SMMEs: Getting the Financial Fundamentals Right

While small businesses are regarded as the growth engines of economic development, the success rate of start-ups in South Africa is nominal.

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Image Courtesy of Innovative Solutions Group

In fact, estimates suggest that between 70% and 80% of small businesses fail within the first two years of operation.

According to the Global Entrepreneurship Monitor’s (GEM) 2017/18 Global Report, Africa has one the least favourable entrepreneurship environments. The report cites below average ratings for financing of entrepreneurial ventures, school-level entrepreneurship, internal market burdens or entry regulations, relevant government policies and R&D transfer, amongst others.

The South African government recognises the importance of a thriving entrepreneurial sector. In his recent State-of-the-Nation address President Cyril Ramaphosa committed to investing in small business incubation; establishing a small business and innovation fund targeted at start-ups; and reducing the regulatory barriers for small businesses.

Reinforcing this, Finance Minister Malusi Gigaba’s announced in his February budget speech that a fund would be established by the departments of small business, science and technology and the treasury to help get start-ups off the ground successfully. 

Innovative Solutions Group CEO, Arnoux Maré, says there is much to be done before small businesses can be truly successful in the country.

“The GEM report notes that entrepreneurship education in Africa is particularly weak. This is evident in South Africa where many people start businesses without doing the most fundamental preparatory work.

“Importantly, people should not start a business with the expectation of making a massive profit at the get-go. Starting a new business requires passion, hard work, long hours and a lot of sacrifice. People who aren’t willing to embrace this, should not start a business in the first place,” he adds.

And he should know. Maré has done the hard yards, transforming his own business from a small start-up in 2010 to a multi-million operation incorporating 17 subsidiaries and almost 8 000 employees.

Maré suggests success is possible if entrepreneurs follow a few basic steps.

“Every entrepreneur needs to draw up a clear roadmap to achieving his or her financial goals and ensuring the sustainability of the business.”

Draw up a plan

Drawing up a business plan is one of the most important steps to ensuring success of a business. It forces the would-be entrepreneur to do research and interrogate every aspect of the business.

“If a proper business plan is drawn up, entrepreneurs will immediately be able to see where the strengths and weaknesses of their ideas lie or – indeed – whether the business is a viable proposition or not,” says Maré.

Understand financial fundamentals

Aspiring entrepreneurs who did not study accounting or economics at school or college should brush up on the basic financial aspects of running a business.

“Many people who start their own operations don’t have a fundamental understanding of how finances work. They need to gain insight into basic concepts such as inventory, payroll, fixed expenses versus variable expenses and tax. If they cannot get to grips with these aspects, they need to enlist the services of someone who can shed light on these for them,” says Maré.

Continually monitor finances

One of the biggest mistakes small business owners make is to take their eyes off their finances.

Maré says many entrepreneurs have great ideas and are generally competent at what they do.

“Problems arise, however, when they don’t keep tabs on what is happening to their finances, whether it’s overspending on salaries or stock, undercharging on products or services, or keeping poor records.

“Here, data is key. It is important to keep a record of every transaction with relevant dates, times, amounts, terms and information about clients. When a lot is happening at once, it is tempting to take short-cuts, but this can be a crucial mistake, leading to avoidable financial loss down the line.”

Keep the end-goal in mind

Starting a business can be an adrenalin-filled exercise.

“While there may be a lot happening at once, it’s important to take a step back from time to time to evaluate whether things are going according to plan. Small business owners should refer back to their original business plan and goals to assess where they are at and whether they are meeting their various short-, medium- and long-term goals,” concludes Maré.

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