The entrepreneurship sector is frequently highlighted as a significant driver of employment and economic expansion in South Africa.
However, small businesses face dauntingly high rates of failure. Despite contributing 39% to South Africa’s GDP, the SME sector grapples with failure rates ranging from 50% to 95%, varying by industry.
On average, SMEs experience a substantial 75% failure rate, as noted by Vuyelwa Nyakaza, managing director of Sukume Consulting, which specialises in SME development across South Africa and the continent.
The conversations around entrepreneurship are often focused on external factors impacting small businesses such as the country’s sluggish economy or infrastructure challenges.
However, how entrepreneurs conduct their business is one of the key determinants of success or failure.
There are various factors that contribute to the failure of entrepreneurs.
Through her extensive work with entrepreneurs, Nyakaza believes that some of the biggest challenges facing the sector are limited knowledge, technical skills and a lack of wise and implementable or practical advice or mentorship.
Limited sector knowledge
One of the trends Nyakaza has picked up while working with entrepreneurs is that they have limited knowledge of the sector they have chosen to operate in, and this impacts how they run the business.
According to Nyakaza, very few entrepreneurs invest the time and effort to understand what basic dynamics of the industry can sometimes be that they are involved in.
For example, sectors like agriculture, hospitality and fashion are highly influenced by seasonality. Understanding the trends and fluctuations of one’s business is important for cash flow management.
This is because the cost model is the same even though the revenue is seasonal. Business owners need to ensure that their cash flow projections accommodate the lower demand cycles.
“It is these types of mistakes that entrepreneurs make and once they are on the back foot, make it harder for them to stay afloat,” explained Nyakaza.
Technical financial skills gap
In her work with entrepreneurs, Nyakaza has listed skills and training along with cash flow management as two key challenges faced by the SME sector.
The 2023 Momentum SMME and Side Hustle report also listed similar challenges for the self-employed and business owners. The report describes the self-employed as those who create the job or are the job and business owners as those who have others working for them.
For the self-employed, 34% said that good financial understanding is one of the top five needs for them to reach their business ambitions.
Of those who are business owners, 35% had a need for financial planning, forecasting and budgeting, while 34% also listed good financial understanding as a need to achieve their business ambitions.
As the business grows and scales up – the need for technical financial skills becomes increasingly imperative for the success of the business.
Value of the right advice
Nyakaza believes that business coaching or business development services (BDS) is a vital input for entrepreneurs to build stronger, more efficient and more profitable businesses.
She said that some entrepreneurs undervalue the importance of sound business advice as a tool to help their businesses grow. This is because they get caught up in the hustle to deliver, i.e., working in and not also working on their businesses.
“You need someone to look at your business objectively and interrogate your strategic and operational approach to better your business,” she added.
“Another big challenge facing the SME sector is access to capital and funding. A lot of entrepreneurs decide to fund their businesses themselves often using their pension and retirement savings,” Nyakaza added.
“This means that when entrepreneurs start businesses, the line between personal and business finances is often blurred. This can have devasting repercussions for their personal finances and savings, so advice is very important,” Nyakaza said.
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