As the year ends now is a good time to reflect on 2023, and the verdict is clear, it has been a challenging 12 months for both businesses and individuals due to the tough economic environment.
We entered the new year after a long national election campaign while tackling the last economic aftershocks of the COVID-19 pandemic. However, since then, the freefall of the Shillings has led to runaway inflation, as the cost of conducting business continues to rise, making it a difficult year.
To complete the misery businesses and individuals are entering the new year expecting a higher cost of credit after banks gave notice of their intention to increase rates following the Central Bank of Kenya’s (CBK) Monetary Policy Committee’s recent decision to raise the base rate to 12.5 percent from 10.5 percent, the highest in 11 years.
If as a business, especially a small and medium-sized enterprise (SME), you managed to navigate the turbulent waters of 2023, hold on because the storm looks like it is gathering momentum and now is a good time to carefully plan because we are entering a turbo-charged Volatile, Uncertain, Complex and Ambiguous (VUCA) environment.
To survive and hopefully thrive in the VUCA environment, business owners should look at some of the biggest risks they face and as mentioned above the cost of credit will be a major one in 2024.
Because interest rates have started edging up in tandem with the base rate hike, managers must now engage with their banks, Saccos, and other financiers early. If your business is already struggling to service facilities, now is a good time to begin this engagement process.
Renegotiating the terms and conditions of loans, for instance, reduction of the interest rate, and extension of the repayment period among other strategies should be jointly explored by both business owners and their lenders.
Where possible SMEs can take advantage of government subsidy programmes or tax breaks.
Another area that SMEs need to plan well ahead is power supply. This year we have seen three national blackouts and Kenya’s energy planners say that rationing or load shedding for some parts of the country is on the table.
Should this happen, businesses most susceptible to power interruptions should plan now on how they will manage this crisis.
For example, manufacturers depend on a constant and reliable power supply because interruptions can result in production downtime or damage to machines. Businesses in the food and beverages on their part must plan for interruptions in power supply to avoid perishable foods becoming spoiled. This challenge is even more dire in the healthcare sector where power supply disruptions can jeopardize the safety of patients.
Business owners that had plans of expansion must relook at these plans carefully. Kenya is rife with examples of companies that went under due to unbridled expansion.
Businesses should also plan for potential tax increases. Our taxation policy has been unpredictable, making planning a challenge. This year businesses and individuals have been battered by increases in statutory deductions including the National Health Insurance Fund (NHIF), National Social Security Fund (NSSF), and the introduction of the Housing Levy. Value Added Tax was also increased on petroleum products.
One way to mitigate all these challenges is for businesses to open a contingent fund.
There is no way a firm or individual can accurately foresee all the risks in the environment, however having a financial plan that incorporates the creation of a reserve fund, will ensure the achievement of competitive edge in the long run while making the business absorb shocks in the short-term.
The good news is that there is consensus that there needs to be more consultation, especially on taxes and the Government is encouraging this win-win approach. Additionally, there is a commitment to begin clearing pending bills which will be a reprieve for SMEs.
Finally, even in a tough environment, there are opportunities. This is when businesses can negotiate for bargains, especially for areas such as buying assets.
Let me take this opportunity to wish you all a prosperous 2024 as you plan to navigate the new year.
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CPA Philip Meeli Ole Kamwaro is a finance specialist