For many would-be entrepreneurs, information about starting and running a small business can give mixed messages: It’s the backbone of the economy, the solution to unemployment, but the statistics of small business survival and success aren’t very encouraging either. Then there’s the question of funding.
It’s easy to become discouraged before you even start. But read on and see it’s possible to overcome many of the initial challenges.
What is considered to be a small business?
A small business is one that is privately owned by an individual or with a partner or two on board. It is for-profit and its actions, whether selling a product or service, are designed to generate income.
A small business can employ a handful of staff, or it may be a sole proprietorship in which case everything that goes down is through you. From a financial perspective, a South African small business has turnover of less than R1 million a year.
Stats on small business
Latest statistics of small businesses in South Africa are enough to make anyone want to give up before they start.
Trade and Industry Minister, Rob Davies, said in May 2013, that five out of seven new small businesses fail within the first year.
That’s a scary statistic especially when 68% of South African workers are employed by businesses that have less than 50 staff, and 43% are employed by businesses that hire less than five staff, according to the Minister.
Adcorp Analytics (2012) also paint a gloomy picture: The growth of local small businesses has stagnated between 2003 and 2012. Despite the economic boom of ‘04-‘06 that saw small businesses increase from two million to 2,4 million, since then the number hasn’t increased as hoped but shrunk on average 100 000 a year, meaning 440 000 small businesses have closed their doors in the subsequent five years.
This is a worrying trend, especially since the number of would-be entrepreneurs starting their own business is also at an all-time low. According to Adcorp Analytics (2012), in 2001 approximately 250 000 individuals were engaged in some kind of activity to start their own business. But by 2011 that number had dropped to 58 000.
The glimmer of hope is that this isn’t a global phenomenon. While recession has influenced some prospective entrepreneurs to stay in their secure, salaried jobs, developing economies like Brazil and India have thriving entrepreneurial communities.
The difference lies in the fear of failure. According to the Global Entrepreneurship Monitor (GEM) 2011 report, South African’s aren’t afraid of a challenge: Approximately 64% of SA entrepreneurs are driven by a sense of opportunity rather than necessity, and nearly 73% of South Africans believe entrepreneurship is a good career choice with high social status, so the key to improving entrepreneurship is to improve success rates through business and entrepreneurial education.
Small business as the backbone of the economy
Even with these poor statistics, small businesses remain the backbone of the economy:
- In 2011 South Africa had 5,579,767 small business owners – that’s roughly 10% of the total population involved in entrepreneurship.
- The total number of small businesses was slightly higher, owing to some entrepreneurs having more than one business.
- Of these 5,5 million businesses, nearly 80% were retailers – selling something in the same form it was bought in – while a little more than 20% were service providers – providing a skilled service like hairdressing or accounting for example.
- Nearly two thirds of these businesses were run from home and accounted for nearly 12 million jobs.
The government is acutely aware that small businesses are the key to addressing high unemployment and developing the economy – with an average of seven individuals benefitting for every one person employed. To this end, great emphasis is being placed on mentorship programmes, micro and small business finance and non-financial support, and making the red-tape associated with registering a new business as streamlined and easy as possible.
Are small businesses sustainable?
The high failure rate of small businesses suggests that something fundamental is going wrong. The key to small business success lies firstly lies in hard work and dedication to the business, and secondly in sustainability.
Many an entrepreneur has been blinded by the excitement of starting a business and initial success, that a solid foundation in the form of a business plan and cash flow management has been ignored.
Here is a list of some top reasons small businesses fail:
- In it for the wrong reasons. If you want to start a business to get filthy rich, it won’t be a good enough reason to keep you motivated when times are seriously tough.
- Poor money management. Without basic financial and business knowledge, an entrepreneur might not distinguish profit from cash in the bank. They start living the high life, and then realise there’s no money to pay suppliers, staff, and creditors at the end of the month. Profits should be re-invested into the business while it builds equity.
- Microscope/telescope mentality. While a small business may kick off with a niche idea, entrepreneurs need to pay attention to their market. If the market is too small it will fail to generate enough consistent income throughout the year. Similarly, if the business is trying to be too much to too many, the business can lose focus.
- No business or marketing plan. Some businesses emerge from a spontaneous gap in the market and may enjoy success growing organically. But unless there is a comprehensive business plan and marketing strategy in place, the business’ growth can be unsustainable.
- Lack of brand awareness. Thanks to today’s technology, building a brand is easier and more affordable than ever. Without access to a good and informative website, consumers will be less likely to engage you. Build an online presence through blogging, online advertising and social media, and don’t ignore poor reviews – building a reputable brand is critical to success.
- Wearing too many hats. Some businesses have to start off with just you running all aspects of it, but it’s a balancing act. If an entrepreneur gets too involved in the daily operations of a business, they don’t have the time or energy to work on developing the business, managing it, and strategising growth. Conversely, if an entrepreneur is too involved in business strategising, they won’t be devoting time and energy to sales. Business owners should spend their energy in areas of personal strength and recruit skilled people to fill in the gaps.
- Uncontrolled growth. While hyper-growth might seem fantastic at first, growing too quickly for business resources, infrastructure and skills to keep up with is a recipe for disaster. Businesses mustn’t over-gear either, and strategy is essential to sustainable growth.
Small on purpose or small because owners are unable to grow it?
When starting a business, a small business owner needs to determine their reasons for starting a business. Is it because you want a change from the nine to five rat-race? Want to be at home more for the family, because you want to be your own boss, or because you have spotted a gap in the market and believe it’s a gold mine, because you want to harness your skills better?
One of the main reasons for a business being stunted is because of the owners themselves. Without systems, a business owner may find themselves in a position where only they can complete the required tasks – either because of specialised knowledge, reluctance to delegate, or because of lack of systems.
Another reason for limited growth may be an issue of money. As the saying goes: You need to spend money, to make money.
This may require the business owner to take out a loan to increase their business’s capacity through equipment, for example, or by spending money on hiring an administration assistant, manager or accountant.
Pros and cons of small business
Starting and running a small business comes with its fair share of benefits and drawbacks. Here’s a list of the most common pros and cons:
- You get to be your own boss, meaning any success you experience in a business is your success too.
- You have the potential to exceed your current income and control your future wealth.
- You can take your skills and personal interests and turn them into your own business that your employer might not be interested in pursuing.
- A small business has the potential to positively impact your surrounding community with jobs and skills development.
- Until a small business is sustainable, income will be unstable. In fact, many small business owners need to forfeit a salary for a long time.
- You may need to take significant financial risk to get the business off the ground – taking a bond on the house or cashing in a pension fund, for example.
- A small business will take up significant amounts of time and energy that can result in neglecting family responsibility and sacrificing personal time.
- Until you can afford additional staff, you may have to perform tasks that don’t align with personal strengths.
Growing a small business
For small businesses that have survived the first year failure-hurdles, sustainable growth is the next goal.
Depending on the kind of business you own, there are a number of courses you can take, some on their own, some simultaneously.
Here is a list of some ideas for growing your business.
- If your business is operating at full capacity, investigate opening another branch, but plan your strategy and financials carefully. Ensure that your current business has consistent bottom-line numbers, examine the market for demand, prepare a complete business plan for the new branch (don’t assume that what works in one location will work exactly the same in the new location), and figure out how you will finance the new location – a loan, bootstrapping, using the existing business to fund the second – each option having its own pros and cons.
- Consider franchising if the business is thoroughly systematised. While converting to a franchise can be a costly exercise, the benefits include expanding in a less capital intensive manner as franchisees foot the bill new locations. You will have to be absolutely certain, however, that the business is replicable and has all the operational kinks ironed out of it.
- Seek an investor. Provided your business is in demand and well run, you can approach angel investors, venture capitalists or banks for funding to expand. Make sure your books are in order, that your research and projections are realistic (and conservative), and that expansion is what you really want.
- You can expand your business by diversifying your product or service portfolio and by targeting other markets. Both strategies require intensive market research, time and energy.
- You can negotiate a merge or acquisition with another small business, taking on board skilled staff and better resources, but at the risk of losing control of your original business goals, vision and culture.
Support for small business
Entrepreneurship can seem like a lonely and isolating experience for some. Networking is important to your confidence and providing opportunities to learn from others.
Networking also allows you to develop your reputation as a subject expert and bring in new business through referrals.
No new business owner is expected to know all the answers all the time and it’s a good thing to learn from those who have different ideas and perspectives.
Having an experienced business person to mentor you can provide a sounding board for ideas, a channel to offer advice and caution, holding you accountable to your decisions and actions, and guide you on a path to success.
There are also numerous private and public organisations dedicated to improving the skills of small business owners. Don’t fall into the trap of believing you can be great in all areas of running a business.
If you have a weakness in finance, try self-study, short courses, part-time courses, or ask someone with the right skills to teach you what you need to know.
All great entrepreneurs eat, live and breathe the philosophy of never stopping learning and being curious about things they don’t know much about.