Challenges faced by South African small businesses
Phakiso Pax Mataitsane, Founder and CEO of Pax Divitiae
In South Africa 20% of small businesses fail in the first year and another 30% in the second year – this is one of the worst statistics in the world. The question we need to ask ourselves is why this is happening in a country that has such high numbers of unemployment, particularly within the youth. What can be done to change this and change it quickly?
Everyone discusses small business as the key to transforming the South African economy and that is true; however, we are observing the opposite. The past few months have emphasised some of the pitfalls of what is mainly challenging for small businesses to me. It is not just lack of capital, but some key issues emerge from barriers to entry. When large organisations and state entities issue on most bids, they request that the company should have more than two years’ experience, even for SMEs, including reference letters. How can you have a reference letter if you have not been given a chance yet? How should entities get to the two-year threshold when 50% of them won’t be there in year three, as they have not been allowed to enter the market?
The criteria for funding is so administrative in nature, without taking into consideration that the lifetime of a business plan is limited. Business plans are always outdated by the time one starts applying for funding. For small businesses, being agile is key and what you are measured against might not be a true reflection of what the SME brings to the table.
One of the worst challenges to this lies in the ICT services area. It takes new SMEs over three to five years to build solid skills for implementations and support, but somehow, they are expected to have fully experienced resources in their first year of operating. How can this be possible if we need time to develop skills and the youth? The only alternative then becomes importing skills and only keeping to the work at hand while forgetting about the unemployment rate in the country. This manifests instead in the “each one, teach one” system where we can have a few very skilled resources working with the youth to ensure that in three to five years, they have the necessary skills required to continue their career. The model should also be used for medium and large-sized organisations for growing SMEs.
The second major stumbling block for SMEs is invoice payments; without money it’s like trying to drive a car without petrol. It can operate for some time, until it runs out of petrol and leaves the passengers in the car desolate for miles as they attempt to get money for petrol. Their focus is then shifted to obtaining the money to run their car, instead of their original goal when the business began – to get to a particular destination. Once the company gets paid, they stop what they were aiming for because so much time is lost after chasing the petrol money to run their business.
This applies to private sector and public sector sadly, where there is no urgency in understanding that SMEs need the fuel more than the larger enterprises. This is because they have the flexibility and can do the work first before contracts, and then only ask for the contracts once the work has been done. Again, this is another example of how most businesses were created in the past, but there was honour and integrity, which is not as common in business today.
Recent reports have showed that 416 million businesses were owed R3.2 billion and not paid in 30 days by government and provincial departments. We should ask ourselves how can we build a country’s economy from the small businesses if we do not pay them on time. Is this the reason why most small businesses fail in the first two years? The answer is within the facts and clear for everyone, yet there hasn’t been any will to addresses this.
The only new way to mitigate this now is that treasury has set up an e-mail account (email@example.com) for querying unpaid invoices by government departments in various provinces. This has just created another process that is unnecessary instead of dealing with those who offend and have serious consequences against them due to lack of payments being made. The mail doesn’t specify resolution timelines, and this becomes another black hole yet again for the SMEs.
With over R2.3 trillion generated from small business out of R10.5 trillion, you would expect more focus being towards developing and supporting small businesses in the country. Ironically, it’s the opposite where only R2.3 billion is allocated to the department while we have R200+ billion allocated to social services.
Just by looking at those numbers, the question one asks is, why perpetuate this dependency which will not generate more jobs and income while another solution can ensure that we reduce dependency… where should the focus be?
When we started our journey, as Pax Divitiae, we were always asked for references. Today we have a customer reference that serves as a testament to how well we can deliver through our services. So far, we have created over 13 permanent jobs, and we support five contracting/small businesses. We are making an impact and looking forward to assisting your organisation – take an informed bet on us and let us make a meaningful impact in your business today.