WHAT IS SLOWING THE GROWTH OF THE SME SECTOR?

via CA(SA) Dot News

 

Red tape, lack of funding and compliance with legislation continue to be the main challenges faced by most Small Medium Enterprises (SMEs) in South Africa – according to a latest survey conducted by the South African Institute of Chartered Accountants (SAICA). 

 

 

Access the full “2015 SME insights report” at http://www.saica.co.za/Portals/0/documents/SAICA_SME.PDF.

 
Policymakers should reduce red tape around starting a business

 

One of the main barriers to starting a business in almost all developing countries is the difficulty of obtaining finance. This holds true for South African SMEs where this is considered the second most difficult barrier when starting a new business. In South Africa, red tape from government is considered to be the biggest obstacle with red tape from the private sector coming in third place. Compliance with legislation and registering for VAT are also significant obstacles. Finding customers and marketing the business are the biggest commercial/operational obstacles.

 

South Africa is ranked 120 out of 144 in the 2014/15 Global Competitiveness Report i for the ‘Burden of government regulation’. We could learn some lessons from other African countries. In Rwanda for example, who are ranked 6 out of 144 for the same element, starting a business takes on average 6.5 days, whereas in South Africa it takes approximately 46 days.

 

 

While red tape is a significant barrier to starting a business, it may logically be argued that as compliance increases with size it may therefore be a factor that influences the degree to which SMEs may wish to grow. The same red tape that makes it difficult to start an SME or to graduate from micro enterprise to SME may also inhibit In the 2014 survey ‘restrictive labour laws’ were cited as a major barrier to SME growth. The World Economic Forum’s Global Competitive Report is again instructive. South Africans rate restrictive labour regulations as the most problematic factor to doing business. South Africa ranks 143rd out of 144 countries on hiring and firing practices and 136th for pay and productivity. Policymakers who recognise that red tape needs to be reduced and/or simplified would do well to consider the effect of current labour law on SME enablement, and their consequent ability and willingness to create jobs. Although regulation is necessary, a more balanced approach is needed. VAT registration in particular is considered the most onerous of the red tape issues. Currently the red tape around VAT registrations exists in an attempt to prevent fraud. This objective is important. SAICA has always advocated that the South African Revenue Services (SARS) should make it easy to register, and then to develop effective risk responses to control VAT fraud – making the lives of honest SMEs a lot easier. The red tape issue is not restricted to government. Red tape from large private sector businesses is also a significant obstacle for new SMEs.

 

 

Main reasons for SME failure


According to SMEs, the main reasons for SME business failure are overwhelmingly cash-flow related. The diagram below demonstrates that from the view of SMEs, they start with too little capital, they collect debtors late, are subject to bad debts, overhead levels that are too high, and they are victims of the risks they haven’t identified. Effectively, a lack of financial planning and control are at the heart of many of their problems. Research that SAICA previously undertook with the major lenders to SMEs confirmed that many of these small businesses would do well to engage SMPs [CAs(SA)] to assist with business and cash-flow planning, and risk identification and mitigation. It was also the view of the banks and SME risk-based lenders that SMPs could assist SMEs when it comes to sourcing finance more successfully.

We know from the SAICA Enterprisation project, the BUSINESS/PARTNERS’ mentorship and technical assistance philosophy, and the reasons behind the government allocation of R3bn in funding for mentoring of microenterprises that if we could teach SMEs to overcome their technical shortcomings they might do better financially and they would, as a consequence, employ more people. Given that financial and cash-flow issues are cited by SMEs as the primary causes of business failure, and given the importance of SMEs’ role in job creation as a partsolution to poverty, government could do worse than to extend their technical assistance funding to SMEs who are likely to create significant employment. SAICA would be an ideal partner to dispense this assistance given their level of expertise and the geographical diverse nature of their SMP membership.

 

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