MAKING SMALL BUSINESS WORK IN SOUTH AFRICA
Small, Medium and Micro Enterprises (SMMEs) contribute around 40% of South Africa’s gross domestic proﬁt and employ more than half of the private sector work- force. It is estimated that as much as 80% of new jobs in world economies are being created by SMMEs, making small business a key player in the future growth of our country. It is estimated that more than 1,5 million self-employed people constitute the SMME sector, contributing about 40% of the total remuneration in South Africa.
South African Business Warrior offers clear explanations, logical suggestions and expert advice for small business owners in South Africa.
This section focuses on starting and managing your own business. We provide you with the tips, tools and essential references you need to save time, share knowledge and secure maximum returns on your small business investment.
Getting the basics right
Starting an entirely new business is uncharted territory for most people. It offers great rewards, but equally high risks. About 80% of all new small businesses fail within the ﬁrst ﬁve years. Wanting to be your own boss isn’t enough to make you successful and, before you set up shop, you need to think hard about whether you have the right temperament, leadership skills, support system and dedication to be an entrepreneur.
Evaluate your strengths and weaknesses by honestly answering the following questions:
Are you a self-starter?
You need to be able to develop and drive projects, manage your time and follow through on details.
Are you willing to work long hours?
When you own a business you’re committed to it 24 hours a day, seven days a week, particularly during the ﬁrst few years.
Are you good at making decisions?
As a sole owner you will have to make decisions quickly, under pressure and on your own.
Do you plan well?
Research indicates that many business failures could have been avoided through better planning. Good organisation of ﬁnancials, inventory, schedules and production is the oil that keeps any business engine running smoothly.
Do you have the strength to stay motivated?
Running a business can wear you down, especially when all the responsibility is on your shoulders. It takes strong motivation and passion to survive a slump in business, or periods of burnout.
Are you willing to invest?
True entrepreneurs put their money where their mouths are, and this might mean using personal savings or property.
Have you considered the possible impact on your family?
Starting a business can be hard on family life. The strain of a spouse who isn’t behind you 100% may be hard to balance against your new business demands. There also may be ﬁnancial difﬁculties until the business becomes proﬁtable, which could necessitate lowering your standard of living.
Do you have a network of friends or associates who could provide outside ﬁnancing?
Insufﬁcient capital is a key cause of small business failure. If you are not able to obtain enough funds from a bank, you may need to rely on funds from friends and family. Most start-up business are funded this way.
If you can answer YES to most of the above questions, then you may have the potential to join the ranks of successful SMME owners. If you cannot, you need to consider whether starting a small business is the best solution for you.
Which structure suits your business best?
There are several ways to structure the legal ownership of your business, depending on the nature of the business, the number of people involved, management capabilities, personal risk and your future plans.
Sole proprieter/sole trader:
This is best suited to a business that is not ﬁxed asset-driven (ie, is service-based) and in which the owner is the sole employee. Income accrues directly to the owner and there are no complicated statutory returns other than meeting basic legal and tax requirements. The disadvantage is that the business is not a separate legal entity, so the owner is liable for, and can be sued for, the business’s debts. If the owner of the business dies, the business ceases to exist.
Based on the same principles as a sole proprietorship, this structure allows you to have up to 20 partners who share responsibility, skills and liability. A partnership requires a contract to formalise each person’s contribution to the business, their responsibilities, proﬁt share, means of resolving disputes, disability/death insurance and what procedure will be followed if the partnership changes or is dissolved. Finding funds for a sole proprietorship or partnership depends on the security that the individual owner/partners are able to provide.
Close corporation (CC):
This is a popular and widely used structure that gives a business a separate legal identity without the formalities of the Companies Act that governs (Pty) Ltd companies. This structure is ideal for for a business that purchases stock on credit. A CC can have between one and 10 members, each of whom owns an agreed percentage of the business and who is liable for managing it properly. A CC cannot be owned by a company or be a subsidiary of another CC or company. A CC (rather than its members) can sue and be sued.
How to register your CC - All CCs in South Africa are governed by the Close Corporations Act, which is administered by the Companies and Intellectual Property Registration Ofﬁce (CIPRO).
Purchase CC registration forms from a local stationer, or download them from the CIPRO website at www.cipro.co.za.
Choose a name for your corporation, plus a second and third option in case your ﬁrst choice is already registered. If you have access to the Internet, you can check this by using the name search function on www.cipro.co.za/home. Reserve this name by ﬁlling in form CK7. Then complete the founding statement form (CK1) in duplicate. Obtain written consent from a certiﬁed ﬁnancial accountant to act as your accountant.
Certain payments must be submitted with the forms (usually under R200) and can be done via direct deposit, electronic transfer, credit or debit card, or in cash. See the CIPRO website or call the CIPRO call centre on 0861 843 384 for details.
Send the forms, letter and proof of payment to the:
Close Corporations Registrations Ofﬁce
If the corporation name is approved and all the formal requirements are met, the Registrar will allocate your CC a number. This must appear on all your business documents in addition to the letters CC after its name.
Company (Pty) Ltd:
This is also a separate legal entity in which directors are protected from individual liability. A company can make shares available to staff as a private company (Pty) or to the public as a limited company (Ltd), and these are easily transferred from one owner to another. (Pty) Ltd companies are subject to an annual audit. This is the best legal structure for people who ultimately want to sell their business to a large competitor, or list on the stock exchange.
Cost of Starting a Business Top During start-up phase, the small business owner needs funds for once-off start-up costs as well as at least six months of working capital. Plan for things to cost more than you think, and include this budget in your business plan.
Calculating start-up costs
If you are not sure what your expenses will be, make ﬁnding out part of your due diligence. Research similar businesses in your industry and aim to uncover any general expenses that you might not have thought of. If possible, consult a lawyer or accountant who has experience with small businesses.
Typically, start-up costs include the following:
• Expenses before the starting date, such as market research, registration fees, legal fees, ofﬁce stationery, design and printing of corporate identity (business cards and letterheads), registration of a domain name and creation of a website, installations and utility connections (if moving into a new property).
• Start-up inventory (if yours is a product- based business).
• Cash reserve to support the company during the early months before sales reach break- even levels.
• Current assets, such as ﬁxtures and signage, ofﬁce furniture and vehicle/s (either purchase price or down payments).
• Long-term or ﬁxed assets, such as property and equipment.
Beware of hidden costs
Hidden costs are those you don’t see, don’t always expect, and which seldom feature in a business plan. In fact, many people don’t realise that, while they are pounding away on their treadmills, the main things holding back the growth of their small business are costs that haven’t been factored into the monthly budget. These costs vary, depending on the size and nature of your business, and can include:
• Monthly interest on your business overdraft (R100 000 at 11% costs you R934 every month). The interest rate is linked to the ofﬁcial prime rate and is dependent on factors such as risk proﬁle, usage and collateral.
• Bank interest charged by suppliers when you pay them late.
• Interest lost when customers pay you late, or when you pay a third-party supplier before you have been paid by your own client for a product or service.
• Depreciation of equipment and property.
• Maintenance (eg, IT support, vehicle services).
• Money lost by spending time on tasks that could be outsourced (eg, spending R60 on a driver or delivery service, compared to an hour or two of your time that could be better spent closing a sale).
• Commissions and administration fees (eg, of beneﬁt plans).
• Employee turnover is one of the most substantial hidden costs in business today.
You can’t always avoid these costs but being aware of them helps you minimise their impact and plan for them in your budget.
Managing cash ﬂow efﬁciently Top
Poor cash ﬂow is one of the major causes of failure in small businesses. You can turn a proﬁt but still go bankrupt if your business has a cash ﬂow problem. Developing a cash ﬂow forecast will indicate the estimated money ﬂowing into and out of the business over a period of time, allowing you to set budgets and targets, and monitor performance.
Regardless of the size of your business, it’s important to do regular cash ﬂow and proﬁt projections if you want to maximise returns and minimise cash ﬂow problems.
In a new business you don’t have existing cash ﬂow information on which to base a forecast. In the book Up and Running: A Guide to Running Your Own Business, local authors Andrew Patricio and Paul Mitchell suggest using the following questions as a guideline:
• What portion of your sales will be for cash, if any?
• What purchases will you have to make to achieve those sales?
• How much opening stock will you require?
• How much capital do you have available to invest in the business?
• What loans are you going to make from the bank or other sources?
• What monthly expenses will you incur?
• What capital expenditure are you going to make?
• What monthly salary are you going to draw?
Bear in mind the following factors:
• Seasonal ﬂuctuations.
• Price increases.
• Emergency situations.
• The need to be conservative and realistic.
• Allow for late payments by debtors.
Intelligent ways to control cash ﬂow
Keep overheads down:
Every Rand counts. If you have a 20% mark-up, then every Rand of ﬁxed costs spent unnecessarily means ﬁve additional sales are needed to get back to the same point. It’s easier to save costs than to grow proﬁt, so don’t buy new if you can do with second- hand, and don’t buy at all if you don’t really need it.
Avoid credit terms:
Bad debts are the quickest way to sink a small business. Make sure your payment terms are understood and agreed to in writing before a project begins or a sale is made.
Follow up as soon as money is due. A new debt is far easier to resolve than an old one.
Improve supplier payment terms:
Negotiate preferential payment terms, extensions of credit lines or discounts for early settlements. However, don’t compromise your relationships with your suppliers – you need them on your side.
Keep stock to a minimum:
Stock costs money to buy, transport and store. It can also be stolen, damaged or become obsolete. Managing stock sensibly is as important as managing cash ﬂow.