JUNE 2006
Changing economy changes business stakes

by Randal Godden, Chairman and CEO, at TEC South Africa
This article was first published in Real Business, a supplement to Business Day which appears on the third Monday of every month.

At the time of writing, the Rand exchange rate has effectively devalued by about 20 % - the Rand / Dollar is at R7.25 and the Rand / Euro at R9.10. This will obviously have a significant impact on the economy, and it is crucial to make a strategic evaluation of the likely effect this will have on your business. The impact will vary depending on your particular segment and the range of your commercial dealings, but the following provides a few indicative areas and some matters to consider.

If you are an importer, your cost of materials and/or products will bear the increase. The first consideration is how to protect your profit margin, whether you can pass on a price increase and what the profit impact will be. The second consideration is the effect on Working Capital; the Inventory value will increase and so will your Creditors, but the most significant impact will on Debtors or Accounts Receivable, which should escalate by the effective price increase.

Questions to consider are whether this will exhaust your finance facilities or whether you are operating well within your limits. In either case, it’s prudent to inform your financing institutions of any change and keep them informed.

As an exporter, there is increased opportunity for competition in overseas markets. Do you maintain your prices in foreign currency or is this an opportunity to modify prices and increase volume? Or, does this enable you to penetrate new markets? If you are experienced in exports, you will be aware that it is a longer-term customer relationship, and decisions taken need to be considered in that light.

The manufacturing sector should experience an easing of competitive pricing from imports, which, in most instances, could create a window of opportunity. This may result in either increased volumes through more, attractive local pricing, or in price increases to improve lagging margins, or a combination of the two. However, it is imperative that this be done as a strategic review, taking into account key customers, product groups and relevant competition. Also ensure that decisions taken are adequately and considerately discussed with customers to ensure there is an understanding and a continuation of the relationship.

The mining industry should benefit directly as most commodities are quoted in foreign currency, potentially creating a windfall. Still, it is essential that the impact be carefully evaluated and well communicated to all stakeholders.

Exchange rates will place price pressure on a wide range of goods and services, which is significant for the business community at large and, for that matter, consumers too. This pressure will come from the direct impact of the increase in price of imported goods as well as the knock-on effect of parity pricing of local goods and services. Accordingly, it is a time to consider cost containment as a strategic activity to protect margins and preclude rampant inflationary activity.

Interest rates will come under severe scrutiny, and the cost of funds will undoubtedly rise in the second half of 2006. It is likely that this will also result in tightening of credit by financial institutions.

This would be a good time to ensure that your balance sheet is well managed, particularly your working capital. Also ensure that your financiers are fully informed of your position and plans.

The intention with this alert is not to predict “doom and gloom” but, rather, offer a strong recommendation to take a strategic re-valuation of your business and implement appropriate action plans that are consistent with that evaluation.

Remember that there is a threat in every opportunity and opportunity in every threat or problem. Our job as leaders and managers is to see and grasp those opportunities.