SMEs are considered the backbone of the South African economy, generating jobs, prompting innovation, developing skills, and driving economic growth. However, unlike enterprise businesses, SMEs can encounter significant challenges as a result of economic shifts which may threaten the stability of their business.
Through the constant monitoring of economic trends, SMEs can develop proactive strategies to help them better prepare for potential challenges and identify future business opportunities that might have gone unnoticed. By having a firm understanding of future economic challenges and its implications for SMEs, SMEs will be better equipped to ensure their long-term business success.
Before we dive into the effects of economic shift can have on SMEs, let’s decode the jargon often heard among industry experts relating to economic trends.
What does it mean?
When we read articles around economic developments or listen to the news, we often hear or read the same key phrases or terms relating to an economic event. Understanding these terms and analysing how they can impact your business is the first step to making more informed business decisions.
- Inflation: Inflation is the rate of increase in prices for goods and services over a period of time. These increases erode the purchasing power of consumers and businesses throughout the country and is measured by the Consumer Price Index (CPI). For SMEs, inflation can cut into profit margins, making potential earnings appear less whilst the cost of raw materials, suppliers, staff, and even rent increases.
- Interest Rates: The Interest rate is the amount charged over and above the principal amount by the lender from the borrower. When the interest rate increases, borrowing money becomes more expensive, thus deterring SMEs from taking out loans for potential expansion or development, temporarily stunting growth.
- Exchange Rates: An exchange rate is a relative price of one currency expressed in terms of another currency, and this rate will fluctuate over time and is impacted by economic developments. Therefore, when the Rand is weaker, the cost to import supplies becomes costlier, which can impact and SMEs ability to manufacture or produce goods for sale.
- Economic Growth: This refers to an increase in the capacity of an economy to produce goods and services in a country over a period of time. The size of the economy is generally measured by the total production of goods and services in the economy. A thriving economy translates to higher consumer spending, which can stimulate the growth of SMEs.
- Other Global Events: Global events such as trade negotiations, strikes, political instability, civil unrest etc. are all events that have the potential to disrupt the supply chain which can impact the cost to import or export goods. This fluctuation in cost can impact SMEs that operate with a tight budget.
How SMEs are impacted by economic shifts
All businesses, large or small, are impacted by economic shifts in some capacity. However, SMEs aren’t as financially resilient yet, compared to larger corporations and can experience these shifts on a more dramatic scale. Let us consider how the above economic events can impact SMEs:
- Inflation: With inflation on the rise, SMEs may experience increased input costs, as raw materials and supplies become more expensive. As the cost-of-living increases, employees may request higher wages to maintain their lifestyles and purchasing power. SMEs’ may also experience a decrease in sales as disposable income affects consumers, forcing them to tighten their belts.
- Interest Rates: When interest rates increase, SMEs may be more reluctant to take out loans. This behaviour could stifle their ability to fund an expansion, pay for additional inventory, or possibly maintain their day-to-day operational costs, which could temporarily stunt their growth.
- Exchange Rates: When the Rand is weaker, the cost to import supplies becomes costlier, which can lead to increased input costs for SMEs, adding more pressure on their current profit margins.
- Economic Growth: When economic growth is slow, consumers tend to monitor and reduce their spending. As a result, SMEs will notice a decrease in demand for their products or services, leading to smaller profits being made.
- Other Global Events: When there are disruptions in the supply chain, the flow of products or resources becomes unstable. This instability can impact the SMEs ability to meet client deadlines, maintain adequate stock levels, or be able to take on large requests. As a result, SMEs may experience inflated costs, consumer satisfaction issues, and a cut to profit margins.
How SMEs can endure during economic shifts
Monitoring economic trends and understanding how they can impact your business; SMEs can develop a comprehensive strategy that will allow them to navigate the complex economic challenges smoothly. Let us look at some of the strategies SMEs can apply to their business to ensure that they are not caught in the storm unprepared:
- Manage Rising Costs: SMEs can monitor their input and identify areas of unnecessary spending or exorbitant spending and adjust accordingly. They can also evaluate their operational processes and identify ways to improve efficiency, reduce waste, and further minimize costs. Additionally, SMEs can consider utilizing technology to automate various business processes to improve productivity.
- Proactive Financial Management: SMEs can develop a tightly managed budget that allows them to monitor their expenditures. They can also aim to set up a reserve fund which can help cover costs in events of slower economic growth.
- Effective Pricing Strategies: SMEs should evaluate the value of their product or service offerings by identifying how consumers can benefit from it. By doing so, SMEs can set up marketing strategies to communicate the benefits of the products, rather than focusing solely on pricing. They can consider a tiered pricing strategy to cater to their different target markets and lastly, SMEs can set up discounts or promotions to generate sales without sacrificing profits.
- Customer Satisfaction: SMEs should prioritize customer satisfaction and drive customer loyalty, as these two elements become paramount during economic hardships. SMEs can achieve this through responsive communication, creating personalized experiences with their customers, and developing loyalty programs that incentivize customers to return.
What is the take away?
Knowing and understanding how economic shifts can impact your business, and having proactive strategies in place for these events can help your business become more resilient and adaptable. It is vital that SMEs develop financial resilience, invest in technology, optimize operations, and build customer relationships, as these are key to long-term success in turbulent economic environments.
