T T R I TT TR RI I T T ra ining fo r T o wnship Re ne w - - PowerPoint PPT Presentation

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Understanding the small business market in Gauteng: Findings from the FinScope small business Gauteng pilot survey

Judi Hudson 31 October 2007

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FinScope small business syndicate members

(Association Incorporated under Section 21)

• Reg. Number 2004/031868/08

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Objectives and contribution of the study

• Aim? To quantify the small business market

using a sample that is representative of all small business activity in Gauteng;

• Key innovations – Business Sophistication

Measure (BSM) segmentation modelling to capture diversity in small business market;

• And, spatial mapping: BSM data aggregated to

municipal boundary level

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Methodology *Sample design guided by Prof D Stoker + the HSRC

* Respondents aged +16 * International Labour Organisation approach * 3 degree sampling: enumerator areas, then household, then enterprises * 2 001 small business owners interviewed

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Characteristics of Small Business

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Characteristics of Small Business

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Characteristics of Small Business

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Key findings * Total number of small businesses estimated to be 1 053

818 or one in six adults * In 78% of cases, income generated the only source of income for the small business owner * Provide employment for 1,3 million people * Trading businesses account for two thirds of sample * Some 7% specifically add value to the products they sell

• n, women more likely to add value than men.

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Key findings contd.

• Half of Gauteng’s small business owners are youth
• 8% are non-SA citizens – 70% male, 78% informal, 2

in 10 will employ other people, more negative outlook

• n life
• Majority of customers are private individuals (96%).

BSM 7 other clients emerge – wholesalers, government, co-operatives + retailers. BSM 6 & 7 most likely to have service level agreements + long term contracts.

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Key findings contd.

• 69% of small businesses are home-based

businesses – home, a back yard, a garage

• Only 27% have plans for taking advantage of

2010

• Approximately 7 in 10 business owners are not

aware of any organisations that provide support, back up, advice or training to small

• businesses. 8% usage of govt. support

mechanisms.

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Of the 28% business owners who had ever heard of an organisation that supported small business, prompted awareness was …

72 28 10 20 30 40 50 60 70 80 90 100 Total

Yes No

72 43 30 26 22 19 18 18 16 14 11 9 8 7 5 4

40 80

Umsobomvo Khula Enterprise The Banks (all) NAFCOC Business Partners SEDA SETA's dti Dev Bank of SA I D C GEP NEF Business Place ITC Women's Dev Bank SA MicroFinance Apex Fund %

n=2001

Support initiatives

Awareness of business support

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One size fits all? Introducing the BSM lens BSM provides lens to view the very different needs of small businesses with different levels of sophistication along a continuum – from informal street vendors to more sophisticated businesses Using business characteristics – eg: location, pays taxes, contracts of employment with employees, access to finance issues - BSM identified 7 segments plotting the growth of small business

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1 7 6 5 4 3 2

Total Market Size 1 053 818

Top Line Breakdown of Business BSM1 BSM2 BSM3 BSM4 BSM5 BSM6 BSM7 Informal Vendors 100% 92% 74% 64% 58% 30% 1% Unregistered Individuals 0% 7% 18% 24% 29% 41% 5% Registered Business 0% 1% 8% 12% 13% 29% 94%

12% 9% 10% 10% 23% 26% 9% 123 522 96 876 100 171 110 512 247 075 278 291 97 370

The BSM identified 7different segments plotting the growth of business sophistication

The Landscape of Small Business

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Market Continuum

99% 92% 74% 64% 58% 30% 1% 0% 7% 18% 24% 29% 41% 5% 0% 1% 8% 11% 13% 29% 94% 0% 20% 40% 60% 80% 100% 120% BSM 1 BSM 2 BSM 3 BSM 4 BSM 5 BSM 6 BSM 7

Informal Trader Unregistered individual Registered Businesses

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On a footpath 76% BSM 1 BSM 3 BSM 2 BSM 5 BSM 4 BSM 6 BSM 7 On a footpath 39% From home 37% From home 53% On a footpath 11% Back Yard 10% Garage 13% Shop in small complex 18% Office Block 11% From home 57% From home 63% From home 59% From home 43% 50% n=2001

High percentage of home-based businesses in all BSMs, except for BSM 1 where there is no fixed location

Location of businesses

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BSM 1 BSM 3 BSM 2 BSM 5 BSM 4 BSM 6 BSM 7 No Water 98% Toilet Facilities Outside Business 28% Running Water Outside Business 27% Electricity 64% Cell Phone 44% No Electricity No Water Kitchen 43% Running Water Inside 13% Toilet Facilities Inside 26% Hot Running Water 15% Landline Telephone 27% Business Budget 14% Business Budget 27%

Company Car 27%

Computer/s 24% Storeroom 63% Internet / e-mail 59% Business Budget 57% Fax 55% Up to date accounting records 47% Security 46% Marketing Plan 36% Reception 27% Credit Card Machine 23% 50% n=2001

BSM1 have no water or electricity to run their business Business budget and technology come to the fore in BSM 5 upward, penetration of insurance products only starts in BSM 6 Only 10% of all small businesses have access to a computer, only 22% of these have a website

Business facilities

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4 26 83 5 19 87 1 10 67 1 4 56

10 20 30 40 50 60 70 80 90 100 BSM5 BSM6 BSM7 VAT Registration Income Tax PAYE UIF (Unemployment Insurance Fund)

n=711

VAT Registration starts in BSM 5. Lack of time and the size of the businesses are the primary reasons for non-compliance. Regulations felt to hinder small business most are income tax (25%) and VAT (16%) as the cost of compliance is too high Tendering in BSM 6 & 7

Regulations matter

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87 100 99 100 92 89 68 28 2 3 7 4 3 1 1 1 7 10 1 5 4 27 63 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Total BSM1 BSM2 BSM3 BSM4 BSM5 BSM6 BSM7 Black Coloured Indian White n=2001

Population group

87% of all small businesses are black. BSM 7 dominance of white businesses (63%)

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0.1 0.1 0.2 0.5 0.9 1.8 8.9 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 BSM1 BSM2 BSM3 BSM4 BSM5 BSM6 BSM7 n=2001

The average number of jobs created by small business is 1.3. Importantly, there is a significant skew towards the upper BSM tiers. 70% of all small businesses do not create any jobs, BSM 5 + 6 start employing staff.

Job creation

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*The poverty indicators are calculated using a poverty line that varies according to household size. A household of 4 persons has a poverty income of R1290 per month - HSRC

R 9,113 R 10,723 R 16,793 R 24,710 R 27,841 R 66,597 R 463,747 100,000 200,000 300,000 400,000 BSM1 BSM2 BSM3 BSM4 BSM5 BSM6 BSM7

Below the poverty line

n=2001

The average turnover of small business is R61 799.00, just over R5000 per month BSM tiers 1 and 2 operate below the poverty line

Turnover

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n=2001

67 89 84 80 65 66 43 19 17 7 14 13 18 14 30 36 5 1 1 2 5 5 9 12 2 3 1 2 2 7 5 2 1 1 1 15 1 1 1 2 1 2 1 3 4 4 1 1 1 1 1 1 1 3 1 1 1

Total BSM1 BSM2 BSM3 BSM4 BSM5 BSM6 BSM7 Sale Of Goods Service Industry Construction Manufacturing Professionals Transport Industry Traditional Healer Landlord Run A Daycare Centre Run A Public Phone Service

Industry sectors

10 times more service businesses, than manufacturing BSM 7 – services industry outdoes trade

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No knowledge on how to start a business 58% BSM 1 BSM 3 BSM 2 BSM 5 BSM 4 BSM 6 No Problems 42% Finding Money to start my business 18% No knowledge of market conditions 12% Creating Awareness of Business 21% Finding a place to trade from 22% Limited Resources 24% Finding right staff 17% No Problems 72% No Problems 62% Finding Money to start my business 27% No Problems 50% Finding Money to start my business 28% No Problems 34% Finding Money to start my business 43% Creating Awareness of Business 27% Finding Money to start my business 44% Creating Awareness of Business 29% No Problems 24% Finding Money to start business 36% Creating Awareness of Business 43% Finding staff 24% Compiling business plan 23% Finding a place to trade from 20% Finding a place to trade from 20% Managing Finances 19% Registration Requiremts 16% BSM 7

n=2001

The largest problem experienced across the board is finding the capital to start a business. More problems in the upper BSM tiers - may be linked to processes involved in registering the business, finding premises. 10% of youth businesses found start-up capital to be the main problem

Problems with start-up

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Access to financial services

• 59% of small business owners are banked
• 42% have a separate business bank account
• 2% took out a loan in order to start the business,

63% used their own personal savings.

• Non-SAns - higher negative perception of banks –

62% personally unbanked

• Lower BSMs: hard to open a bank account; generally

positive relationship with the banks in higher BSMs

• 25% found crime + theft to be major problem. Formal

businesses felt crime was the major problem

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37 8 23 20 33 51 72 93 10 20 30 40 50 60 70 80 90 100 Total BSM1 BSM2 BSM3 BSM4 BSM5 BSM6 BSM7

n=2001

81 78 89 90 92 92 90 49 19 23 12 10 8 8 10 51 10 20 30 40 50 60 70 80 90 100 Total BSM1 BSM2 BSM3 BSM4 BSM5 BSM6 BSM7

Self Have help

n=667

A surprising number in the upper BSMs do not keep financial records Only in BSM 7 do about half of the businesses get

• utside help with

financial record keeping

Keep financial records

Financial records

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BSM 1 Do banking personally Travel to bank by taxi Travel over an hour to bank Don’t need a specific business account – use personal account Currently receive communication from bank in branch – would prefer telephonic communication in the future

Awareness of Support Programs = 10%

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BSM 7

BSM 7 Internet banking used for balance enquiries, statements and payments to another person Travel to bank in own car Takes less than 10 minutes Go to the bank weekly Would like bank to communicate with them by e-mail in the future Have a business loan, credit card and overdraft facility

Awareness of Support Programs = 58%

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Zone of Transition

87 100 99 100 92 89 68 28 2 3 7 4 3 1 1 1 7 10 1 5 4 27 63 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Total BSM1 BSM2 BSM3 BSM4 BSM5 BSM6 BSM7

Survivalist businesses

*most potential to double number of employees and turnover

Short term strategy Long term strategy

They would take a job if

• ffered

55% agree a lot 18% agree a little

Anybody can be an entrepreneur?

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Zone of Transition Using BSM

10 20 30 40 50 60 70 80 90

BSM 1 BSM 2 BSM 3 BSM 4 BSM 5 BSM 6 BSM 7 Don't own a Cellphone Own a Cellphone

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• Many “survivalist” businesses, as many as 220

000 business owners generating a turnover below the current poverty line.

• Only a small percentage are job creators
• Access to finance: not the only constraint – 25%

pointed to crime + theft as the biggest problem they faced.

• Small businesses need training in basic business

skills, technical advice, linkages to markets and

• mentoring. As businesses grow, they typical

require stronger management + more equity capital

Concluding remarks

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Access to financial services conclusions

• Currently banks are servicing the upper sector of the

small business market with a wide range of products, insurance penetration very low

• Penetration by formal financial sector low: incidence
• f loans and borrowing – 2%
• The amount of money used to start a business is

generally very low (below R500.)

• Consider basic insurance product to accompany a

transaction account

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Policy aspects

• Government support services needs to be communicated

effectively – a targeted approach drawing on segmentation models could be fruitful – using appropriate delivery channels

• High degree of informality suggests that the regulatory

framework may be too complex

• Continue efforts to ease compliance burden, particularly tax,

Regulatory Impact Assessments potentially useful tool

• Developing infrastructure for small business eg. water,

electricity, business parks, secure trading environments

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Concluding remarks

• Strike a balance between support to start-ups

+ existing businesses

• Government financing support to address

equity issue as well as debt.

• Govt. speed up payment processes for small

businesses

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• Judi Hudson

Consultant – FinMark Trust judih@finmark.org.za