'Economic conditions, labour relations and labour policies are biased against employers and small and medium enterprises [SMEs]." This comment, by one of the 500 company owners who took part in the 2012 SBP SME growth index study, sums up how small-business owners in South Africa feel.
SBP is a not-for-profit company that collects evidence to contribute to policy-making that creates a business environment that promotes entrepreneurship. The three-year annual study was started last year.
South Africa acknowledges the large role that small businesses have to play. The national development plan, for instance, says: "Some 90% of jobs will be created in small and expanding firms. The economy will be more enabling of business entry and expansion, with an eye to credit and market access … Regulatory reform and support will boost mass entrepreneurship."
But few small businesses are actually growing in South Africa, or experiencing any encouragement from government policy, according to the study. "They are essentially in survival mode, rather than being geared for growth," it says.
"They are battling with a very difficult environment and operating on very narrow profit margins. All indications are that they are trying to reduce exposure to the labour market."
Employment creation potential
The 500 "panellists" are divided more or less equally between three sectors identified by government as having employment creation potential: manufacturing, business services and tourism.
The study found that in 2011 small businesses were confronting serious difficulties in their operations. But in 2012 business conditions were considerably worse.
Nearly three-quarters of panellists said it had become more difficult to operate a business in the past year. Even this result is considered to be relatively optimistic, because only companies that managed to survive the year were surveyed.
Despite this, as in 2011, most business owners were somewhat optimistic about the future – 57% of the panellists expected better trading conditions.
But these positive expectations were based on strategies for survival rather than any encouragement from government policy.
There was considerably less optimism among manufacturers than among business services and tourism operators. This might be a reflection of general deindustrialisation in South Africa, according to the study. Another problem, according to the study, is that the entrepreneurial pool is growing older, with relatively few younger people coming up to replace them, especially in manufacturing.
The tough economic climate is a major brake on growth. Labour regulations, skills shortages and cash flow issues are also areas of concern.
Although just over half the firms (51%) reported an increase in turn-over, and aggregate turnover in 2012 was 9% higher than in 2011, this was apparently primarily because of cost increases.
Red tape
Labour costs and material inputs were the biggest cost contributors. Very little was left for profit, for saving or for reinvestment.
Red tape takes a considerable slice of what is left – "in round figures, between R1 in every R17 and R1 in every R25 that goes through these firms is committed to red tape".
Crime consumed about 1% of turnover, largely through internal theft, pilfering and shrinkage.
Around 44% of firms kept staff numbers constant in the previous year, 34% increased them, and 22% reduced them. Though this might not appear to be too bad, there was a distinct shift in the pattern of employment from permanent to temporary work.
Panellists identified the main barriers to hiring more employees as: not enough demand (45%); cannot find people with suitable skills (16%); labour regulations (15%); and insufficient working capital (11%).
Most (55%) panellists expressed support for a youth wage subsidy – the highest support was among manufacturers. Very few said they would use a subsidy to displace older workers because of the latter's valuable skills.
The study showed that small manufacturing and business services businesses' premier source of turn-over was local big business – indicating that the fates of big and small business are closely intertwined.
Panellists identified their chief concerns relating to future business growth as: municipal rates and services (38%); regulations and red tape (21%); global economy (15%); and local economic conditions (9%).