It's tough out there: Small businesses still under pressure

January 2011

The increase in the cost of running a small business has by far outstripped its growth in profits, according to a new survey of the sector by accounting software firm Softline Pastel. Costs beyond the control of business owners - including electricity, petrol, phone and Internet connectivity, rates and taxes, as well as labour costs – have put many small businesses under severe pressure.

Yet they've had to keep their prices down to remain competitive, says Softline Pastel MD Steven Cohen. Half the companies reported an increase in turnover in 2010, while revenues of the rest remained stagnant or declined. Just a third (32%) reported a rise in profit margins. An almost equal number - 29% - faced a decrease in profitability.

The company surveyed 2 000 of its clients, across a number of sectors. Half of the businesses employ a maximum of 10 people, while 17% have between 10 and 20 workers and 14% up to 100. The survey results represent the perceptions of established businesses that have the ability to invest in technical products like accounting software. Two-thirds of respondents reported an annual turnover of under R5m, 5% said they had a turnover of over R50m and the rest were evenly spread in between.

However, the survey excludes smaller businesses and one-man shows, which are traditionally included in the definition of small business enterprises. Surveys conducted by FinScope and World Wide Worx, for example, take a broader category of respondents into consideration. They more adequately represent the diverse patterns of small business ownership in SA. What is more, Softline Pastel's survey is limited to online respondents, whereas the country's typical small business owner is still an individual product seller, like a sweet vendor.

The firms interviewed are overwhelmingly from Gauteng, KwaZulu Natal and the Western Cape, and the majority have been in operation for many years. Two thirds have run their businesses for more than eight years.

Despite its limitations, the survey provides further evidence that the small business sector is struggling to balance higher costs, even where demand has increased. It also illustrates that the more established small enterprises are as vulnerable to economic shocks as newer and even smaller ones.

The small business sector has been described as the powerhouse of the economy. But this is based on the assumption that they employ people and in doing so redistribute wealth. Yet Cohen says that despite SA's high unemployment rate, respondents reported that they struggled to find, and pay for, experienced labour. He says Pastel will conduct the survey annually. It was initially created to understand its constituency, but Cohen says it can have broader use. He wants it to become a mouthpiece for the often disempowered small business sector.