Case Study - ABSA Developing a sustainable SME

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CollaborativeEnterpriseDevelopment.jpgAbsa Business Bank Enterprise Development’s Denver Tavira stumbled onto the truth about creating and developing sustainable SMEs in South Africa: businesses, financial institutions and government need to work together.

He shares Absa’s findings from promoting the development of a Clean Energy SME with the assistance of Eskom, in this month’s SmartProcurement.

“What we need most is better coordination and collaboration of efforts.”

Context

The core product offered by Clean Heat Energy Saving Solutions (Clean Heat) is Solar Geysers.

The business’ primary market in the solar water heating space is Eskom, with an average of 1500 to 2000 units per month. Its secondary market is the private residential sector averaging of 100 to 150 units per month.

Clean Heat derives its income from its supply contracts with Eskom through the power utility’s ‘Eskom Rebate Programme’. Under the rebate programme Clean Heat manufactures and installs solar geysers in line with its allocation given by Eskom.

Problem

Once the geyser is installed the homeowner officially signs over the Eskom rebate to Clean Heat, which then submits claims to Eskom for audit and verification – a process that often took 8-12 weeks to be finalised before Clean Heat would be able invoice for the claims.

Clean Heat was, therefore, carrying a number of costs upfront: the manufacturing/sourcing of the geysers; installations (labour, travel, allowances, etc.) and then in some instances having to wait as long as three months before it could receive its income - a situation detrimental for the cash flow of most major businesses, let alone an SME.

Absa’s Invoice Clearing Solution

Clean Heat approached Absa for assistance with stabilising its cash flow in order to meet month-to-month production needs and cover operational expenses.

Absa’s Invoice Clearing Solution would best address the cash flow needs of Clean Heat.

Absa agreed to assist Clean Heat, provided that Eskom would assist with two key risks associated with this type of funding:

• Establishing a point within Eskom where Absa could verify the legitimacy of invoices presented for discounting.
• Eskom agreeing to ensure that all payments due against the contract would be made directly to an Absa nominated account for the purposes of loan/advance recovery and further commitment that these banking details would not be altered/changed without the prior written consent of Absa.

Eskom duly agreed to Absa’s requirements and the bank began discounting the rebate claims for Clean Heat in late February 2011.

Result

As result of the financial assistance provided by Absa, Clean Heat was able to stabilise its cash flow within three months and at the same time increase the number of geysers it was able to install each month from an average of 1000 units to around 2000 a month.

The Knock-on effect of the increased installations was that the business had to employ a further 50 people to maintain 2000 units per month.

The business has still ongoing contracts with Eskom.

For more information on partnering for enterprise development contact Denver Tavira on denver.tavira@absa.co.za

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