After prices climbed relatively slowly during 2020 and most of 2021 as the world locked down for COVID-19, inflation has returned significantly. Though South Africa’s CPI remains stable at around 5.7%, the reality is that prices of transport, electricity, food, healthcare, education, municipal tariffs, and many other products and services are climbing far faster than the index.
This affects small and medium businesses (SMBs) directly and indirectly. As inflation rises, it bites into consumers’ disposable income, meaning they have less money to spend. Furthermore, it increases the cost of doing business at a time that’s difficult for SMBs to pass price increases on to their customers.
Interest rates are also climbing as the South African Reserve Bank (SARB) moves to stay within its inflation target. Unsurprisingly, our Small Business, Big Opportunity? global study that looks at SMB confidence, found that inflation is on their minds. Some 43% of South African respondents expected rising inflation and cost pressures to persist and worsen in the year ahead, significantly impacting growth prospects.
Over a third of SMBs said they have not been able to operate their business as normal due to the pandemic, and 9% reported on financial outlooks, which put them at risk of going out of business. SMBs are the backbone of the global economy, and how they navigate this challenge will have a major impact on prosperity and job creation in South Africa.
Automate and get visibility
While there isn’t much SMB owners can do about inflation, innovative businesses can take a range of steps to improve their fitness for an environment of higher inflation and interest rates. For those that don’t yet have modern business systems in place, automating repetitive, low-value activities is a great place to start.
With the right software, you will be able to dig into your financials to better understand your historical performance. You will also be able to run budgets and forecasts that illustrate how unanticipated increases in input costs will affect your margins. These business insights, in turn, can help you determine which steps to take to protect profitability.
Think about costs and pricing
If your input prices are rising, there are two things you can do: adopt cost-cutting measures and hike prices. Your ability to pass all or some of these costs on to your customers will be partially determined by their willingness and ability to pay. Your competitors’ ability to absorb price increases will also impact pricing dynamics. For example, they may be bigger than you and able to operate on lower margins.
Depending on your market power, you can either increase prices directly or by stealth. For example, there is the ‘shrinkflation’ tactic FMCG manufacturers love. You simply offer slightly less of your service or product at the same price. Another approach may be to cut frills or charge extra for value-adds. For example, restaurant owners may consider not offering free bread to patrons ahead of their meal.
Get rid of debt
During the COVID-19 pandemic, many SMBs used credit cards and overdrafts to remain operational. Others took advantage of loan payment holidays to keep cash flow positive. But with the South African Reserve Bank (SARB) expected to increase rates several more times this year, SMBs will want to eliminate as much of their short-term debt as possible.
Now might be a good time to invest in vehicles, machinery, technology and other productive assets before prices increase. You could also look at bulk-buying consumables or inventory with a long shelf life, provided you have somewhere to store them.
SMB resilience through difficult times
A business landscape characterised by high inflation and low growth will place further strain on SMBs following the pandemic’s challenges. Innovative technology that provides SMBs with the visibility, flexibility, and efficiency to manage finances, operations, and people makes it easier for SMBs to find the optimal route through the storm. SMBs have been through a trial by fire over the past two and half years, but they have shown they have what it takes to thrive in adversity.
By Pieter Bensch, Executive Vice-President, Africa & Middle East at Sage
