The small business sector in South Africa has been ravaged by the recession and - not surprisingly - thousands of small and medium-sized business owners have been wiped out owing millions to creditors. This prompted Finweek to investigate what could be done to prevent you and your business being dragged under.

"Most business owners only really become aware of their difficulties when the cash runs out - and usually it's too late to deal with it," says Brian Civin, a member of Seamless Business Support, an SME consulting firm. Civin says Seamless is seeing an increasing number of distressed or crippled SMEs seeking assistance.

According to industry statistics, liquidations of formal businesses have risen by 33% year-on-year, with 283 companies applying to be liquidated in May and 311 in June this year. Many businesses hit early in the recession were close corporations (CCs), which afford their owners limited protection in their personal capacity from creditors.

Civin says many people who went into business often had a lot of support from friends and family - and even clients - when they launched their venture. But when things went wrong, they found out just how tough the small business environment was. "Only when you're in your own business do you discover it's probably the loneliest job in the world and one in which you're the last person to get paid," says Civin.

Recent research by the Africagrowth Institute showed business confidence at small, micro and medium-sized enterprises is at an all-time low. Its index has declined for the second successive quarter and business confidence for second quarter 2009 was at 40,23% - 0,79% down on the first quarter.

Other small business consultants we spoke to say one of the most common mistakes made by SME owners was their inability to separate their businesses and their personal financial and legal responsibilities. When money became tight, the owner would use personal credit lines to assist the business in the hope trading conditions would improve.

Xoliswa Bebula, of small business financing firm Mazwe Financial Services, says the company has to spend a lot of time with clients educating them about managing their finances and cash flow. It's a move being echoed by a number of SA's big banking groups, which have established small business support initiatives.

Bebula says many SMEs she sees don't know how to separate their personal and business finances and will often live "hand-to-mouth" on revenue and profits generated within the company.

In terms of trends he's seeing in failing SMEs, Civin says: "Business owners do not want to admit to anyone that the business is failing and that they're not in control - and probably nobody wants to listen anyhow."

Civin says that results in SME owners either paralysed by over-analysis (of what's going wrong with the business) or by the fear of standing up to customers and suppliers. A key area he's noticed problems emerging in is that many SMEs are largely dependent on a small customer base, which places pressure on the company if it loses key accounts. One of the recommendations commonly made to small business owners is to "stress-test" whether or not it could continue without a key client and how they'd respond if that happened.

Another impact of the recession and the current bad debt cycle is many SME owners are being approached by their employees to increase their pay or personal loans, that (if granted) could place increased pressure on cash flows or negatively impact the performance of key staff when they're refused.

Without question, this recession has taken its toll on the SME sector countrywide and its impact is likely to be felt for a long time.

Addressing problems

If you conclude your business is in trouble, Seamless Business Support's Brian Civin recommends some of the following steps to try and address problems:

Get over yourself. If you think you're the only person experiencing such problems, think again. Recent statistics show approximately 53% of South Africans with a credit record have a bad one. You aren't unique and there's no shame in having financial difficulties. Nobody is going to think worse of you if your business is in trouble. They may be disappointed if you owe them money but, guess what, they're probably in the same boat and just won't admit it. 

Don't play games with Sars. Don't under any circumstances think of the SA Revenue Service as a way of funding your cash flow. The pay as you earn (PAYE) that you pay and the value-added tax (VAT) you collect are trust money. You're handling it on Sars' behalf and you'll be taken to task if you play with that money. 

Get help. Unless you're an experienced turnaround specialist why would you try and solve your problems yourself? 

Negotiate. Suppliers and creditors are all facing increasing challenges from tight cash flow throughout SA's business chain: work with them so you can help each other. 

Separate business from family and friends and don't take everybody down with you. Your business is a stand-alone activity - it isn't the responsibility of your family and friends. They'll all want to help and will try to out of loyalty and not necessarily because it will work.

Don't try and hide assets. If you try to quickly transfer assets to family or into a trust when you're already in trouble, these transactions will probably be reversed in the case of liquidation and you'll find matters getting worse. Selling things off and pocketing the money will also be investigated.

Civin concludes: "Remember you can't go to jail for debt, only for fraud."

Further small business tips can be found at www.sbs-rsa.co.za.