Analysis of Factors That Affect the Long-Term Survival of Small Businesses in Pretoria, South Africa

doi:10.4236/jdaip.2013.14008

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Journal of Data Analysis and Information Processing, 2013, 1, 67-84

Published Online November 2013 (http://www.scirp.org/journal/jdaip)

http://dx.doi.org/10.4236/jdaip.2013.14008

Open Access JDAIP

Analysis of Factors That Affect the Long-Term Survival of

Small Businesses in Pretoria, South Africa

Zeleke Worku

Tshwane University of Technology Business School, Pretoria, South Africa

Email: WorkuZ@tut.ac.za

Received September 15, 2013; revised October 17, 2013; accepted October 31, 2013

permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

ABSTRACT

The paper is based on a 5-year follow-up study (2007 to 2012) of a random sample of 349 small business enterprises

that operate in and around the city of Pretoria in South Africa. Data were gathered from each of the businesses on so-

cioeconomic factors that were known to affect the long-term survival of small businesses. The objective of the study

was to identify and quan tify key predictors of viability and long-term survival. Pearson’s chi-square tests of associations,

binary logistic regression analysis and the Cox Proportional Hazards Model were used for screening of variables, and

for estimating odds ratios and hazard ratios of key predictors of viability and long-term survival. The study found that

188 of the 349 businesses that took part in the study (54%) were not viable, and that the long-term survival and viability

of small businesses were adversely af fected by lack of entrepreneurial skills, lack of supervisory support to newly estab-

lished businesses, and in ability to operators running newly established busin e sses to acquire relevant vocational skills.

Keywords: Small Businesses; Entrepreneurial Skills; Vocational Skills; Odds Ratio; Hazard Ratio

1. Introduction

This paper was based on a 5-year long study (2007 to 2012)

of a random sample of 349 small and medium sized en-

terprises conducting business in and around the city of

Pretoria, South Africa in which factors responsible for

failure in small businesses were investigated by using

panel data analysis. At the end of the study, 188 of the

349 small businesses were not financially viable. The

purpose of the study was to identify and quantify key va-

riables that were responsible for failure in the 188 busi-

nesses that were not viable. This is the first study of its

kind in Pretoria, is exploratory in nature, and describes

the current state of small businesses that are operating in

Pretoria.

2. Background of Study

According to the South African Small Enterprise Devel-

opment Agency [1], 60% of South African small busi-

nesses fail within their first year of operation. The

agency has found that although the South African De-

partment of Trade and Industry provides incentives and

support to small and medium sized enterprises, the de-

gree of support provided to newly established small

businesses is grossly inadequate. As a result, small and

medium sized enterprises are seen failing in a number of

areas of specialization [1-4]. The purpose of this research

was to identify factors that affect the growth and devel-

opment of small enterprises that conduct business in and

around Pretoria. The South African Chamber of Com-

merce and Industry [2] has reported that more than 30%

of the total gross domestic product of South Africa is

attributed to small and medium-sized enterprises. Also,

20% of all units exported by South Africa are produced

by small and medium-sized enterprises. It is impossible

to grow the South African national economy on a sus-

tainable basis without simultaneously achieving sus-

tained growth and development in small and medium-

sized enterprises [5]. Swanson [6] has reported that real-

izing sustained growth and development in small and

medium-sized enterprises is a critical requirement for

achieving sustained growth and development at the na-

tional level. Failure in small and medium-sized enter-

prises amounts to failure in the national economy ac-

cording to Zheng, O’Neill and Morrison [7], Friedman,

Miles and Adams [8] and Nieman [9]. This particular

study is essential for finding out the root causes of failure

in small and medium-sized enterprises that are conduct-

ing business in the Pretoria region of South Africa. Very

few studies have been conducted so far in an d around the

Z. WORKU

city of Pretoria. For this reason, this study carries sig-

nificant weight and importance. Future researchers can

use findings from this study for conducting large scale

studies at other regions of South Africa.

Small businesses and enterprises make a significant

contribution to the South African national economy. The

growth and development of national economies is de-

pendent on the rate at which small enterprises grow. In

recognition of this fact, the South African National Gov-

ernment supports and actively promotes the growth and

development of small businesses in South Africa [10].

However, the failure rate of newly established small

businesses in South Africa is hi g h.

3. Objectives of Study

The overall objective of this study was to identify key

predictors of failure in small enterprises in Pretoria, and

to propose feasible remedial actions so that support could

be provided to struggling small business enterprises. The

study had the following specific objectives:

 To describe the characteristics of small enterprises

conducting busin e ss in and around Pretoria;

 To identify factors that adversely affect sustained

growth and viability in small enterprises in Pretoria;

and

 To propose suitable and feasible remedial actions that

could assist small and medium-sized enterprises in

Pretoria.

4. Research Questions

This study aims to provide adequate answers to the fol-

lowing researc h questions:

 What are the socioeconomic characteristics of small

business enterprises operating in and around the city

of Pretoria?

 What are the key factors that adversely affect long-

term viability in newly established small enterprises

operating in and around th e city of Pretoria?

5. Literature Review

According to the South African Small Enterprise Devel-

opment Agency [1], although the South African Gov-

ernment promotes the growth and development of small

and medium-sized enterprises by massively investing in

local institutions such as the South African Centre for

Small Business Promotion (CSBP), Ntsika Enterprise

Promotion Agency and Khula Enterprise Finance, the

failure rate in newly established Sou th African small and

medium-sized enterprises is as high as 60%. The study

conducted by Ladzani and Netswera [4] has found that

small and medium-sized enterprises often fail due to lack

of access to finance and lack of entrepreneurial skills. At

the national level, South African small and medium-sized

enterprises in all economic sectors are characterized by

an acute shortage of entrepreneurial and technical skills

and difficulty in raising finance from micro-lending in-

stitutions at favourable rates [1]. According to research

conducted by the South African Chamber of Commerce

and Industry [2], the situation at the Pretoria region is not

different from the situation at the national level. The

purpose of the study is to identify and quantify key fac-

tors that are responsible for failure in small and me-

dium-sized enterprises operating in the Pretoria region.

Findings obtained from the study conducted by the

South African Small Enterprise Development Agency [1]

show that 60% of all newly established small businesses

in South Africa fail within their first year of operation.

According to the report, although the South African De-

partment of Trade and Industry provides incentives and

support to small and medium sized enterprises, the de-

gree of support provided is grossly inadequate. As a re-

sult, small and medium sized enterprises are seen failing

in a number of areas of specialization [1-4]. A cco rding to

Zheng, O’Neill and Morrison [7], Friedman, Miles and

Adams [8] and Nieman [9], it is essential to develop

small and medium-sized business enterprises in order to

develop national economies.

To date, very few studies have been conducted in the

Pretoria region to identify and quantify the key factors

that are responsible for failure in small and medium-

sized enterprises. Small Businesses are often regarded as

high risk operations locally and globally due to the pres-

ence of factors that are difficult to predict adequately

[11]. According to Useem [12], it is essential to support

and guide small busine ss enterprises in the early stage of

establishment by providing them with supervisory and

skills-related support and supervision. White [13] has

found that small and medium-sized enterprises often ex-

perience costly bureaucratic and administrative chal-

lenges. In South Africa, small and medium-sized enter-

prises are set up with minimal support an d guidan ce fro m

the national Government although the duty of the na-

tional Government is to create an enabling economic

environment. The study was conducted against the back-

ground of the need to obtain vital information that ex-

plains why more than half of all newly established small

and medium-sized enterprises fail in the first three years

of their establishment in Pretoria. Findings from the

study are valuable for providing meaningful assistance to

businesses that operate in Pretoria.

According to Lawal [14] and Joseph [15], small, micro

and medium-sized enterprises are defined as an enter-

prise with a maximum asset base of about 10 million

Rand excluding land and working capital in which be-

tween 10 and 300 employees work. According to Oboh

[16], small, micro and medium-sized enterprises are de-

fined as an enterprise that has an asset of between 2500

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and 20 million Rand excluding the cost of land and

working capital. According to the National Small Busi-

ness Act of South Africa [3], small, micro and medium-

sized enterprises are defined as follows:

Micro enterprises: With growth potential that in-

volves the owner and family members or at the most four

employees and whose turnover is below 150,000 Rand,

the threshold for VAT registration;

Small enterprises: With 5 to 100 employees and are

owner-managed and fulfil all the trappings associated

with formality .

Medium-sized enterprises: With 100 to 200 employ-

ees which are still owner-managed and fulfill all the

trappings associated with formality.

Small, Micro, Medium-scale Enterprises (SMMEs) are

also defined as enterprises with a minimum asset base of

25 million Rand excluding the cost of land and working

capital by the South African Department of Trade and

Industry [3].

The rapid increase in consumer expenditure by resi-

dents in the Pretoria region since the early 1990s and the

fact that the overwhelming majority of township dwellers

have chosen to stay in their townships has enabled small

businesses to set up shop s with a view to render essential

services to residents in the Pretoria region of Gauteng

Province. The importance of small and medium-sized

enterprises is well documented in terms of economic

development, competitiveness, and innovation. The con-

tribution and importance of small enterprises to the na-

tional economy is based on the ability of the sector to

create employment opportunities to the masses, utilize-

tion of local resources, output expansion, transformation

of traditional and local technology, the production of

intermediate goods, the promotion of an even develop-

ment, the reduction of income disparities, and its ability

to increase the revenue base for the South African Gov-

ernment. Small, micro and medium-sized enterprises

(SMMEs) are of a great importance in the area of low

capital and output ratio, op timal utilization of local inputs

and other multiplier effect per unit of investment. The

SMME sector is viewed by the South African Depart-

ment of Trade and Industry [3] as the key element in

fostering economic growth among the unemployed

masses in urban and semi-urban parts of Pretoria. Small

and medium-sized enterprises often use locally made and

available technologies for operation, growth in SMMEs

amounts to growth in local and indigenous technology.

The SMME sector is crucially needed for achieving

overall economic growth and for the alleviation of pov-

erty among the masses. The SMME sector is supported

by the South African Government as a means of building

capacity in local entrepreneurs an d to promote the use of

local raw materials, technologies and manpower.

The SMME sector plays a critical role in job creation,

skills development, technology transfer, and the allevia-

tion of poverty among the unemployed. As a result, the

South African Government regards the SMME sector as

an engine of growth and economic expansion. The

SMME sector in South Africa is similar to the SMME

sectors in other Sub-Saharan African countries, and is

exposed to high failure rate, lack of entrepreneurial skills,

lack of resources, lack of access to finance and lack of

modern technology. Although growth in the SMME sec-

tor is essential for establishing sustained growth in the

overall economy, the sector is characterized by high fail-

ure rate due to lack of en trepreneurial and techn ical skills

that are essential at the market place [17].

According to the South African Department of Trade

and Industry [3], small, micro and medium-sized enter-

prises (SMMEs) contribute around 40% of South Af-

rica’s gross domestic proﬁt, and employ more than half

of the private sector work- force. It is estimated that as

much as 80% of new jobs in world economies are being

created by SMMEs, and this makes the SMME sector a

key player in the national economy. There are more than

1.5 million self-employed people in the SMME sector,

and they contribute about 40% of the total remuneration

in South Africa. The South African Department of Trade

and Industry [3] promotes small businesses by imple-

menting a number of key initiatives. Examples of such

initiatives are the Centre for Small Business Promotion

(CSBP), Ntsika Enterprise Promotion Agency and Khula

Enterprise Finance. The CSBP implements and adminis-

ters the aims of the national strategy, which includes job

creation. The DTI has recently signed an agreement with

the European Union which will see the EU donating

R550m to start a risk capital fund for SMMEs. The fund

will be administered by the Industrial Development

Corporation (IDC) and the European Investment Bank,

and 90 enterprises will benefit. The IDC allocates 75% of

new business loans to SMMEs. The South African

Women’s Entrepreneur Network was rolled out country-

wide in 2002, alongside manufacturing advisory centres

in all provinces. Non-governmental organizations include

the Small Enterprise Foundation, which has a microcredit

programme aimed at micro-enterprises, and the Tshu-

misano credit programme that specifically supports and

promotes female entrepreneurs. The NTSIKA pro-

gramme provides non-financial support services to the

SMME sector, tackling issues like management devel-

opment, marketing and business development services.

The agency also helps with research and inter-business

linkages. Khula offers financial support mechanisms to

the sector. The financial products include loans, the na-

tional credit guarantee system, grants and institutional

capacity building. The KHULA programme provides

micro-lending to newly established businesses. The

BRAIN programme (Business Referral and Information

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Network) offers basic information and essential service

links to entrepreneurs. The BRAIN website includes in-

formation about the government’s incentives and SMME

support agencies, as well as links to business centres. The

Franchise Advice and Information Network (FRAIN)

programme strives to supply high quality information

and support services to individuals and small businesses

in order to promote growth and improvement in franchise

businesses. The FRAIN programme is implemented by

NAMAC (National Coordinating Office for Manufactur-

ing Advisory Centres) with assistance from the Council

for Scientific and Industrial Research (CSIR). The Na-

mac programme has developed an extensive delivery

structure across South Africa that serves as a channel for

the application of new tools, information, products and

projects, thus enabling the effective delivery of solutions

aimed at SMMEs. The emphasis is on Historically Dis-

advantaged Individuals' (HDI) businesses. The Business

Partners Limited (BPL) programme provides assistance

to small and medium enterprises financially. The pro-

gramme provides financial assistance at a cost of be-

tween 150,000 Rand and 15 million Rand. The Tourism

Enterprise Programme (TEP) supports small businesses

in the tourism industry financially and technically. The

main objectives of the programme are to encourage and

facilitate the growth and expansion of small and medium

enterprises in the tourism economy, resulting in job crea-

tion and revenue generating opportunities. Primary em-

phasis is placed on historically disadvantaged entrepre-

neurs and enterprises. For example, at the World Parks

Congress the TEP was instrumental in facilitated deals

which provided employment for its beneficiaries. The

National Small Business Office (NSBO) in SARS is the

custodian of all small business tax and customs policy

matters within SARS. The office exists to maximise

compliance among small businesses while at the same

time finding ways to reduce the compliance burden faced

by these businesses in South Africa.

There are various business structures that are suitable

for small businesses. The structure of the business deter-

mines the legal status of the business enterprise. De-

pending on the nature of the business, the number of

people involved, management capabilities, personal risk

and future business plans, a suitable business structure can

be chosen for a newly established company. A sole-

trading company is suitable for running a business that

has no fixed assets. The owner is the sole employee. In-

come accrues directly to the owner and there are no

complicated statutory returns other than meeting basic

legal and tax requirements. The disadvantage is that the

business is not a separate legal entity, so the owner is

liable for, and can be sued for, the business’s debts. If the

owner of the business dies, the business ceases to exist.

A business based on partnership enables 20 or fewer

partners to operate a business by pooling their resources

and skills together. A close corporation (CC) company

enables a business a separate legal identity without the

formalities of the Companies Act that governs (Pty) Ltd

companies. This structure is ideal for a business that

purchases stock on credit. A CC company can have be-

tween one and 10 m embers, each of whom owns an agreed

percentage o f the b usi ness a nd w ho i s li abl e for managing

it properly. A CC cannot be owned by a company or be a

subsidiary of another CC or company. A CC (rather than

its members) can sue and be sued. All CC companies in

South Africa are governed by the Close Corporations Act,

which is administered by the Companies and Intellectual

Property Registra tion Of f ice ( C IP RO ).

A review of the literature shows that small and me-

dium-sized enterprises are often beset by a host of factors

that curtail their survival. In the majority of Sub-Saharan

African countries, the most no table obstacles to sustained

growth and development are lack of access to finance

[18], the acute shortage of entrepreneurial skills [19],

poor infrastructural development [20] and heavy bu-

reaucracy and legislative obstacles [21]. The study con-

ducted by Chapman [22] has found that superior and

well-proven entrepreneurial skills are essential for estab-

lishing viable small, micro and medium enterprises glob-

ally, and that business operators who lack entrepreneurial

skills must aspire to improve their capacity of business

leadership constantly.

The South African Government aims to use small and

medium-sized enterprises for the creation of employment

opportunities for the masses. To this end, the South Af-

rican Government has invested heavily in the sector with

a view to foster economic growth, job creation and the

alleviation of poverty at the national level. The South

African Government has an agreement with the European

Union in the European Union donates 550 million Rand

for establishing a risk capital fund for small and medium-

sized enterprises [1 ]. According to Useem [12], th e qual-

ity of entrepreneurial skills and leadership is a critical

factor that determines the survival of small businesses.

Ratten and Suseno [23] have reported that although

access to finance is critical for the growth and develop-

ment of small businesses, entrepreneurial skills are

equally important. Small and medium-sized enterprises

in the Pretoria are similar to enterprises in other parts of

South Africa. They are characterized by a high failure

rate in the first three years of establishment, lack of en-

trepreneurial skills, failure to assess the market condition,

failure to utilize financial and logistical resources pru-

dently, poor quality of leadersh ip, the wastage and abuse

of scarce resources, failure to meet the expectations of

customers, inability to acquire training on essential en-

trepreneurial skills, and failure to dr aw up business plans

for their operations. Lack of leadership is a critical prob-

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lem in the SMME sector. According to Rowe, small and

medium-sized enterprises that perish in their first three

years of establishment are often characterized by poor

leadership qualities and poor organizational skills.

Entrepreneurial skills are essential for steering small

businesses in a manner in which they are profitable and

viable. A good entrepreneur has good leadership skills.

Such leadership skills and the ability to make the right

choices enable small businesses to thrive under difficult

circumstances. Leadership skills are key attributes of

successful companies locally and globally [25]. Yuki [26]

has found that superior leadership skills and entrepre-

neurrial success are inseparable. According to Yuki [26],

good business leaders adhere to the key principles of

corporate governance. These principles are accountabil-

ity and transparency. In this regard, Abor and Biekpe [27]

have reported that good corporate governance and sound

leadership skills are critically needed in small and me-

dium-sized enterprises. In successful businesses, signify-

cant market research is conducted by leaders and stake-

holders. In addition, business processes are well defined

in order to cut down operational cost. Industry bench-

marks and standards of service delivery are adhered to by

business leaders as a means of satisfying the needs and

requirements of customers. The study conducted in

Ghana by Carmingnani [28] has found that the viable

small, micro and medium-sized enterprises set up in

Ghana are often led by competent business leaders with

superior entrepreneurial skills and sound market research

experience.

The study conducted by Coelho and Matias [29] shows

that entrepreneurial success depends on market condi-

tions, the possession of adequate skills and capital, and

the ability of business owners to secure a reliable clien-

tele base. Doom, Milis, Poelmans and Bloemen [30] have

found that high performance institutions and vibrant

small businesses require superior technical and entrepre-

neurial skills and the ability to negotiate amicable terms

of service delivery with potential customers at the mar-

ketplace.

Globally, all national governments of the world’s lead-

ing economies actively support the Small, Micro and

Medium Enterprises (SMME) sector globally [31]. Sup-

port is provided to the SMME sector in various ways.

One commonly used method of providing SMMEs with

support is the adoption of tax-related policies that pro-

vide preferential treatment to newly established small

businesses [32]. The study by Hussey and Eagan [33] has

shown that small and medium enterprises that thrive to

protect the environment are often granted tax breaks in

view of their contribution to values that are deemed im-

portant to the national economy. The other commonly

used method of supporting small and medium-sized en-

terprises is the provision of skills-based and entrepre-

neurrial trainings free of charge [34]. Small and me-

dium-sized enterprises that spend significant resources in

promoting basic innovation and research and develop-

ment are often provided with adequate support by na-

tional governments as a means of promoting science and

technology in the economic sector. In this regard, the

most notable examples are small and medium-sized en-

terprises in countries such as China, South Korea, Sin-

gapore and Japan [35]. The rationale of providing such

support is motivated by the desire to use the SMME sec-

tor as a driver of national technological advancement

[36].

Keller [37] has reported that superior business leader-

ship is required for ensuring the survival of small busi-

nesses in competitive markets. Qian, Theodore, Peng and

Zeming [38] have f ound th at superior business lead ersh ip

is a critical requirement for ensuring viability in small

businesses, and that leadership skills must be constantly

improved by business leaders. The study by Luke [39]

has found that the ability to provide superior services at

competitive price is a critical requirement for establish-

ing reputation. The ethical aspect of conducting business

carries enormous weight in the eyes of customers. This is

especially true in newly established businesses because

newly established businesses often take a long period of

time before they can establish their credibility at the

market place.

In South Africa, a series of procedures need to be fol-

lowed in order to set up a small business. Newly estab-

lished businesses must be registered with the South Af-

rican Department of Trade and Industry (DTI) and the

South African Receiver of Revenues [3]. The registration

of closed corporations (CC companies) is governed by

the Closed Corporation s Act. The Act is administered by

the Companies and Intellectual Property Registration

Office (CIPRO). The establishment of private companies

(PTY) or Limited Companies (Ltd) is also governed by

an Act in South Africa. Such companies need to be au-

dited annually. For this reason, auditing skills are essen-

tial in setting up PTY or Ltd companies. In order to set

up a new small business, it is essential to have adequate

capital, stock and a good marketing skill. Working capi-

tal is needed for at least six months according to guide-

lines set out by the South African Department of Trade

and Industry (2013: 3) to new beginners. The guideline

recommends that new entrepreneurs must have th e ability

to determine their start-up cost. Such entrepreneurs must

be able to take inventory, draw up a list of items that

need to be stocked and ordered, estimate selling prices,

and market their goods and services effectively. Failure

to have such skills often results in a loss and failure [40].

According to Meyer and Heppard [41], start-up costs

include expenses before the starting date such as market

research, registration fees, legal fees, office stationery,

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design and printing of corporate identity (business cards

and letterheads), registration of a domain name and crea-

tion of a website, installations and utility connections (if

moving into a new property), start-up inventory, cash

reserve to support the company during the early months

before sales reach break- even levels, current assets, such

as ﬁxtures and signage, office furniture and vehicle, and

fixed assets. Newly established businesses must make

arrangements for overdrafts with their banks. Most banks

demand collateral as a requirement for extending loan to

new entrepreneurs. As such, it may not be easy for newly

established businesses to borrow money from comer cial-

banks at favourable rates. Lack of access to easy finance

has been pointed out as a major cause of failure in

SMMEs in most Sub-Saharan African countries [42].

Small businesses that are newly established in the Euro-

pean Union benefit from superior infrastructure, high

technological input and minimal bureaucracy. The same

cannot be said about newly established small businesses

in Sub-Saharan African countries including South Africa

[43]. Newly established small businesses are often ex-

posed to hidden costs such as wastage of valuable time

on bureaucracy, water and light expenses, telephone fees,

transportation cost, maintenance fees, employee turnover,

outsourcing functions, and the payment of commission

and administration fees to service providers. Most newly

established businesses pay consultants to set up business

plans. They also pay fees to have their tax returns com-

pleted and submitted in time. The cost of renting busi-

ness premises in central business districts is often a cost-

ly exercise for newly established small businesses [44].

Newly established small businesses often do not have

the skills to manage their cash flow an d perform auditing

exercises. The study conducted by McGrath and Mac-

millan [45] indicates that auditing and accounting skills

are essential for viability in small and medium-sized en-

terprises. According to the researchers, newly established

firms are often characterized by over-spending, wastage

of scarce resources such as time, failure to take stock and

inventory, failure to order items that are needed in time

and in good quantity, and lack of skills in welcoming

constructive suggestions from potential customers. Lynn

[46] has reported that failure to manage or control fi-

nances according to approved business plans is a differ-

ential factor that adversely affects business processes in

newly established firms globally, and that su ch problems

are rampant in the world’s poorly developed economies.

Poor cash ﬂow is one of the major causes of failure in

small businesses. Businesses may be profitable. However,

if they fail to manage cash flow issues efficiently, they

could easily go bankrupt. The ability to manage cash

flow enables business owners and operators to forecast

their cash flow. Cash flow problems are abundant in

South African small and medium-sized enterprises due to

lack of formal education in the preparation of business

plans, forecasting, auditing and accounting among busi-

ness owners and oper ators. In this regard, the problem in

the Pretoria region of Gauteng Province is not so differ-

ent from the problem in all South African metropolitan

cities. There is an acute need for training newly estab-

lished businesses on auditing, accounting, business plan

preparation, report writing, oral presentations, stock tak-

ing and inventory.

The majority of small businesses fail to acquire tech-

nical assistance in areas related to auditing and account-

ing in an attempt to save cost. The ability to develop a

cash ﬂow forecast enables business operators to estimate

the amount of money that is likely to flow into and out of

their business over a period of time, thereby enabling

them to allocate suitable budgets for their operations, set

realistic targets and operational budgets, and monitor

their overall performance. Mullins [47] has pointed out

that efficient organizational skills are essential for viab il-

ity in small business enterprises, and that such skills en-

able business operators to manage utilization of their

resources effectively.

According to O’Dwyer, Gilmore and Carson [48], bu-

siness operators, managers and owners working in newly

established enterprises must have th e ability to determine

what portion of their sales should be kept in cash, what

purchases should be made in order to secure enough

stock, when such stock must be ordered and purchased,

how much opening stock is needed, how much capital is

required, how much loan is needed for operational re-

quirements and needs, where such loans should be ob-

tained, the rate at which loans shou ld be raised, the list of

routine daily, weekly and monthly expenses, ways and

means of reducing such expenses, fees paid for employ-

ees in exchange for their labour-related services, how

much monthly salaries should be paid out to employees,

and how marketing should be done to potential custom-

ers. According to O’Donnell [49], it is essential to have

adequate information on the cost of similar goods and

services by rival business operators.

Based on findings from the study conducted by Porter

and Tanner [50], th e world’s most successful and vibrant

small businesses and enterprises are characterized by

service excellence, dedication for satisfying their cus-

tomers, research, innovation and development, and atten-

tion to quality. In this regard, small and medium-sized

enterprises in Sub-Saharan African countries including

South Africa are characterized by lack of entrepreneurial

skills and relatively lower professional standards. The

authors argue that service excellence often leads to a

solid and sustainable customer base, and that dedication

for rendering quality services is a requirement for sus-

tained growth and development at the market place. The

level of skills possessed by the majority of business op-

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Z. WORKU 73

erators in newly established businesses is often poor. As

such, operators working in newly established businesses

must be dedicated for achieving service excellence and

reliable clientele. However, it is impossible to secure

reliable clientele without demonstrating devotion for

service excellence [51]. The study by Chetty and Stangl

[52] has found that dedication for service excellence is a

key requirement for credibility at the marketplace, and

that newly established businesses cannot survive without

possessing solid reputation and credibility at the market

place. This assessment is consistent with findings re-

ported by Bekele and Worku [53], Carroll and Wagar

[54], Cooper and Schindler [20] and Bosworth [21]. Ac-

cording to Abor and Adjasi [55], the vast majority of

newly established businesses that fail in their first three

years of establishment are characterized by poor repute-

tion and low entrep reneurial sk ills in the eyes o f potential

customers, and often struggle to establish credibility.

This explains why service excellence is critically needed

in newly established small and medium-sized enterprises

in the Pretoria region of Gauteng Province. It follows

that newly established firms need to allocate enough re-

sources for the acquisition of essential entrepreneurial

and technical skills in their first three years of establish-

ment.

Ingstrup [56], Isaksson [57], Jack, Moult, Anderson &

Dodd [58] and Jiang & Mike [59] have suggested useful

methods of minimizing operational cost at newly estab-

lished small enterprises. These methods include keeping

overheads down, avoiding credit terms, debt collection,

improving supplier payment terms, keeping stock to a

minimum. The study conducted by Jagoda, Maheshwari

and Lonseth [60] has found that newly established small

businesses must not possess more stock than is needed

because they could easily tie up all their free cash in

stocks that are too difficult to sell fast enough. Jonsson

and Lindbergh [61] have found that newly established

businesses often fail due to lack of mentorship pro-

grammes and lack of accurate market-related information.

Maine, Shapiro and Vining [62] have reported that newly

established businesses need to develop capacity for the

effective and timely utilization of market-related infor-

mation. The authors have also found that new entrepre-

neurs have a tendency for rendering services on credit,

and that such a practice often leads to bankruptcy in most

economies. According to Kozovska [63], efficient debt

collection requires business owners and operators to be

aggressive in demanding monies that are owed by cus-

tomers. If businesses fail to collect debt in time, they

stand to go bankrupt. Malhotra and Temponi [64] have

found that the ability to collect outstanding debt from

customers in time is critical for the survival of newly

established businesses.

The cost of labour and human capital is often high in

South African businesses. It is essential for newly estab-

lished businesses to save cost by minimizing labour. At

the Pretoria region, a few small businesses make an at-

tempt to use family members as a means of saving mo-

ney that should otherwise be paid for labour. The prac-

tice becomes useful if family members possess the entre-

preneurial skills that are needed for business operation.

Otherwise, the practice could be detrimental for sus-

tained growth. Zhu, Chew and Spangler [65] have re-

ported that the ability to utilize human capital efficiently

as well as leadership and organizational qualities are es-

sential for long term survival and viability in small and

medium-sized enterprises globally. According to Foster

[66], the cost of labour and capital in small business en-

terprises should be managed at competitive rates based

on market conditions. The cost of goods and services

fluctuates seasonally. The cost of some goods and ser-

vices increases depending on demand that comes in cer-

tain seasons of the year. For example, the cost of warm

clothes and winter shoes increases in winter. It would be

prudent to keep extra stock for the next season in cases

where it is not possible to sell such items currently. The

other innovative method of managing cash flow is to

allow customers to pay phase by phase depending on

how much they can afford. However, in selling items on

credit, the proper paperwork and procedures must be

followed as a means of avoiding loss. In some cases, late

payment should be allowed by debtors.

According to Hashim, Ahmad and Leng [17], good

leadership is a pre-requisite for the effective accom-

plishment of organizational tasks in small and medium-

sized business enterprises globally. The style of leader-

ship of an entrepreneur has a significant bearing on the

ability of the business enterprise to win and retain loyal

customers on a sustainable basis. Good leaders have the

ability to interact with their potential customers effec-

tively. In cases where there are complaints from custom-

ers, good leaders have the ability to resolve disputes and

misunderstandings promptly to the complete satisfaction

of customers. Such a track record counts heavily in the

eyes of the community. Good business leaders foster in-

tegrity, good leadership, and high efficiency in the eyes

of potential customers. Different leadership styles result

in different organizational effectiveness and performance

in small and medium-sized enterprises.

Workers employed in business enterprises where the

leadership is autocratic in style are less efficient and

productive in comparison with workers employed in

business enterprises where the leadership is democratic

[57]. The styles of managerial leadership towards subor-

dinate staff and the focus of power can be classified into

three categories. The authoritarian style of leadership is

autocratic, and the focus of power is with the manager

and all interactions within the group move towards the

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Z. WORKU

manager. The manager alone exercises decision-making

and authority for determining policy, procedures for

achieving goals, work tasks and relationsh ips , control of

rewards or puni shment [47].

The ability to respond to queries from customers and

the manner in which customers are treated are crucially

important for viability in small businesses. The study by

Harms, Kraus and Reschke [67] shows that small and

medium-sized enterprises that fail to respond to queries

made by customers often fail in the first three years of

their existence. A good ex ample in this regard is the fail-

ure of over 50% of all newly established small busi-

nesses in areas such as Soweto, Alexandra, Tembisa and

Sebokeng in their first three years of establishment over

the period from 1994 to 2012 [2]. Street vendors often

thrive in areas where formally setup small businesses fail.

Consumers have a tendency to look for competitive

prices at all times. This indicates that small businesses

must be adequately informed about the selling price of

goods and services. This requires the ability to do re-

search in the market by gathering information on selling

price and the quality of goods and services.

Judge and Piccolo [68] have found that good entre-

preneurs have good business leadersh ip skills. Accord ing

to the authors, leadership skills such as learning from

competitors and fellow subordinates are quite helpful.

The other key leadership skills are the ability to improve

organizational leadership and performance by improving

the degree of customer satisfaction, staff satisfaction, and

financial performance. Understanding leadership is im-

portant to small and medium scale enterprises (SMMEs)

because leadership binds subordinates to work together

and stimulate employees’ motivation. Effective leader-

ship provides the building block for organizational per-

formance. It is absolutely essential to the survival and

growth of every organization. Autocratic leadership is

detrimental to the growth of businesses. In autocratic

business institutions, the leaders are not democratic

enough in their relations with their sub-ordinate, and

problems that affect organizational performance are not

frankly and effectively brough t to the attention of leaders

for fear of reprisal. As a result, overall productivity is

low.

6. Methods and Materials of Study

The study design of the research is longitudinal (01

January 2007 to 31 December 2012) and descriptive.

Data was gathered from a random sample of 349 small

businesses and enterprises conducting business in and

around the city of Pretoria. Data was gathered on a large

number of socio-economic variables that affect the long-

term survival of businesses. Data were gathered regularly

from each of the 349 small business enterprises regularly

on a monthly basis during the period of study by a Doc-

toral student enrolled at the Business School of Tshwane

University of Technology in Pretoria.

Table 1 shows the list of variables based on which

data was collected from each of the enterprises. Some of

the variables were measured based on an ordinal scale

that varied from 1 (lowest possible value) to 5 (highest

possible value). Some of the variables were nominal

variables (Yes, No). The remaining variables were nu-

meric variables that had to be measured in numbers.

Example: Duration of operation of business in years.

Statistical data analysis was done by using Pearson’s

chi-square tests of association [69], binary logistic re-

gression analysis [70] and the Cox Proportional Hazards

Model [71].

Binary logistic regression analysis [70] was used for

estimating odds ratios. The outcome variable Y is di-

chotomous, and has only 2 categories. That is,

1ifbusiness isnotviable

0otherwise

Y







,,,

XX

are a combination of k discrete and con-

tinuous explanatory variables that affect the dependent

variable Y. An estimated regression coefficient is denoted



. In logistic regression analysis, a regression coef-

ficient is estimated for each explanatory variable in-

cluded in the model. In general, the binary logistic re-

gression of a dichotomous outcome variable Y on a com-

bination of k discrete and continuous independent vari-

ables 12

,,,

XX is defined by the following logit

function:



011

ˆˆˆ

logln 1

it pXX

 











k



The odds ratio corresponding to the explanatory

variable i

is equal to



exp



where ˆi



denotes

the estimated regression coefficient corresponding to

The hazard function for the Cox Proportional Hazards

Model [71] is gi ven by:

 

,exp

htXh tX













where





1,,

XX is a collection of p explanatory

variables that affect survival time.

The Cox model uses survival times and censoring for

the estimation of parameters. In Cox regression, the

measure of effect is the hazard ratio, which involves only

the



’s. Estimates of the



’s are maximum likelihood

estimates.





ht is the baseline hazard function. It in-

volves t, but not the X variables. Some of the 349 busi-

nesses in the study were right censored. Odds ratios were

estimated by performing binary logistic regression analy-

sis under the random effects assumption. Hazard ratios

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Z. WORKU

Open Access JDAIP

Table 1. List of variables of study and their levels.

Variable of study Possible values

Category of business

Automotive sale or repair

Carpentry or maintenance

Music or DVD shop

Convenience store

Food outlet

Liquor store

Travel and lodging services

Child care services

Computer and internet shop

Secretarial services

Health, beauty and fitness services

Home based services

Professional consultancy

Legal services

Security services

Transport services

Low cost franchise

Retail franchise

Sports and recreation services

Others

Duration of operation Duration in years

Amount of start-up capital in Rand Amount in Rand

Source of start-up capital Own, Borrowed, Others

Amount of current capital in Rand Amount in Rand

Amount of tax paid in Rand at the end of last y ear Amount in Rand

Level of education of operator

Primary or less

Secondary

Diploma

Degree or above

Business being conducted by owner or employed manager Owner, Employed manager

Gender of business operator Male, Female

Level of entrepreneurial skill of operator

1) if poor

2) if below average

3) if average

4) if above average

5) if good

Level of auditing skills 1, 2, 3, 4, 5

Level of book-keeping skills 1, 2, 3, 4, 5

Level of report-writing skills 1, 2, 3, 4, 5

Level of presentation skills 1, 2, 3, 4, 5

Existence of a business plan Yes, No

Access to training on entrepreneurial skills Yes, No

Employment of a technical assistant or consultant for preparing a business plan or ta x a sse ssment report Yes, No

Supervisory assistance from t he Department of Trade and Industry Yes, No

Monitoring and evaluation assistance from the Department of Trade and Industry Yes, No

Experience of having to borrow a loan Yes, No

Total revenue in Rand at end of most recent month Total revenue in Rand

Amount of loan bo rrowed in Rand Amount in Rand

Ease of securing a loan Easy, Difficult

Reason for taking loan Reason

Existence of unpaid loan Yes, No

Experience of needing collateral for securing loan Yes, No

Ownership of premises Yes, No

Amount of money paid for rent per month Amount in Rand

Amount of money paid for water and lights per month Amount in Rand

Number of full time employees Number of employees

Z. WORKU

Continued

Suitability of business premises for conducting business Yes, No

Source of supplies Private, Government, Others

Amount of profit made at the end of last year in Rand Profit made in Rand

Experience of a financial loss Yes, No

Failure to file a tax return Yes, No

Experience of a labour dispute Yes, No

Extent to which business has been affected by inflation 1, 2, 3, 4, 5

Ease at which money could be borrowed from the commercial banks 1, 2, 3, 4, 5

Degree of convenience of borrowing money from the commercial banks 1, 2, 3, 4, 5

Perception on the fairness of terms of repaym en t to commercial banks 1, 2, 3, 4, 5

Ease at which money could be borrowed from micro-lenders 1, 2, 3, 4, 5

Degree of convenience of borrowing m oney from micro-lenders 1, 2, 3, 4, 5

Perception on the fairness of terms of repayment to micro-lenders 1, 2, 3, 4, 5

Experience of selling on credit Yes, No

Having a solid clientele base Yes, No

Level of demand for goods or service s 1, 2, 3, 4, 5

Perception on the degree of assistance provided by the South African Government 1, 2, 3, 4, 5

were estimated by performing panel data analysis based

on the Cox Proportional Hazards Model. Estimated odds

ratios an d hazard ratios were used as a meas ure of ef fect,

and for ranking influential predictors of viability and

survival in order of their strength.

Kaplan-Meier survival probability curves were used

for comparing viable and non-viable businesses with

regards to the most influential predictor variable (level of

entrepreneurial skills). Descriptive and summary statis-

tics were also obtained. The adequacy of the fitted Cox

regression model was assessed using the likelihood ratio

test and Akaike’s information criterion (AIC) statistic.

The fulfilment of the proportional hazards assumption

was tested by use of log-minus-log plots. The duration of

survival of businesses was measured for each of the 349

enterprises in the study by using 01 January 2007 as the

starting point. Enterprises that were still operational at

the end of the study period (31 December 2012) were

considered right-censored observations as their exact

durations of survival could not be measured due to ad-

ministrative censoring (inability to measure the survival

times of businesses beyond the date at which the study

came to an end) at the en d of the study period. For enter-

prises that ceased operation prior to 31 December 2012,

survival time was defined as the number of days of op-

eration between 01 January 2007 and the date of closure.

The Cox Proportional Hazards Model takes censored

observations into account, and this property of the model

makes it quite attractive in comparison with other models

used for panel data analysis in economic studies [71,72].

In Cox regression, hazard ratios are used as an econo-

metric measure of effect. Key predictors of survival are

identified and estimated based on hazard ratios. Kap-

lan-Meier survival probability curves were used for

comparing businesses that survived the 5-year study pe-

riod (viable businesses ) with businesses that did not sur-

vive the study period (non-viable businesses ) with re-

gards to key predictors of survival. Kaplan-Meier sur-

vival probability curves were used for comparing viable

businesses with non-viab le businesses graphically. At the

5% level of significance, influentialpredictors of survival

are characterized by hazard ratios that differ from 1 sig-

nificantly, 95% confidence intervals of hazard ratios that

do not contain 1, and P-values that are smaller than 0.05.

7. Results of Data Analysis

Table 2 shows the distribution of factors that affect the

long-term survival of enterprises for viable and non-vi-

able businesses. The table provides frequency propor-

tions for 6 key predictors of viability and long-term sur-

vival for viable and non-viable businesses. In the 5-year-

study period, 188 of the 349 businesses in the study (54%)

failed while the remaining 161 businesses (46%) man-

aged to survive. The table shows that 68% of viab le busi-

nesses possessed adequate entrepreneurial skills whereas

only 26% of non-viable businesses did the same. Viable

businesses managed to acquire adequate supervisory su-

pport when they were newly established (51%). The cor-

responding figure for non-viable businesses was 27%.

The level of vocational skills possessed by viable busi-

nesses (77%) was relatively higher than the level of vo-

cational skills possessed by non- viable businesses (38%).

Viable businesses were able to secure loans relatively

easily (74%) in comparison with non-viable businesses

(37%). Viable businesses were operated by managers

with relatively higher levels of formal education (71%)

in comparison with non-viable businesses (43%). Non-

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Z. WORKU 77

Table 2. Group proportions with regards to the financial

viability of small businesses.

Predictor variable Viable (n = 161) Not viable (n = 188)

Level of

entrepreneurial

skills

Adequate: 68%

Inadequate: 32% Adequate: 26%

Inadequate: 74%

Acquisition of

supervisory support

by newly established

small businesses

Adequate: 51%

Inadequate: 49% Adequate: 27%

Inadequate: 73%

Level of relevant

vocational skills

acquired by

business operator

Adequate: 77%

Inadequate: 33% Adequate: 38%

Inadequate: 62%

Ability to secure

loan needed for

operation

Easy: 74%

Difficult: 26% Easy: 37%

Difficult: 63%

Level of formal

education acquired

by business operator

College level or

above: 71%

Below college

level: 29%

College level or

above: 43%

Below college

level: 57%

Past history of

bankruptcy Yes: 11%

No: 89% Yes: 58%

No: 42%

viable businesses were characterized by a past history of

bankruptcy (58%). The corresponding figure for viable

busin esses was only 11%.

Table 3, below, shows adjusted odds ratios estimated

from binary logistic regression analysis in which the ran-

dom effects model was used. It can be seen from the ta-

ble that viability in small businesses is significantly in-

fluenced by 4 predictor variables. The 4 influential pre-

dictor variables are lack of entrepreneurial skills, lack of

supervisory support to newly established small busi-

nesses, inability to acquire relevant vocational skills, and

low initial capital, in a decreasing order of strength. The

most influential predictor variable affecting long-term

viability and survival is lack of entrepreneurial skills.

The percentage of overall correct classification for the

fitted logistic regression model was equal to 89.07%. The

P-value for the Hosmer-Lemeshow goodness-of-fit test

was equal to 0.1076 > 0.05, thereby indicating that the

fitted logistic regression model was theoretically reliable.

Hazard ratios estimated from the Cox Proportional

Hazards Model are shown below in Table 4. It can be

seen from the table that viability in small businesses was

significantly influenced by 3 factors. The 3 influential

predictor variables are lack of entrepreneurial skills, lack

of supervisory support to newly established small busi-

nesses, and inability to acquire relevant vocational skills,

in a decreasing order of strength. The most influential

predictor variable affecting long-term viability and sur-

vival is lack of entrepreneurial skills.

It can be seen from Tables 3 and 4 that hazard ratios

estimated from the Cox Proportional Hazards Model

Table 3. Adjusted odds ratios estimated from binary logistic

regression analysis.

Variable *Adjusted Odds

Ratio P-value 95% C.I.

Lack of

entrepreneurial skills 3.86 0.000 (1.43, 6.02)

Lack of supervisory

support to newly

established small

businesses

3.54 0.000 (1.71, 5.96)

Inability to acquire

relevant vocational skills3.27 0.000 (1.77, 5.81)

Low initial capital 2.03 0.004 (0.35, 3.42)

*Adjustme nt was done for geographical location, age of owner and gender.

Table 4. Adjusted hazard ratios from the Cox Proportional

Hazards Model.

Variable *Adjusted Hazard

Ratio P-value95% C.I.

Lack of entrepreneurial

skills 3.87 0.000(1.44, 6.01)

Lack of supervisory

support to newly

established small businesses3.55 0.000(1.72, 5.94)

Inability to acquire

relevant vocational skills3.29 0.000(1.79, 5.83)

*Adjustme nt was done for geographical location, age of owner and gender.

were fairly similar to odds ratios estimated from binary

logistic regression analysis. In view of the fact that the

design of the study is longitudinal, and not cross-sec-

tional, hazard ratios estimated from the Cox Proportional

Hazards Model carry more weight theoretically in com-

parison with odds ratios estimated from binary logistic

regression model. As such, interpretation of results will

be made based on hazard ratios.

The hazard ratio of the variable “Lack of entrepre-

neurial skills” is 3.87. This shows that businesses that

are run by operators who do not have adequate entrepre-

neurial skills are 3.87 times more likely to fail in com-

parison with businesses that are run by operators who

have adequate entrepreneurial skills. It can be seen from

Table 1 that 68% of the 161 viable businesses in the

study were run by operators who had adequate entrepre-

neurial skills, whereas only 26% of the 188 non-viable

businesses in the study were run by operators who had

adequate entrepreneurial skills. The hazard ratio of the

variable “Lack of supervisory support to newly estab-

lished small businesses” is 3.55. This shows that newly

established businesses that had inadequate supervisory

support were 3.55 times as likely to fail in comparison

with businesses that enjoyed adequate supervisory sup-

port. The hazard ratio of the variable “Inability to ac-

quire relevant vocational skills” is 3.29. This shows

that businesses that were run by operators with poor vo-

Open Access JDAIP

Z. WORKU

cational skills were 3.29 times as likely to fail in com-

parison with businesses that were run by operators with

adequate vocational skills. Adjustment was done for

three potential confounding variables: geographical loca-

tion of business in the city, age of owner and gender of

owner. Unadjusted and adjusted hazard ratios did not

differ much. This shows that none of the three variables

used for adjustment was a confounding or effect modify-

ing variable. The adequacy of the fitted Cox model was

assessed using log-minus-log plots, the likelihood ratio

test and the AIC (Akaike’s Information Criterion) as di-

agnostic procedures. All log-minus-log plots were paral-

lel, showing that the assumption of proportional hazards

was satisfied. The P-value from the likelihood ratio test

was small (0.0001 < 0.01), thereby showing that the 6

variables constituting the fitted Cox model were jointly

efficient in explaining variability in long term survival at

the 1% level of significance. The estimated value of the

AIC statistic was also small (10.01), thereby showing

that the discrepancy between the fitted and true models

was insignificant [73].

Kaplan-Meier survival probability plots were used for

comparing the survival probabilities of viable and non-

viable businesses with regards to entrepreneurial skills. It

can be seen from Figure 1 that businesses that were run

by operators with adequate entrepreneurial skills have a

relatively larger probability of survival in comparison

with businesses that were run by operators with inade-

quate entrepreneurial skills.

8. Discussion of Results

The study has found that 188 of the 349 businesses that

took part in the study (54%) were not viable, and that the

long-term survival and viability of small businesses was

adversely affected by lack of entrepreneurial skills, lack

of supervisory support to newly established businesses,

and inability to operators running newly established

0.00 0.25 0.50 0.75 1.00

020 40 60

analysis time

Adequate skillsInadequate skills

Kaplan-Meier survival estimates

Figure 1. Kaplan-Meier survival probabilities by level of

entrepreneurial skills.

businesses to acquire relevant vocational skills. The 188

non-viable businesses in the study (46%) were charac-

terized by low level of entrepreneurial skills, low level of

supervisory support, lack of relevant vocational skills,

difficulty in securing loans, low level of formal education,

and a past history of bankruptcy. The study has shown

that businesses that were run by operators with adequate

entrepreneurial skills have survived much better than

those that were run by operators who did not possess

adequate entrepreneurial skills. Results obtained from

Pearson’s chi-square tests of associations (P < 0.05)

showed that businesses fail due to lack of initial capital,

failure to utilize finance in accordance with business plan,

high labour cost, shortage of entrepreneurial skills that

are needed for operating business, adverse market condi-

tions, difficulty in securing loans needed for business,

inability to pay fees that are required for renting business

premises, inability to draw up business plans, inability to

do bookkeeping, the practice of selling on credit, the

status of business being operated, and lack of training

opportunities that are relevant to the business being op-

erated. Businesses that failed were characterized by loss

of money, inability to draw up business plans, inability to

do book-keeping, inability to acquire technical and voca-

tional skills due to shortage of finance. The key findings

of this study are in agreement with results reported by

Jiang & Mike [59], Globerman, Peng & Shapiro [74],

Zoogah, Vora, Richard & Peng [75], Peng, Rabi & Sea-

Jin [76] and Daley-Harris [77]. The South African edu-

cational curriculum does not prepare potential entrepre-

neurs adequately for the task of operating newly estab-

lished businesses. The content of the curriculum for vo-

cational training at the high school and undergraduate

level is vastly inadequate and irrelevant to the specific

needs of young graduates who aspire to thrive in business.

This failure constitutes a major obstacle to the growth

and development in small and medium-sized businesses

and enterprises in South Africa.

The study has shown that the failure to utilize finance

in accordance with business plan is detrimental for vi-

ability, and that non-viable businesses are characterized

by a past history of bankruptcy. Similar findings have

been reported in other Sub-Saharan African and South-

East Asian countries in which it has been found that suc-

cessful businesses are often run by operators with sound

entrepreneurial skills and fiscal discipline [78]. Success-

ful operators improve their managerial, vocational and

technical skills incrementally. Managerial ability was

assessed in terms of the ability of owners or operators to

produce sound business plans, perform standard book-

keeping, auditing and record-keeping duties, introducing

appropriate technologies and expertise, acquiring innova-

tive business skills from rival enterprises, degree of mo-

tivation and commitment in sharing useful experience

Open Access JDAIP

Z. WORKU 79

with employees, commitment in terms of empowering

employees, investing in skills related training opportuni-

ties for employees, ability in resolving business related

disputes amicably, etc. Successful businesses and enter-

prises were associated with managers who enjoyed what

they were doing, whereas unsuccessful businesses and

enterprises were associated with mangers with little or no

motivation and commitment.

Although there is an understanding that the SMME

sector has the potential for contributing to the growth of

the national economy, the sector needs to be supported

by the national Government. The study conducted by

Kumar, Antony, Madu, Montgomery and Park [78] has

shown that the sustained growth of the national economy

depends on the sustained growth of the SMME sector.

This is especially true in developing economies such as

South Africa. Klotz, Horman, Bi and Bechtel [79] have

found that all tender procedures that might benefit small

businesses and enterprises must be administered with

adequate transparency as a means of supporting the

SMME sector. Dasanyaka and Sardana [80] have found

that strategic partnerships between national and provin-

cial Governments as well as academic institutions benefit

the SMME sector in terms of producing workable plans

of actions. Edwards, Sengupta and Tsai [81] h ave argued

that mentorship is critically helpful for reducing failure

rate in newly established small enterprises. Studies con-

ducted by Dougherty [82] and Estebanez, Grande & Co-

lomina [83] have found that support mechanisms and

supervision are critically needed for reducing failure

rates in newly established enterprises. Rumiler and

Brache [84] have reported that business processes that

aim to benefit small, micro and medium enterprises must

be free from bureaucratic procedures and bottlenecks in

order to enable small businesses to reach their full poten-

tial in the SMME sector of the economy. Black-owned

enterprises conducting businesses in and around Pretoria

need tangible support and mentorship in order to grow

and make a sustainable contribution to job creation and

the alleviation of poverty among the masses.

The strategic benefit of entrepreneurial and managerial

skills for the long term survival of small and medium-

sized enterprises has been pointed out by Rummler and

Brache [84] and Smith and Fingar [85]. Both authors

have found that the lack of entrepreneurial and manage-

rial skills constitutes a major obstacle to the development

of SMMEs. These findings have been corroborated by

Zhang [86], Wennberg & Lindqvist [87], Van Praag [88]

and Sun & Liu [89] in which it has been found that the

acute shortage of entrepreneurial and technical skills has

become one of the key reasons why newly established

small and medium-sized enterprises fail to grow on a

sustainable basis. The study conducted by Hicks, Culley,

Mc Mahon & Powell [90] has found that newly estab-

lished small enterprises cannot thrive in situations where

infrastructure is poorly developed. The constant shortage

of entrepreneurial skills in small and small and medium-

sized enterprises is further exacerbating the plight of

emerging firms in and around Pretoria. The shortage of

such skills is responsible for the high rate of failure of

newly established companies. According to Clemens [18]

and Wagner [91], it is strategically important to have

access to skills-based programmes of training if newly

established companies are to bridge the skills gap in the

SMME sector. Business programmes that are offered by

South African universities are not relevant to the survival

needs of small and medium-sized enterprises. The ab-

sence of accredited training programmes in this regard

has aggravated problems that arise from the lack of tech-

nical skills.

Due to the nature of the SMME sector, access to fi-

nance remains vital because projects can get delayed in

cases where contractors fail to raise adequate working

capital for the project being done. Since contractors are

expected to utilize initial capital before claiming for

work done, the extent to which they are able to access

financial backing is fundamental. Under financial con-

straints, small and small and medium-sized enterprises

are likely to perform poorly on a contract [91]. Based on

findings reported by Dowla [92], Harris & Rae [93],

Hadaya & Pellerin [94], Mc Adam, Moffett, Hazlett &

Shelvlin [95] and Curran & Blackburn [96], the key rea-

son why the majority of newly established firms go out

of business in the first three years following establish-

ment is their inability to raise the finance needed for the

completion of projects.

Newly established businesses seek financial assistance

from financial institutions such as the Industrial Devel-

opment Compotation (IDC), Business Partners Limited

(BPL), Khula Enterprise Finance Limited (KFL), as well

as the big four South African commercial banks (Amal-

gamated Bank of South Africa (ABSA), First National

Bank (FNB), Standard Bank and Nedban k). Althoug h the

commercial banks have adequate funds to lend, their

lending policies are quite stringent, and are based on col-

lateral. The other microfinance institutions do not have

adequate funds to satisfy the needs of newly established

firms. Also, their lending rates are quite high, and are not

affordable to small enterprises. The study conducted by

Smedlund [97] has shown that it is quite difficult and

unaffordable for the majority of small enterprises to bor-

row money on unfavourable terms from financial institu-

tions conducting business. Basically, these financial in-

stitutions have limited resources, and impose rather

stringent repayment conditions on borrowers. This con-

dition exacerbates the plight of newly established firms.

Newly established firms often lack the ability to utilize

borrowed money wisely and according to plan. They

Open Access JDAIP

Z. WORKU

have poor auditing, managerial and entrepreneurial skills.

They do not report their progress at the workplace regu-

larly to financial institutions that choose to lend them

money. As a result, the majority of commercial banks

and micro-lending financial institutions are often reluc-

tant to lend monies to newly established small and me-

dium-sized enterprises conducting business in the Preto-

ria region of Gauteng Province.

The academic curriculum used in South African terti-

ary level academic institutions needs a fundamental

overhaul and review in order for young graduates to ac-

quire entrepreneurial and technical skills that are essen-

tial for operating businesses successfully. Studies con-

ducted by Bekele and Worku [53] and Zoogah, Vora,

Richard and Peng [75] have found that the failure of ter-

tiary level academic institutions to equip young graduates

with skills that are relevant to the actual needs of society

is the key reason why young graduates in the world’s

least developed nations are virtually unemployable.

9. Recommendations

Based on findings obtained from the study, the following

recommendations are made to the South African De-

partment of Trade and Industry, the South African De-

partment of Higher Education and Training, and the

South African Chamber of Commerce and Industry with

a view to improve viability in small and medium-sized

enterprises operating in the Pretoria region of Gauteng

Province. The recommendations have the potential for

improving the plight of struggling small and medium-

sized enterprises in the region.

 It is necessary to design relevant and tailor-made

skills based training programmes on vocational and

entrepreneurial activities in which young matric

graduates can be equipped with the skills they need to

run businesses successfully;

 It is necessary to provide mentorship and supervisory

assistance to newly established small and medium-

sized enterprises fo r a period of at least three years or

more;

 It is vital to encourage academic and research institu-

tions to create academic programmes in which train-

ees can acquire experiential training by working for

businesses and industries as part of their academic

training in South African institutions of higher learn-

ing. Such programmes should be jointly coordinated

and funded by the South African Department of

Higher Education and Training, the South African

Department of Trade and Industry, and the South Af-

rican Chamber of Commerce. Doing so has the poten-

tial for producing graduates who possess skills that

are relevant to the actual needs of business, industry

and government.

 It is necessary to monitor and evaluate the viability of

newly established small businesses on a monthly ba-

sis. This task falls under the ambit of the South Afri-

can Department of Trade and Industry. Such an in-

tervention has the potential for minimizing the rate at

which newly established small businesses fail in and

around the city of Pretoria.

10. Limitation of Study

The study was conducted only in the Pretoria region of

Gauteng Province in South Africa mostly due to shortage

of resources. Small and medium-sized enterprises oper-

ating in and around the city of Pretoria have a smaller

capacity in terms of trade volume and exposure to the

general South African market in comparison with busi-

nesses that operate in and around the city of Johannes-

burg. As such, it would be worthwhile to extend the

study to the city of Johannesburg. Findings obtained

from this particular study may not be generalized to

businesses that operate in and around the city of Johan-

nesburg.

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