Thriving in tough economic times

In today’s economic climate, South African small and medium enterprises face a formidable challenge: persistent inflation that continues to erode profit margins and complicate financial planning. As costs rise across the board – from raw materials to energy, labour, and transportation – many business owners find themselves struggling to maintain profitability without sacrificing quality or raising prices beyond what the market will bear.

Understanding the current inflation landscape

Fluctuations in South Africa’s inflation rate create an unpredictable business environment. While the South African Reserve Bank (SARB) targets inflation between 3 and 6%, various economic factors have pushed costs higher for businesses across multiple sectors. The recent VAT increase from 15.0% to 15.5% (effective May 1, 2025) adds another layer of pressure to already strained business budgets, with a further increase to 16.0% planned for April 2026.

For businesses operating on thin margins, even small percentage increases in costs can significantly impact overall profitability. The VAT increase directly affects pricing strategies, cash flow management, and administrative processes for all registered businesses. Without proactive management, these rising costs can quickly spiral into serious cash flow problems.

Responding to the VAT increase

The 0.5% VAT increase requires immediate attention from business owners:

• Update your systems: Ensure accounting software, point-of-sale systems, and invoicing processes are updated to reflect the new rate.
• Review pricing strategies: Determine whether to absorb the increased VAT or pass it on to customers. Consider the competitive landscape and customer price sensitivity when making this decision.
• Communicate with customers: If passing on the VAT increase, provide clear communication to customers about the reason for price adjustments.
• Check for zero-rating opportunities: The expanded list of zero-rated food items may benefit businesses in the food sector. Talk to your accountant to understand if any of your products now qualify.

Strategic cost management approaches

Smart business owners recognise that controlling costs requires more than simple cost-cutting. It demands a strategic approach that preserves business value while identifying inefficiencies. Here are several effective strategies:

• Conduct regular spending audits: Review all expenses quarterly to identify unnecessary costs or services that no longer provide adequate value. This process often reveals subscription services, underutilised software, or inefficient processes that can be optimised.
• Renegotiate with suppliers: Many businesses accept existing supplier terms without question. However, in the current economic climate, suppliers may be willing to offer better terms to retain reliable customers. Consider consolidating orders with fewer suppliers to increase buying power.
• Embrace technology: Automation and digital tools can significantly reduce labor costs while improving accuracy. Cloud-based accounting systems, inventory management software, and customer relationship management tools often pay for themselves through increased efficiency.
• Review staffing models: Consider flexible staffing arrangements, including part-time specialists or outsourced services for non-core functions. This approach can provide access to expertise without the overhead of full-time employees.
• Optimise inventory management: Excess inventory ties up capital and creates storage costs. Implementing just-in-time inventory systems or negotiating consignment arrangements can free up working capital.

Financial planning in uncertain times

Beyond cost control, businesses need robust financial planning to navigate inflation and tax changes successfully:

• Create scenario-based budgets: Develop multiple budget scenarios based on different inflation projections and the upcoming VAT increases. This approach helps businesses prepare contingency plans rather than reacting to changes as they occur.
• Implement regular forecasting: Monthly or quarterly forecasting allows businesses to adjust strategies based on real-time data rather than waiting for year-end results. This agility is crucial during periods of economic volatility.
• Consider price elasticity: Understanding how sensitive customers are to price changes helps businesses make informed decisions about when and how to adjust pricing. Some products or services may allow for price increases without significant impact on demand.

Now, more than ever, a partnership with a qualified accountant will help you develop comprehensive strategies to not just survive inflation and tax increases but position your business for sustainable growth even in challenging economic conditions.