Johannesburg - Research by the FinMark Trust has found that informal micro enterprises are ill-equipped to handle cash flow challenges they face on a daily basis.
The businesses are not aware of their lack of capacity, resulting in huge losses that kill the enterprises or inhibit growth.
FinMark Trust is a non-governmental research house which focuses on financial tools and products that can work for the poor.
Other challenges uncovered by the study include micro businesses' lack of skills in managing debtors, pricing goods and hiring and training of staff.
Most notable in the research was the recommendation that micro enterprises needed a credit facility to help them address short-term challenges.
"Micro businesses need something equivalent to an overdraft - a line of credit that can be accessed and paid back to bridge very short periods when business revenues are temporarily low," stated the research.
Businesses sampled made losses of up to R36 000 a year. The study noted that hard cash changed hands frequently and this led to unnecessary expenditure.
"Having lots of cash in hand makes it more difficult to save; micro-business owners deal almost purely in cash and therefore are in particular need of finding effective ways of saving on a high frequency basis," it said.
Crime control issue
Rashid Ahmed, manager of FinMark Trust's small business division, said the challenges were due to a lack of education and the fact that banks did not create products specifically suited to the needs of small firms.
"Most small businesses have an even sharper need than earners of regular income for appropriate savings mechanisms that can capture the high- frequency cash flow they experience," he said.
Micro firms are also prone to crime because they largely make transactions in high-visibility areas.
Independent small business analyst Septi Bukula said it would be ideal for financing institutions to provide micro enterprises with overdraft facilities.
"However, I wonder which financial institution will have an appetite for the idea, as banks do not look kindly at small businesses from a financing point of view but are keen to take deposits."
Bukula said pulling off the overdraft facility would take an institution with a strong developmental focus on investing in micro enterprises, for example a national micro-enterprise finance institution.
He said crime would continue to affect the micro businesses unless banks made the debit card system cheaper for them.
Bukula said most micro entrepreneurs started their firms to meet their daily needs rather than to grow the businesses.
"No amount of training will change a person's point of view if that person has set up a business primarily to meet daily needs," he said.
"People have to understand that their lives are separate from their businesses and the businesses need to be grown."
The research sampled 26 businesses in Western Cape specialising in manufacturing, services, construction and the sale of goods.
The businesses had an average household income of between R2 500 and R10 000.
The goal of the pilot study was to test if nationwide research would be feasible, including the budget and time period the project would need to be carried out in. Ahmed said the research took a month to complete.
- City Press