SMEs’ biggest challenges – how 2016 compares with last year

Updated on 19 October 2016

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SMEs' biggest challenges - how 2016 compares with last year

Has the entrepreneurship and business landscape changed since a year ago?

According to the 2016 National Small Business Survey released by the National Small Business Chamber (NSBC), not so much – if anything more businesses are working to find solutions to many of the same challenges as they did last year.

Marketing continues to be the dominating concern for most small businesses in South Africa along with a lack of funding, insufficient cash flow, poor sales as well as competition from large businesses which have also remained high on the list of challenges SMEs have had to deal with in the past year.

One key difference, however, is that a large number of small businesses (92%) actively plan to increase their customer base and generate more sales over the next 12 months.

“Although the challenges have been fairly similar over the past three years, what we can see is the increase on the sales and marketing area. The inability for a small business owner to go out there and build a client base and make sales – that’s becoming more and more dominant as the years go on,” says Mike Anderson, NSBC founder and CEO.

“What we foresee based on the trends is that sales and marketing will continue [to top the list], the right technology will become number two, and then of course, access to funding will always be in the top three.

Unpacking the 2016 survey

The annual national survey, which looks at the state of small businesses in the country, shows continued resilience of South Africa’s SMEs in the face of economic challenges.

According to the survey, the Western Cape is still the fastest growing region in South Africa for SMEs, while Gauteng has kept it’s pedestal as the largest.

The bulk of small businesses in South Africa operate in the manufacturing and business services market, followed by IT and professional services.

Anderson says the survey canvassed more than 17 950 small businesses throughout the country, providing valuable insight into current trends and sentiments in the sector.

To see how things have changed and also where your business lies, here are some of the biggest differences and similarities to come from this year’s survey compared to last year.

Scaling across Africa and abroad

2015 – 31% of businesses said they had considered taking their business into Africa or further afield.
2016 – 56% of businesses surveyed indicated that they have thought about scaling across the continent or internationally.

Sharp increase in desire to grow across the continent and beyond

56% of businesses have considered expanding their operations into Africa and beyond, while a further 25% indicated they would consider doing so in the future.

This has grown from last year’s 31% who said they have considered taking their business into Africa and beyond, while the number of those businesses who said they might consider expanding in the future was at 26%.

One of the reasons for expansion could be South Africa’s underperforming economy with Philip Myburgh, head of Franchising Africa at Standard Bank, in an interview with SME South Africa saying South African franchisors are drawn to attractive growth of African economies and the linked increase in levels of income available.

Funding and cash flow

2015 – 57% of SMEs listed lack of funding and insufficient cash flow as their biggest obstacle to growing their business.
2016 – 56% said lack of funding and insufficient cash flow was their biggest obstacle to growth in their business.

Funding and cash flow constraints affect over half of SMEs

Last year’s survey found that 57% of SMEs said the lack of funding and insufficient cash flow was their biggest obstacle preventing growth. This year the number saw a slight decrease. Financial management was this year listed as the third biggest area (13%) that small businesses say they require assistance.

While a lack of funding remains the most significant hurdle to growth, some 75% of SMEs surveyed this year did not apply for a loan or other means of finance for their business in the previous year. Of the 25% that did, the majority chose to approach banks, followed by government agencies. The majority of small businesses surveyed indicated that finance for growth would be the most likely they would apply for, followed by working capital and equipment finance, respectively.

Credit score

2015 – 53% of business owners say they have never checked their business or their personal credit scores.
2016 – 46% of the entrepreneurs surveyed admitted to not checking their business or personal credit scores.

SME owners overlook credit scores

Interestingly, the 2016 survey also found most entrepreneurs (46%) do not check their business or personal credit scores, and 15% only did so just before applying for credit.

Last year the number of entrepreneurs who said they never check their business or personal credit scores stood at 53%, 21% said once a year, 15% said when they are applying for credit and at 5% each are those that check two to five times a year and those that check more than five times a year.

A further 69% of SMEs do not have insurance to cover their business citing a wish to become more established before doing so.

The most popular sectors

2015 – 14%
 of respondents were in the business services sector, the largest sector in the country for SMEs.
2016 – 15% of SMEs were in the businesses services sector, which was still the largest sector this year as well.

The most populated industries for small businesses

The business services sector ranked the highest with 15% of the respondents operating within this sector. This was followed by manufacturing (14%), Computers and IT (12%), professional services (11%), consulting (10%), retail (9%), building and construction (7%) and lastly food and hospitality (6%).

In 2015, the bulk of small businesses in South Africa indicated that they operate in the manufacturing and business services market with 14% of respondents each, followed by IT and professional services at 12% and 11% respectively.

Business service has always dominated, says Anderson, but what we do know is that professional services continues to climb and the country should expect a much higher growth rate in that area over the next 2 to 3 years.

Hiring and recruitment

2015 – 49% of the SMEs surveyed said they employ between 1 and 5 people.
2016 – 52% of the businesses who employ between 1 and 5 people.

More small businesses are hiring

This year the number of business which employ between 1 and 5 people grew to 52%; between 6 and 10 sits at 29%; between 11 and 25 is at 14%; between 26 and 50 is 3% and 51 to 100 sits at 2%.

Majority of the small businesses said they plan on hiring more staff within the year. This is also despite many small businesses citing regulations that make it costly to terminate poor performing staff, as well as the high costs involved in recruiting and skilling quality staff as the primary stumbling blocks preventing them from employing more people.

Last year, almost half of the businesses reported that they employ between 1 and 5 people at 49%. Followed by 28% with between 6 and 10 people; 17% hire between 11 and 50 people and 5% between 51 and 100 people.

A substantial number of SMEs (78%) had also planned on hiring more staff. 46% of respondents answered that they had hired staff in the last year, and 55% said they had not.

The survey also looked at what small businesses regarded as their most critical needs and some of the areas they required the most help. Here are some of the questions the SMEs were asked and their biggest concerns.

If you had an extra R100 000 to spend in your business, what would you spend it on?

42% of respondents stated that if their business were to receive a R100 000 cash injection, the biggest portion would be used towards marketing efforts. This is compared to 37% last year who said they would spend the cash injection on marketing their business.

What are the most important areas where you require assistance?

43% of the respondents singled out sales and marketing as the most important area where they require assistance this year. This was followed by business and strategic planning at 26%. Financial management was the third most important area at 13% followed by IT and technology at 5%.

The percentage remains unchanged from last year’s survey with 43% of small businesses placing sales and marketing as a key area in which they require the most assistance, business and strategic planning following with 30%.

What is the biggest area where you require skills training or development?

Sales and marketing again was the biggest area of concern with 39% of the SMEs saying it was the area they require skills training or development. This shouldn’t come as a surprise says Anderson because if you have an abundance of sales, cash will flow and with cash flow you can fix anything.

What is the greatest IT challenge that is facing your business?

Lack of understanding and confusion was rated as the biggest IT challenge that small businesses had with 65% of the SMEs surveyed saying they simply do not understand what it is they need to do.

Anderson says the problem is that there are so many options out there and historically IT had been made so complicated for SMEs to adopt technology that they haven’t done so.

Another IT challenge highlighted in this year’s survey was that 69% of SMEs don’t have a website. “It’s the most inexpensive thing to do and yet the most important thing you can do in business – to create a professional image, a website, Facebook header, e-mail signature, but if you can’t do that you’re not going to get ahead.

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