Contrary to global trends, South Africa’s small and medium enterprises are showing a decline in employment, turnover and a majority are struggling to survive.
According to Small Business Project’s (SBP) 2015 SME Growth Index, just over one in five firms reported a decline in turnover from the previous year and a further 20% reported no growth in turnover in the same period.
“The signs are crystal clear,” the report explained. “The business climate for SMEs is becoming ever more hostile. There needs to be a quantum change in government’s thinking if conditions are to become any better for SMEs to grow, employ more people and prosper.”
Only 56% of the panel reported an increase in turnover at an aggregate annual increase of just 11%, marginally better than the 9% recorded in 2012, but down from an average of 13% in the previous year.
The index is based on a survey of a panel of 500 established firms, employing less than 50 people and operating in three sectors: manufacturing, business services and tourism.
Regulations killing growth
Burdensome regulations represent the top factor impeding business growth, the index revealed.
Nearly 80% said the business climate is becoming increasingly hostile to their firm’s growth, representing the highest number of firms reporting this since the SME Growth Index base year in 2011.
SMEs revealed that burdensome regulations (40%), a lack of skills (38%), local economic conditions (37%) and cost of labour at 32% inhibited the growth of their firms over the past year.
Over 75% of the panel report that the amount of red tape has increased, up two percentage points from the previous year.
From a competitiveness perspective, the increasing regulatory burden is deeply concerning, the report showed. “South African firms are operating under severe and adverse circumstances, which firms in competitor economies may not have to contend with,” it said.
“The challenges of the overall business environment appear to be driven mainly by domestic factors, rather than global conditions.”
Customers are dragging their feet
Over 38% of the panel reported a significant cash-flow problem, up two percentage points from the previous year. “These findings collectively translate into significant cash-flow problems for the enterprises; the life-blood of a small firm,” the report said.
The large proportion of firms reporting cash-flow problems attributed this to late payments from their clients and a slowing down in economic activity in their respective industries, the report said.
Cost increases and margin squeeze together with bad debts have also contributed significantly to the firms’ cash crisis.
Panelists report that it takes on average between 46-60 days to receive payment.
One panelist sums up the problem noting: “Customers are dragging their feet; those that usually paid in 30 days are now only paying in 60 days … it puts a huge pressure on the business.”
Drop in employment figures
The number of firms reporting a decrease in staff has spiked for the first time since the SME Growth’s base year, from 18% in the previous year to 21% in 2015.
“The shrinking role of small firms as job creators in South Africa has a troubling dimension,” the report said.
“Not only could they be sources of dynamism and economic growth for the country – as they are in other economies – but as previous findings from the SME Growth Index show, smaller firms employ the type of people whose labour market characteristics mirror those of the unemployed and most marginalised in our labour force.”
The SME Growth Index has found a strong bias in SME hiring patterns towards unskilled employees.
“Those without matric qualifications are statistically 19% more likely to be employed by SMEs and SMEs are more likely to employ young work seekers than those in middle age,” it said.
“Relative to a 35-year-old, a 20-year-old is almost four percentage points more likely to be employed in a small firm.”
What government should do
The SME Growth Index findings send an important message to government: “Given the right conditions, SMEs in South Africa could provide an important source of employment for the most marginalised in the South African labour market.
“There needs to be a quantum change in government’s thinking if conditions are to become any better for SMEs to grow, employ more people and prosper.”
SMEs want opportunities to achieve success and an environment to make this possible, the report said. “This, rather than political intervention or subsidies is what will help them to thrive.”
The 2015 SME Growth Index is supported by SBP with additional funding from the Friedrich Naumann Foundation for Freedom and the National Treasury of the Government of the Republic of South Africa.