It took the South African economy seven years to recover the last time it was downgraded in 1994… and that was with the goodwill of the entire world behind us. The 2017 downgrade brings new and harsher challenges for small businesses – South Africa is no longer the darling of the world and the global economy is facing massive political uncertainty, terrorism and sluggish performance. America is sneezing, Europe has a cold, the Middle East has pneumonia and well… the rest of the world is reaching for a ventilator! The reality is that the prospects for the South African business environment are ranging from turbulent to tsunami.
Economics is anything but an exact science, but what economic consequences can we expect?
Best case scenario, we can expect poor growth with high inflation and worse case, we may be heading into a deep and disastrous recession. While there are always winners and losers in any economic change, a rising tide lifts all ships and boats, but the converse is also true and this tide is not rising. Business owners cannot control macroeconomics, but we can affect changes to make the business more resilient.
Interest rates are likely to rise significantly, which is good news for lenders but bad news for borrowers. This is not the time to be taking on large working capital debt unless you have a very reliable, credit-worthy customer signed and sealed. If possible, reduce your exposure to existing debt, which is going to become very expensive. Where possible, try to re-negotiate more favourable terms with your suppliers.
Sit with your employees, a flip chart and a bunch of ‘’post-its” to analyze the efficiency of the business and take action to reduce bureaucracy, duplications, bottlenecks or waste. At the same time, look for possibilities to improve productivity (Output) without incurring extra costs. The price of Inputs in general is going to increase because of the predicted rise in imports, electricity and petrol along with a weakening rand. Labour costs may also rise because employees will be under increasing pressure to make ends meet, leading to higher wage demands.
Running a tight ship will help contain costs but to maintain a workable profit margin, revenue will need to grow. This is a major challenge in a market where the customer is going to be under increasing pressure and the share of the wallet is less. Businesses that are innovative, responsive and willing to collaborate with other companies will have a better chance of improving sales.
Relationships are especially important now. Be a good customer to your key suppliers so that you are more likely to negotiate advantageous terms. Be a good supplier to key customers (make doing business with you, simple, pleasant and beneficial) so that you are preferred. Cultivate your network for trending information or possibilities. A healthy relationship with your banker is vital. Banks always prefer to lend money to you when you don’t really need it. Share your plans and your recession-proofing strategy with your banker and discuss access to finance before it becomes a necessity.
Get your hard hats ready!