South African small businesses are caught in several socioeconomic crosswinds - record-high petrol prices, electricity load shedding, and significant inflationary pressures. In the wake of the pandemic, what has become clear is that a small and medium enterprise's (SME) savings culture (or lack thereof) can dictate its ability to survive economic hardship. While much focus is placed on the importance of personal saving, SME owners also need to be encouraged to develop healthy saving habits within their businesses.
his is the message that Rene Botha, area manager at South African SME financier, Business Partners Limited wishes to emphasise as the country tackles tough economic times.
“Financial discipline is arguably the single most important trait that small business owners need to nurture. A big part of becoming financially efficient as a business involves nurturing and promoting a culture of savings – one that prioritises your business’ liquidity as a way of mitigating risk, planning for the future and building a sustainable business.”
A number of unforeseen circumstances can cause a drop in sales, including seasonality, increased competition in the market, shifting regulation and changes in consumer behaviour. The financial impact of these kinds of factors can be mitigated by building an emergency fund or ‘precautionary savings’.
The importance of maintaining this pool of savings came into stark focus with the onset of the pandemic, which had a devastating effect on SMEs who had not saved up funds to support and keep their operations afloat in the event of complete business disruption.
As the quarterly Business Partners Ltd SME Confidence Index consistently reveals, cashflow remains the biggest challenge to South African SMEs. Developing a savings regimen is an effective way of creating an emergency fund and providing financial support when cashflow problems arise, Botha asserts.
A driving force behind business growth
Over and above the significance that savings can have as a potential source of emergency funds, it can also form part of an effective growth strategy. While the first few years of a small business are its most crucial, SME owners need to include their long-term goals into their forecasts and save towards this.
“Growing a business usually involves a significant cash injection and includes a considerable level of risk. Ideally, SMEs should aim to fund their next level of growth partly with own capital rather than turning exclusively to credit options. Savings should be seen as an investment into the future of your business,” explains Botha.
Leveraging the agility of an SME
Furthermore, the agility of small businesses is a major advantage afforded to them by their relatively smaller size when compared to larger companies. They therefore have the ability to iterate and pivot faster than their larger counterparts, and to benefit from being first to market when new technology and innovations drive change.
In these circumstances, savings can be a powerful way to gain a competitive edge by “taking risks that your competitors can’t,” expands Botha. “This could include acquiring another small business, evolving your product or service offering to cater to changes in the market or onboarding new talent with specialist expertise.”
Savings as a tool for social development
In a book written by Black Mycoskie, the founder of TOMS - one of the fastest growing shoe companies in the world - much emphasis is placed on the role small businesses can play in giving back to their communities. For Mycoskie, donation drives and charitable initiatives are important business objectives.
Given the evident rise in social entrepreneurship in the world and in South Africa in particular, many SMEs are joining the fray of companies who believe that profitability as a business imperative is just as important as uplifting people and conserving the environment.
Against the backdrop of this focus on sustainability, savings can provide a vehicle via which SMEs can use their resources to make a positive impact on their communities.
As Botha explains: “SMEs can incorporate savings as part of their CSI objectives or their commitment to larger frameworks such as ESG (Environmental, Social and Governance), which are not only becoming essential cornerstones of big business but are filtering into the operational philosophies of businesses.”
“Developing a savings culture as a business owner is therefore good business practice,” asserts Botha. “For this reason, we encourage SME owners to adopt a ‘save first, spend later’ policy and add savings as a line item in their budget at the beginning of each month, as one would treat an expense. This will help business owners to make the mindset shift from seeing savings as a nice-to-have to seeing it as a business imperative.”
All rights reserved. © 2022. Bizcommunity.com Provided by SyndiGate Media Inc. (Syndigate.info).