In this newsletter, we will take a look into some of the main areas where South Africans and South African businesses can expect to feel the impact of the downgrade. We will also venture into some helpful suggestions for you and your business’ finances and how we at Meredith Harington are looking forward to adding value to our clients in the process.
The first and most obvious expected impact is an increase in interest rates. This immediately presents a cash flow risk to all individuals and businesses with significant debt, as the same principal amount borrowed will now require a higher monthly payment due to increased interest. Where possible, it makes sense to extinguish short term debt normally subject to higher interest rates as soon as possible (e.g. credit cards, personal or short term loans, etc.) so that monthly payments going forward can be focussed on repaying long term debt (e.g. vehicle financing, mortgages etc.).
In addition to higher interest rates, it is further expected to become increasingly difficult to obtain funding, which will affect many start-up businesses. When an entrepreneur therefore approaches an investor for funding, the bar is just that little higher, which makes it essential to have a prudent and robust business plan and realistic and accurate cash flow forecasts.
Increased interest rates may dampen the appetite of those looking to invest in property, which may impact property prices. The flipside of this coin is that the demand for rent can be expected to increase which can lead to increased market-related rent. The full impact on the property market remains speculative at best, but it is worth keeping a close eye on developments if you are heavily invested in this sector.
A weakening rand increases the cost of imports. One of the most significant imports affected is of course the fuel price, which then has a domino effect on the prices of many other consumer goods, including food prices among many others. Increased prices lead to higher inflation. So what does this all mean? In the context of local businesses, the cost structure and profitability may be significantly affected in instances where input costs are increasing more significantly than sales prices can be adjusted and negotiated with customers. In this environment it becomes essential to remain aware of how profitable your business is so that any concerns can be addressed earlier rather than later. Having an appropriate budget against which results can timeously be measured is key to identifying any loss of operating margin as well as excessive or avoidable cost incurred.
In a time of uncertainty, investors may be tempted to divest their portfolios and seek greener pastures. It is as important as ever that investors avoid impulsive decisions and focus on long-term goals rather than short-term opportunism. Many a fund manager will attest as to how divesting and re-investing elsewhere at the inappropriate moment can have a destructive impact on an investment portfolio. South African based investments in general were already market adjusted for the impact of an expected downgrade, which softened the immediate blow to the JSE. Well-balanced portfolios may require very little adjustment given that most already incorporate diversified asset classes and offshore exposure. In any event, avoiding rash changes and consulting with your financial advisor before making significant adjustments to your investment portfolio is recommended.
At this point in the article many will have noticed that we have not yet made mention of the proverbial elephant in the room. The implication of a downgrade in the credit rating of the South African government means that the cost of government borrowing increases. Furthermore, many institutions such as banks are not allowed to invest in junk status debt, so the government will need to borrow from sources that are willing to invest in higher risk debt, and for this they charge a higher borrowing cost. The higher borrowing cost necessitates increasing taxes, reining in spending or a combination of both. The 2016/17 budget speech already unveiled various increased tax rates, a trend that following the downgrade status is likely to continue. This increases the need for effective and appropriate tax planning.
The American country music singer, television host, actor, and businessman, Jimmy Ray Dean, once famously said, “I can't change the direction of the wind, but I can adjust my sails to always reach my destination.” These are wise words to live by in our current climate of change, and perhaps this is the ideal time for businesses to internally challenge the status quo by having a fresh look at business structures, tax planning, investment related fees, cost structure, suppliers, revenue forecasts and cash flow projections. The same principle can of course be applied to personal finances, for example by ensuring your remuneration package is still structured in the most tax-efficient way.
At Meredith Harington, our more than 38-year history gives us vast experience, judgement and wisdom in understanding our clients in order to add value to them and their businesses. Our entrepreneurial approach demonstrates our commitment to enhancing our clients' wealth in addition to ensuring their compliance with legislation and regulation. The services we offer to our clients are tailored to their needs, and that includes providing the solutions and services required to make relevant and appropriate financial and business decisions. In the context of this article, that includes providing financial solutions that enable our clients to adapt to challenges and mitigate business risks identified. Examples of services our clients may find useful are:
- Monthly accounting services and preparing monthly management accounts – enabling our clients to maintain up-to-date accounting records to monitor performance and profitability;
- Tax services including international tax and setting up effective and appropriate tax structures;
- Financial and strategic business planning;
- Budgeting, forecasting and cash flow management;
- Business efficiency reviews;
- Business valuations;
- Finance training;
- Advice on business structures;
- Preparing initial business plans for start-ups;
- Compilation, independent review or audit of financial statements;
- Forming and administrating trusts; and
- Estate planning as well as preparation of wills and acting as executor.
In short, we deliver more than just an audit: we go beyond the numbers. We see ourselves as trusted business advisors offering practical solutions to our clients in changing times. If this article has struck a chord with you, please feel free to give us a call. We would welcome the opportunity to discuss how we can add value to your business and help you weather the storm.