South Africa’s SME Landscape

by Tania Wannenburg
SME feature Jnl 4 16

SMEs have the ability to take on corporate giants. Here’s how.

SMEs in South Africa play a crucial role in the development of the economy and job creation, and as such need to be nurtured and supported by both government and the private sector alike. Minister of Finance, Pravin Gordhan’s 2016 Budget speech and his discussion on key disciplines affecting SMEs, which has been viewed as positive, has further highlighted this notion. In the article to follow we unveil prominent aspects of his speech, identify the role of corporate governance and offer some insightful tips on how SMEs can successfully compete with the corporate giants.

Before delving deeper into the world of SMEs, it’s worth noting their exact definition within a South African context. According to the South African Small Business Act, a Small Business Organisation is any entity, whether or not incorporated or registered under any law, consisting primarily of persons carrying on small business concerns in any economic sector, which has been established for the purpose of promoting the interests of or representing small business concerns, and includes any federation consisting wholly or partly of such association, and also any branch of such organisation.

The term “small business” refers to a separate and distinct business entity, including cooperative enterprises and non-governmental organisations, managed by one owner or more which, including its branches and subsidiaries, if any, can be classified as a micro-, a very small, a small or a medium enterprise. The National Small Business Act divides SMMEs into the following categories: survivalist enterprises; micro enterprises; very small enterprises; small enterprises and medium enterprises.

With regards to Minister Gordhan’s Budget Speech, R475-million has been reprioritised to the Department of Small Business Development for assistance to small and medium enterprises and cooperatives. “This is a positive development, but we’d love to see more detail about how the Department will be spending this money,” says Anton van Heerden, Executive Vice President and Managing Director, Sage South Africa and Southern Africa. “In countries such as The United Kingdom, governments support start-up companies and entrepreneurs through access to mentoring programmes and funding; we would welcome a similar approach in South Africa.”

In terms of relief for SMEs, Minister Gordhan announced that a tax-free portion of the taxable income for small business corporations has been adjusted from R73 650 to R75 000. “The tax amendments highlighted in the 2016 budget show some relief for the SME sector in the adjustment to the income tax for small business corporations,” adds Ben Bierman, CFO of Business Partners Limited. “While it’s disappointing to note that the turnover tax for micro businesses was not adjusted, the relief provided for individual taxpayers, and the unchanged marginal tax, will however ensure that consumer spend, in the context of rising interest rates and inflation, is not too negatively affected.”

The Minister also announced that steps to reduce the regulatory burden for business investors are in progress, including the establishment of Invest South Africa as a partnership with the private sector and concerted efforts by our largest cities to reduce the administrative costs of starting businesses. The Minister announced that a review of business incentives has been initiated to strengthen their impact on growth, productivity, trade and competitiveness.

“The inclusion of this statement in the Budget Speech signifies that Government is aware of the constraints that some regulations bring to small business and entrepreneurs,” says Ben. “This allocation of resources will ease the burden for small businesses, and the announcement of the roll-out of Small Business Desks by SARS to facilitate the single registration process is welcomed.”

Anton goes on to say that red tape ultimately benefits big businesses who have the resources to manage complex compliance requirements. “Less administrative overheads will help smaller businesses to focus on growing rather than on ticking regulatory boxes,” he explains.

Corporate governance – a step in the right direction

A guide published by the Institute of Directors in Southern Africa (IoDSA) in August 2015 gives the SME sector a boost by helping it to access one of the corporate sector’s most vital success factors: good corporate governance.

Corporate governance refers to the structures and processes for the direction and control of companies. It concerns the relationships among the management, board of directors, controlling shareholders, minority shareholders and other stakeholders. Good corporate governance contributes to sustainable economic development by enhancing the performance of companies and increasing their access to outside capital.

According to Vikeshni Vandayar, Legal and Governance Specialist at the IoDSA, governance shrines how accountable, responsible, transparent and fair an organisation is run. South Africa’s King III guide has established itself as the gold standard for corporate governance globally, however, SMEs often assume that it is too expensive or time-consuming to implement. “Not so,” states Vikeshni. “King III is extremely flexible because it follows an ‘apply or explain’ approach.”

She goes on to say that the Governance in SMEs guide aims to help SMEs understand their current state of development and consequently the appropriate level of corporate governance required. “Then as the company evolves, the guide will help the leadership strengthen and adapt its governance framework, in the process clearly differentiating itself from competitors to investors, banks and potential customers,” Vikeshni continues.

Furthermore, companies can benefit significantly from learning how to apply the governance best practises to ensure they operate well and build stakeholder confidence. “SMEs that want to become tomorrow’s corporates have to start building solid foundations from the start – this guide can help them to achieve that,” Vikeshni states.

According to Rosanna Choi, Chair of the Global Forum for SMEs, SMEs need to realise the potential benefits of implementing corporate governance within their businesses. But equally, governments, advisors and other stakeholders need to realise the challenge for SMEs is that established corporate governance frameworks have been developed with larger listed companies primarily in mind. Such frameworks and codes may not reflect the realities of running a small business.

The report, Governance for all: the implementation challenge for SMEs, establishes that while in larger organisations corporate governance is primarily tasked with ensuring that management acts as shareholders’ agents, for SMEs it’s mainly about improving business performance and managing risk.

“Governance issues are nevertheless of critical concern to small businesses, where owners may often be its managers as well, or where company ownership may be shared across family shares,” Rosanna says. “Sometimes the line between business and personal interest can be blurred. Corporate governance should establish clear roles and responsibilities for each individual and as such is relevant to businesses of all sizes.”

Taking on the giants: 6 Tips for SMEs

1.    Create a personal brand
When launching a business, an individual is their brand. It’s all about relationships and how they are positioned in the market already that will help them to enter with success. It’s important to leverage your personal brand in order to connect with your target market, strategic partners, community and stakeholders.

2.    Take advantage of a business’s agile properties
Small businesses aren’t faced with the red tape of larger businesses. If they see they are headed in the wrong direction they can make a quick pivot much more quickly than a larger brand can. It’s advisable to tap into the benefits of agility in the areas of innovation, market research, marketing execution, while also leveraging social media. Agility is the fuel that enables you to make quick yet well thought through decisions.

3.    Focus on customer service
Small business can improve their service offerings by leveraging their personal brand, personal relationships and human touch to make their customers feel unique. It’s important to set proper expectations and not be pushed into time-frames for deliverables that cannot be achieved. Leverage agility to make quick choices when service decisions need to be made. While the larger brands are still meeting to decide what to do, smaller businesses are in a position to take action immediately and start delivering on a project.

4.    Identify niche markets
Small businesses need to focus on niche markets early on and act fast. Select one to two markets that can be targeted and serviced quickly and efficiently. While larger companies are still deciding on who to approach first, smaller companies could’ve already delivered on that particular project.

5.    Plan for scalability and save time later
Think big and focus on where you need to be. Don’t always opt for the smallest of everything – instead plan for growth, believe in your vision and achieve your goals. A short-cut now could very well reap negative rewards in the future. It’s important to prioritise investments based on individual goals and to remain competitive. Implementing for growth now will save time and money in the future.

6.    Don’t wait until the last minute to launch a social media campaign
Take the time to plan and integrate a social media marketing plan early in the planning cycle. Be sure to include mobile marketing as part of the planning process and not as an after-thought. Social and new media should be integrated into the DNA of a business and its marketing plan. Leaving it to the last minute will result in Random Acts of Marketing (RAMs) which hurts a brand and a campaigns desired results. FLOORS in Africa has many platforms to assist you with this.

Simply put, smaller companies have the ability to get things done fast, have a greater sense of personal responsibility, are adaptable and offer a personal touch – all attributes that place them in good stead to successfully compete with the industry giants.

Acknowledgement and thanks go to the following sources for the information contained in this article: www.entrepreneurstoolkit.org; www.smesouthafrica.co.zawww.iodsa.co.za; www.accaglobal.com; http://southafrica.smetoolkit.org/sa; http://ifcln1.ifc.org/ifcext; www.pammarketingnut.com and www.smeinsider.com


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