A look at the Impact of the recent downgrade on SMME’s
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It’s been a long time coming for South Africa to be downgraded to sub-investment grade. We breathed a sigh of relief in December 2016 when South Africa averted the downgrade. However, our worst nightmare is now a reality! As a small business owner, it is important to figure out how will this and other impending downgrades impact your business and how can you minimise the impact?
Firstly do not panic! The downgrade relates to the dollar denominated government debt. This only makes up 10% of the total of the government debt. The rand denominated debt has not been impacted. However, with the growing government deficit, there is an increased need to borrow money outside of South Africa.
The South African government will attract higher interest rates on their borrowings outside of South Africa and, with the rand weaker against the dollar, the rand amounts paid for the interest will be even higher. This will push government to spend more on interest payments, reducing the amount remaining in the coffers to run South Africa, increasing the deficit and, as a result, increasing the need to further borrow… creating and perpetuating the cycle.
To avoid the above scenario, government has to collect more revenue in South Africa in order to avoid going to borrow from overseas. Government will do this by hiking taxes. Corporate tax is currently at 28%; we can see it going back to 35% that it once was. VAT would most likely increase as well so as to increase the amount of revenue collected. The tax rates are out of any business’ control but a good tax expert can assist you in minimising your tax liability.
With the weaker rand, we will see the increase of fuel by next month, which will automatically increase expenses for many businesses. OPEC has agreed to cut oil production and are trying to get crude oil to about $55 a barrel. The petrol increase next month can be expected to be quite steep, possibly close to R2 more per liter.
If your business is heavily dependent on transport, alternatives could be better fleet management or outsourcing. As part of the fleet management, monitoring driver behaviour, seeking out shorter routes for the transportation and regularly servicing vehicles to ensure efficient fuel consumption should alleviate the strain in that every little bit will help. If transport is not core to your business, outsource it. Remember to lock in the fees for a year to protect your business from the volatility of fuel prices.
Inflation was projected to fall within the three to six percent target range by the last quarter of 2017. Unfortunately, this is now unlikely with the weaker rand and increases in prices from fuel and food to labour costs. So we can expect high inflation to continue into 2018.
The strike and labour wage season will soon be upon us from May 2017. Consumers are already feeling the pinch as salaries are barely keeping up with inflation. The labour force will demand higher wages thereby increasing the labour costs of many businesses in South Africa. This is the time to play open cards with employees, with regards to what is really possible in terms of increases. Businesses may have to forgo increases in order to save jobs and avoid retrenchments.
If your business has debt and the repayments are becoming unaffordable, approach the creditors and renegotiate your terms so that they are more manageable. This would release some cashflow for the business to cover increasing expenses.
Try to increase cashflow within the business and manage it more closely. Negotiate earlier payment terms with large corporates and government. Corporates can get enterprise development points for paying SMM’s early. Collect on all your outstanding debt when it becomes due, don’t be lax about this. Negotiate longer payment terms with your suppliers.
Entrepreneurs are known to be optimists. It is important to maintain a positive outlook over the next couple of years as South Africa tries to regain its political and economic stability and gets its credit rating restored. South Africa has done it before and it can do it again.
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