Consulting firm Mckinsey has published a new report on the impact of Covid-19 on small businesses in South Africa.
The group said that small and medium-sized enterprises (SMEs) across South Africa represent more than 98% of businesses, employ between 50 and 60% of the country’s workforce across all sectors, and are responsible for a quarter of job growth in the private sector.
“Coming into the Covid-19 crisis, small enterprises in the country were already facing significant headwinds,” it said.
“A sluggish economy coupled with several ratings downgrades have negatively affected SMEs year on year and the economic impact of the coronavirus is likely to exacerbate these trends.”
An earlier survey conducted by Mckinsey in March found that more than 80% of respondents were looking to decrease spending across all retail categories, and more than 70% were looking to cut back on transport and travel-related costs.
Sectors worst affected include the services sector (for example, private accounting and legal firms), tourism, hospitality and retail.
While these are some the fastest growing SME sectors in the country, the majority of businesses in them were not able to operate during the 35-day lockdown and their activities continue to be curtailed under level 3 and 4 restrictions, McKinsey said.
“Not surprisingly, business disruptions are signalling a strong decline in revenue and profitability of SMEs. Business confidence has fallen, too.
“In a flash survey we conducted in April 2020, just over a third of businesses surveyed expressed that they are pessimistic about the economy and economic outlook and more than 30% indicated that they expected revenues to fall by between 5 and 50% over the next six to 12 months leading to negative profits in excess of -5 %.”
Mckinsey’s data shows that SMEs are taking drastic steps to hedge against future risk, with 70% saying they have reduced business spending already.
The largest area of impact is likely to be on employment based on responses, the group said.
Other possible cuts include ‘looking at the entire business spend to cut costs’ and reducing the number of hours a business is open daily to reduce expenses.
“Many low maturity and new SME businesses lack the financial, operational, and strategic structures that are common in larger businesses,” McKinsey said.
“This hinders them from making the best use of available capital to scale their operations. This may be because they have limited cashflow and are highly dependent on clients paying their invoices on time or because they have little knowledge and insight into how to effectively set up and run the business, and the associated key metrics to be tracked.”
The group cited the example of an agricultural client that had an ambitious growth plan to expand its facilities in core and non-core areas, but struggled to obtain the required funding because the business was not in a financial position to meet stringent funding requirements.
“A lack of prioritisation and financial planning that would have allowed them to focus on core areas to finance and build-out, meant that rather than growing sustainably, the scale of their ambitions and poor internal management combined to ensure that they did not grow at all.”