Many small businesses fall victim to premature failure because they are started as survivalist ventures.
While small businesses are recognised as key drivers of economic growth and employment in South Africa, the reality is that for every success story there are several businesses that do not make it through the first two years of existence.
Ravi Govender, Head of Small Enterprises at Standard Bank, says although statistics vary, on average about 50% of all start-up businesses in South Africa fail within 24 months due to the inability and inexperience of their owners.
This was one of the most important messages to emerge from the recent Standard Bank ‘Think Big - Building Business Champions' TV series.
‘Think Big’, which featured 12 successful small businesses that competed for a R1-million cash injection to drive their businesses forward, also featured discussions and advice on how the traditional pitfalls and challenges facing small business can be met and defeated.
Starting as a survivalist venture
“One of the main reasons for the premature failure of small businesses in South Africa is that they are started as survivalist ventures. It is almost inevitable for them to fail because their owners do not have the skills, experience or resources to build a sustainable business,” says Govender.
Sometimes you find entrepreneurs who have a passion for business and more capital available, still struggle to build sustainable enterprises.
Govender says there are several common reasons for the high rate of business failure in South Africa, namely:
Many potential entrepreneurs have no formal business training, and tend to ignore the vital step of developing a business plan. As a result they do not have a realistic grasp on the costs, responsibilities and medium- to long-term requirements of a business.
Access to finance
Many start-ups rely on financial support from family and friends. However, as many business owners have not planned correctly, they often find that the money they need to start and subsidise the business is not enough. Costly trial and error in the use of capital often results in business failure.
Often start-up entrepreneurs make the mistake of trading from their personal bank account. This makes it harder to differentiate between your personal expenses and business expenses. It also doesn’t allow you to build up a credit risk profile for your business, which is an important factor should you ever want to approach a bank for financing. Rather, start trading as a business from the get-go by opening up a Business Current Account.
Passion is no substitute for experience
A lack of management experience and training results in new entrepreneurs not fully coping with the range of responsibilities within a business.
A lack of financial expertise
Many entrants do not understand the financial requirements of a business or the VAT, tax, costing, financial controls and other obligations that are part of the business mix.
Poor stock and cash flow management
The link between stock on the shelves and the costs attached to having too much, too little or incorrect stock on hand is not appreciated as proper controls do not exist. Poor calculation of margins and cash flow often lead to crippling pressures impacting on the business.
Failure to differentiate between company and personal accounts
Using the company account as a personal account leads to confusion regarding the true costs and profitability of the business. This is further complicated by poor record keeping.
Related: Silent killers of great businesses and how to avoid them
“The bottom line is that people enter business to make money, but are not properly equipped with the knowledge required to manage cash flowing in and out of the business. Failing to plan correctly and manage budgets simply leads to errors and business failure,” says Govender.
“Filling in the knowledge gaps, and then taking steps to keep operating costs down, controlling payment terms and tight control of credit can go a long way to reversing the current business failure rate,” says Govender.
‘While the ‘Think Big’ series has concluded on TV screens, episodes can still be viewed online by visiting www.standardbank.co.za/thinkbig.