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How your SMBs can navigate an environment of persistent inflation

Global inflation spiked in 2021 as the world started to come to grips with the impact of pandemic-related supply chain disruptions and government stimulus and has remained high since then. Although many economists forecasted that the global situation would change in the first half of 2024, it seems likely that inflation will remain elevated longer than expected.

By South Africa’s historical standards, consumer inflation isn’t anywhere near historical highs and has subsided since 2022. We are also more accustomed to higher inflation than most developed countries. Nonetheless, South Africa is affected by a global cost of living crisis. Prices of services and goods such as electricity, food, healthcare, education, and municipal tariffs are climbing far faster than headline inflation.

Furthermore, the South African Reserve Bank (SARB) won’t start to decrease interest rates until the global inflation narrative changes—meaning higher borrowing costs for SMBs. SARB recently decided to leave the repo rate at 8.25% noting that headline inflation was expected to reach the midpoint of its target range of 4.5% at the end of 2025. This is later than previously forecast.

This environment of sticky inflation is challenging for small and medium businesses (SMBs) that are already struggling in a low-growth environment.  Higher costs of living mean that SMBs’ customers have less money to spend in real terms, which makes it difficult for them to grow their businesses. At the same time, higher input costs threaten to erode their profits because they have limited scope to increase their prices.

In response to this reality, every SMB must take steps to manage how higher prices affect its bottom line and cash flow. There are some difficult trade-offs to be made, but businesses that navigate these challenging times will be stronger when they emerge on the other side. Here are a few ways that your business can survive and even thrive through times of low growth and higher costs:

  1. Sharpen your financial systems and processes

One of the keys to navigating economic uncertainty is keeping your finger on your business’s financial pulse. A cloud-based finance software solution will provide you with the financial insights you need to understand how inflation is affecting revenues and profits. You’ll be able to run budgets and forecasts that help you anticipate how inflation will affect your margins or how raising prices could affect sales. These insights will enable you to make wise choices about cutting costs and increasing your prices.

  1. Embark on a strategic cost-cutting exercise

Most businesses have spent the past few years cutting costs, but there may still be some opportunities to cut back you’re spending. One option is to look at ways of automating business processes so that your existing team has more time to focus on growing your business. Other ideas include reviewing costs for services such as insurance and telecoms when it’s time to renew contracts.

  1. Collaborate with suppliers and service providers

If you don’t have much scope to pass higher costs on to your customers, reviewing your relationships with service providers and suppliers could be one way to cope. Work with longstanding business partners to find ways to bring pricing down. If you can’t negotiate better pricing with existing suppliers and providers, consider working with them to establish more favourable payment terms.

  1. Adjust prices

Your ability to increase your prices depends on factors such as your customers’ ability and willingness to pay, how essential or unique your product or service is, and how able your competitors are to cut or maintain their existing pricing. If you operate in a competitive market and sell discretionary goods, you may have less scope to hike your prices, for example.

There are, however, many ways to tackle pricing:

  • You can charge for extras and value-adds—for instance, you can add a small charge for tomato sauce sachets at your takeaway store.
  • You can bundle services and products to increase your price—for example, offer gutter cleaning as part of your garden service.
  • You can look at cutting frills, like elaborate packaging for your artisanal beauty products.
  1. Optimise accounts receivable

Ensure that cash comes into your business as promptly as possible to reduce the need to borrow money to pay your expenses. Send invoices immediately after a sale or service completion to accelerate receivables. You could also offer customers discounts for early payments to encourage faster cash inflows. A good accounting software solution can help you automate invoicing and follow-up reminders.

Be proactive about persistent inflation

In the face of rising costs, it’s important to be proactive about managing its impact on your business. By making prudent, data-driven financial decisions, working closely with partners and customers, and exploring growth opportunities, your business can not only survive but also thrive in a challenging landscape.