and as a result entrepreneurs find themselves out of pocket and possibly having to downsize and retrench employees. Our economy can ill afford to allow people to become unemployed. It is imperative that strong combined action is taken by government, businesses and the community at large to bring crime under control.

Another challenge SMEs face is the high level of insolvency often caused by cash-flow problems. Entrepreneurs often find it difficult to appropriately manage money going in and out of the business. They can often unintentionally see their companies as a financial extension of themselves and therefore may sometimes lack the fiscal discipline required to keep the company afloat. It is critical that a good credit standing is maintained as it is important for any financing applications, especially during challenging economic times, similar to what we are currently experiencing.

For SMEs who depend heavily on financial assistance provided by potential credit grantors, the need to exemplify their creditworthiness takes priority. There is greater need for SMEs to adopt sound credit culture if they want to gain the trust and confidence of potential credit grantors. With the current economic environment, SMEs need to be mounting various initiatives to brave the escalating costs and put their business on a stronger footing. In short, they need to become extremely disciplined in their spending.

Although there are some SMEs that have been able to weather the storm, albeit at the expense of their margins, and probably due to building capital in the business when the economy was booming, most SMEs are facing difficulty in obtaining funding. SMEs require funds to grow during upturns in the economy and funds to consolidate during the downturns. However, many SMEs lack the collateral to back-up their loan applications. This is where Government must play a stimulus role. For example, in Canada the tax legislation is such that SMEs pay tax at a lower rate than what large corporations are taxed (i.e. at between 16 and 18% on taxable income up to a small business limit of approximately $300k). This tax break allows the SMEs to put the windfall from the lower tax rate back into their businesses, which in turn creates employment and stimulates growth. South Africa needs to consider the Canadian tax model.

Entrepreneurs generally are driven by great business ideas and a willingness to take risks, and accordingly may be inclined to place less focus on the financial health of the company. SMEs generally have small financial teams and therefore entrepreneurs look for trusted business advisors. Your banker, accountant or financial advisor can be this trusted business advisor. During tough economic times it is even more imperative to maintain your relationship with your trusted business advisor as they can be critical to assisting and providing you with the right advice during these tough economic times.