SMEs must prepare for rising cost of doing business

Businesses face a challenging 2nd quarter of 2015.

Monetary Policy Committee.The first quarter of 2015 has been a roller-coaster for business as well individuals in South Africa. The quarter saw a drastic drop and sudden rise in fuel prices, individual tax increases which will impact disposable income as well as the retention of current interest rates by the South Africa Reserve Bank’s.

According to Daniel Kaan, CEO of Core Lending at FNB Business, there are strong indications that the second quarter of this year could be especially challenging for SMEs as the cost of doing business is set to rise.

“Even though the first quarter had an equal share of good and bad economic news, the second quarter is likely to be very different as SMEs will have to absorb the recent increase in fuel, water and electricity prices. In addition, economists have cautioned of a potential rate hike in the short-term, depending on a number of economic factors. All these factors point to a substantial increase in the cost of doing business, which will no doubt affect the most vulnerable entities such as SMEs,” says Kaan.

At the recent MPC announcement, the SARB cautioned that a weak rand and unstable oil prices remained a risk to the inflation outlook for the country. This view is shared by FNB Economists, who note that a combination of higher maize prices, fuel tax increases and a weak Rand/US Dollar exchange rate imply that the inflation relief has largely run its course.
Kaan believes that SMEs should start preparing for tough economic times they are likely to face over the next quarter. He suggests some of the following measures:

Review resource allocation

The rise in fuel, water and electricity prices will have an immediate impact on your business so the best approach is to proactively factor these costs when allocating operating budget for the months ahead.

Assess debt commitments

Even though interest rates remained unchanged during the last MPC announcement, economists have warned of a potential hike in the short-term, and this could affect debt repayments which are linked to interest rates. We advise businesses to properly manage debt by paying-off or paying more, before any rate increase takes effect.

Review pricing or fee structure

If you have not factored the various increments in your fees or pricing structure, do so immediately because your business could incur losses. Chances are that your suppliers will or have already done the same to absorb the various price hikes.

“It is important for businesses to prioritise cash flow because failure to do so could have far-reaching consequences. Going forward, businesses need to capitalise on opportunities while preparing for undesirable economic times such as the upcoming second quarter of 2015,” concludes Kaan.