Here are 3 arduous reasons among many; Why small businesses fail to grow beyond their potential today?
What are some of the challenges being faced by SMMEs, especially those that are family owned, or run by individuals? Surprise, its not just covid19 pandemic or external business factors.
Having a conversation with the senior partner at Price Walter House Coopers (PWC) on a subject bordering on SMMEs and many other issues surrounding the operations challenges. So, this is a very pertinent topic, considering all things and the economic decline and hard business conditions facing SMMEs in this pandemic. The key thing that we see at the moment especially with regards the management of a SMMEs, one of the biggest issues is really, the Separation between ownership and management.
Well, lets jump right into one of the constraining factors for SMMEs: Governance of SMMEs
Separation between ownership and management.
Having a conversation with the senior partner at Price Walter House Coopers (PWC) on a subject bordering on SMMEs and many other issues surrounding the operations challenges. So, this is a very pertinent topic, considering all things and the economic decline and hard business conditions facing SMMEs in this pandemic. The key thing that we see at the moment especially with regards the management of a SMMEs, one of the biggest issues is really, the Separation between ownership and management.
This is more pertinent for those businesses that have been set up by an individual, they conceived the idea, they grow the business and try to scale the business, as the managing director, the operations officer, chief financial officer and the major shareholder at the same time; and what we see is an overlap, a blurring of the lines between what is the owner is supposed to do and what is supposed to be done by management.
In many instances where these overlap, governance is compromised. You start to see an owner or the person who owns the business, start to treat it as though it is their back pocket basically, so that inability to separate between the business as an operation, and a separate legal entity and the ownership; is there of one of the fundamentals challenged that SMMEs are facing today.
Consequently, falling at governance affects a number of different things, for example this is where you see the business owner putting money in the business, taking it out it with no record what so ever, and this affects transparency, and it affects accountability. Governance is critically. The reason why governance is important, it’s about holding different people and different individuals to account. Now when you are everything in an organisation, how do you hold yourself to account? It could be that, ‘yes,’ you own the Vision, ‘yes,’ you have driven the business up to this particular point in time, but do you know everything yourself? are your decisions always in the best interest for your business, are your decisions always the best for your business?…… So, the importance of having a structure that allows for accountability, even of those who are running the business in the event that that person is also shareholders is quite critical.
Accountability and Good Governance.
How then can SMMEs create that accountability, and good governance; considering that most SMMEs don't have money to pay an accountant to do the books for them or subcontractor other people?
When the business is just starting, even 3 or 4 years down the line and you still feel like it’s a huge cost to the business to engage someone to do your books or to engage this guy to do your taxes and what not, Accountability and Good Governance can be a huge challenge.
How can you as a small business owner strike a balance between the cost and maintaining the transparency of the business and maybe beginning to detach myself from the business?
So it’s all about fit-for-purpose; fit for a particular size of business, it’s all about fit-for-purpose, ok! So, if the business is just starting out very small, with a few customers limited external exposure then it’s fine to do everything yourself but where we see the challenges, is as the business begins to grow and scale up, okay.
When this starts to happen, what one individual was capable of doing and doing effectively, in many cases there will no longer be able to do and that then leads to the business beginning to suffer. So, it’s about extending and scaling the governance structure of the organisation to suit the size of that particular organisation.
Typically, you can start out as a family or an individual business everything you control and you do yourself, as a business begins to grow you should start to look at what is the optimal structure for your business to actually continue to thrive and grow to its next level. What worked yesterday, especially for businesses that are fast-growing may not work today, and we often see this challenge where a business outgrows its structure.
What then happens that it begins to collapse. So then periodically assess where the business is, where the business is going and then review what the optimal structure is. That structure is not just management and functions, it’s also governance as there’s a certain point you may want to bring him directors who are independent of the business, to start to help you to think through various things, to manage certain risks and to actually help you grow your business.
If you perceive it as a cost then you obviously be reluctant to make those Investments of bringing in that expertise to help you grow to the next level, in fact it could even extends to bring in additional shareholders. Questions is, what exactly do you want? Do you want do 100% of ZAR100 or do you want 50% of ZAR10,000, you decide right. Sometimes for you to reach the level of ZAR10,000 requires you to bring in other partners or expertise that you don’t already have yourself. So, it’s not just a cost, there are huge benefits in ensuring that the Governance of an organisation is fit for purpose and that is actually achieving its intended purpose.
There are so many examples given of large organisations that have collapsed where governance was lacking and didn’t work, so it’s critical to make sure that you continue to adapt, and you continue to restructure the business to deal with where you are, as well as we’re going so that you’re not caught by surprise.
Finding an investor or partner.
So how does a small business deal with the cost of financing options?
There are issues of how to find an investor for your business or someone who is a venture capitalist to put in money give them percentage of your business or something like that.
What factors should SMMEs owners consider if they are going to bring in let’s say, Mr Ncobo, who has the money to finance the business, to scale it up but then wants a portion of the business?
What’s the best way to go about finding an investor or partner?
Okay! This speaks to control ownership, right? because the moment you start bringing someone else into your business, you’re starting to dilute, but what are you diluting exactly? Are you diluting the vision of the organisation or are you simply diluting its ownership? So the first thing is are the goals outlined, do you have a common vision of where we want to take this business, do we have a common set of philosophies, is our culture similar?
…because those are the things that often trip up businesses, when you start to bring in partners. it’s all rosy in the beginning, then sooner or later you find one is pulling in this direction, the others pulling in that direction, and you do not have a meeting mind regards to strategy and where you are supposed to go, that’s a Big Problem.
You need to be aligned in that regard. You also need to look at, what sort of track record do they have, do they have a track record which could credit them to partner with you. So, for example you’re starting out as a business in technology and there is another organisation or individuals with vast experience in that particular field which you want to grow to the next level, so you say this is the organisation or person who possesses the skill and experience that we think we need to get to that next level; hence it could be a perfect fit.
So you should look at, the track record, do you have a common goals and Vision for what you’re trying to do or achieve.
You should also look at other factors like what sort of resource do they have, return on investment and the Expectations are the expectations aligned, you don’t want to bring in a shareholder who tells you, “Look I want my money back next year with 20% interest,” when you need an investment that is 5 years for it to start pouring dividends, so you also what to look at what is the Investment Horizon that they’re looking at.
Basically, you want to look at what’s in the best interests of the business and whether the goals are aligned. These are some of the key issues that you need to think about when you’re looking at bringing in potential investors but remember it’s about scaling, logically if everything is in place wouldn’t you much rather have 50% of ZAR10 000 than 100% of ZAR100 that’s basically logic you should be looking for.
If someone is simply coming to divide what’s already there, you need to start evaluating if it is actually worthwhile to bring them in or you may just be diluting the ownership but not getting the exponential benefit of them coming in.
If there’s exponential growth even when you have a smaller stake but in a much larger Enterprise then you will be smiling, because it’s going to be worthwhile.
These are just some of the few basic things that we can share for now and hopefully you got a number of nuggets. There are so many SMMEs and businesses of different sizes, with different objectives and facing different challenges so in our next post we will discuss how SMMEs can use technology to ensure that they are efficient and scalable. So even in this covid19 pandemic, your small to medium business can still thrive. If you are someone running a business or know someone running a business hopefully you were able to get some value out of this post. In any case let us know your thoughts, leave a comment, like and share our post with other who may benefit from it. Cheers!
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