Success in Challenging Times

Small and Medium Enterprises (SMEs) have been identified as productive drivers of inclusive economic growth and development in South Africa and around the world. While these small businesses are of importance, it is their durability that can be considered of greater significance. The precarious nature of SME existence has been well documented - only about 65% of small businesses are still trading after the first three years of initial start-up. After five years, fewer than 45% of businesses will have survived. Put simply, small businesses are more likely to die than larger ones.

More often than not, research into small businesses has focused on their failure. The danger of this approach is that it identifies what has gone wrong, but may fail to discover what they need to get right. That is why the approach of this article, then, is to focus on the triggers that lead to small business success, as a way of highlighting more effective strategy decisions for businesses themselves, and to inform better decision making.

There is no universally accepted definition of small business success, which is probably one reason why it has been interpreted in many ways. Few studies have to date been conducted to systematically explore and validate what success really means to entrepreneurs. Yet, establishing a valid measure of success is essential to help identify the critical success factors for small businesses. Many measures however, have been suggested, in terms of earnings, size and growth, and number of employees. We have focused only on three financial indicators. However, it is important to note that non-financial measures may be equally important to perceived SME success.

Social Capital: Successful small businesses are likely to use more than one source of finance to both start and sustain their business. While access to finance remains a challenge for most businesses, there exists on the market more and more solutions and institutions geared to assist SMEs. Banks and traditional lending institutions are always the first point of call for SMEs, but not only do they not provide the capital required, they seem to know very little about what businesses (particularly small businesses) need. As such SMEs are required to think creatively about alternative ways to fund their business. Some businesses have turned to discounting their invoices as a means of maintaining cash flow, whereby a discount is offered in return for prompt payment. Third party equity finance is sometimes utilised and sometimes new ventures are grown organically through the reinvestment of funds from an original, successful business.

Recommendation: Diversify sources of finance.

Cashflow and Liquidity: Successful small businesses proactively monitor their cash flow and liquidity. The key focus of SME finance is cash flow, in particular the need to learn about it. Monitor it and ignore it at your peril. Conversely, too much money is considered just as harmful, because SMEs are going to spend (and not always wisely) what they have. Keeping a close eye on liquidity can mean using new technology to track liquidity on a regular basis. Instead, SMEs tend to keep a close eye on their pipeline of orders. For businesses seeking growth, securing one large contract can put them into a new league of “big hitters”. It can transform the way the market perceives their business. However, they must also be able to contract when market conditions require it. This means being able to identify strains on financial liquidity at an early stage and take steps in a timely fashion.

Recommendation: Monitor cash flow and liquidity proactively, taking quick and decisive action when necessary, but also focus on planning, sales, marketing, managing people, website development, and using social media.

Outsourcing: Successful small businesses have the flexibility to adapt to changing market conditions. Outsourcing is becoming increasingly important for entrepreneurs as they strive to keep control of cash flow and as they attempt, in the light of this, to keep head count and costs down. Typical areas include accountancy, human resources and payroll (often to agencies who are themselves SMEs), IT (particularly web design and search engine optimisation) and some legal advice. But one of the dangers of this strategy is employing people who don’t necessarily identify with the business. Hence, it is essential to outsource to people who have the same ethic and work approach and appreciation of the brand that you are trying to build.

Recommendation: Consider outsourcing some activities, especially in turbulent economic conditions.

Admittably, being an entrepreneur has its share of ‘ups and downs’. Although it is good to have dreams about the business, the key to success for businesses is financial success. Success is based on repeatability of business to achieve recurring revenues and, for some, growth, maintaining cash flow and creating shareholder value. For others, success is also based upon non-financial measures such as a sense of fulfilment or challenge, or building a lifestyle business and work-life balance. Enhanced reputation and being seen as making a contribution to society. Whatever your goal, we wish you every success in achieving it!