South Africa has one of the highest business failure rates in the world: analysts

South Africa has one of the highest failure rates for SMMEs, with five out of seven of these businesses failing within the first year, says specialist advisory service Cova Advisory.

In a webinar held at the end of April, the group stressed the crucial importance of SMMEs in job creation, due to their higher capacity to absorb labour, with a lower average capital cost per job created.

“SMMEs play a big role in addressing the major challenges of unemployment and inequality in our country, but we are not doing well,” said Cova Advisory director Tumelo Chipfupa.

“The failure rate in South Africa is higher than many other places in the world, with access to finance being a major stumbling block. Only 6% of SMMEs report they have received government support.”

Tanya Fouche, Head of Business Development at Aurik Enterprise Development, suggested that government “is under a great deal of pressure to create jobs and is trying to use enterprise and supplier development programmes to drive start-up businesses”.

“However, we are seeing that working with existing businesses and driving them into a more sustainable growth model creates more jobs and a greater contribution to the economy.

“Currently the greatest gap for companies in reaching their preferential procurement points is in procurement with black, women-owned businesses, as well as the designated groups such as youth and the disabled.

“There seems to be a great shortage of businesses in this space and so we are seeing a lot of start-up business programmes designed to support the inception of these businesses.”

Liquidations

Data published by Statistics South Africa last week shows a steep annual increase in liquidations across the country, largely attributed to the Covid-19 lockdown.

Liquidation refers to the winding-up of the affairs of a company or close corporation when liabilities exceed assets and it can be resolved by voluntary action or by an order of the court.

216 companies were liquidated in March 2021, compared to the 178 the month before – a 21% jump. Voluntary liquidations increased by 61 cases and compulsory liquidations increased by 10 cases.

This is 49% higher than the total liquidations registered in March 2020. The report also shows that the total number of liquidations increased by 18.9% in the first quarter of 2021 compared with the first quarter of  2020.

Of all sectors, financing, insurance, real estate, business services (77 liquidations), trade, catering, and accommodation (47) and manufacturing (10) are the hardest hit.

Commenting on the data, Lings Naidoo, co-founder of BeyondCOVID, said it is not that more companies suddenly find themselves in trouble, but rather that they have struggled for many months before having to close. This is especially true for smaller, and medium-sized businesses.

“Our research has shown that smaller, micro, and medium-sized businesses, in general, are 26 times most likely to close their doors in times of economic upheaval than their corporate counterparts,” said Naidoo.

Read: The jobs that South Africans are developing new skills for