Social Impact

Exploring factors that lead to failure or non-growth of small businesses in the Western Cape

By USB MBA student Donovan Adams (supervisor: Dr Marietjie Theron-Wepener)

 

Why was this study undertaken?

What are the factors that lead to the failure or non-growth of small businesses in the Western Cape? An understanding of these factors would help to transform the economy by empowering people through meaningful employment and advancing their skillsets.

The primary objective of this research was therefore to explore factors that lead to the failure or non-growth of these small businesses. The secondary objective was to investigate reasons personal and social reasons for failure or stagnation.

Ten small business owners from various backgrounds and with different experience levels in the Western Cape area were identified and interviewed. These small businesses represent various industries: construction (1), consulting (1), fishing (1), goods transport (2), hair salon (1), liquor (1), passenger transport (1), retail (1) and waste management (1). Of these small businesses, one was a survivalist business, five were micro enterprises, three were small enterprises and one a medium enterprise.

The feedback from the interviews showed that these small business owners experienced similar challenges.


The context

Small business creation and maintenance is widely regarded as an important contributor to alleviate poverty and unemployment. In South Africa, small business development has been viewed as a possible solution to the growing unemployment rate. However, many small businesses either fail, or are unable to expand to the next level of development; this is detrimental to our country’s economy.

The government is gradually becoming aware of the importance of small business development, and several structures of support have been offered to potential small business owners in South Africa. Despite this support, the growth rate of small businesses in the country is severely strained with more than 50% of them failing to grow. Support given to these small businesses include beneficial tax rates as well as loans and grants for start-up initiatives.

Although the government plays a key role in growing small businesses, small business owners must also contribute to the mix. For a small business to succeed and thrive the owner needs to be equipped with the proper tools and skills to manage the business. Most failures and causes of non-growth can be avoided or predicted by following and adhering to certain procedures.


Doing a literature review to provide understanding

An extensive overview of literature on the reasons for small business failure or stagnation in the Western Cape was undertaken to gain a deeper understanding of small businesses in general and in the South African context (where small businesses are subdivided into survivalist enterprises, micro-enterprises, small enterprises and medium enterprises). The literature review also looked at the characteristics of business failure and non-growth in developed and developing economies, and at the factors negatively affecting small businesses in the Western Cape (lack of management skills and training, the impact of globalisation, technology, finance resources and accessibility, legal and regulatory environment and the crime factor).


How was the research conducted?

The investigation followed a case study research design, which relied on in-depth interviews to investigate the reasons for small businesses failure and non-growth in the Western Cape. This qualitative study therefore used semi-structured interviews to collect data from small business owners. Purposive sampling was used to select respondents from areas such as the West Coast, Boland and Cape Town. A total sample size of 10 small business owners was used in this study. The interviews were then analysed to identify communal themes.


What did the study find?

The aim of this study was to determine the factors that contribute to the failure or non-growth of small businesses in the Western Cape. The study also looked at the financial, personal and social reasons for failure or non-growth of these small businesses. It was found that the following factors negatively impacted these small businesses:

  • Lack of proper management capacity and training: Operating any form of business venture requires a particular set of skills and experience to succeed. Owners of fishing, passenger transport and transportation businesses said that they acquired much of their business management skills and knowledge through informal training as apprentices. However, other small business owners believed that formal training is key to business success. Most of the respondents agreed that a lack of proper training, be it formal or informal, can lead to business failure. Thus, to achieve entrepreneurial success, businesses owners need to have obtained some form of commercial expertise and training before establishing their enterprises. This study discovered that most of the small business owners, particularly those who were in fishing, goods transport and passenger transport businesses, lacked financial management skills. These can be clustered into poor daily, weekly and monthly budgeting procedures. The majority of these business owners had no formal budgeting skills, which contributed to poor financial decision-making. For example, the study found that business expenses were made as they occurred from income received. Also, business and personal expenses were not always separated.
  • Lack of access to sustainable financial assistance: Lack of access to external financing is considered a major challenge for small business growth, contributing to high failure rates among such businesses. The lack of financial capital has resulted in most business owners in the Western Cape being incapable of growing their enterprises and hindering them from achieving optimal business success. The lack of access to financial resources was prevalent among all business owners in this study as they funded their enterprises from their own personal savings. One reason for this could be the relatively small initial investment required to establish their businesses. The study also established that although most of the entrepreneurs were able to obtain capital to establish their enterprises, sustaining and developing them remains a key challenge. As opportunities for development arise, expansion in terms of additional machinery, floor space and other necessary resources required an additional financial injection. All the respondents reported that securing additional capital was a major challenge as traditional financial institutions rejected applications for financial assistance. The study participants mentioned that banks charged high interest rates on loans. Business owners claimed that they relied on either informal institutions or their family and friends for financial assistance because they had no access to information on alternative financial sources. The inability to obtain financial assistance thus hampered their growth. Some of the small businesses eventually had to close their doors because they could not source the funding they required.
  • Inadequate industry research: Most of the small business owners interviewed cited the lack of proper industry research as one of the main causes of business failure. This is because these businesses are based on good business ideas but they lack understanding of the industry in which they operate. Respondents, particularly those in the consultation, transportation and liquor businesses, highlighted the importance of proper industry research prior to the establishment of a small business. One respondent in the liquor business said that it was critical to obtain knowledge of competitors in the market. Underestimating the number of competitors, and the oversupply of similar goods and services in certain industries, can lead to some of the small businesses closing down. Thus, one can conclude that a lack of proper industry research can be detrimental to small businesses.
  • Crime: Some entrepreneurs see crime – including burglary, assault, looting and murder – as the biggest problem facing the entrepreneurial industry. The Western Cape Province is no exception to the high crime rate in South Africa. Only a few entrepreneurs reported that they experienced a problem with crime in their businesses, either from criminals or from their employees. Small business owners with fishing and liquor businesses experienced more crime than other types of entrepreneurs.
  • Business competition: One of the biggest challenges facing entrepreneurs in the Western Cape is business competition. This puts pressure on profits and business growth.
  • Lack of entrepreneurial networks: Forming links with other entrepreneurs can facilitate the sharing of resources and information. This study found that most of the entrepreneurs are not part of any entrepreneurial group or network. However, some of the respondents stressed the importance of immigrant networks in the success of their businesses. They said that entrepreneurial networks can provide them with essential and much-needed resources such as capital and partners, business advice and information on the latest trends and business support. Networks ensured that business owners have the necessary resources for their businesses. The entrepreneurs in the liquor and transport businesses specifically mentioned that good entrepreneurial networks can be used to obtain financial capital to launch or grow a business.
  • The findings revealed that most of the business owners perceive their challenges to be unique and believed that other small business owners are not in similar situations.

In essence, the study participants mentioned the lack of proper financial management skills, which include budgeting, cash flow management and the ability to negotiate with suppliers and debtors, as key skills for small business owners. Lack of access to financial support and too many legal procedures and requirements for financial applications also hampered their progress. According to the study participants, they also needed knowledge of the industry in which they operate and of their competitors. Crime also impacted their businesses. The lack of support from networks for financial capital, business advice and information was also seen as a drawback.

Addressing these factors will therefore help small business owners to increase their chances of success.

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