SMALL BUSINESSES- A SOUTH AFRICAN PERSPECTIVE

registered and do not contribute to the national fiscus (DTI, 2008). The construction industry, while highly regulated in South Africa, still experiences high volumes of contractors that do business with consumers without the necessary licenses in the form of NHBRC certification or CIDB grading.

Although the development of SMMEs is one of the South African government’s priority programs, the 2010 Global Entrepreneurship Monitor (GEM) survey confirmed below- average entrepreneurial and business activity in South Africa (Herrington, Kew & Kew, 2010). In ECFs’ context, this renewed emphasis on entrepreneurship and business development, coupled with South Africa’s poor performance in this regard, confirms the need within both the public and private sectors for more information about the drivers of and the barriers to entrepreneurship and business development. In South Africa small businesses are firms with a maximum of 200 employees (NSBA 102 of 1996). This classification is further extended by scholars such as Falkena (2001) and van Aardt et al. (2010:4) by including other categories that distinguish small businesses. van Aardt et al. (2010:4) provide the following classifications:

3.4.1 EXTENDED CLASSIFICATION OF SMMES

While guidelines provided in the NSBA 102 of 1996 ascertain that SMMEs can be defined in both qualitative and quantitative terms. van Aardt et al. (2010:4) extended the classification offered by NSBA by including other categories that distinguish small businesses. The next section discusses these classifications.

3.4.1.1 Basic survivalist

A survivalist is a self-employed individual who operates his or her business enterprise either alone or with between one and five assistants (Mahadea & Youngleson, 2014:51). For this type of business, the person operates as an entrepreneur to survive until he obtains a formal-sector job or entrepreneurial opportunity. In survivalist enterprises, the income generated is less than the minimum income standard or poverty line, there are no paid employees, and asset value is minimal. Survivalists usually have limited education, training, technical skills, resources, market growth prospects and an annual turnover of around R12000 (Ntsika, 2001). This category, in ECFs’ terms, can be referred to ECFs in grade 1 of the CIDB grading system.

3.4.1.2 Pre-entrepreneur

This person is involved in welfare-based entrepreneurship where profit maximization is less important than the collective. This category includes vendors and hawkers and, in ECFs’ context, will be regarded also as a contractor with a CIDB grading of 1CE - 2CE. CIDB contractor grading is discussed in detail under section 3.7 of this chapter.

3.4.1.3 Subsistence entrepreneur

Also called an opportunistic entrepreneur by other scholars, this person often starts a business with a mix of rounded education and technical knowledge and his orientation is not to stay stagnant, but to proactively seize profitable opportunities to grow the firm and adapt to the changing environment (Mahadea & Youngleson, 2014:55). This person is involved in independent income-generating activities operating as a small- scale vendor. This type of an entrepreneur will be an equivalent to a 3CE CIDB graded business.

3.4.1.4 Micro-entrepreneur

Micro-enterprises have a turnover less than the VAT registration limit (i.e., R150 000 per year) and are not usually formally registered for tax or accounting purposes. This person employs fewer than 10 people except in the mining, electricity, manufacturing, and construction sectors. This type of an entrepreneur will be an equivalent of a 4CE CIDB graded business.

3.4.1.5 Small-scale entrepreneur

In small enterprises, a secondary coordinating managerial structure is in place, providing some coordination and therefore exhibiting more complex business practices than very small enterprises. This person is a formal-sector entrepreneur with 11 to 49 employees. In ECFs’ terms, this is a typical contractor who is graded at either 5CE or 6CE in terms of the grading system of the CIDB. Falkena (2001:29) extends the classification provided by the NSBA and van Aardt et al. (2010), by also including

both the annual turnovers and assets in the classification. Table 3.3 below indicates an extended classification of SMMEs by Falkena (2001), which includes both the annual turnovers and gross assets.

Table 3-3: An extended classification of SMMEs Enterprise

size Number of employees Annual turnover Gross assets excluding fixed property

Medium Fewer than 100 to 200

depending on industry Less than R4 million to R50 million depending on industry

Less than R2 million to R18 million depending on industry

Small Fewer than 50 Less than R2 million to R25 million depending on industry

Less than R2 million to R4.5 million depending on industry

Very small Fewer than 10 to 20

depending on industry Less than R200 000 to R50 000 depending on industry

Less than R150 000 to R500 000 depending on industry

Micro Fewer than 5 Less than R150 000 Less than R100 000 Source: Falkena (2001:29)

A comparison of Falkena’s (2001) extended classification with the CIDB’s contractor grading system indicates a significant difference in terms of available capital and/or assets. The classification is, however, similar in the sense that ECFs classified as

“micro” in terms of Falkena will be graded 1CE by the CIDB, as both specify a turnover of less than R150 000. The 2CE CIDB-graded contractor corresponds with Falkena’s

“very small’ classification since both specify ECFs’ turnover of less than R200 000.

Both classifications categorize 4CE and 5CE as small enterprises with a turnover of less than R2 million. For a better comparison of the two classifications see Table 3.4 under Section 3.7 of this chapter.