Why SMEs need different rules to big businesses

In South Africa, it is estimated that small and medium-sized enterprises (SMEs) make up 90 percent of formal businesses, provide employment to about 60 percent of the labour force and contribute roughly 34 percent of gross domestic product (GDP).

Richard Andrews said: “By nature, SMEs are inherently more adventurous than big business. SMEs have the single largest potential to move people out of the poverty trap of structural unemployment.”

Andrews defines an SME as an independent organisation with one, or more, of the following characteristics:

  • Less than 200 employees
  • Total annual turnover of less than R64 million
  • Capital assets of less than R10 million
  • Direct managerial involvement by the owners

In a South African context, the continued rise and long-term success of the SME is critical. The aim in the National Development Plan is for SMEs to contribute 90 percent of job growth by 2030. However, the environment in which SMEs operate in South Africa does not fully support this aim.

SME’s are subject to the same labour legislation as large corporates. Given the toughness of these laws, no small business hires new staff unless absolutely necessary. This has a direct impact on the SME’s ability to contribute to the improvement of South Africa’s unemployment burden.

Andrews noted that one particularly identifiable problem with the fair dismissal procedures lies in the procedures’ applicability to people employed as probationary employees. “In general, the probation period is where employers can assess whether an employee is competent and suitable for a particular job. The problem arises however, in that fair dismissal procedures apply even if the employee is on probation” says Andrews .

“Although there is a provision in place setting lower hurdles for dismissal on the basis of poor performance, there is uncertainty over how the interpretation of the, ‘lower hurdle’ is to be carried out, and more often than not the courts apply the fair dismissal procedures as they would if it pertained to the dismissal of a permanent employee. This means that on top of providing the employee with; ‘adequate’ training, instruction and opportunity to improve, employers would be expected (looking at the way the provisions fair dismissal procedures are interpreted and applied in practice) to carry out a formal hearing before dismissing an employee that is on probation.”

As important as skills development is in South Africa especially, it is evident that labour legislation fails to take into consideration the difficult climate SMEs exist within. As an SME you need a fully competent workforce working towards a common goal, which ultimately is increasing your bottom-line, revenue growth and the amount of free cash – there is little space and not enough resources to focus on providing training support to non-performing employees on probation, that is the role of the government and big businesses.

SME’s are subject to the same minimum wages requirements as big business and the same exorbitant charges from inefficient state-owned enterprises.

Said Andrews: “The implementation of a national minimum wage is really not practical in South Africa given the economic environment. The way in which Government can address issues like unemployment, poverty and income inequality can be addressed through increased government intervention, through public investment and sound industrial policies. Imposing minimum wage requirements on SMEs will have the direct opposite impact”.

The SME is subject to (for the most part) the same tax environment, the same licensing requirements, and a myriad of other obstacles that Big Business, with their pools of resources, can handle more easily.

Andrews is of the opinion that the current turnover based tax regime in particular should be revised in order to remain relevant for the changing business environment. “This is a regime that was introduced in 2009!  Promoting internships through tax incentives for business in a bid to educate the youth and serve as a tool to transfer skills,  will not only achieve government’s objectives in respect of the youth wage subsidy,  but it will also alleviate unemployment and provide practical business tools to the unskilled to become entrepreneurs.”

Like Big Business. SME’s have to operate in an environment where state capture and corruption from the top of government cause ever slower economic growth and makes each business and hiring decision that much riskier.

Applying a different set of rules for SMEs is not going to be possible and would create a headache for many stakeholders and administrators!  That said, Andrews points out 5 ways in which the government can help SMEs thrive.

Reduce red-tape

It’s not so much the rules themselves, but the lack of official assistance, clarity and coordination between government agencies and departments that wears SMEs down.  These frustrating bureaucratic processes and penalties only serve to discourage new business growth. The current legal environment is not designed to support entrepreneurs fairly and help them grow – all unnecessarily obstructive regulations should be eliminated.

Offer tax breaks

The government should be doing its utmost to protect the economy, create jobs and keep revenue in the country. Offering tax incentives to would-be entrepreneurs is a great way to encourage new business development. As the number of start-ups increase, so too will the amount of tax revenue – an easy win-win for both the small business community and the government

Provide more funding

If the government can increase its number of small business funds and subsidies, it follows that more entrepreneurs will be able to access the money they need to launch their businesses successfully.  This will be far better for the country now, and in the long-term.

Improve access to finance

Traditional financial institutions are often reluctant to lend money to small businesses. Compounded by the absence of subsidies and grants, entrepreneurs are struggling to access the finance they need to grow. In desperation, many look to the government for help.  Government needs to expand its offer of available financial solutions – and clearly communicate all the options to the small business community.

Invest in education

Without the right talent on board, small businesses will battle to reach their growth objectives. The South African government needs to work harder to improve the country’s overall skills base. With greater investment in education, schools and tertiary institutions will produce more competent workers – improving the quality of employees and chief executives.

SMEs are expected to function as a driving force in South Africa’s social and economic stability, however, for this to happen and to unlock the full potential of the market as a whole, it is clear that there is much work that needs to be done on the part of big business, government and SMEs themselves.


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