Make each decision count
The current economic downturn and rising operating costs, fuelled by escalating fuel prices and the knock-on effects of the wave of power cuts earlier this year, is having an impact on small and medium businesses in different ways.
Jo Schwenke, managing director of Business Partners, says such businesses should be segmented into two categories: those for which business in the current economic cycle is going quite poorly and those that are still faring quite well.
Any business that is a supplier to big infrastructural projects, for example, or to any form of building refurbishment, sinking of mine shafts or even the mega Gautrain project, among others, is more likely to be withstanding the financial and economic pressures. The extent of the buoyant construction activity in many of South Africa’s cities is evident by the number of cranes that can be seen on the skyline, he says.
“This does not mean that only building and construction-related small and medium business firms are doing alright,” says Schwenke, “but also the likes of manufacturers or jobbers who provide support services—those that make kitchen equipment or built-in cupboards, for instance. These types of businesses or light manufacturing premises are still looking fairly good or even doing well—so it’s not all doom and gloom on that front.”
But, Schwenke says, in other market segments—typically people in the retail or service sectors, small supermarkets, restaurants or even filling stations and suppliers to the motor vehicle industry—“we are seeing something of a cooling off, tempered by factors such as location and the average income in a particular area.
The newer businesses and lesser-known franchises are suffering.”
This is where innovative financing and business solutions can often make a difference in making or breaking a business. Adversity for some can provide a business opportunity for others and a win-win situation for both parties.
According to Schwenke: “We do an analysis of their financial information and check whether they break even before financing costs. If the answer is yes, that’s good news, because we have the mechanisms to restructure, where we can put in some sort of more permanent capital.” This could take the form, for example, of a shareholder’s loan account to alleviate the cash flow.
“It’s all about cash flow. There is an old saying that ‘turnover is vanity, gross profit is sanity and cash flow is reality’. You have got to survive and make the next month count. We are able to put in a long-term structure, and provided things don’t get worse, we would have structured that business to a level where we would have a cash break-even situation.”
In a different business and financial context, public-private partnerships (PPPs) have taken on a particularly valuable role in South Africa, often in major projects such as the building of new hospitals or public-sector administration buildings, among others. And, more often than not, they provide the springboard for the empowerment of emerging black businesses. Four parties are typically involved in PPPs: entrepreneurs, private companies, funding institutions and government.
Says Dewet Deetlefs, MD of ChemCity, Sasol’s small business incubator: “The first critical role player in any enterprise developing PPP is the entrepreneur. The entrepreneur is the person best equipped to take on the business risk, see the gap, the product, the market and, ultimately, the opportunity—and decide to take on the business risk as a result.”
In many instances, Deetlefs points out, an entrepreneur will not have the requisite skills or technical know-how to make the business a success. This is where the next role players—corporate or other enterprise development initiatives—move into the equation.
“Our role is to facilitate the development of chemical and chemical related business opportunities. We empower entrepreneurs by means of technical as well as business assistance. We provide specialist enterprise development support to specific chemical and chemical-related industry clusters.
“Entrepreneurs walk through our doors with an idea and, if it is feasible, we strive to make it possible for them to walk out with a well-developed, quality-tested product and business plan of their own, for which they now need funding.
Says Deetlefs: “While funders are generally prepared to finance new start-up businesses, we have seen a tendency to demand that the entrepreneur brings a huge amount of collateral to the party, something very few are in a position to do. I believe that funding institutions should be prepared to bear the financing risk. Admittedly, we have recently seen this changing.
“Risk ensures responsibility. If more financial institutions would take on the necessary amount of funding risk, it would mean significant and positive things for the entrepreneur. They could expect to receive more site visits from the funder and far greater involvement in terms of management and business advice.
Financial institutions would thereby continue giving ‘big brother’ guidance where private companies leave off,” Deetlefs says.
Government, as another partner, is there to ensure that the business environment is secure and streamlined through legislation, law enforcement and incentives—as well as the necessary infrastructural support—to enable entrepreneurs to get their companies up and running as soon as possible.