Junk Status: 3 Challenges Facing Your Business

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It’s been a tumultuous couple of weeks for South Africa politically and economically. Finance minister Pravin Gordhan was ousted from his position in a midnight cabinet shuffle, South Africa was downgraded to junk status and countrywide protests were led against Jacob Zuma. But how will the chaos affect SME’s? Find out what difficulties your business may soon face, so you can adapt accordingly…

Credit Ratings: What’s All the Fuss About?

Credit rating agencies such as Moody’s Investors service, Fitch Ratings and Standard & Poor’s are companies that assign sovereign country’s credit ratings. These ratings or grades signify a country’s ability and willingness to repay debts in the form of bonds (read: money) borrowed from other countries and international organisations.  Very simply put, if a country rates below a BBB- they are considered non-investment grade (aka junk status). This tells other sovereign wealth funds and investors that South Africa is a very risky investment option.

How Will South Africa’s Junk Status Affect Me?

Overheads:

If you have loans linked to the prime lending rate you will have to pay more to service the debt and business property bonds will exact higher monthly installments, which will push up your business overheads. To manage creeping overheads, review your finances and work to eliminate any excessive debts you have. Also, you may struggle to access capital to start or expand your business as banks are already increasingly unwilling to approve loans and in this economic climate they will only become more reluctant. This doesn’t mean you can’t set-out by yourself, but you need to think out-of-the-box about how to raise capital. There are many innovative ways to go about self-funding or bootstrapping business capital – get some inspiration here.

Employees:

National economic instability will put pressure on SME’s to cut costs across the board. This will potentially stop you employing new staff or even mean laying people off. You need to be prepared to triage elements of your business spending responsibly and timeously.  Invest in cross-training to maximise productivity with a limited staff and make sure your HR department is equipped to deal with retrenchments compassionately and legally. This will ultimately help soften the blow of potential austerity measures on your business and on your employees.

Consumers:

A rise in inflation and interest rates is going to put a dent in consumers’ confidence in the economy and leave them with less disposable income. This could hurt your business as consumers become reluctant to spend money on non-essential services and products. Think about how your products and services will fair in a country heading into recession – would it be worth diversifying? Targeting different markets? Perhaps re-evaluating existing marketing strategies? Or finding more cost-effective IT and accounting systems? Regularly evaluate how you can make your business more robust and competitive – this will mean you won’t be left implementing a host of reforms when it’s a little too late.

Don’t let economic shifts damage your business: Contact RBK Business Accountants to get valuable business, investment and accounting advice and ensure your business’ success.