How SMEs can act to mitigate the COVID-19 crisis

While COVID-19 is expected to wreak havoc on the SA economy, the full extent of this is yet to be determined. But even in crisis, there are always opportunities for innovation. Mikael Samuelsson, who heads up the UCT GSB's Solution Space tells us what to expect and how SMEs can act to mitigate the crisis. 

There’s a lot of fear and uncertainty about the future for business owners right now, and with good reason. Like many other countries, over 95% of all companies in South Africa are small and medium enterprises (SMEs). How can one determine which companies will make it through this challenging period?

The impact of COVID-19 will resonate throughout the South African economy. For a country with an extensive tourism industry Covid-19 is a lethal pill. Every day there will be more casualties, with firms going out of business and retrenchment fuelling the downward spiral of the economy. On the other hand, online businesses, and food retailers in particular, are likely to feel the pinch less than most. Children still need to eat regardless of whether they’re at school or at home. The economy can survive a short-term knock, but the longer lockdown remains, demand will decrease, and the number of firms that go out of business will escalate, ultimately only the strongest will survive. From both an evolutionary and resource-based perspective, firms that are not sustainable are likely to disappear, which will in turn free up resources that can be used to create new firms that are more effective and efficient.

Is it possible for companies to survive and even thrive during a recession?

The last recession from 2008-2010 killed around 170 000 small businesses in the US, but there are opportunities in turbulent times too. Some of the most successful firms operating today started during recessions. For example, Canon started during the great recession in 1930, Airbnb started in 2008 and Uber in 2009. For some, turbulent times present opportunities to disrupt and capitalise on resources that are being redistributed in the economy.

What are your top five tips for SMEs wanting to put plans in place to survive the coming months?

1. Focus on sustaining revenue and curbing costs

Look at your cash situation and plan for how long you’re likely to be able to sustain your business with decreasing revenue streams. Cut costs directly and go into maintenance mode. Talk directly to your bank or credit provider to extend/increase your credit line. Try to postpone interest payments.

This advice is based on the assumption that you have a sustainable business in the first place. If you do not have a cash buffer it might be a good idea to exit your company directly. It is a sign that your company might not be a very sustainable business in the first place. Your experience might be more valuable in another context, a new type of business, a new position, or taking the opportunity to upgrade your skills through some of the many on-line courses that are now being developed and delivered, for free in many cases. If you have a buffer, try to extend the timeline through revenue focusing activities and/or investments into future revenue streams.

2. Use the time to strategise

This is a perfect time to look at ways to improve your business, an opportunity to plan for the future. Go through each of your firm’s processes. Ask yourself, what can be improved, what can we take out, change, add or perhaps innovate entirely into something with a higher return on investment?

3. Look at hiring new talent

When firms are laying off staff, this creates a supply of experienced individuals with the skills and capacity that could be beneficial for future growth. Think of this as an opportunity to hire the best talent for beyond COVID-19. Based on your strategy, seek to attract talent that could turn your strategy into a sustainable competitive advantage in the future. If you’re stretched for cash, use equity as payment. But never hire before someone proves that they can generate value to the business. The new member of the team works toward equity over a three-year period rather than some short time frame.

4. Plan for succession

This is also a good time to plan for succession. A large number of successful firms in South Africa have older owners. Sometimes it is tricky to know what to do, when to retire and pass the business on or exit it. Most family businesses have some kind of idea. Use this as an opportunity to sit down with the family and an advisory team to look at different options for the future.

5. Spot the opportunity in acquisitions

If for any reason, you’re sitting on funds or could come up with a bankable idea, now is the time to act on it. Don’t let COVID-19 stop you from putting your idea into action - the investment required is considerable regardless so turning downturn into future growth could be a very lucrative strategy. There are always opportunities to consolidate and grow through acquisitions. Firms that have valuable resources, customers, products and services that could complement and build competitive advantage, could be acquired and merged to create a more competitive firm. In these types of situations, there are likely to be more firms up for sale or takeover. Even bankruptcies could be turned around. That doesn’t mean you should forgo your due diligence, as acquisitions can be tricky game. Use a combination of bank and VC funding if possible.

What can Government and big business do to help SMEs?

Ultimately, to help SMEs get through the next few months, both government and big business have a role to play. The South African government, compared with those of the world’s more industrialised countries, is restricted in its ability to help due to the shortage of funds available. Traditionally governments have also tended to favour subsidising large corporations and state-owned entities. On top of that, with a high debt-to-GDP ratio, the government will be loath to decrease interest rates, but it should consider this, as well as postponing VAT payments, PAYE and other taxes and fees for a period, in order to help sustain small businesses. Banks, meantime could relax credit restrictions, giving small business owners a bit of respite. Large corporations should pay their invoices on time and not use small businesses as a credit provider. In short, try to keep to business as usual as far as possible.

It may feel like the end of the world as we know it, but if we act together and act wisely, the world won’t come to an end. As long as you have a viable solution to a problem and the human and financial capital are available, there will be a role for SMEs in the post COVID-19 economy.

Useful resources:
University of Cape Town Graduate School of Business
UCT GSB is internationally renowned as one of a few business schools in Africa with the prestigious triple-crown accreditation with endorsements from EQUIS, AACSB and AMBA.
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