The single biggest challenge South African small and medium enterprises (SME) owners’ encountered in 2014 was the perilous state of the economy, which resulted in established businesses stagnating, as well as a decline in new businesses creation.
According to Nazeem Martin, MD of Business Partners Limited, a specialist risk finance company for formal SMEs, 2015 will be similarly challenging for South African small businesses due to the continued sluggish economic growth and the inability of Eskom to ensure an adequate, consistent and reliable power supply.
He says that overall, 2014 was a tough year for businesses and this was primarily attributed to generally adverse conditions. “Many factors during the year undermined businesses confidence and hence their desire and ability to grow and contribute towards economic growth in the country,” says Martin.
Martin says one such factor was the national elections were held in May 2014. “Many decision makers and business owners tend to go into a hiatus, holding back on future business decisions for between six and 12 months prior to an election. Many businesses therefore only started planning their growth strategies post elections, after May 2014. While no election will take place this year, local elections will be held in 2016, and this may again cause an interruption in decision making towards the end of the year as campaigning for local Government elections begins.”
Martin says that the labour unrest which commenced in 2012 and 2013, and which also spilled over into 2014, was disconcerting for businesses, especially small businesses. “Economic growth was decimated due to industrial action in 2014, and businesses ended the year less confident as a result. On a positive note, the sentiments emanating from all stakeholders – labour, business and government – seem be calling for safeguards against protracted periods of industrial action, and measures to reduce the violence, destruction and turmoil often associated with strikes. However, the 2015 civil service wage negotiations will test these sentiments given the austerity measures announced by the Treasury Minister in his mid-term budget speech which alluded to reigning in civil servants salary increases to inflation or less.”
The power supply crisis also continues to weigh heavily on economic growth as the country heads into 2015, says Martin. “Eskom’s inability to consistently supply sufficient electricity makes it difficult to run a business, and plan and implement growth strategies. Eskom’s predicament, and its adverse impact on business and economic growth, is not a challenge that can be overcome in the short term. It is advisable that if businesses have yet to develop a contingency plan for a power source, they do this soonest as the impact, and duration, of the current power crisis is often being underestimated.”
It has been reported that the unstable and inadequate power supply is shaving up to 1% off the country’s economic growth rate. “While big business has specific arrangements on how to manage electricity usage, small businesses’ ability to grow is hampered by uncertainty around power supply. Regular downtime affects production cycles and subsequently business owners’ confidence. This in turn affects their ability, willingness and desire to plan for expansion.”
He adds that given that the economies of South Africa’s main trading partners (North America, China and Europe) were either in the early stages of recovery, experiencing slower growth or still experiencing difficulties, the demand for export commodities from South Africa was muted in 2014. “Currently these regions are in different stages of economic recovery or growth, and such uneven economic patterns calls for different economic stimuli and interventions contributing to level of uncertainty which discourages business owners from developing bold growth plans. While much of the emerging world, such as Africa, continues to grow at a rapid pace, South Africa’s levels of trade with, and exports, into such markets are still too low to compensate for the lower levels of business with country’s dominant partners, and in particular Europe and China.”
Apart from the economy not being conducive to business growth in 2015, South African SMEs also remain confronted with the age old issues of being over-governed and overregulated, both in the private and public sector. Martin adds however that the formation of the Small Business Ministry last year is positive in that it may be a signal of Government’s commitment to reducing red tape. “While actions have yet to be implemented, it is a positive sign and we hope that the department delivers on its promise of making regulatory, compliance and market conditions easier for small business.”
He says that small business should be encouraged to use their business chambers to lobby the newly formed ministry to persuade government to procure goods and services from small business, as well as for changes to the SME-unfriendly labour regime. “Currently for example, with collective bargaining, trade unions negotiate with employers’ associations, which are usually controlled by big business, and together they agree to minimum wage which small businesses, who are not represented at the bargaining table, can ill afford but are compelled to also pay. Small business should be allowed to deviate from collective bargaining agreements.”
Martin says that SME success depends on sentiment and perception, and unfortunately it is clear that certain issues will continue to dampen economic growth in 2015. “Businesses’ desire and willingness to take on risk is dependent on confidence levels, and tough economic conditions will test an entrepreneur’s ability. While positive economic circumstances and high levels of economic growth take a marginal business and turn it into a profitable business, as soon as the economy begins to slow, as in the case of 2014, those marginal businesses struggle.
“We are however confident that small businesses will continue to prosper in the country despite the many hurdles confronting them. Entrepreneurs, by nature, are eternal optimists and robust, and will always find ways to survive, even when conditions are tough. In 2015, business owners should vigilantly manage their expenses, and any windfall gains they may experience – due to factors such as lower fuel and transport costs – must be saved or invested in growing their businesses,” concludes Martin.
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