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State of South African small business A report produced by World Wide Worx in partnership with Xero Index Start-up finance pg 4 Financial management pg 6 Profitability and success pg 8 Work-life balance pg 9 Challenges pg 10 Technology pg 11 Business confidence pg 12 2 It’s hard to overstate the value that small businesses provide to the economy. In addition to their financial contribution and job creation, there’s the personal enjoyment they bring to those who strike out to become their own boss. For this research we surveyed 400 small business owners across 22 sectors to better understand the state of South African small business. THE RESULTS... Start-up finance The majority of small business owners are self- turned to business angels or venture capitalists. funded, with 63% reporting using personal savings It is possible that this is not by choice – 27% of while 20% found investment or a loan from a small business owners cited access to funding as family member, partner or friend and only 6% the biggest challenge to starting their business. SOURCES OF FUNDS TO LAUNCH BUSINESS 6% 6% 2% 3% Personal savings Personal loan Other 20% Investment or loan from family member/partner/friend Investment from a business Venture capitalist 63% 4 Bank Loan The initial start-up funding required was below R100,000 for more than half (62%) of businesses surveyed, with only 4% raising more than R1,000,000. INITIAL START-UP INVESTMENT 4% 8% 23% 3% None Below R20,000 R20,000 - 100,000 R100,000 - 500,000 27% R500,000 - 1,000,000 More than R1,000,000 35% 5 Financial management While over half (51%) the small business owners using either a spreadsheet (31%) or paper records surveyed use desktop accounting tools, only 8% (9%), which is pretty worrying given that according have moved on to cloud accounting software. to studies, 88% of all spreadsheets also contain Over a third still manage their finances manually, errors of some kind. The maths: If you consider that the economic output of small and medium-sized enterprises (SMEs) in South Africa is estimated at 52% of GDP, that’s a potential R1 trillion of GDP that’s at risk. HOW ARE THE MAJORITY OF YOUR FINANCIAL RECORDS MANAGED? 1% 31% Manually, using a spreadsheet Manually, using paper records 51% Using online/ cloud accounting software Using desktop accounting software Other 9% 8% 6 South Africa’s SMEs are confident managing to falling sales, 10% to late-paying customers and their companies’ finances, with 87% reporting 6% to the need to reinvest in the business. they feel “very confident” in this area, and only 1% feeling “not confident at all”. This is perhaps not surprising, as the majority (88%) use an accountant or bookkeeper regularly, and 93% report a “good” or “very good” relationship with their advisor. This number drops to 31% of those businesses that use cloud accounting software, which could be explained by the real-time benefits of cloud accounting software – enabling businesses to issue invoices and get paid more quickly. That said, cash flow remains a worry for 39% small business owners, with 21% attributing this ARE YOU WORRIED ABOUT CASHFLOW? 2% 6% 20% No Yes - customers often pay late which affects the cash flow 21% Yes - falling sales/low seasonal sales have affected day-to-day finance Yes - we have faced an unexpected cost/a client has been unable to pay 10% 41% Yes - we have had to invest or reinvest in the business,which has hit the cashflow N/A 7 Profitability and success An encouraging finding was that 94% of the founders: 75% of SME owners believe they make businesses surveyed are profitable, with over more money running the business than they a third (37%) profitable from the start. And would in a job, and for 91% their business is their these businesses are serving the needs of their only source of income. WHICH FACTORS ARE CRUCIAL TO BEING A SUCCESSFUL BUSINESS OWNER? 8 Taking time off for myself and family 27% Marketing training 23% Personal resilience 18% Management training 15% A business degree 9% Financial training 4% Having a mentor or coach 2% Work-life balance However, this prosperity comes at a cost. 95% of do take holidays, 98% are unable to switch off small business founders work more than 8 hours completely, with almost two thirds (65%) working a day, with 42% working more than 10 hours and at least an hour a day and one fifth (21%) working 16% working more than 12. Only 4% reported more than six hours each day. In addition, while working less than 8. 27% reported that taking time off was crucial to Furthermore, when asked about taking time off, over a quarter (27%) reported working every day throughout the year, while a further 19% being a successful business owner, only 2% cited improving work-life balance as a priority for the next year. take only one day a week off. And when they HOURS WORKED PER DAY OF HOLIDAY 22% 33% 0 - 30 mins 1hr 2-3 hrs 4-5 hrs 14% 6+ 15% 16% “ Annual leave is one of the many employee benefits that small business owners sacrifice, because it could have a detrimental impact on the bottom line. Getting a good work-life balance is very tricky, but it’s really important that we all switch off occasionally. It’s a question of balance: if you’re waiting to board a plane, relaxing with a coffee or stuck in a queue, why not log in and check your emails or accounts? On the other hand, when you’re spending time with the family or headed for the beach or mountains, I say leave your work behind.” GARY TURNER Xero co-founder and managing director for Xero in the Europe, Middle East and Africa region 9 Challenges Stiff competition was cited as the biggest challenge (42%) to starting a business, followed by access to funding (27%) and marketing (11%). BIGGEST CHALLENGES TO LAUNCHING 4% 2% 5% Competition 6% Access to funding Marketing 11% Recruitment 42% Managingthe finances Generating cash Regulation 27% WHAT KEEPS SMALL BUSINESS OWNERS UP AT NIGHT? 10 Keeping ahead of the competition 27% Crime 3% Cashflow problems 20% Skills shortages / finding good people 3% Economic volatility 18% Dealing with regulatory red tape 3% Future sales 17% Data security 3% Tax / interest rate rises 13% Stress-related health issues 2% Access to finance 4% 1% Increase in cost of doing business Technology Technology is becoming increasingly relevant although for those who were uncomfortable with to South Africa’s small businesses. 66% cited the technology, the top three concerns were: technology as “very important” (47%) or “essential” (19%) to running their business, with only 4% marking it as “not very important”. 55% claimed that smart devices and cloud apps have made running their business easier and most (60%) do not Privacy: 17% Reliability: 12% Security: 9% have any concerns about using cloud technology, Gary Turner, Xero co-founder and managing director for Xero in the Europe, Middle East and Africa region, suggests that as the world of business becomes increasingly digitised, choosing cloud accounting software is a “no brainer” for small business owners. “ When you consider that 52% of South Africa’s GDP is generated by small businesses, SMEs need to be smarter and more connected to ensure they’re at the forefront of economic recovery.” Most revenue is still generated offline, with almost Only 4% counted a smartphone as essential. a quarter of small businesses (23%) having no Nearly half (41%) use their smartphones for social online sales channel, and only 29% generating at media, whilst the second most popular function least half of their revenue through this channel. was email, at 39%. 34% use online banking Surprisingly, in our increasingly digital age, just over a quarter (26%) of those surveyed consider a PC to be an essential business tool, whilst only 6% deem an internet connection to be necessary. Old fashioned bricks and mortar was valued on their smartphones and 19% make mobile payments, suggesting that there is definitely room for improvement when it comes to how small businesses use technology - 10% did not have a smartphone at all. most highly, with 49% considering an office or commercial premises to be essential. 11 Business confidence South Africa’s small businesses are bullish about When asked about growth priorities for the next the future. 58% expect to grow in the next year, two years, efficiency was a clear priority: 50% while 29% expect to stay the same and only 12% cited growing sales to improve profit margins, 5% expect to shrink. focused on cutting operating costs, and 2% want to improve financial control. THE FACTORS PREDICTED TO HAVE THE BIGGEST POSITIVE IMPACT ON BUSINESS GROWTH WERE RANKED AS: 44% Economic growth 27% Increased consumer demand Tax breaks from government 11% Access to finance 9% Access to faster internet: Access to better technology: And a significant 86% of small business owners did not feel the government provides enough support for small businesses. 12 3% 2% Top tips from Xero for building business confidence and becoming a striver: “ Small businesses are significant economic drivers, improving their outlook lifts the entire economy. My advice to these businesses is to have a firm grasp on your finances and don’t be afraid to enlist the support of a strong collaborative network: family, advisors and mentors, an accountant or financial advisor. This is the formula for success.” GARY TURNER Xero co-founder and managing director for Xero in the Europe, Middle East and Africa region 1 2 3 Enrol great advisors: Try, try and try again: Know your numbers: Enlist the support of A positive mind-set and It goes without saying: a strong, collaborative a willingness to fail— being able to have a tight network: family, advisors and successful small business grasp on your finances is mentors, an accountant or owners are more likely to key to business confidence. financial advisor see failure as a good thing, Managing your finances learn from mistakes and and cash flow should be a want to try again. fundamental part of your business strategy, not an afterthought. This will give you the knowledge you need to keep your company running and help it to grow when the time is right. 13 About Xero Xero is beautiful, easy to use online accounting software for small businesses and their advisors. The company has over 700,000 subscribers in more than 180 countries. Xero boasts more than 500 third party integrations, and was ranked No. 1 by Forbes as the World’s Most Innovative Growth Company in 2014 and 2015. About World Wide Worx Arthur Goldstuck heads the World Wide Worx research organisation, leading ground-breaking market research into how change is affecting business and society, and presents his findings and insights to audiences across the globe. World Wide Worx produces the most widely accepted statistics for Internet use in South Africa, and has conducted research across Africa since 2001, unravelling the complexities of operating on the continent. 14