James Caan gives insight into how he has become an internationally successful entrepreneur and why he has decided to come to talk to South African entrepreneurs.

 

 

1. Can you tell our readers a bit about your success as an entrepreneur?

Many people dream of being a successful entrepreneur and watching my father run his own business was what gave me the business bug. I realised from a fairly early age that I wanted to follow in his footsteps and become my own boss.

 

I left home at 16 and after a few years of working in recruitment, I helped my future wife start her own fashion boutique. I didn’t actually have the money at the time but was so desperate to help her that I took out 3 separate overdrafts, something I wouldn’t necessarily recommend now.

The current economic climate is placing businesses under severe pressure resulting in large numbers going out of business, filing for bankruptcy or turning to Business Rescue as a possible lifeline.

 

During 2012 the success rate for businesses that applied for Business Rescue was only 8 %. Initially unfavourable tax demands, stringent legal regulations, unviable business plans and the skills set of the appointed practitioners, all contributed to the low success rate of business rescue attempts. Statistics circulated by the Companies and Intellectual Property Commission (CIPC) during 2013 however reveals, the real rate of success of all businesses that have concluded their rescue operations is between 12 % - 15 %. During 2013, the number of appointments in the Western Cape alone was 15.8 % less than in 2012. This gives some credence to the interpretation that companies are benefiting from Chapter 6 of the Act, which came into effect in May 2011.

 

Could the reason for the high failure rate be the legal emphasis on Business Rescue?

Although Business Rescue is functionally non-judicial in nature, the current trend in South Africa places the decision of whether to file for Business Rescue in the hands of the Board of Directors and a trusted team of attorneys. Major decisions in the process are based on the business plan prepared by the directors and employees, often overlooking the inherent emotionally charged bias stemming from their desire to see the business succeed. A further reason for the failure of the rescue proceedings is the over-optimistic operational and financial projections which overstate the forecast cash flows and understate the funding requirements of the business. At a Turnaround Management Association of Southern Africa meeting during 2013, the questions were posed whether Business Rescue in South Africa is too legally focussed, and whether key financial considerations were overlooked in favour of legal consideration.

A number of small and medium enterprises (SMEs) in South Africa are struggling to grow in the current economic environment, as they are not employing more resourceful financial solutions within their business models.

 

This is according to Gary Palmer, CEO of Paragon Lending Solutions, who says that SMEs that are able to offer their clients more favourable credit payment terms are gaining a competitive edge within their industry.

 

However, Palmer explains that the 2013 economic forecast for growth in South Africa has been reduced from 2.8% to just 2%, making the outlook for SMEs very competitive. “Cash flow restrictions also inhibit entrepreneurs and SMEs from offering preferential credit terms to their clients, as they would be unable to fund from their own resources,” says Palmer.

 

“In addition, these SMEs struggle to obtain finance from traditional lenders as traditional lending facilities, such as overdrafts, require collateral security such as property or other capital assets to access working capital facilities.”

 

He explains that regular credit providers also look at the historical performance of a business and seek strong balance sheets. “This affects small and emerging businesses more so as they have a lack of or a sparse trading history. SMEs are struggling to find a foothold in the market due to limited demand in the current economic environment. They are further constrained by the limited financial recourses available to them, which makes it difficult for them to expand despite having sound management principles.”

 

Palmer says SMEs need to be more innovative in their financial management practices and explains how  private lenders who provide debtor’s finance facilities take factors, such as payment history, credit record of the debtor, and the business model into account.

 

“Businesses can obtain short-term working capital via a debtor’s finance credit facility, which uses the business debtor’s book as security. A debtor’s finance facility provides a business with the means to extend competitive credit terms to its customers, without running the risk of facing cash shortages or losing control of their debtors’ book.”

 

Debtor’s finance involves the purchase of an invoice from a supplier by a financier, who pays a percentage thereof within a few business days, giving the company much quicker access to the liquidity it requires.

 

“Customers will always seek suppliers who can offer them with extended credit terms, as this improves their cash cycle,” adds Palmer.

 

He says that a debtor’s finance facility will be especially beneficial to growing businesses with good customer relationships and a healthy debtor’s book. “Credit terms asking for deposits will be less attractive to costumers and early settlement arrangements might negatively impact the company’s profits. Early settlement discounts can range up to 10% which is way more expensive than the cost of a debtors finance facility.”

 

He adds that a financier’s average term ranges up to 5.5% for debtors with 60 day terms, so the business will lose more by offering discounts to its clients.

 

Palmer also says that disclosure of using this facility does not have a negative impact on the company's customers because debtor’s finance has become a well-known and valuable tool and shows that your business is applying innovative cash management resources. “It is a flexible solution; as your turnover increases so the debtor’s facility will grow with it,” he concludes.

Top five tips to save on costs

 

In today’s tough economic climate, unnecessary company costs are always top of mind, especially for small to medium enterprises (SMEs) that face many challenges pertaining to their growth, such as sufficient cash flow.

 

According to Michael Barr, Chairman of SureTransact, an innovative mass electronic payment provider, in order to manage cash flow effectively, it is important to always be fully aware of the various monthly company costs, as well as the unnecessary expenses which could be cut in order to save money.

 

Gerrie van Biljon, Executive Director of Business Partners Limited, “Cash flow difficulties are generally one of the most devastating challenges for small businesses...says that a common downfall for companies, from small enterprises to large entities, is poor cash flow management. “Cash flow management is a key challenge and companies need to manage their cash flow according to the sector they operate in by taking into account the challenges they could, and are likely to, experience.”

 

Businesses are often unaware of smaller, less significant costs which they may routinely pay each month, such as additional electronic transactional banking fees. “While these costs may be minimal, they accumulate to large sums of money over long periods of time, and could be put to better use, such as reinvesting into the business,” says Barr.

Barr refers to a recent independent survey commissioned by SureTransact, which revealed that 51% of businesses do not know whether they are being charged additional electronic transactional banking fees for EFTs such as batch upload fees, beneficiary amendment fees, or viewing fees for online platforms.

 

He says that this is just one example which highlights how additional, and often unnecessary expenses, can slip through the cracks. “Cash flow difficulties are generally one of the most devastating challenges for small businesses, and ultimately affect a business’ bottom line. By eliminating unnecessary costs, businesses may be able to ensure higher profits.”

Barr offers five tips, which may assist businesses to save on their financial costs:

President Jacob Zuma’s commitment to ensuring that government departments pay small and medium enterprises (SMEs) within 30 days, made during his recent State of the Nation address, should be embraced by South Africa’s small and medium enterprises (SME) sector.

 

This is according to Gerrie van Biljon, Executive Director at Business Partners Limited, who says that prompt payments by state departments will relieve the mounting pressure that SMEs are currently under, and may even alleviate the rate of SME closures in South Africa.

 

He says that while this announcement was first made four years ago, it is important for the President to reiterate the message. Late and protracted payments by state agencies have put many SMEs under unnecessary pressure over the past few years and, in many instances, led to the failure of otherwise sound companies.

 

“As it is estimated that small and medium-size enterprises generate half of gross domestic product (GDP) and nearly 60% of employment locally, this commitment is very positive for our economy. The proposed monthly reporting system that President Zuma discussed could go a long way in keeping track and monitoring the situation.”

 

He says that some government departments might not realise the negative effects that late payments can have on SMEs. “While payment delays can be easily absorbed by larger companies with access to credit, late payments could have potentially devastating consequences for small firms, which struggle with cash flows and cannot easily secure overdrafts or bridging finance.”

 

He says that while government’s commitment to paying on time should be welcomed, it is important for SMEs to remain vigilant and advises the following steps for business owners to protect themselves against late payments.

 

Negotiate payment terms with customers upfront

Van Biljon say that unfortunately, many small businesses are afraid to negotiate stringent payment terms upfront, for fear of losing a potentially large customer, such as a government department. Many large organisations know this and put pressure on suppliers to accept their often lengthy payment terms. “While it is not always easy to stand firm in these situations, failing to do so could result in massive dangers down the line.

 

“Make it clear to the customer what the credit terms are. If there is a difference between the two parties’ payment terms, don't ignore the issue – discuss it and come to an agreement, otherwise it will arise later when it has become more critical to cashflow.”

 

Ensuring invoicing is done correctly and timeously 

Before accepting an order or brief, van Biljon advises that the supplier should fully understand the meaning of all payment terms. “This includes particular requirements regarding invoicing, what references or order numbers should be quoted, what the procedures are for making payment, as well as whether the customer only accepts electronic invoicing. It is highly unlikely that the customer will pay before their standard terms, but it is advisable to discuss payment before in order to find out what flexibility they have.”

 

Take swift action on late payment 

He says that many small businesses shy away from pressing large clients for payment as they fear it could damage the relationship they have with their client contact. “One option is to outsource invoicing and collections to an outside supplier, who is able to chase late payment on the supplier’s behalf. This will save the business owner’s time and effort of chasing overdue invoices, which is a distraction from running a business.”

 

Escalate issues soonest rather than later

Van Biljon says that it is sometimes advisable to escalate the issues internally so that the client’s senior staff is involved sooner rather than later. “This particularly applies at the first signs of a debt going bad, or if there are implications for other invoices or work already in progress. Establish a policy on how long an invoice is allowed to be outstanding before resorting to debt collection and when supply of goods or services would be stopped.”

 

Use the government late payment option

He says that SMEs experiencing late payments of more than 30 days after doing business with government can now call a hotline on 0 for assistance. “The hotline will provide SMEs and suppliers with a single point of contact to facilitate the speedy payment for services or products provided to the government.”

10 out of 11 private airlines launched in South Africa have failed since 1991, a list which now includes 1time airlines. Many of these new ventures struggled when it came to support, financing and in particular, cash flow. The recent news of 1time airline’s decision to file for liquidation, after applying for business rescue in August 2012, also highlights the need for adequate research, planning and support when starting and running a new venture.

 

According to Gerrie van Biljon, Executive Director of Business Partners Limited, a specialist risk finance company for SMEs in South Africa, a common downfall for companies, from small enterprises to large entities, is poor cash flow management. “Cash flow management is a key challenge and companies need to manage their cash flow according to the sector they operate in by taking into account the challenges they could, and are likely to, experience.”

 

He adds that support and mentorship is another key area to business success, as it is vital companies are given guidance when deciding on certain business decisions, such as business rescue.

 

Van Biljon says that 1time’s situation is a common occurrence in the small and medium enterprise (SME) industry. “This situation is a key lesson to many South African businesses out there. It highlights that the old saying, “cash is king”, remains vital in any business as cash is the life blood of any business and without it, it is dead.”

 

1time was trading under the protection of a business rescue with an estimated R320 million in short-term debt and had been in negotiations with creditors since March 2012.

 

He says as with 1time, when businesses compete with large players they are often not on equal footing. “Large businesses have the buying power, the muscle and the means to act, which makes it very difficult for smaller businesses to own a fair share of the market.

 

“When businesses compete on an unequal base, as 1time did in the South African aviation industry, they are very prone to encounter issues, especially if the competition receives additional funding from external sources.”

Van Biljon explains that if the cost of a product or service is dependent on external factors which are difficult to control, it poses a major threat to a business. “In the case of 1time, the cost of fuel was a threat. If the correlation between what businesses may charge the customer and what the costs actually are is out of sync, the business model becomes vulnerable.”

 

Van Biljon says that even if an SME is offering excellent service and good prices, there is no guarantee that the business will thrive. “However, the SME will have particular competitive advantages over a corporate. Entrepreneurs have the ability to move quickly and adapt to changing environment, which large business find difficult to do. They are very innovative and act in an entrepreneurial manner, which means that they are always on a lookout for an opportunity that can lead to more business or even a new venture.

 

“In these very difficult trading conditions, entrepreneurs have no choice but to make the business work as there is just too much at stake. It is also a good time to revisit the business model, change tact and explore new markets,” concludes van Biljon.

A sharp decline in business confidence in many rapid growing economies is raising a warning flag that global business may face continued volatility for some months to come. In South Africa, confidence levels have remained largely unchanged, dropping one point in the Regus Business Confidence Index (from 117 to 116) since April 2012.

 

Business confidence in some of the world’s leading growth economies has dropped significantly over the last six months. Despite the fall, levels of business confidence in rapidly growing economies still remains well ahead of levels in mature economies – yet this setback should act as a warning flag for businesses across the world to stay nimble and expect further volatility before a general global upturn, finds the latest Regus Business Confidence Index (BCI) based on the views of more than 24,000 senior business people from 92 countries.

 

In South Africa, the Business Confidence Index rating is lower for small businesses (111) than for large firms (132)and, given the important role of small and medium-sized enterprises as an engine of growth and provider of jobs, this finding is of particular concern. Access to affordable credit and cash-flow management were among their biggest concerns, highlighting the need for flexible, pay-as-you go business services allowing businesses to remain flexible and agile.

 

Key Findings and Statistics

 

 

It’s clear that there’s been a stagnation in business confidence, accompanied by significant falls in some rapidly developing economies since our last BCI report in April. This suggests that slowing trade with Europe and Western economies, combined with a host of national factors, is taking its toll. In South Africa, unrest in the mining sector is expected to affect production and demand, but also allowing the central bank to keep interest rates low.

 

We were particularly struck by slower improvement amongst entrepreneurs and small businesses. In order to improve their cash situation, respondents identified affordable and flexible business services – especially for overheads such as workspace, administrative support and sales/marketing. 45% of respondents, for instance, reported that one of the major burdens during the downturn has been inflexible property leases. Flexible services allow businesses to be more agile and free-up cash for investment without relying on credit at a time when it is so difficult to secure.

While there has been a lot of focus on the difficulties faced by small and medium enterprises (SMEs) in South Africa in the current tough economic conditions, the low interest rate environment presents an ideal opportunity for small and medium enterprises to pay off existing debt that may be hampering growth.

 

According to Gerrie van Biljon, Executive Director at Business Partners, many SMEs are burdened with high levels of debt at the moment, which they have built up over many years. He says that the low interest rate environment that South African SMEs are currently operating in should provide an ideal opportunity for businesses to pay off the debt weighing them down. “Interest rates at this low level come as a relief to the already struggling business community. Although the recent cut in interest rates may be small, every bit of relief is welcome.”

 

Van Biljon says that in this environment, business owners that can afford to accelerate their debt repayments should definitely do so. “By paying an increased instalment business owners can reduce the payment term by a significant extent. Where possible, entrepreneurs should see this as a golden opportunity to get rid of debt sooner.”

 

He says that the increased cash flow available to business owners due to the interest rate cuts opens many doors for SMEs. “Additional cash flow relieves pressure and also gives SMEs the freedom to expand or reduce costs. The temptation to spend this additional cash flow should be resisted and rather be used to reinvest in the business or build up a nest egg, which most businesses are not usually able to do.”

 

Van Biljon says that entrepreneurs should capitalise on this favourable situation whilst it lasts. “While the interest rate trend is not clear, the possibility always remains that rates will increase over a period of time, which will have negative financial consequences for SMEs. Business owners should ensure that they use of this window period as best possible,” concludes van Biljon.

SA property investors who require short-term liquidity for commercial purposes are increasingly being turned away by banks. This is due to banks tightening up even more as their margins are being squeezed and is subsequently preventing banks and bond brokers from providing property owners and investors with finance.

Gary Palmer, CEO of Paragon Lending Solutions, says that, “Stricter control measures and tougher lending criteria has resulted in the major banks being unable to process and approve loans as quickly as they would like and we are currently in a situation where investors do not have access to immediate cash flow.”

South Africa’s major banks are primarily focused on unsecured lending. But there are growing concerns at the rate of which unsecured lending has been managed to the extent that the National Credit Regulator is in discussion to amend loopholes in the National Credit Act to reduce the rate of unsecured lending.

Furthermore, stricter guidelines in terms of Basel regulations require banks to hold more capital and the increased costs of holding capital has resulted in banks’ profit margins becoming tighter than they were before the recent interest rate cut.
Palmer says, “The rate cut is likely to further contribute to a decrease in banks’ financial results and the outcome has caused a knock-on effect whereby bond brokers are now battling to secure finance for their clients who require lending to develop properties and invest in further developmental projects.”
He says that what this means for the property investor is that they are finding themselves between a rock and a hard place. “For example, an investor requires short-term immediate finance for working capital, the purchase of an investment property or funding a development. However, due to a bank’s lengthy processing times, the investor can find himself out of pocket due to the delay in approving the loan, and can result in the investor losing out on the investment.”
Palmer suggests that second tier lenders play a crucial role in short/medium term finance for the property investor. “Second tier lenders are not restricted by the major banks when it comes to finance as the investor, who has a valuable asset, can utilise these alternative sources to acquire short-term finance in order to be able to take advantage of investment opportunities. The investor puts their valuable asset up for security with the second tier lender while they are waiting for finance from the major banks.”

He explains that reputable second tier lenders, who usually have good working relationships with the banks and brokers, are then able to structure a short-term loan with the investor, providing them with a bank guarantee in a short space of time. “An experienced lender in the property space will be able to advise on the actual cost of a development and can advise investors on how to arrange the finance that is necessary.

“By doing so, the investor can rest with the confidence that his or her needs are being met. Short-term liquidity allows him or her to continue to finance their investment, without the risk of losing their investment while waiting for finance by a first tier bank, or lose out if their application goes awry.”

Palmer concludes that property developers and investors need to be aware that they have alternative options and should consult a reputable second tier lender for an assessment.

Arguably, any company with a growth plan needs to look at Africa as a potential business option, as it is one of the few places that are currently showing growth.  Business in the region is however very different.  The African business landscape is definitely more relationship-driven in addition to being extremely price-sensitive, and with more and more companies piling in, it is very competitive.

It is important to stay abreast of the legislative requirements of each country and also to understand the impact of foreign exchange fluctuations, which can impact profitability rapidly.  From our perspective, we ensure that our branches not only abide by legislation, but we also prefer to employ locals from each of the countries we operate in. Not only does this afford locals the opportunity to assist in the economic upliftment of their own country, but it also helps us to better understand and deal with local business issues.

Challenges

It is however crucial to do your research and to have solid financial controls in place before embarking on an African business venture.  The money trail is certainly a great deal harder to track in Africa as you don’t have agencies and companies that can readily do a credit check on a prospective client.  Business transactions can be very large, and companies often find that they will not be insured on a transaction for the full amount or not insured at all.  It is therefore of paramount importance to have an airtight financial management system in place.

Finding a balance between too rigid an approach to financial control systems and the building of a lasting relationship can be tricky though.  It literally boils down to having sufficient country knowledge on your side that needs to be supported by a strong ability to build lasting relationships and trust.  People in Africa are generally great to deal with and the cultural experience is fantastic, but it takes time and presence in a country to gain enough of a foothold to comfortably partner with prospective clients.

The logistics of doing business in Africa is a complex dynamic that needs to be considered.  By definition, you will be dealing with custom officials and varying country regulations on a regular basis, which in itself poses an element of risk.  Do you then deliver directly to the client or do the products become the property and responsibility of the client once it enters the country?  All of these logistical factors need to be considered and planned for when it comes to the establishment of a distribution network that works.

Keeping cash flow liquid in Africa is another challenge to contend with.  Financial transactions are a great deal more complex in Africa, but very rewarding.  Some countries are quite prompt with their payments whereas you can wait up to 90 days for payment from others, which diminishes your profits in the low-profit market quite significantly. We also find that the government and parastatals in each of the countries are big drivers of technological business.

The infrastructure within Africa is steadily increasing with connectivity improving a great deal.  Education standards, unfolding opportunities and the size of the economy in each of the countries act as a barometer to how Tech-savvy a country is.  All the countries are however growing with leaps and bounds from a technological point of view, which provides a perfect platform for businesses to expand its footprint on the African continent.