/ 24 February 2017

Small business 101: Avoid the pitfalls

If you get to know all you can about starting up a small business before doing so
If you get to know all you can about starting up a small business before doing so

Starting a small business is often presented as the big hope for millions of unemployed South Africans, and President Jacob Zuma’s State of the Nation Address for 2017 turned the spotlight in SMMEs as being crucial for the country’s economic growth.

While entrepreneurship experts would agree with these sentiments, South Africa’s small business failure rate of almost 80% within the first three years means the average entrepreneur’s chance of starting a business, growing it and creating much-needed jobs is painfully slim.

Carol Weaving, managing director of Reed Exhibitions, which stages the annual #BuyaBusiness franchising show and the Small Business Expo in partnership with the Eskom Foundation, says: “We see literally thousands of delegates at our expos every year, most of whom are already in business or planning to start a business. Unfortunately, according to our expert conference advisors, a large proportion of them are likely to fail at least once or twice. But if they are able to access business skills, mentorship and funding, they have a far greater chance of success.”

Before planning the launch party, the entrepreneur must determine whether the idea is indeed a viable one. Not only must it meet a market need, but customers must be willing to pay for it, and the entrepreneur must consider whether she has the resources to deliver on the plan.

“Market Research is always a good idea, whether [you are] launching a new business or embarking on a new product line,” says Jayshree Naidoo, Standard Bank incubator head and a 20-year entrepreneurship industry veteran. “Unfortunately entrepreneurs are not doing enough of it, which results in a high failure rate. Entrepreneurs should be looking to tools that can assist them with this, including the Lean Startup model, to at least help them validate their offer.”

Lean Startup methodology is based on the build-measure-learn feedback loop. The first step is to determine what problem needs to be solved and then developing a basic business model and minimum viable product (MVP) to begin the process of learning as quickly as possible. With a MVP out in the market, the startup assesses market response and refines its product offering based on learnings. In a nutshell, Lean Startup methodology revolves around starting small, and learning as the business grows.

The South African Institute of Chartered Accountants (SAICA) says in its 2016 SMME Insight Report that the biggest challenges facing SMMEs include economic uncertainty/volatility, rising costs, difficulty accessing finance, and compliance with laws and regulations, with an inability to manage cash flow and debtors, and an inability to manage administrative and business cited as common reasons for failure. SMMEs surveyed said mentorship, business tools and incubators could help them overcome these challenges.

Over the last decade, a number of organisations — both private sector and government-sponsored — have sprung up across the country, with the aim of providing fledgling businesses with the facilities and support needed to run their businesses successfully.

Everything from office space, shared technology, back-office administration and business mentorship is provided to member entrepreneurs who survive an often rigorous selection process. Unfortunately, the majority of these are based in the metropolitan cities of South Africa, with most rural entrepreneurs being left to their own devices.

The Gordon Institute of Business Science and FNB’s Entrepreneurial Dialogues State of Entrepreneurship in South Africa report found: “Business incubators assist emerging companies [to] survive and grow during the startup period, when they are most vulnerable. The incubation process improves the survival rate of startup companies by assisting them to become financially viable, usually within two to three years.

“Startups fail at a rate of about nine in 10 in the first two years of operation. Within the 27 Seda (Small Enterprise Development Agency) incubators (in operation), the survival rates are in the region of 84% to 97% in the first two years of operation. Post-graduation from the incubators, the numbers come down, but they are still in excess of 70%.”

Small businesses fail for a wide number of reasons, but there are several basic mistakes that can hamper growth in the early years.

  • Failure to plan: A thorough business plan, or at least a business model, is the heart of a business strategy and lays out exactly how the small business owner is going to create, deliver, and capture value. Even the most innovative idea risks stalling at the gates without a proper business model.
  • Not finding a niche market: Assuming “the more, the merrier” when it comes to market outreach is one of the biggest marketing mistakes an entrepreneur can make. A lot of time and money is wasted on a marketing campaign that tries to be all things to all people. Conversely, the target market cannot be too small either, as the startup needs enough customers to sell to without saturating the target market within its first six months of operation.
  • Poor financial management: Financial literacy is a major problem in the South African landscape, and it becomes all too apparent in a small business setting. The entrepreneur struggles to manage cash flow, does not know how to differentiate between profit and cash in the bank, fails to plough profits back into the business and starts to spend lavishly or unnecessarily before paying employees, creditors and investors. It’s vital that the entrepreneur implement sound financial management principles from the outset.
  • Assuming the product will sell itself: No matter how good the offering is, if the business is not making sales it will not be sustainable. A proper marketing strategy is crucial, based on thorough research into the target market demographics, the market’s wants and needs, the competitor environment and the logistics of selling and delivery. Low cost and free marketing in the form of websites and social media give the start-up access to a highly targeted market, but digital marketing strategies must be managed well, and customer engagement through these channels must be consistent and ongoing.
  • Not testing the product: Every aspect of the product needs to be well tested in advance. Many entrepreneurs make the mistake of assuming that they know what their target audience wants. Startups have a lot to learn from large enterprises that carry out vigorous research, test the product, adjust it accordingly and test it again.
  • Poor management: This is one of the biggest and most common mistakes an entrepreneur can make. The business plan may look sustainable on paper, but this counts for nothing if there is a lack of focus, vision, planning, operating standards and everything else that goes into good management. Many entrepreneurs are experts in their craft, but fall short when it comes to having effective business management skills.
  • Diversifying or growing too early: After initial success, far too many business owners rush to diversify or scale the business. It is critical to stay focused on core products until the business has established a strong customer base and has the capacity to deal with new product lines. No matter how tempting the opportunity to branch out, the entrepreneur must reinvest revenues, amass operating capital and take enough time to build a strong foundation the business can grow from.
  • Lack of finance: Most entrepreneurs report that accessing finance is a major hurdle to either starting or growing their businesses. “Startup finance is not easy to come by as there are many unknowns,” says Jayshree Naidoo, Standard Bank Incubator Head. “However, research, planning and access to markets assist in unlocking funding. Entrepreneurs can bootstrap, but only to a certain level. Thereafter, they need structured support.”

While the challenges may seem daunting, those in the know would argue that there is no better time for entrepreneurship than right now. Opportunities abound for the savvy entrepreneur and by all indications, the intentions from government and big business are to foster the growth of small businesses.