The alarming truth about the number of small businesses in South Africa

A new report by The Small Business Institute (SBI) claims that South Africa only has a quarter of a million formal small, medium and micro-sized enterprises (SMMEs) – some way off many other reported estimates.

Moreover, the research shows that while 98.5% of the country’s economy is made up of small and medium-sized enterprises (SMEs), they’re only delivering 28% of all jobs.

These sample findings are part of a comprehensive study conducted by the SBI, in partnership with the Small Business Project (SBP), which will be released in early 2019.

Previous reports put the number of SMMEs at 5.6 million – of which 3.3-million were ‘survivalist businesses, 1.7 million micro-enterprises and 554,000 small enterprises’.

According to SBI’s report, as many as 56% of jobs in South Africa are created by the 1,000 largest employers, including the government.

And the institute warned that the National Development Plan’s goal of small business creating 90% of jobs by 2030 will be stillborn unless this vital segment of our economy is properly understood.

Bernard Swanepoel, chairman of the SBI, explained that the study is intended to deliver the baseline facts needed to underpin policy interventions and strategic planning for small business development in South Africa.

It will provide fresh, accurate data to help steer the country’s small business segment in the right direction, he said.

“Right now, we are flying in the dark,” said Swanepoel. “It’s no surprise then that we can’t seem to make headway tackling unemployment and inclusive economic recovery and growth if we’re relying on guesswork. No matter how good government’s intentions are, without the facts, policy to help SMEs will be based on ideology or ignorance.”

“The early research has already made some alarming findings,” he said.

According to the report, large firms have added more jobs and grown employment at a faster rate in the 2011 to 2016 period than small business; while small firms pay more to retain staff than the larger firms (as a percentage of turnover) but are not employing people at a desirable rate.

“A matter of great concern highlighted by the review is that South Africa’s small business segment is an outlier internationally in respect of SMEs’ contribution to GDP, employment and the fiscus,” said Chris Darroll, CEO of SBP.

“For example, in OECD countries, over 95% of enterprises are SME’s, accounting for between 60%-70% of the working population and contribute as much as 60% to GDP.

“Small businesses continue to be as economically fragile as they were over two decades ago, with some 70% of our emerging small businesses failing within their first two years of operation. We need the right data to get the right answers to develop the right policies.”

The research also found that government has failed to apply a common definition of a small, very small, or medium business across its laws, regulations and key strategies. The definition of small enterprises was completely inconsistent across the 70 laws, regulations and key government strategies it reviewed.

“This lack of policy harmony generates a mind-boggling amount of red tape, confusion, and barriers for SMEs starting, running or growing their businesses despite the advent of a Department of Small Business Development tasked with coordination, red-tape reduction and data collection.

“It has failed in its mandate – the minister has yet to issue guidelines to enforce Section 18 of the Small Business Act which requires all cabinet ministers to review the impact of their actions on SMEs,” said Swanepoel.

“The only rational course of action is to shut it down and collapse it into a nimble, strategic unit in the Presidency.”

The study’s early findings confirm that despite good intentions, most small business policy and supportive initiatives developed over the years – by both the private and public sector – fail since their assumptions and data have been wrong.

In the research, for example, the CEO Initiative’s SASME Fund identified 84,000 firms with turnover between R20 million and R500 million as its ‘investable universe’ – when in fact there are more likely to be only 20,000 to 40,000 firms the fund could support.

“To meet the objectives outlined in the NDP, we need a vastly improved understanding of the business dynamics of small firms, which includes their diversity, characteristics, needs and constraints,” said Darroll.

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