A recent report by MSME development specialist Fetola has highlighted a significant challenge facing South Africa's small business sector. Despite being profitable, many small enterprises lack the financial systems and planning needed to secure funding and grow. The report, based on financial verification data from 177 growth-oriented firms across all nine provinces, found that 86.6% had sustainable sales and 76.8% were profitable. However, only 34.7% produced credible management reports, and just 13.3% could present a 12-month budget.
The report's findings suggest that there is a disconnect between running a viable business and proving it is financially prepared for growth. Fetola CEO Catherine Wijnberg describes this disconnect as the "bankability gap". According to Wijnberg, capital is rarely the only constraint for small businesses, and those that grow sustainably are those that develop systems, disciplines, and resilience long before they seek funding. This gap is a significant concern for small businesses in South Africa, which are crucial for economic growth and job creation.
The report highlights the importance of financial planning for small businesses. Half of the businesses assessed reported cash-flow pressure despite being profitable. However, 90.9% of firms with a 12-month budget were financially stable over six months, compared with 65.3% without one. This suggests that financial planning is a key differentiator for small businesses, and that those with robust financial systems are better equipped to manage cash-flow pressure and achieve sustainable growth.
The report's authors argue that improving access to finance must go hand-in-hand with practical support to strengthen financial records, management accounts, budgeting, cash-flow forecasting, and internal controls. Without this, many commercially active MSMEs may remain excluded from growth opportunities despite their profitability. Grant Prince, head of impact investing at Fetola, notes that many small businesses have customers, generate revenue, and make a profit, but lack the systems, financial information, and management disciplines that allow an investor, lender, or commercial partner to assess the business with confidence.
The report's findings have significant implications for policymakers and stakeholders seeking to support small businesses in South Africa. By addressing the bankability gap, policymakers can help create a more enabling environment for small businesses to grow and thrive. This, in turn, can help drive economic growth, job creation, and poverty reduction. The report's authors argue that a comprehensive approach is needed to address the bankability gap, including practical support for small businesses to strengthen their financial systems and planning.
The Fetola report is based on a comprehensive analysis of financial verification data from 177 growth-oriented firms across all nine provinces in South Africa. The report provides a nuanced understanding of the challenges facing small businesses in the country and highlights the need for a more holistic approach to supporting their growth. By providing practical support and guidance, policymakers and stakeholders can help small businesses overcome the bankability gap and achieve sustainable growth.
The bankability gap is a significant challenge facing small businesses in South Africa, but it is not insurmountable. With the right support and guidance, small businesses can develop the financial systems and planning needed to secure funding and grow. By addressing this gap, policymakers can help create a more enabling environment for small businesses to thrive, driving economic growth, job creation, and poverty reduction in the country.
Key points
- 76.8% of small businesses in South Africa are profitable, but lack financial systems and planning to secure funding and grow.
- Only 34.7% of small businesses produce credible management reports, and just 13.3% can present a 12-month budget.
- Improving access to finance must go hand-in-hand with practical support to strengthen financial records, management accounts, budgeting, cash-flow forecasting, and internal controls.
