The Link Between Insufficient Finances And Financial Poor Financial Control And The Unemployment Crisis Within South Africa’s Small Business Sector
The South African government regards small businesses as critical to driving economic growth and socio-economic advancement and the creation of new jobs. Stated out, the government put in place the necessary legal and regulatory framework to promote and advance small businesses in the South African economy. However, the government is experiencing challenges as the small businesses in South Africa are surviving only a couple of years and then failing. A factor contributing to financial mismanagement is insufficient funding and this has a bigger effect in small businesses failing. The high and chronic unemployment situation in South Africa is exacerbated by the collapse of small businesses and the poor financial control evident in these businesses.
The Contribution Of Small Business To Employment Opportunities
The small and medium enterprises (SME’s) in South Africa are a source of sustenance to the people as they create accessible and at the same time numerous work opportunities in the country. SMEs are the backbone of the South African economy, and their economic activities provide a wide range of services to the economy. As indicated by the Small Enterprise Development Agency (SEDA): “SME’s are the highest contributors, accounting for a staggering 60% of jobs created in the formal economy, and are thus the primary source of stimulus for job creation.” However the sector continues to underperform due to in poor financial control as well as underfunded to manage their finances.
Limited Funding: The Main Source of Financial Mismanagement
The lack of access to finances continues to be one of the greatest challenges for small businesses in South Africa. South African small businesses are considered high-risk borrowing. This is because they have no collateral, no credit history, insufficient documents, and they try to get loans and/or other forms of finances. The evidence suggests that only a small minority of South African SMEs (1%) are able to get access to formal financing. This, therefore, suggests that the vast majority of these businesses are left to self finance or access informal loans.
The consequences of inadequate funding are serious. The small businesses, when they do not have enough capital and/or funds, are forced to short term remedies just to keep the business going. For instance they will use personal savings, borrow money from family or friends, or obtain high-interest informal loans. These stop-gap measures create a risky thin financial base in which businesses are forced to operate without proper financial planning and without enough finance reserves and it is in this situation that business financial planning mismanagement happens.
Mismanagement of Financial Resources
Small businesses lack the knowledge, tools, and systems to control financial resources even when funding is available. How this gets manifested in the case of small businesses is in the form of poor budgeting, lack of financial records, over-reliance on debt, and inefficient allocation of resources. Studies put a significant portion of South African SMEs not keeping any formal records of accounting or financial statements. If business owners do not maintain adequate (accurate) records, they will not be able to use those records to help them make rational and informed financial decisions, manage their company‘s cash flow, and develop a plan for future growth in a fiscally responsible manner.
The absence of professional training and financial literacy compounds the problem of financial mismanagement. It is a well-known fact that a large number of small business owners possess technical skills that are relevant and necessary for their industry, but lack the necessary skills to manage the required finances in a proper and sophisticated manner. This leads to a number of avoidable errors, such as overspending, poor allocation of resources, and debts that are not paid, increasing the risk of failure of the business.
The Sad Fate of Wikek Businesses
The relationship between inadequate funding, poor financial management, and unemployment is one of the issues of the economy. Small and medium-sized businesses wilt do to not enough funding, and poor financial management shrink since they cannot hire or even keep displace workers. High firings and bankruptcies reduce the job openings in the economy and are the reason why South Africa is one of the poorest countries in the world.
Given the poor financial management of the small and medium-sized businesses and the bankruptcies of many of them, they contribute to the social and economic problems of our country. And they do not even realize this growing unfairness. Unemployment exceeds 33%, and growing, poor management of small and medium-sized businesses bankrupting and poofing unemployment is poor social financial and economic management.
Lack of SME Focus
The South African financial system is primarily focused on large and established more financially secure businesses leaving the more vulnerable smaller businesses and enterprises economically marginalized and financially ostracized. Businesses that are small do not meet the lending criteria set by the major financial institutions like banks that control and set the financial systems. They do not meet the substantial financial history, they do not meet reasonable profitability, and they do not meet reasonable collateral security.
The second problem is the disconnect between the funders and the entrepreneurs. The entrepreneurs may not have the ability to compile the required financial statements or draft business plans that might be accepted. On the other hand though, the funders may not have the time, interest, or necessary skills to evaluate the worth of the business potential that the small business is proposing.
Regulatory and Administrative Challenges
The other challenge is due to the regulatory/administrative barriers that are inherent in every state. Business owners typically find themselves overwhelmed by the amount of administration, licensing, regulation, and taxation required to operate a small business. The administrative tasks involved often consume both time and financial resources and detract from the ability of the owner to focus on his or her business. The combination of these challenges along with not having sound financial literacy often leads to poor management of the business and resources, even when there is financing available.
The Economic and The Social Consequences
The closure of small businesses due to lack of capital and financial mismanagement creates larger scale economic issues such as increased job loss leading to higher unemployment rates creating lower household incomes. This leads to a lack of economic spending, and slows down the economic activity flow. It also leads to greater societal issues, including poverty, social unrest, and a greater risk to the social environment. If small businesses also cannot succeed, the economy and the overall risk of the economic environment become less stable. Money from both the public and private business sectors that is meant to fund the growth of small businesses also goes to waste when the small businesses do not have the ability to manage business financing. Poor management of funds leads to greater inefficiencies of public funding in support programs and discourages new potential private investors in the small business economy.
Proposed Solutions and Policies
Recommended Strategies and Policies Balanced and diverse strategies must be taken as a way of correcting the impact of lack of funds, poor management, and joblessness as the consequence of both. The following remain some of the most recommended:
Access to Funding Should be Eased:
Funding products must be tailored to the realities of small business and new ventures by the Government and lending institutions. Examples of products designed for small business include, microloans, grants, and risk mitigation credit guarantee schemes.
Financial Literacy Should be Improved:
Training programs and workshops should be made available to equip entrepreneurs with the financial management skills.
Encouragement of Financial Professionalism:
Mentorship as well as advisory services should be available to small businesses for the purpose of instilling the desired financial professionalism.
Reduction of Bureaucratic Barriers:
Regulatory and compliance requirements must be reviewed in a bid to free up resources and reduce admin burdens.
Increased Institutional Support:
There should be increased support for development finance institutions and public agencies to support the provision and management of long-term sustainable funding.
Encouraging Responsibility:
Attaching funding to performancer metrics and milestones ensures that funding is spent and allocated responsibly.
Wrap Up
Financial resource misallocation in South Africa’s small business sector is a result of funding and, paradoxically, a misallocation in funding is a result of the poor financial resource management systems in place. Some of the systems that have been put in place are the inadequate access to financial resources lost to South Africa’s entrepreneurial community as they can’t make the appropriate strategic and financial management system investments. The current frameworks lead to the high closing rates of small businesses and the paradoxically high South African unemployment rates.
Enjoying the benefits of small businesses in South Africa means escaping the current financial systems restraints. Policies that are not used include funding, financial management, and financial education, and to a lesser degree, supportive political frameworks. With the restraints lifted, South Africa will be able to realize the benefits of small businesses and also be able to sustain their economic growth.
