Ever wondered why so many SMEs struggle?

A broad look at the findings of the South African Institute of Chartered Accountants’ (SAICA) most recent SME survey reveals their most prominent struggles

This year’s SAICA SME survey saw over 1 300 participating respondents providing a clear view into the mechanics of small businesses, what can be done to help them, and the common pitfalls of which future or current small business owners should be aware.

1.     Cash-flow woes

Answer to question: Small businesses have a high failure rate. What do you think are the most important reasons why they fail? Please rank each item from 1 to 7, where 1 represents reasons that are less important and 7 represents reasons that are most important. The above is the average rating per response out of 7

When asked, business owners indicated that cash-flow woes top the list of reasons why small businesses fail. The reasons were listed as: SMEs start with less capital than they need, are unable to adequately manage their cash flow, receive late payments or non-payment from debtors, and have large company overheads.

We are able to deduce, then, that while business owners are getting their businesses off the ground and working hard to attract customers, they are underestimating the importance of actively managing their cash flow from day one. Quick business expansion coupled with poor cash-flow management quickly tips the scales and stops SMEs in their tracks.

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Adding to the burden of cash-flow related obstacles, SMEs cite long payment terms as one of the reasons why they don’t do business with government. Research findings indicate that 73% of business owners do not do business with national, provincial, municipal or parastatal sectors. The top reasons that rated the highest was non-transparent tender process with 49,7%, slow speed at which decisions are made with 48,3% and long payments terms with 44,2% of respondents listing this as a top reason for not engaging with government.

Question: If you do not do business with government, what are the major reasons why not? Please score each item where 1 is not an important reason and 7 is a very important reason

2.     Starting with too little: inadequate access to funding

Would-be business owners who need funding to get their business off the ground have historically been underserved by South Africa’s banking sector. In South Africa traditional lenders (such as the Big Four) require collateral against SME loans – with the result that the many SMEs who lack collateral are unable to have their loans approved.

While Business Partners (South Africa’s premier risk-based funder), the Industrial Development Corporation (IDC) and the Small Enterprise Finance Agency (SEFA) are successfully funding SMEs without the traditional collateral required by the banks, government should ensure that SMEs are adequately funded.

Government would do well to use their R3 billion budget allocation for mentoring and training of owners of micro-enterprises, to contribute to the skill sets required of those SMEs being funded by government to ensure that the risk of these SMEs failing is reduced.

3.     Beneath the red tape

In the context of this article, red tape can be viewed as all those processes that hinder ease of doing business – by imposing delays and cost that exceed their benefit.[i]

Answer to question: What are the most difficult barriers to entry when starting a new business? Please score each activity from 1 to 7 with 1 being a very low barrier and 7 being a very high barrier. The score above is the average score out of 7

When asked which are the most pertinent barriers to entry: red tape from government ranks highest with 77% of respondents, followed by obtaining finance with 70%, red tape from large private sector businesses with 65% of respondents, and registering for VAT with 56% of respondents.

Findings indicate that, surprisingly, in comparison to the above difficulties, most respondents have very little difficulty registering for PAYE and UIF, registering their business, registering for tax, or opening a bank account.

The way forward

These findings are valuable in terms of wayfinding for government and SMEs – highlighting the way in which government can meaningfully assist small businesses and alerting small business owners to the pitfalls of the small business ecosystem.

Between lack of funding, late payment and red tape there are clear ways to assist SMEs in their growth and development goals going forward. If we can create an enabling environment where SMEs have the help necessary to manage their cash flows, can rely on the funding they need to start their businesses, are not constrained by burdensome red tape and are willing to engage in doing business with government, we will no doubt strengthen the sector.



[i] See http://led.co.za/tool/red-tape-reduction-rtr.
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