The backbone of any economy is small business. In OECD countries, SMEs account for around 95% of all enterprises, and contribute up to 60% of GDP and 60-70% of employment. Yet it is only the big corporate scandals that get any attention, and governance failures only examined when they happen at large organisations.
Small business failures, despite being much higher, are often ignored, perhaps because it is easier to fine a single company or introduce new corporate legislation than to understand and solve the structural issues needed for the small business landscape.
In South Africa, this is particularly true. Over 98% of enterprises in Africa’s most developed economy are SMEs (or Small, Medium and Micro-sized Enterprises, SMMEs). Yet a 2018 report by the Small Business Institute estimated that they only account for some 28% of jobs. With a shocking 9% making it to 10 years in business, something is clearly wrong and no-one has a sensible answer.
Billions of Rand have been poured into “empowering” black-owned SMMEs. It has been a black hole which has also helped create the culture of dependency and entitlement so prevalent in this country. Large amounts pass through government organisations with historically very little in the way of checks and balances, mainly because officials do not have the training to provide the sort of assessment (much less the business training needed by funding applicants) to maximise success rates.
This has worsened access to commercial finance, despite the obligations placed on big business to support small businesses and entrepreneurship, both because owners would clearly rather have a grant than repay a loan but also because lenders are much more wary of lending and rates are accordingly high.
There is a solution and it is surprisingly simple. It consists of three core concepts: trust, infrastructure and training.
1. Build Trust
There is a huge trust deficit in South Africa, between people, government and private funders (be they bankers or corporates). The best way to rebuild this trust is to break the dependency culture and provide the mechanisms to guarantee transparency and accountability at all levels. This is called corporate governance in larger organisations but for some reason the term is almost never applied to small business
Yet it is as essential as anywhere to ensure minimum standards of ethics and professionalism – and so trust. The way to do this is through fostering personal governance and responsibility and installing robust systems and support infrastructure.
2. Infrastructure
Many SMEs fail because they lack the basic building blocks a business needs to establish itself and grow. They also lack the skills and experience to know what these are and how to acquire and use them (unconscious incompetence – you don’t know what you don’t know). Cost is often an obstacle, but it does not need to be.
Providing low-cost infrastructure, especially in basic Information and Communication Technologies, is essential to give this sector the platform it needs to thrive. Business need reasonable-cost power, of course, but we are really talking about what is basic to modern competitivity and efficiency: high-speed internet connectivity with access to essential IT functions such as accounting & finance and basic management information systems.
Instead of pouring money into municipalities so they can offer grants to local businesses with, at most, an application form with a one-off business plan, we propose a model where the municipality becomes the trusted local supplier, offering SMEs low cost access to the basics, outsourced to established local players but being the central point for support.
In order to ensure best use of these resources, and, of course, minimum entrepreneurship skills, training is required.
3. Training
This should begin with the municipalities themselves, who need to have an idea of the challenges faced by the local SMEs they are tasked with helping. They can then help oversee the training imparted to business owners, further reinforcing the local connection between municipalities and their constituents. If necessary, some of this training can be subsidised to make it accessible to as many as possible, but it is important that the business make an investment in order to ensure it is valued and taken seriously.
The ultimate goal of all this is to prepare small businesses and new entrepreneurs for long-term viability. Training in the basics of finance, sales, leadership, ethics, and so on, supported by a secure online infrastructure designed to facilitate management and allow selective access to data for audit and transparency purposes, will naturally lead to an increase in trust
SMEs will have the confidence in themselves and in local government to support them where they most need it. And they will be naturally prepared for financing through the rigours of using the systems they are using to run their business.
Funders will therefore have more confidence in business going through this process, opening up more financing possibilities while lowering costs.
And government can finally show they are acting in the best interests of everyone while stemming and eventually reversing the ebb of funds from public coffers.
Transforming the small business landscape
This could lead to a massive shift in the prospects for small business in South Africa – and the model could be used around the world. All sides need to take responsibility and this is the only way the sector will be transformed. The National Development Plan’s vision that it should supply 90% of jobs by 2030 is currently a pipe dream.
But it needn’t be if the three-pronged approach outlined here is adopted. We intend to be a part of this transformation and TLC and its partners have the vision, experience and expertise – as well as the passion – to help transform the small business landscape in South Africa.
Arthur Kendall, Director, Applied Corporate Governance
Botshelo Wa Rakate, Director, Trueline Leadership Consulting