These are particularly challenging times for small and medium entrepreneurs. Record breaking interests rates and double digit inflation coupled with rising electricity tariffs and high fuel prices are all conspiring to make doing business almost impossible.
Although the shilling seems to be gaining lately, and inflation dropping from 30.4 per cent in October to the current 27 per cent, the marginal changes are yet to have a significant impact on the market .
Interest rates on loans have remained high, meaning the SMEs who constitute up to 90 per cent of the private sector will find it difficult to borrow because they cannot afford to service the loans at an average interest rate of 30 per cent.
For that, the likes of Badru Ssentongo and Margaret Birungi, all traders, are considering suspension of their wholesale and boutiques businesses till the economy gets better. While Zubair a trader in South Sudan who relies on goods from Kampala plans to cut down on the volume of his re-export trade, saying it is no longer tenable.
Aggrey Mutazibwa, a supermarket proprietor wants to slash the salary of his staff drastically to stay afloat. These are some of the predicaments that SME proprietors are dealing with. This sector employs more than three million people on top of contributing over 70 per cent to Uganda’s total Gross Domestic Product .
“Access to finance is one of the key determinants of SMEs survival and growth; the present high inflation and high commercial bank interest rates are hitting them the hardest,” Trade and Policy analyst, Uganda National Chamber of Commerce and Industry, John Walugembe said in an interview last week.
This, he adds, is exacerbated by the fact that SMEs do not have huge resources to keep them afloat like their larger counterparts. For instance being small, they cannot cut back on the number of staff they employ. And they tend to be heavily dependent on credit and cannot rely on a wide range of financing options like listing on the stock exchange to raise funds.
According to UNCCI trade and policy analysts, different SMEs will be affected differently as they endure the hard times he described as “credit squeeze” although, generally the majority, he said will experience a drastic drop in the demand of goods and services, disrupted cash flows due to the tightening of credit terms, increased payment delays on receivables leading to an acute shortage of working capital and a decrease in liquidity leading to increased defaults, insolvencies and bankruptcies.
However, the economic challenges carry both risk and opportunity for SMEs. And depending on how they respond to market and react accordingly, this will be an opportunity for them to not only stay afloat but grow as well.
“This is the time that SMEs need to embrace customer care more than ever before,” Ruth Musoke Biyinzika, PSFU director for membership said last week. Ms Biyinzika, who also owns three boutiques in Kampala said times like these calls for repackaging businesses and if one cannot stay afloat then it is time to close shop.
The Executive Director, Enterprise Uganda, Charles Ocici warns against borrowing for consumption. He is actually of the view that times like these are bad for borrowers. He contends that servicing the loans will not only eat into the profit but chances of default seem quite high.
“Only people who are sure that they will succeed can borrow for investment, but you are better of depending on your own savings or if you must borrow get it from cheap sources like cooperatives or from friends and family,” he said.
“And remember you understand your situation better than anybody else. So do not do things that will make you lose sleep.”
According to Uganda Chamber of Commerce and Industry, SMEs can stay afloat or even grow, if they spend on investment trying to come up with new things to spur their businesses.
“In this situation, competition for clients and markets will intensify as companies are no longer bound by borders. With the East African Common Market, Ugandan companies can no longer feel safe in the knowledge that their market here is protected from competitors. They should therefore strive to enhance their productivity through innovation,” Mr Walugembe said.
Previously, productivity enhancement used to be regarded as a way of cutting costs through minimizing inputs and maximizing outputs. In recent years, quality has become very important.
SMEs need to focus on improving the quality of both their products and processes, if they are to remain relevant and competitive. And importantly, for SMEs that did not know their customers, it may not be long before there are on their own too.
Analysts also say, no matter the method you use, it is time your business is known.
However, as you do that, Mr Walugembe argues, SMEs must value themselves, their time and resources. He said: “It is useless for you to underprice your products in these hard times, just because you want to sell more than your competitors.”
“Charging less than your competitor, is a loss to yourself, and it is the worst marketing strategy an SME could adopt at this time.”Flexibility or rather an informal and dynamic process, which will allows SMEs to quickly respond to changes in the market and meet the demands of their consumers is highly recommended.
Worth noting is that, success is no guarantee any more, especially in these tough economic times. For all businesses are facing unprecedented pressure to maintain their profitability and growth, and SMEs will have to make some sacrifices to get out of this situation.
But even with the present volatility of the economy, SMEs need to remain optimistic about their prospects. They must not wait for opportunities but must look for them, including from organisations whose mandate among others includes helping SMEs progress. Among these organisations are the Chamber of commerce, PSFU, and Enterprise Uganda among others.