Welcome to the Battle of 2023

EXACTLY a year ago, as a small and fledgling entrepreneur (then six years in the making), I wrote a column for Vrye Weekblad to share the business lessons we had learned.

I was mildly concerned that it might come across as conceited if someone who had been in the industry for so short a time presumed to be some sort of business guru. But, I thought, in addition to being an entrepreneur I am a journalist, I like to tell stories and share experiences, and there is no better time to tell a story with clarity and vibrancy than while it's washing over you.

I also thought our company had survived enough storms in six years to be able to share some wisdom. We founded it in 2017, just in time to flounder in the foothills of a recession, then came a sweeping pandemic, complete with months-long lockdowns and restrictions, and not long afterwards a new series of disruptive load-shedding began.

It's interesting but also painful to read those tips again. The British prime minister Harold Wilson said in the 1960s: “A week is a long time in politics." I can confirm that a year is a very long time in business. A year ago, I wrote: “The business is profitable, and it's growing". Well, neither of these two statements is true now. The year 2023 is unlike any of the others in which we have traded: it has been a bloody battlefield.

Just before that, in the last six months of 2022, our company performed like a SpaceX rocket — the best half-year of our existence. I jubilantly declared that we had fully recovered from Covid and ... Forward, march! Then, after a few stable months for Eskom last year, the power outages returned with meaning early in December 2022, and they are still with us.

Since January, it's as if an invisible hand switched off the economy. In last year's article, I wrote that the doldrums are just part of trading and that an entrepreneur must plan for tough times. After you've survived a few bad cycles, you don't freak out as much when they happen.

At the time, however, my idea of a bad cycle was two below-average months in a row. A third bad month was a rarity and a sign that you might have to dip into your savings (if you have any) or pray for a significant inheritance from a long-forgotten aunt.

Since January, we have seen five or six bad months in a row for the first time in our company's existence. You try to figure out if it's something you're doing wrong. Maybe you have the wrong products? Did fashion suddenly change and you missed it? Or is it nothing to do with you, because larger forces are at work, beyond your control, affecting all businesses in your industry or even in the larger economy?

Who advises small entrepreneurs?

For small entrepreneurs, it's difficult to find reliable information and statistics about what is happening here and now in their niche market. You read the business pages and listen to Ryk van Niekerk's interviews with economists in the afternoons on RSG's Geldsake, but most economists focus on large, listed companies, or at best medium-sized enterprises, and they talk about indices that consider statistics that are three to six months old.

This is despite small businesses being the backbone of the economy. According to Statistics South Africa, small businesses contribute around 27% of the income of all businesses in South Africa, compared to medium-sized businesses at 9%. Between them, small and medium-sized enterprises provide about 50% of all jobs.

You end up trying to hear what other people in the same boat are experiencing. You ask the guy next to you at the auction how it's going, but you know he's probably lying if he says it's fantastic, because he's your competition and he doesn't want to show weakness. Anecdotal intelligence is woefully unreliable.

However, the most valuable piece of information I've read about small businesses in the last six months has been just that: anecdotal. It didn't come from an economist or a statistician but from a heart-on-your-sleeve Facebook post by an artist from Cullinan (and Richmond), Lientjie Wessels. Wessels is not only a painter but a chef with a lot of experience and success. Here are excerpts:

“This year is a very difficult one if you find yourself in a world where you yourself are responsible for making, marketing and selling products, whether it is food, art or other items. This also applies to people with shops who have to pay rent on top of that. I talk to a lot of people in the industry and turnover is down 50% to 60%.

“I myself try everything I can, with as much variation as possible, but even that bears little fruit.

“There are very few sales of paintings and ceramics on FB and Instagram … well, not like it was in previous years. Perhaps it is time to return to traditional methods and more galleries; I don't know.

“There are many artists and other people who make and cook things who are not so lucky. I hope things change soon and that people will think about maybe supporting artists and small businesses. It's really not easy out there."

What struck me was not just what she said but the reaction to the post — 356 people responded and 185 left comments; most were affirmative, and people also posted their own stories of tough times and persistence. And they were remarkably consistent with our experience.

From the mouth of the business infant

My own speculation about 2023 so far is that there have been several strong confluences of negative influences. Just ask any retailer (even big chain stores) about the effects of stage 6 power cuts.

It's not just about productivity and the cost of generators; you lose a kind of general momentum in a business because everything comes to a standstill for at least a moment up to three times a day. Furthermore, you struggle with your suppliers because other businesses are also less efficient than usual.

Your deliveries become more expensive because the cities are full of traffic jams due to traffic lights not working. Online stores like ours  struggle at times with internet and cellphone coverage because transmitters, towers and networks go down and batteries get stolen.

But above all, people hold on tighter to their wallets as soon as the power goes out three times a day. They focus on survival rather than any form of luxury, especially on a 10 to 15-year type of investment like a piece of furniture.

A similar reaction followed the resignation of Eskom's former CEO André de Ruyter in December 2022. I have no doubt that a certain group of bitter white people simply believed no black man could be better at the job than a chap with silver hair and an angular jaw. But my optimism about people makes me think it had more to with the fact that the first non-cadre, or ANC outsider, to become the head of Eskom in 20 years had a better chance of stopping the rot than even a well-intentioned cadre trapped in the sleazy networks of the “new elite".

Most people believed a corporate ANC-outsider with average abilities was a better bet at Eskom than a handsome compromised cadre.

In the seven years  I've worked in the furniture industry, the months between March and May have usually been quiet, then it gets busier by mid to late June. Usually July to November were strong months. Like clockwork. This year, the market barely raised its head in June. In the last two weeks of July, we breathed a sigh of relief. And then, on August 3, Santaco announced, in the middle of a Thursday, an immediate and indefinite taxi strike in the Western Cape.

During previous taxi strikes, we picked up and dropped off our employees at a point some distance from their homes. But this time it was different. People in areas where minibus taxis are frequently used did not want to venture outside their homes because of the aggressive intimidation. After two days we realised it was better to close the workshop for the week, like most businesses in the Cape did.

It's difficult to bring home the impact of such an unexpected interruption to people who have been used to a guaranteed monthly salary for decades. Not only do you lose important momentum and rhythm; it takes the entire industry two more days after strike to restart. You are left with the usual rent payments, wages, vehicle payments and many other expenses at the end of the month, but without at least a quarter of the income you counted on.

Then, just when it felt like you were slowly recovering, an almost R3-a-litre diesel price increase was announced in September, plus the return of stage 6 load shedding after 50 days. Kaboom! Kaboom!

All this means inflation is not going to move downwards, which probably also means the interest rate will not be lowered any time soon, which in turn means people will be clinging to any change in their wallets for even longer, which means  more and more small companies are running out of options, with tragic consequences.

What do the guys in suits say?

I'm not relying solely on anecdotal information. Earlier this week I spoke with Ken Afrah, an associate director in financial advice, turnaround and restructuring at Deloitte Africa. He is an expert on companies under pressure and the strategies they can follow.

Much of what he says I already know instinctively. First, there is not much data on small enterprises, but plenty on medium-sized and large enterprises. He says his team, which helps businesses that are in trouble, is receiving many more calls for assistance this year than before. There has been a strong decline in the fortunes of businesses that deal directly with customers, like ours.

Afrah's team regularly publishes the Deloitte Restructuring Survey, which has a section that features the opinions of various executive and financial heads of companies, and of restructuring lawyers and financiers on what they see regarding distress in companies in the future and the levels of pessimism in the economy. Of these informed people, 81% were pessimistic about the economy and businesses' ability to survive in 2023, but the important part is that only 63% of these people were pessimistic in 2022.

Afrah says small businesses should pay attention to sources such as the Reserve Bank's half-yearly report, and in particular the section on household debt, because it is a reliable indicator of how people will spend their money in future. Household debt and defaults are on the rise, which is a dangerous trend amid rising interest rates.

What is Afrah's advice to small businesses under huge pressure? They should plan properly for the six to 12 months ahead, with realistic expectations based on the levels of trade they have experienced recently. You also need to plan for when things go bad, and even the worst-case scenario, like when interest rates rise even more or your sales drop by 20%.

The biggest complaint he hears from banks and other financiers is about the quality of information they get from companies applying to extend credit agreements or take out new loans. Banks find that many entrepreneurs do not understand the key risks in their business and do not apply that knowledge to try to predict the next six to 12 months.

On the question of whether interest rates will soon start coming down, and whether the environment for small businesses can improve, Afrah believes there is a good chance this will happen, but it all depends on national and international events to which the Reserve Bank reacts. After Covid, most economists expected inflation would rise for a while then come down as things normalised. But then came the war in Ukraine that upended the international economy. Afrah says similar “black swan" incidents have increased enormously in the past decade. Where you used to expect one in a decade, these days they land on the lake every two or three years.

‘The smell of napalm in the morning’

Chatting to the neat and friendly Afrah and listening to his well-formulated answers was pleasant, but I couldn't help wondering what would happen if I was to send a 15-year-old Hilux to take Afrah out of his skyscraper in Sandton and drive him down to the Cape to visit my little office of three square metres in Parow East with the poster of a half-naked girl on the wall and the whine of sanding machines in the background.

What would someone like him do when, after a month of taxi strikes, stage 6 load shedding and a hell of an increase in the diesel price, he was faced with the question of where to find, by the very next day, R30,000 in rent, R20,000 in wages and R40,000 in VAT for the South African Revenue Service, when the money is simply not in his account?

I wonder how many people would survive a typical day in the life of a small entrepreneur with few support networks. You drive to work in the morning with a list of urgent tasks that need to be completed throughout the day — things like a financing application at a bank, preparing workers' pay slips, maintenance work in your accounting system, orders for materials and quality control of your products. Then, as you arrive at your office, the first curve ball hits you.

A customer you've been trying to deliver to for weeks is suddenly available, and you decide to do it yourself, also to free up much-needed storage space occupied by his cabinet. Two hours later, on your way back from Paarl, you rearrange the list of urgent tasks so you can start all over again as soon as you get to the office.

But upon arrival there, you are greeted at the door by an inspector from the department of labour who almost scornfully announces that you are the lucky winner of an audit of your premises and employees. Now, you know you do everything to do with employees by the letter of the law, and you support the rights of workers, and your workers are paid well above minimum wage, but this type of audit keeps you busy for two days; filling out and submitting a load of documents takes time and causes extra stress.

The interview keeps you busy for another hour, and as soon as the inspector has left you quickly answer the most urgent emails in your inbox and a few queries on WhatsApp. After that's done, you walk into your workshop for the first time that day. It's lunchtime now. You greet your people and start discussing some immediate and strategic demands with them. Halfway through your second sentence, the power goes out. The load-shedding schedules changed during the morning but you didn't see the notice.

And so the day goes on and on. Finally, you stagger home in the early evening beaten down and having completed only one little thing on your to-do list.

If you can't stand this kind of chaos, don't try to start a business. And know one thing for a fact: even though this country's best hope for job creation and economic growth is small entrepreneurs, the state will not lift a finger to help or support you, especially when you're going under. On the contrary, it is actively working against you.

The tax burden on new entrepreneurs is heavy. And if you miss just one VAT payment by 10 seconds, you are immediately hit with a 10% fine and the heavy interest starts to accrue. They have the right to send inspectors to your premises at any time to interrupt you and increase your workload. Organisations created by law, such as the bargaining councils, have the right to step in and inspect and audit you at any time. And they will do so.

I am perfectly happy with this, but then the state also has to do its part. It should provide the electricity for which you faithfully pay, just like you pay income tax and VAT. Then it should stop alienating investors who could bring economic growth. It should regulate and integrate the taxi industry as the most important public transport component in our country so that a strike cannot bring the entire economy to a standstill. And many other things.

If you're planning to start a small business, get your finances and scenario planning right, as Afrah says, but also make sure you have a good psychiatrist to help you deal with the anxiety and fear of going it alone and fearing the collapse of everything. Make sure you're reasonably fit, and make sure you're in control of your drinking and other bad habits, because it takes a clear head and a healthy body to face these kinds of challenges.

Finally, in the movie Apocalypse Now, Lieutenant-Colonel Bill Kilgore, standing amid the destruction of war, declares: “I love the smell of napalm in the morning."

If that doesn't appeal to you even just a little bit, don't start a business any time soon.

♦ VWB ♦

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