June 27, 2022

Tough Economic Times: Effects of Inflation on Small and Medium Enterprises in Kenya

Shailja Sharma

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Over the past three to four years, small business owners have had to grapple with increases in the costs of supplies and services required to run their businesses. The COVID-19 pandemic and associated supply chain disruptions hiked prices as access to goods became harder. As economies opened up last year, people were able to spend their money again. Demand for certain goods and services increased, which put further pressure on supply chains and businesses, further driving up costs. Furthermore, shifts in the labour market globally led to higher wages, adding to the operating costs of many businesses. The war in Ukraine and sanctions on Russia have hiked up fuel and food prices. Shipping costs increased with the hike in fuel prices and many businesses had to deal with stock outs and increased waiting time for raw materials, which slows down production. These factors combined have raised the costs of running a business and many Small Medium Enterprise (SME) owners are forced to ask themselves some tough questions. Should they raise their prices to counter inflation? Would their customers accept these higher price points? To reduce their overhead costs, should they reduce their inventory, slash their market budgets and lay off some of their employees? How can they manage to reach their margins and remain profitable with the rising costs?

Inflation measures the progressive increase in the price of goods and services over a set period. Typically, as the cost of products and services goes up, consumers start buying less. Although the word ‘inflation’ has negative connotations, in the US, the Federal Reserve aims for an inflation rate of 2 per cent per year because if it is too low, the economy weakens. However, if it is too high, this will create financial burdens for both consumers and businesses.

Economists predict that in the long run, this inflation will level off at some point and some sense of normalcy may return. Businesses need to make some important choices; do they stay lean or focus on growth? Do they cut back on non-essential costs and reduce their production costs? How can they spend more time marketing with a reduced budget to boost sales? How can their level of investing keep up or outpace inflation? Can they restructure and embrace technology to improve productivity and reduce overhead costs?

As entrepreneurs try to figure out how to absorb higher costs and how much of these extra costs they can pass on to consumers, they may resort to taking on debt. They must revisit their business plans and adapt to the changes in the environment by coming up with new forecasts. Taking an audit of current costs and re-engineering processes to cut out inefficiencies and adopting lean manufacturing principles may help to reduce unnecessary costs. Conducting an audit of their prices and competitors’ prices and market surveys may also help them decide whether price increases will raise their profit margins and how consumers will respond.

About the Strathmore Entrepreneurship Development and Innovation Centre (SEDIC)

Strathmore Entrepreneurship Development and Innovation Centre (SEDIC) is the entrepreneurship arm of Strathmore University that aims to empower SMEs and MSMEs across the continent with a presence in 9 African countries, including Kenya, Uganda, Tanzania, Rwanda, Nigeria, Zambia and Ghana.

According to the World Bank, SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development. They represent about 90 per cent of businesses and more than 50 per cent of employment worldwide. Formal SMEs contribute up to 40 per cent of Gross Domestic Product (GDP) in emerging economies. These numbers are significantly higher when informal SMEs are included.

In the last 12 years, SEDIC has impacted about 12,000 SMEs in East Africa through various entrepreneurship training Programmes along with coaching and mentoring services. Over the years, SEDIC has also partnered with global and local organisations such as International Finance Corporation, Executive Office of the president (SME Advisory Unit), International Trade Centre (ITC), Oxfam, Bank of Africa, British Council, NCBA Bank, ABSA Bank, Family Bank, Ministry of Industrialization, Mpesa Foundation Academy, American Embassy, USAID, Aljamea, Conrad Hilton Foundation, among others.

Article by Shailja Sharma, Executive Fellow and Coach

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