Financial Strategies for Africa’s Women-Owned Businesses in the Midst of Inflation
Sub-Saharan Africa is facing one of the most challenging economic environments in years, marked by a slow recovery from the pandemic, rising food and energy prices, and high levels of public debt. One of the most urgent issues confronting the region is the need to tackle decade-high levels of inflation—which are devastating incomes and food security—while also supporting growth.
Understanding the Concept of Inflation
Inflation is the increase in prices of goods and services in an economy over time. This can be caused by a number of factors such as increases in money supply, increases in government spending, or declines in the value of currency. While it is considered a normal feature of the economy, it can either be too low (meaning that consumers put off spending their money with businesses) or too high (meaning that businesses struggle to set prices as demand outstrips supply).
Inflation has been rising following the combined aftershocks of the war in Ukraine, climate change, a global pandemic now in its third year and sharp increases in food and energy prices. Using the term ‘polycrisis’, World Trade Organization (WTO) Director-General, Ngozi Okonjo-Iweala, warned that the situation could prove catastrophic for the world’s most vulnerable countries and usher in a devastating new era of debt and dependency.
The Impact of Inflation on Women-led SMEs in Africa
Although African women entrepreneurs own 40% of Africa’s SMEs (small and medium-sized enterprises), they tend to be smaller, have fewer employees and typically do not have as many sales and profits as their male counterparts, making them a lot more vulnerable to global economic shocks like those the world is currently facing. There are a number of challenges that women entrepreneurs face due to inflation.
When prices rise, it doesn’t just affect consumers. Firstly, inflation can lead to higher costs for goods and services. Businesses will have to pay more for the inputs they need in order to produce their products or services. For example, if the cost of raw materials goes up, businesses will have to charge more for their products in order to cover these costs. As they pay more to buy materials and products, businesses are affected by supply pressures; they may have to wait longer until stock becomes available (and then face increased shipping costs).
Wages also increase as employees ask to be paid more to compensate for increasing inflation—or move jobs altogether, which could lead to labor shortages.
In addition, inflation can also lead to a decline in the value of the currency. When the value of a currency declines, people have less purchasing power and they can buy less with their money. As a result, businesses may find it difficult to sell their products or services at the same price as before.
Finally, inflation can also lead to economic instability. It can cause prices to change rapidly, which can create uncertainty and chaos in the economy. Entrepreneurs may find it difficult to plan for the future when there is so much uncertainty about the direction of the economy.
Strategies to Implement Now
Maintaining their businesses and making profits during inflation may seem insurmountable, but, despite the challenges, there are some strategies that women entrepreneurs can use to overcome these challenges.
Cut Costs
Cancel non-essential subscriptions or unwanted services. In a 2020 SaaS (Service as a Software) Trends Report, the average company wastes around $135,000 annually on SaaS tools they don’t need or use. At the same time, abandoned subscriptions are increasing by as much as 100%.
Conducting a thorough audit of the company’s bank statements can save you money. If you notice a regular payment, check if it’s something you regularly use. If not, it could be worth cutting back. If you can go back a year, you might also pick up on annual payments that auto-renew like travel insurance or other online services.
Postpone big-ticket purchases immediately. In a recent CNN interview, Amazon founder Jeff Bezos cautioned small business owners to avoid large capital expenditures and defer purchases that are not immediately necessary. There is a danger with year-end festive spending to splurge; however, it’s imperative that they keep their costs down as much as possible.
Increase Efficiency and Optimize for Productivity
It may sound counterintuitive, but business owners can maintain profitability by investing in productivity improvements. By increasing the efficiency of your business, you can offset some of the effects of inflation. Consider automation and digital solutions, which will help to reduce errors and increase efficiency while streamlining processes.
Move further toward remote working where possible (if this is not in place already). Employees can benefit from less commute time and better work-life balance, while businesses avoid wage-growth pressures. A July 2022 study from the National Bureau of Economic Research (NBER) found strong evidence that remote work decreased inflation. Namely, because employees strongly prefer mostly or full-time remote work, they are willing to accept lower wages to work remotely. As a result, the researchers found that remote work decreased wage growth by 2 percent over the last two years.
Revisit Your Pricing Strategy
It's important to stay up-to-date on the latest price changes so you can maintain profit margins. However, simply raising prices amid inflation has the potential to hurt customer relationships, so endeavor to be flexible. This means being willing to adjust prices according to market conditions, and it also means being willing to offer discounts during periods of high inflation. The team at McKinsey & Company have developed A.D.A.P.T., a 5-step change management process for business owners to assess and navigate price changes. ADAPT is an acronym that stands for Adjust, Develop, Accelerate, Plan, Track.
Adjust: Business owners are tasked with accurately evaluating revenue generated from every transaction, limiting unnecessary erosion, and maintaining a disciplined, value-based margin level.
Develop: It is important for companies to understand the art and science of price changes. This requires deep-dive knowledge and insight into customer behavior, their expectations on value and what they’re willing to pay for.
Accelerate: While price changes during inflation should be executed thoughtfully, business owners are encouraged to make decisions quickly so that they can test the market, evaluate feedback and adjust accordingly.
Plan: McKinsey notes that leading companies go a step further by looking beyond pricing and redesigning products and services most affected by inflation.
Track: As with all operations in business, it is important to measure the performance of price changes. Analyzing the captured data will inform the team’s next steps in the process.
When implementing these processes, remember to keep customers informed. Let them know about any price changes so they can plan ahead. This will help keep them from switching to competitors who may be offering lower prices.
Additionally:
Seek advice from financial professionals: When it comes to business finance, one of the four common mistakes women make is not consulting a financial professional to make the right decisions for their businesses. Financial advisors can lend expertise and perspective in the industry to help a business grow and navigate through an uncertain economy.
Consider hedging against currency risk: This means taking steps to protect the business from any potential declines in the value of the local currency. For example, consider investing in foreign currencies or assets, or entering into contracts that lock in the exchange rate for a certain period of time.
Build a cushion into the business budget: Inflation can be unpredictable, so as a next step from the point above, it's important to make a plan to have some extra money set aside to cover unexpected costs.
Stay abreast with the news: It is crucial for women entrepreneurs to keep themselves updated on current economic conditions. This includes keeping track of announcements by central banks, tracking indexes such as the CPI, and reading economic journals and newspapers.
Rally a network of like-minded entrepreneurs: Having a supportive network—including those who have been through it before—can be crucial to ensuring a healthy entrepreneurial journey. Seasoned entrepreneurs can provide you with practical advice and share guidance based on their successes and mistakes.
With economists forecasting the current economic climate will last well into the coming year, it’s important that women entrepreneurs prioritize how they want to manage their businesses, particularly over the next few months. We noted at the beginning of this article that women-led SMEs are often smaller in size, and while that might be seen as a disadvantage, smaller means more nimble, which allows for agility and adaptability!
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