New research from the UCT Graduate School of Business (GSB) has revealed that a high percentage of entrepreneurial small- and medium-sized firms in South Africa are experiencing financial difficulties that could make them vulnerable to failure.

The research, carried out as part of the 2003 South African Global Entrepreneurship Monitor (GEM), found that as many as 45% of businesses surveyed had experienced cash flow problems in the past six months, as indicated by having exhausted their overdraft in that time. Furthermore, 18% of registered proprietary (Pty) businesses involved in the survey had failed to pay all their wages over the previous 12 months. The survey included 224 businesses, drawn from all industry sectors , that had been operating for at least a year. All businesses were registered businesses, had a turnover of over R100 000 per annum and were at least 50% black-owned.

Speaking at the recent launch of the 2003 GEM report in Johannesburg, John Orford, a researcher at the Centre for Innovation and Entrepreneurship at the GSB, said that the results indicated a clear need for training to improve the administrative and financial management capabilities of entrepreneurs.

"Government policies are currently focused on boosting entrepreneurs' access to finance and on preferential procurement for black entrepreneurs. But this research suggests that unless priority is given to addressing underlying managerial weaknesses, these policies may not work in the long term," said Orford.

"In isolation, simply throwing additional external finance at the problem is unlikely to address the underlying problems and cash shortages in these firms. Similarly, preferential contracts through empowerment procurement policies are also limited in their ability to boost the sector and may in fact endanger the survival of these firms by further weakening their cash position."

Orford added that the belief that basic training could help the situation is further backed up by the GEM research. The survey shows that entrepreneurs who implement four basic financial management practices can reduce cash flow problems by as much as 61% compared to those who do not implement any of these practices. The four essential practices identified in the survey are: keeping a cash book, a record of accounts receivable and a record of inventory, as well as practising debtor management.

The knock-on benefits for businesses that observe good financial management are also considerable. Orford pointed out that businesses with a good cash flow position are more likely to be able to negotiate favourable trading terms with suppliers. Banks are also much more likely to lend money to a business that can demonstrate good financial management.