Less businesses fail

The failure rate for established businesses has dropped in the last year, the Global Entrepreneur Monitor’s (Gem) 2014 global report reveals. There are signs that things are improving, with South Africa’s discontinuance rate having fallen from 4.9% in 2013 to 3.89% last year. This is only slightly above its 2009 level, but still higher than its 2005 level of 2.9%. But it’s still below the discontinuance rates of other efficiency driven economies (which averaged at 4.5%, up from 4.2%).

Things would be far better still, if more South Africans started a businesses, but just as important, is how to ensure that more stick around and not fail. However, there is also bad news with the percentage of adult South Africans involved in starting a business plunging by over a third.

The report, released in February, reveals that the percentage of adults involved in a business less than three-and-a-half years old (the TEA rate) fell to 6.97% last year from a 13-year high of 10.6% in 2013. The fall means South Africa dived from ranked a modest 35 out of 68 countries in 2013, to a worrying 56 out of 69 countries in 2014. This, while the percentage of South African adults running established businesses (firms older than three and a half years) slipped from 2.9% to 2.68%.

South Africa continues to perform below similar efficiency driven economies, where the average early-stage entrepreneurial activity (TEA) rate is 14% of adults, while that of established businesses is 4.5%. When one looks at the TEA rates of different countries and compares these to the GDP per capita in the country, a ‘line of best fit’ shows that South Africa should have a TEA rate in the region of 14%, which, if achieved, would go a long way towards reducing unemployment and alleviating the poverty experienced by much of its population.

This is the 13th year that South Africa has participated in Gem research.

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Right employees are key

Hiring the right employee is key to growing your business and ensuring it runs smoothly and successfully. If you can figure out how to hire the right people, you are well on the path to success – but how do you hire the right person for your small business?

Here are some tips to help make the hiring process as easy as possible:

Clear job description

Make the job description clear. Often, new employees in small business fall into the “jack of all trades” position and are expected to pick up the slack in multiple areas. To avoid this, make sure the position is clearly defined and that your new employee knows exactly what is expected of them.

Search carefully

Dedicate some time solely to the search for an employee. As your business is coming along well, it is easy to get caught up in running it, meaning the hiring process can become rushed and lack thoroughness. Choosing the right employee is important and deserves your undivided attention. If you really cannot spare the time, consider hiring a specialist recruitment agency to help you.

Sell the benefits

Sell your small business culture. So you can’t offer medical schemes and a company car, but can you give your employee flexible hours? Negotiate some time for them to work from home? A percentage of company profit if the employee performs well? If you can offer any perks like this, you have a better chance of persuading a candidate that you would be preferable to a big corporation, so don’t be shy to sell the pros of joining your business.

Right attitude

Make sure that the interview process determines whether the candidate has the right attitude for your business. However, most startup and small businesses will probably require hard work, creativity and resilience at the very least. Do not make the mistake of talking too much during the interview – the goal is to find out about the candidate, so don’t be afraid to ask difficult questions.

Research

Finally, find out why they left or want to leave their last job. Unresolved issues or conflicts could become problems in the long term at a new position within your company.

Referrals

Last but not least, consider whether your gap can be filled by freelancers. If not, consider asking for recommendations from friends, family or colleagues. If somebody you know and trust will vouch for them, it is likely that you are on to a winner!

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Think of your logistics

Distribution is all about logistics. It is about keeping records and precise timing. However, there are many ways of approaching this. The way you distribute your product depends on your business model. The main models are:

Business to Consumer

It is common to start with a business-to-consumer model and to then grow your business so you are eventually distributing business-to-business. When you work in the business-to-consumer model, you might have your own store or customers might order your products online. Easiest is direct selling, when customers take stock directly after they have paid for it, for example at markets or festivals. Common additional methods of distributing goods to the consumer are through parcels via the post office, or by freighting products that have been bought online. Make sure that any delivery or postage costs are factored into your selling price.

Business to Business

When working with a business-to-business model, the businesses buying from you may determine how you distribute products to them. Some big companies, for instance, may have their own distribution and logistics agencies. Some important considerations to take note of are, where you will store your products before they are distributed and how you will track your products when they leave your storage space up to when they have been received by the customer. Distribution can be complex, with unexpected challenges. There are many service providers focused exclusively on distribution, that you might be able to use very effectively.

And of course there is a combination of both models. Whether you outsource distribution, or manage it yourself, you need to figure out a system that works for your customers, your products and your business.

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Considering a tax free savings account?

Many people would like to know where they should invest their money to benefit from the TSA and are wondering if they should sell existing investments so that they can transfer their money into a TSA.

Background

As a reminder, tax-free savings accounts are savings products on which no income tax, capital gains tax or dividend withholdings tax will be charged. Most unit trusts, exchange traded funds (ETF), savings accounts, fixed deposits and RSA Retail Savings Bonds meet the requirements to be classified as a TSA. In other words these are not new investment products, rather the way that the South African Revenue Service (Sars) will treat them is new and so product providers need to keep record of these to ensure that they remain separate from your other investments.

You are allowed to invest R30 000 per year into a TSA subject to a maximum lifetime limit of R500 000. Sars will charge a 40% tax on contributions above these thresholds so please don’t add more. If you withdraw money from the TSA, you will lose the value of that withdrawal from your lifetime limit; that means you should only use the TSA for long-term investments i.e. 20 years and longer. You are not forced to keep your money in a TSA, you can withdraw at any time with no penalties or tax.

When should you use a TSA?

If you were to prioritise your long-term savings,

1. Pay off your short-term debts (credit cards, personal loans, expensive vehicle debt etc.)
2. Build up an emergency fund (not in a TSA) equal to three months’ worth of your expenses
3. Make full use of your retirement fund contribution allowance (15% of taxable income)
4. Put R30 000 per year into the TSA
5. Normal discretionary savings i.e. shares, unit trusts, ETFs etc.

Some people have asked whether you should sell existing investments so that you can use the TSA. If you do not have new cashflows to invest and you plan to invest for the long term then it might make sense but you should consider the impact of potential CGT before making this decision.

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