3 Economic Tips SMEs Should Follow

In business, just as in life, it is not the situation but the way you respond that matters.

The macroeconomic environment in which we may be operating our business can be conducive or unfavorable, but that should not prevent us from strategizing the best approach to growth and expansion.

Most SMEs have their fingers on the pulse of the market and know the markets that they operate in better than someone with a 9-to-5 job. Market knowledge (in terms of liquidity, demand conditions, and so on), when combined with anticipated monetary or fiscal policy, can help SME owners formulate effective strategies to optimize growth.

Thus, closely watching the Central Bank policy rate action and fiscal policy on taxation can be crucial to making the most of today but should also govern our strategies for tomorrow.

3 economic tips for SMEs

Interbank borrowing rates are perhaps the best high-frequency data point that provides a reliable view of the credit markets. Credit markets undoubtedly provide a good overview of the current domestic economic situation.

Prolonged credit squeezes can imply a slowdown in business activity and, consequently, growth, while the opposite could lead to higher domestic demand, consumption, and investment activity.

Here are three ways SMEs can interpret and optimize any credit market situation.

1. Strained credit market + policy tightening = geographic expansion/cost reduction

As an SME, when we find bank loan disbursals increasingly on tougher terms and the inter-bank lending rates climbing, it may be reasonable to anticipate lower domestic demand in the coming quarters. The higher cost of funds in the economy translates into lower demand for goods and services through the consumption and investment channels.

Tighter monetary policy (or increasing interest rates) or contractionary fiscal policy (increasing taxes) in an already strained credit market environment (potentially due to large capital outflows or huge government borrowing) can further reduce disposable incomes and reduce effective demand.

SME owners need to prepare for tougher demand conditions and limited pricing power. In doing so, they need to consider adopting more efficient operating methods that keep costs low or lower through technology or input substitution, whichever is feasible in our context.

Sometimes, expanding into newer markets can also be a good strategy, particularly when the new market’s government policy is supportive of businesses. Undoubtedly, expanding into new markets is easier said than done. High initial costs can be a deterrent, and not getting a feasibility study or market entry strategy done may make the venture riskier than it needs to be.

2. Strained credit market + policy loosening = stronger market demand within 6 months

In a macroeconomic environment where the government is loosening monetary policy (lowering interest rates) or fiscal policy (cutting taxes), we will likely see stronger consumption demand as consumers' disposable incomes rise. A policy loosening will prop up demand against the backdrop of a tight credit market.

However, the benign policy's effect on domestic demand conditions can take up to 6 months to manifest. SMEs would be prudent in gauging whether policy loosening is a one-off measure or just the first of the few measures the government takes to stimulate domestic demand.

A one-off policy expansion could have limited benefits and may imply formulating a strategy to target higher efficiency or market expansion. A sustained policy expansion may well mean that domestic markets will be vibrant enough to operate in half a year.

3. Easy credit markets = borrowing today to expand/raise efficiency

For most SMEs, easy liquidity conditions should be opportunities for growth, raising efficiencies, or both. Easy liquidity conditions mean that bank loans are easier to obtain, and the cost of borrowing is low. Such a macroeconomic environment is opportune for foraying into new markets, but only after conducting a feasibility study. 

Cheaper credit can also help when an SME is contemplating upgrading technology to raise efficiency. Such moves require high initial investments but translate into lower operational costs in the medium term. 

Conclusion 

Following the above steps can help SMEs optimize credit market situations regardless of the situation. Prioritizing cost-effective strategies, investing in scalable technology, and maintaining a flexible approach to market changes will help small and medium-sized enterprises not only survive but thrive in a competitive landscape.

By combining effective economic strategies with the right business service providers, SMEs can navigate any market condition.