06 Apr Business is in trouble in South Africa, what can be done?
Business is in trouble in South Africa, what can be done?
Gardening is a worrying habit, when your hands are busy your mind tends to work a lot. I have been hearing a lot of anecdotal evidence about companies falling over in the latter period of 2020 and I decided to perform a little digging on a Sunday afternoon. I must warn you this does not make easy reading.
According to published statistics the period of April to October 2020 saw 233 business rescue proceedings commenced in South Africa, which if we do a bit of unscientific extrapolation could mean 400 proceedings could have commenced by the end of the reporting period. I suspect that the final number will be higher due to the December lock-down. This will be a 7% increase on the previous year, which you might say is relatively stable but I want you to think about the following statistic; for the month of October 2020, 329 new liquidations were recorded as opposed to 30 business rescue proceedings. This means that the tipping point has been reached and no amount of engineering could possibly save these entities. Although this is not a new trend (liquidations have always been higher) the numbers for the current year indicate that we are heading towards a record-breaking year in liquidations. (if this trend applies over say a 10-month period this would-be 3000+ liquidations compared to approximately 1800 last year).
A majority of these entities were in the service-related sector thereby shattering a labour-intensive area of our economy, reducing VAT collections and directing entrepreneurial energy towards activities that do not generate money. The effects will cascade throughout the value chain from manufactures, meat-suppliers, laundry services, fresh produce vendors etc. These might sound negligible from an individual company perspective but they represent a huge chunk of the economy. So now this is our abyss we are staring into and it’s looking back, however because we imbibe the American myths, we always tend to think that entrepreneurs can restart their business, but here’s the catch they have run out of personal capital and will need money.
The unseen impact of this is what it does to the credit appetite of lending institutions going forward, rising impairments and bad debt write-offs produce funny feelings in bankers’ stomachs and suddenly they no longer feel so comfortable with risk and giving you money to go build your dream. SA Inc is in for some hard times.
Leaner might be the only way to go for the entrepreneur in the near future, jettison everything that is not your core function (hopefully at a lower price), conserve cash and build up your reserves and ensure that you are ready for surprises. And whilst you’re in the middle of that thinking remember this, SARS is coming around to dig in your pockets for any loose change they might have missed, compliance penalties will represent another revenue channel for the government and this is even before you have adapted to a changing world. The next five years are going to be difficult, get ready to thrive because you are a doer of impossible things!!!!
With the threat of another lockdown looming, it is wise for every business owner/manager to ask themselves the following questions.
- Is my business set-up properly for remote functioning? This covers a lot of areas from IT preparedness, online accounting and administrative processing, internal control environment functionality etc. This represents a fundamental shift to how businesses have been run and managed and failure to put in place the right kind of interventions will have negative consequences for your business.
- Do I have effective cash management process? As important as cash is in these times, we note that businesses are not implementing a cash management process that involves budgeting, forecasting and stress testing cash requirements. I suspect this will be key in determining who thrives and who dies in these times.
- Is my tax and related compliance in line and up to-date? Have you heard that SARS is looking for 200+ employees with various skills and capabilities? This should prompt every business and individual to put their affairs in order. We are at the threshold of a period where government revenue collection will become an invasive procedure where data interrogation is concerned and combined with the powers granted to SARS, will have unfortunate consequences where you are on the wrong side of the law.
- Are my critical relationships with my stakeholders in good standing? How many businesses out there have relationship maps that detail the key partnerships that determine success or failure? The time to negotiate for bad times is before they hit, apply for funding, negotiate payment terms and supply arrangements well ahead of the time you might need them.
- Last but not least, have you planned for how you will grow? Everyone knows the story of how Kodak got killed by digital photography, but few people know that its rival Fujifilm survived, refocused on other areas where their expertise was useful and is still a thriving business. One went out of business in 2012, one is still a thriving business with a project 2.2bn yen in revenue for YE 2021. Understand that the world is changing, certain things will cease to exist or change drastically in how they’re done. You must be ready for this!!
This is not an exhaustive list but represents some of the key items to pay attention to and will prompt other items to think about. As the business community we must remain committed to ensuring that we stay on our toes and box-clever, yes we are punch-drunk but we haven’t been knocked out.