The Small Business Growth Index (SBGI) shows that small businesses are experiencing a fragile recovery with deep-rooted challenges, with one-quarter of the 1 600 small and medium-sized enterprises (SMEs) surveyed growing moderately in the year to end August.

However, nearly half of SMEs surveyed contracted or experienced difficulties trading, while 9.2% indicated that they were at risk of closure.

Nevertheless, one of the most notable trends identified in the current report is that SMEs are expressing cautious optimism, independent market research organisation the Bureau of Market Research (BMR) CEO Professor Deon Tustin said on August 20.

The business sentiment portion of the report shows that, while the share of firms expecting to grow is roughly the same, at 25.5% for the past 12 months, compared with 24.6% of businesses that expect to grow in the coming 12 months, there is a notable shift out of distress and into stability.

This suggests SMEs are hedging bets, expecting to weather storms rather than aggressively expanding.

Further, another key trend showed declining acute stress, with the drop in those SMEs trading with difficulty and at risk of closure signalling that SMEs broadly expect easing of the worst pressures, but this optimism requires external reinforcement, including reliable energy and cheaper credit, besides others, he emphasised during a webinar held to unpack the implications of the report.

“Fewer firms believe they will grow strongly, but slightly more expect moderate growth. Overall, net growth optimism is nearly flat, which an indication of tempered, cautious confidence rather than exuberant expansion plans.”

A much larger share of small businesses, up from 21.6% currently to 38.1% in the next year, expected to simply maintain their current performance rather than expand or contract. This suggested that many firms foresaw a plateauing rather than dramatic swings, which reflected prudence in the face of ongoing uncertainties, he said.

Of businesses currently trading with difficulty or at risk of closure, at 27.6% of those surveyed, 11.1% expect a sharp decline in their estimates of distress for the coming year.

This substantial drop suggested a collective belief that acute operational pressures would ease, perhaps owing to expected policy support or market improvements, said Tustin.

The financial metrics of small businesses surveyed shows that revenue and profits declined for many small businesses, with profit erosion outpacing revenue loss and indicating margin pressure. Two-thirds of small businesses held employment steady, one in four cut positions and only 10% added employees.

However, on a positive note, SMEs are showing an increase in digital adoption, and online trading was the only strong growth area over the past 12 months, with about 35% of small businesses increasing their digital revenue.

Small businesses that were surviving were those that were defending or growing their margins by tightening cost structures and applying value-led pricing, he said.

“SMEs are concerned about rising costs, rising staff wages and power interruptions. However, despite this, SMEs have demonstrated hope when looking ahead, with many planning to expand their reach, buy new tools and equipment or explore markets beyond their current footprint,” he added.

This optimism was grounded in the belief of SMEs that conditions may improve and policy support may ease operational pressures or that their own initiatives and digital expansion would provide benefits, he said.

“This signals resilience and opportunities in the SME sector, and is a critical consideration in the work of policy makers and stakeholders to support SME businesses,” Tustin emphasised.

Effective policy is needed to sustain momentum and convert cautious optimism into real growth. Policy makers should focus on reinforcing macro stability, such as by containing inflation, avoiding value-added tax hikes and maintaining transparent policy.

Policy makers should also tackle exogenous shocks, such as by improving energy and water reliability, and streamlining transport systems, as well as by facilitating improvements in skills development, finance access and digital transformation.

There was an urgent need for policy attention, targeted financial and technical support, in addition to an economic stimulus to prevent further erosion of the small business sector’s resilience, Tustin said.

The lead parties involved in the SBGI initiative include financial services firm Absa Bank’s SME Business Unit, the South African Chamber of Commerce and Industry and the BMR as the research partner.