Over the past few years, South African small and medium enterprises (SMEs) have faced a challenging economic landscape marked by mounting financial pressures. Record-high inflation, steadily rising interest rates and an upswing in the cost of living have eroded the disposable income of their customer base. While recent indicators suggest the economic tide is turning with inflation easing and interest rates stabilising, for many small businesses, this period has translated into decreased sales volumes and smaller margins.
According to Kevan Govender, regional investment manager at Business Partners Limited, the answer lies in diversification. “If you’re earning revenue from just one source – be it one major client or one product line – and that income stream slows down or dries up, it could sink your entire operation. The solution is to create multiple ways to earn revenue so you can cushion your operations against economic downturns, seasonal fluctuations or unexpected disruptions.”
The notorious cashflow challenge
The most recent Global Consumer Insights Survey by PwC revealed that over 70% of local consumers currently feel very concerned about their personal financial situation. The same report found that this inherent anxiety around financial wellbeing will likely lead to a decrease in spending across all retail categories, particularly on non-essential items travel and luxury goods. Consumers are also likely to delay purchases, prioritise value over convenience and turn to bulk buying to take advantage of discounts and promotions.
With SMEs being at the tail-end of this continuum, entrepreneurs need to find ways to overcome sector-specific or seasonal downturns. On this point, the quarterly Business Partners Limited SME Confidence Index has consistently found that cashflow management is the biggest challenge small businesses face in South Africa.
“Without the right tools and strategies to strike the delicate balance between money coming in and money going out, it becomes extremely difficult for small businesses to get the simple things right. Paying staff and suppliers, servicing debt, investing in new technology and generating enough profit to reinvest back into the business, all these aspects rest on optimal cashflow,” says Govender.
Apart from keeping expenses as low as possible, particularly during the first few formative years, one of the most important cashflow management principles is optimising income. Among other strategies, this involves exploring as many avenues as possible for earning revenue in order to become less dependent on a single income source.
Expand your customer base
Suggesting some simple ways that small businesses can achieve this goal, Govender recommends exploring new customer segments to broaden revenue base and reduce reliance on one group of buyers.
For example, a Cape Town based bakery that currently relies on walk-in sales as a main revenue stream has a valuable opportunity to diversify and expand its reach to corporate clients. The bakery could pursue catering opportunities for offices and companies within their area. This could include catering for meetings, staff parties and company events, offering baked goods tailored for special occasions. To attract corporate clients the bakery could introduce incentives such as offering surrounding businesses a discounted rate on bulk orders, free delivery or a themed display or food styling.
Look beyond your current market
Another way to diversify revenue is to expand into other markets. If you’ve focused on local markets, it could be time to look at opportunities that lie beyond your province or even own borders.
Govender adds: “When SMEs think of exporting their products or servicing foreign markets, many tend to think of the UK or America. And while there is growing demand for locally produced goods and local expertise in these countries, the call for African countries to trade amongst themselves is really being amplified at the moment.
Hopefully, with the continued development of the African Continental Free Trade Area (AfCFTA), more South African small businesses can expand into promising new economies such as Nigeria, Kenya and Ghana. The answers to expansion may be closer (and significantly more attainable) than you think.”
Furthermore, with smartphone penetration in Africa reaching its peak as well as the increasing digitisation of payments technology and banking, moving goods between African countries is much simpler and more cost-effective than in previous years.
Cash in on bargain-hunting buyers
Govender also suggests that small businesses explore ways to capitalise on the bulk buying trend by offering promotions and bundling deals. For instance, a cleaning products manufacturer could offer discounted “home hygiene packs” that include multiple essential items such as dishwashing liquid, tile cleaner, and bleach, at a lower price than if bought individually. This could encourage larger purchases while also appealing to cost-conscious consumers.
“The long-term goal of diversifying your revenue streams is to find a place of financial stability that will allow you to withstand market fluctuations. Ultimately, this will allow you to become more adaptable as a business and agile enough to evolve along with the market,” Govender concludes.