In business, just as in life, it is not the situation but the way you respond that matters.
The macroeconomic environment that we may be operating our business in, can be conducive or not-so but that should not prevent us from strategizing the best approach towards 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 us 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
Looking at interbank borrowing rates is perhaps the best high frequency data point that gives a reliable view of the credit markets. Undoubtedly, credit markets give a good overview of the current economic situation domestically.
Prolonged credit squeeze can imply slowdown in business activity and consequently growth, and the opposite could lead to higher domestic demand and higher consumption as well as investment activity.
Here are three ways SMEs can interpret and optimize any credit market situation.
As an SME when we find bank loan disbursal increasingly on tougher terms and the inter-bank lending rates climbing, it may be reasonable to anticipate lower domestic demand in the coming quarters. 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, you need to look at adopting more efficient methods of operating such that you keep a tight lid on costs or lower costs through adoption of technology or through 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 of venturing out 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.
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 disposable incomes of consumers rise. In the backdrop of tight credit market situation, a policy loosening will prop demand.
However, the effect of the benign policy on domestic demand conditions can take upto 6 months to come to play. SMEs would be prudent to gauge if the policy loosening is a one-off measure or just the first for the few measures taken by the government 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 expansion in policy may well mean that domestic markets will be vibrant enough to operate in half a year’s time.
3. Easy credit markets = borrowing today to expand/raise efficiency
For most SMEs, easy liquidity conditions should be opportunities for growth or raising efficiencies or both. An easy liquidity conditions mean that bank loans are easier to obtain and cost of borrowing is low. Such a macroeconomic environment is opportune for foraying into new markets – but only post doing a feasibility study around doing so.
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.
Following the above steps can help SMEs optimize credit market situations no matter what. And as always, make sure to use the right small business accounting software to help expedite all of your financial needs.
Ketaki Sharma is the Founder and CEO of Algorithm Research, a bespoke analytics and research firm based out of the UAE. Algorithm Research was a part of Y-Combinator startup school as well as past winner of various regional entrepreneurship awards.