While big business the world over reels under the weight of a deepening recession, the South African small to medium business (SMB) environment is showing something of a silver lining. Preliminary findings of SME Survey 2009 indicate that these companies are coping well.
That’s according to principal researcher Arthur Goldstuck, who says: “SMEs are holding up incredibly well in the face of the recession. Make no mistake, they are bowed, but they are not broken."
Sponsored by Standard Bank, Umsobomvu Youth Fund (now operating as the National Youth Development Agency) and Fujitsu, SME Survey is in its sixth year and polls 2 500 business decision-makers on crucial issues affecting their business.
Goldstuck explains that this year’s research set out to test the overall confidence of SMEs, their ability to be sustainable in a recession and to shed light on their profitability as a measure of current performance.
“We want to provide a barometer of expectations for the coming year and assess how ready SMEs are to deal with the first recession in 17 years. It is a big deal for all businesses, but perhaps more so for SMEs, many of which have never had to deal with doing business in a shrinking economy.”
Louis van Ravensteyn, head of small & medium enterprises at Standard Bank, says: “With company liquidations up and business registrations down, new entrants are limited, thus a repeat of recent growth in these segments is doubtful. It is also clear that the financial distress experienced by SMEs is more evident in certain industries or related sectors i.e. residential property, vehicle dealerships, restaurants and transport.
"Recessionary periods like the current one have a natural effect of sifting the bad from the good, and it is reassuring to note that some SMEs are showing high levels of resilience in these challenging times. It is also comforting to note that the current environment has again forced SMEs to focus on the basics and place more emphasis on financial management and cost optimisation on the one side, and clever marketing and high levels of customer service on the other.
"At the end of the day the entrepreneurial flair and never-say-die attitude of SMEs will ensure sustainability of this critical business segment of the South African economy.”
Goldstuck says just 5% of SME owners report operating at a loss, whereas some 67% regard their businesses as profitable. “This number is incredibly high; the performance of SMEs leading up to the recession has been very strong, with 39% of this number saying they are just profitable while 28% are strongly profitable.”
Goldstuck believes these numbers are indicative of a resilient environment; they have not changed substantially from earlier years despite adversity. “In the last year prior to the onset of the recession, the SME has had to deal with substantial challenges, such as spiking fuel price and dramatic increases in the interest rate. SMEs weathered these storms effectively; the question that remains is how well these companies are able to cope with the new storm of recession.”
A slightly higher proportion (24%) of SMEs are breaking even than in previous years [22% in 2008]. “This number is fairly high; it indicates that any additional shocks could knock these companies over the borderline. If they stick to strategies that are working for them, they should survive, all else being equal,” Goldstuck comments.
Malose Kekana, CEO of NYDA, adds: “These tough times should inspire entrepreneurs to maximise their resources and be more creative. However, entrepreneurs should not try too hard to save that they forget about key activities that increase sales such as marketing. The National Youth Development Agency’s Business Consultancy Services Voucher Programme has marketing related services such as the marketing voucher and the website development voucher which can assist in making the entrepreneur’s brand more visible."
On perceived readiness to survive going forward, Goldstuck says there is a direct correlation between unprofitable businesses and confidence. “Five percent indicated they have no- or very low confidence of riding out the recession; those that haven’t been making it, won’t make it in tougher times. The greater percentage, however, have managed to come through challenging periods and should survive what appears to be low-level recession. If it deepens, the situation could change,” he says.
A sobering note is that 36% report neither high nor low confidence. This, Goldstuck believes, is a further warning that additional adversity could drive these businesses over the borderline. “And this is a higher proportion than the percentage of those breaking even," he adds.
However, despite the adversity, 28% of SMEs have high and 31% very high confidence in their ability to thrive.
“These are very positive indicators of the resilience of the SME environment. We can see caution and concern, there are danger signs for some, but on the whole the market is poised to come out of the downward cycle and prosper in the inevitable better times that follow every downward part of the business cycle."