UNDERSTANDING SMALL BUSINESSES

Small businesses play a significant role in providing employment, propelling innovation, promoting social stability and advancing economic welfare (Alsaaty, 2011:2). The contribution of small businesses (including emerging construction firms) to the gross domestic product of South Africa is between 52-57%; additionally, small businesses employ an estimated 61% and constitute approximately 97% of formal business establishments in the country (Damane, 2008:12; Abor & Quartey, 2010:216;

Nieman & Nieuwenhuizen, 2010:3; Ngwenya, 2012:17). The South African economy, according to Ponelis and Britz (2011:2), boasts about 2 million Small, Medium, Micro Enterprises (SMMEs), which employ half of the working population (Gumede, 2004;

Mutezo, 2005; Rogerson, 2008). The correct estimate of the number of SMMEs in South Africa is however uncertain as various sources offered differing figures over the years. The 2 million figure by Ponelis and Britz (2011), however, surpasses the Department of Trade and Industry’s (DTI) (2012) figure, which suggests that there are more than 800,000 SMEs in South Africa. Small businesses, and by extension ECFs, are now highly valued as a more important source of innovation than their bigger counterparts by virtue of their being small and nimble (Radnic, Ivanis & Milojica, 2010).

3.3.1 DEFINING SMALL BUSINESSES

According to scholars (Zimmerer & Scarborough, 2008; Mahembe, 2011), small businesses constitute the largest number of businesses in almost all countries, and they are the highest contributors to economic growth and development. Despite the importance of small businesses in the economy there is not a universally accepted definition of the term ‘small business’ (Dzansi, 2004; Moore, Petty, Palich &

Longenecker, 2010; Nieman & Nieuwenhuizen, 2010; Stokes & Wilson, 2010; Venter et al., 2012). The lack of a universal definition can be attributed to a number of factors including, but not limited to, the fact that different countries employ different measures of small business subcategories and also the fact that definitions of small business vary from one industry to another even within same national boundaries (National Small Business Amendment Act, No 26 of 2003; Leopoulos, 2006).

The definition of small businesses has attracted a lot of debate in recent years with scholars such as Lucky and Olusegun (2012:520) maintaining that small businesses are firms or businesses arising as a result of entrepreneurial activities of individuals.

In most countries, observe du Toit et al. (2012:52), it is an accepted practice to make use of quantitative criteria when attempting to define a small business enterprise. This quantitative criteria according to du Toit (2012:52), also discussed in detail in section 3.3.2 of the current study, include the following:

 Number of employees.

 Sales volume.

 Value of assets.

 Market share.

Moore et al. (2010:55) present an overview of what constitutes small businesses. They explain that small businesses are entities that in most cases employ fewer than 100 persons. In their view, small businesses localize their operations except marketing, which may have wider coverage. Most business naturally start small due to resource constraints or strategic reasons (Timmons & Spinelli, 2007; Nieman & Nieuwenhuizen, 2010; Dandago & Usman, 2011; Venter et al., 2012).

Small business definitions commonly entail quantitative and qualitative dimensions (Stokes & Wilson, 2010:5; University of Strathclyde Library, 2012:7). The qualitative issues addressed by these sources include market share, independence in terms of ownership and operations and business form. Quantitative definitions are based on head count, turnover, and balance sheet value (Stokes & Wilson, 2010:4). The quantitative definition is discussed briefly in the next section (3.3.2) on classification of small businesses. The lack of a common definition of small businesses has, therefor, given rise to various definitions in literature. Table 3.2 below gives an indication of a few examples of definitions used by scholars to define the concept.

Table 3-2:Some common definitions of small businesses

Definition Author(s) Interpretation

A small business is any entity, whether or not incorporated or registered under any law, which consists mainly of persons carrying on small business concerns in any economic sector, or which has been established for the purpose of promoting the interest of or representing small business concerns and includes any federation consisting wholly or partly of such association and also any branch of such organisation.

The National Small Business Act (Act No. 102 of 1996)

This definition recognizes the fact that some, small, businesses operate in the private sector as informal traders. This definition also extends to ECFs as most contractors operate in the industry without registration and the necessary insurances such as Workman’s Compensation or Contractor’s All Risk Insurance.

An SME is an entity that is independently owned and operated and is not dominant in its field of operation.

Small Business Administration (2004)

This definition acknowledges the involvement of small business despite the fact that small businesses are not considered a dominant force in their industries.

A small business is a firm with less than 500 employees

OECD (2006:5) This definition of OECD takes a more quantitative view in defining small businesses. The South African threshold is, however, 200 as defined by the NSBA A small business is one that is independently

owned, operated and financed, has one or a few people who manage it without a formalized structure, has a relatively small share of the marketplace or relatively little impact on its industry and does not form part of a large enterprise.

Nieman (2006:7) The definition by Nieman (2006), while taking a quantitative view, acknowledges small businesses’ role in the market place despite having little impact.

A small business is a business that is small compared to a large company in an industry, is geographically localized and is financed by a few individuals and has a small management team.

Moore, Petty, Polich and Longenecker (2010:14)

This definition argues that a small business is more geographically concentrated as a result of a lack of finances and its management structure.

The definitions of small businesses in Table 3.2 above share many commonalities:

they are managed by owners; they control a small share of the market and lack a formalized bureaucratic structure (a qualitative definition). The definitions of small businesses also differ in terms of some parameters, such as revenue turnover, asset base and total number of employees (a quantitative definition). These differential parameters are discussed in detail under section 3.3.2 below. Holt (2008:131) seems to acknowledge such differences by indicating that such parameters will differ across industries and nations. It would appear that the differences are also not only on definitions but also the fact that different researchers use different terminologies to describe small businesses. Small business can be referred to as small to medium enterprises (SMEs), small medium and micro enterprises (SMMEs), small ventures and small firms (Kongolo, 2010:22; Katz & Green, 2014:567). In the context of this study, the terms small business, small firms, SMEs and SMMEs are applied interchangeably to refer to the same form of business. For this study, emerging construction firms (ECFs) refers to small businesses involved in construction- related economic activities per the various classifications of the CIDB.

3.3.2 CLASSIFICATION OF SMALL BUSINESSES

Despite the lack of a common definition among scholars on entrepreneurship, literature (Bradford, 2010:26; Stimpson & Farquaharson, 2012:539) indicates that the classification of small businesses is based mainly on four determinants: number of employees, annual turnover, assets and the status of registration.

3.3.2.1 Number of employees

This classification is common among most definitions of small businesses. The main reason could be due to the fact that human resources are considered the most precious of all the resources a business can possess. Bradford (2010:26) confirms this view by arguing that employees are “a treasure too valuable to waste.” Various countries use different numbers, with South Africa having a threshold of 200 employees, while USA and United Kingdom specify volumes of less than 500 and 250

employees, respectively, and Botswana and Mozambique placing a ceiling of 100 employees (Kushnir, 2010:67). In the context of ECFs even South Africa’s classification (200 employees) remains too high for ECFs to keep such a high volume workforce. The main reason is that ECFs rely on once-off projects that last for three to six months and as such cannot afford to carry such amounts of employees on their books permanently.

3.3.2.2 Annual turnover

Business performance can be measured by various indicators such as growth in annual turnover and, in a stable economy, an increase in annual turnover may signal an increase in the size of the organisation and vice versa (Hill, 2008:8). This measure of SMMEs is used currently in South Africa by the Construction Industry Development Board (CIDB) to grade construction firms. CIDB contractor grading is discussed in detail under section 3.7 of this chapter. The problem with this classification, in ECFs’

context, is that ECFs carry out once-off projects, with some big projects, resulting in high turnovers when work is more and small projects yielding low turnovers when there is less volume of work.

3.3.2.3 Assets

Regardless of their size, most businesses own both non-current asset and current assets (Stimpson & Farquaharson, 2012:539). This is another common measure and a major problem by the CIDB in grading contractors as, in ECFs’ context; most ECFs struggle to acquire non-current assets (machinery and buildings) rather than current assets (raw materials and working capital).

3.3.2.4 Status of registration

Most informal businesses across the globe are not registered and subsequently do not pay taxes. These businesses are generally accepted to dominate (in number) in the informal sector of the economy and the majority of them in South Africa are not

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.