In an eye wakening report 60% of small businesses in townships stop operations as a result of load shedding while 66% and counting continue…
‘Stop strangling entrepreneurship with red tape’
The reality is that it remains tough to be an entrepreneur or small business owner in South Africa. South Africa ranks 45th out of 50 countries in the Global Entrepreneurship Monitor (GEM) National Entrepreneurial Context Index. But a significant glimmer of hope has appeared on the horizon, writes Ziyaad Moosa, a partner at PKF Octagon.
The recent GEM SA report says early-stage entrepreneurial activity, the percentage of adults who were starting or running a new business, rose to 17.5% in 2021, up from 10.8% in 2019. Those owning or managing an established business, in operation for at least three to five years, was at 5.2%, up from 3.5%.
If this trend continues it could lead to a greater depth of established businesses in South Africa, improve jobs and economic prospects.
However, this does not discount the fact that there are mixed signals around the confidence of entrepreneurs, with many not choosing to take the leap of starting a new entity or putting cash into that next ‘big thing”. For instance, the business discontinuance rate (including businesses sold or closed down) increased from 4.9% in 2019 to 13.9%, with South Africa the third worst on this indicator.
Fear of failure, business exits, the unknowns around digital technology, lack of access to funding and red tape remain big hindrances. However, this does not mean that the renewed signs of confidence after the devastation of Covid-19 should be ignored as a sign that prospects could improve and do all the good things we need as a country.
The key will be to build real, tangible success stories through a better enabling environment. There is still much to be done and the ease of doing business has to improve so that we can truly unlock the potential of entrepreneurs to contribute to economic growth and job creation.
The sad reality is that small businesses do not close because they got an offer they could not refuse, but rather due to the business being unprofitable, problems accessing finance, bureaucracy and struggles with red tape. These risks have all increased, unfortunately.
Even when a business is successful and wants to expand, new risks can quickly appear which need to be managed very carefully. Let’s assume the business has an opportunity to access new markets, in Africa or further afield.
PKF Octagon’s experience is that SMEs often find it challenging to come to terms with legislative requirements in foreign countries and that setting up businesses in these locations is a time-consuming process that distracts them from running their enterprises.
In fact, it can be very challenging for a SME to manage two operations. Many small and medium-sized businesses don’t have good succession planning to begin with and entrepreneurs who have not established a good management chain in the local business often find that their business suffers when they are not closely involved in its everyday activities.
A good way to overcome this is to ensure that advice on both sides of the operation is sound, based on on-the-ground expertise that can overcome the hurdles.
If this is so, the results can improve significantly. For instance, our firm recently worked with a client in the retail industry looking at exporting goods into the UK and selling them through a new company domiciled there. Because banking legislation is extremely onerous in the UK and setting up a bank account is significantly more complicated than in South Africa, we introduced the company to our UK partners who enabled the business to seamlessly set up a company and a bank account.
The retailer was able to overcome other challenges that SMEs experience abroad like finding good business partners, employees, and stakeholders. But if you get it right, you will be poised to tap into our network of funders, clients, bankers, and lawyers to work with people it can trust.
Of course, not all SMEs will be successful in expanding into other countries. Generally, businesses need to be reasonably mature to consider an expansion strategy and operate the type of business that will thrive in another country. Some businesses make the mistake of assuming that a product that sells in South Africa will also be successful in another market or they do insufficient research on the effort and capital investment required to build a business in another market.
Economic factors such as import duties and adverse tax legislation, as well as cultural differences may also affect the success of a business’ expansion drive. But this exciting stage of the entrepreneurial journey does not have to be a lonely and hazardous one. Businesses that team up with well-connected business advisory firms like PKF Octagon will find the support structure they need to navigate successful offshore expansions and rise to the next level.
- Ziyaad Moosa is a partner at PKF Octagon. The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of Ventureburn.