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The role of big business in supporting small business growth in South Africa
14 May 2019 Thandeka Zondi
Thandeka Zondi explains that late payments to SMEs by big business must be addressed.
South Africa's economy needs to grow. We are facing a crisis if we don't figure out the problem of how, together. One of the fundamental cornerstones of a growing economy is an environment that is accommodating to small business.
Government certainly has a role to play in supporting SMEs – and hopefully can prioritise this matter of urgency now that the election is over. For example, it is within their control to create real tax incentives to encourage the establishment of SMEs. Or Perhaps they can start with the low-hanging fruit of implementing and monitoring the existing regulations meant to support the growth of business.
However, it's important to note that even if government plays its part, SMEs will still struggle unless big business provides the access to markets by including them in their supply and value chain.
Globally, South Africa is lagging behind in terms of SME growth and SME contribution to job creation. It should concern us all that 82 percent of SMEs fail within two years and only 15 percent of start-ups are successful. Perhaps its time we rethink the relationships between big business, governments and SMEs.
It is an open secret that innovation and growth will not come from big business. The unique South African situation is not sustainable in the long run. Big business must find ways of working with SMEs to help them expand their footprint.
As a CFO in a big business, you should be asking yourself, "How do I create a mutually beneficial relationship with SMEs?" It is critical for you to have a sustainable and reliable supply of goods and services. The statistics of the number of SMEs that fail thus far have provided a strong basis of fear that being reliant on SMEs for a significant part of your value chain may be a poison pill for your business.
Although I understand to some extent the position of big business CFOs and FDs, I do think the answer lies not in what percentage of small businesses fail, but in why they fail. The Small Business Institute (SBI) and SAICA alike have raised late payment as a major contributor to SME failure. SBI has gone as far as calling it an "assassin" to small business.
According to their research, as many as 40 percent of late payments are written off as bad debt by SMEs, and if invoices were paid, payment was received on average 101 days after the 30-day target.
Perhaps solutions to address the cashflow crunch at SMEs are what is needed to reduce SME failure, increase innovation and create jobs.
However, in this economic climate, it's tough for any business to commit to pay any supplier early. We all learn at school that a key lever to working capital management is to extend payment terms with creditors and reduce payment terms with debtors.
The solution to the problem lies in the creation of early payment programmes and financing solutions that deliver value for both big business and SMEs. We are seeing a global emergence of platform solutions that are independently raising funding to provide financial products like invoice, purchase order and contract financing to SMEs who are either registered on their platform for direct SME lending or whose buyers are registered on the platform for buyer-led supply chain finance programmes. Supply chain financing is providing the much-needed support to SMEs, assurance of delivery for big business, and room for innovation and job creation as SMEs become more sustainable and scalable.
In South Africa, supply chain financing solutions may be the best form of cash flow financing to support SMEs as they work alongside working capital management in these tough times.
South Africa has a mature corporate market with an established and tested credit history. It is now time to use these credentials to build and support our much-needed SMEs. It would cost big business nothing, but it will bring access to cash flow financing, a much-needed solution for sustainability and growth of SMEs. And an added bonus to big business is B-BBEE points from early payments of SMEs.
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