Halfway through the year, how ready are SMEs for the next six months?

As small and medium-sized enterprises (SMEs) approach the midpoint of 2025, they have been urged to conduct a comprehensive financial health check.

This proactive audit is essential for navigating the current economic climate and ensuring sustained growth in the second half of the year, according to SME services provider Lula.

“The economic landscape continues to present a mix of challenges and opportunities for SMEs,” Garth Rossiter, chief risk officer at Lula said.

South Africa’s SME enterprises are the backbone of the economy, contributing over 50% to employment and 34% to GDP, and the macroeconomic outlook in which they operate is certainly improving.

The RMB/BER Business Confidence Index hit a five-year high in Q4 2024, while consumer confidence rebounded to pre-pandemic levels.  

“Positive shifts are definitely emerging, power supply is more stable than before, and consumer spending shows signs of recovery. Despite lingering higher operating costs for businesses, the significant drop in inflation and declining interest rates make the future look brighter than it’s been in recent times,” Rossiter further added.

As domestic demand recovers, SMEs that invest now stand to gain market share and avoid late-cycle competitive pressures.

Rossiter said that access to finance remains a key hurdle for many, with traditional lending models often not suiting the needs of smaller and early-stage enterprises.

Global geopolitical events and domestic logistical challenges continue to impact supply chains and overall confidence.

"The agility and resilience of South African SMEs are consistently put to the test. The halfway mark of the year is not just a calendar event; it's a critical juncture for self-assessment. A thorough financial audit now can identify areas of strength to leverage and weaknesses to address, ensuring businesses are optimally positioned to thrive," he said.

.To gauge their financial health and strategies for the remainder of 2025, Rossiter recommended the following practical steps:

1.  Revisit Budget vs. Actuals: Compare your year-to-date income and expenses against your initial budget. Identify significant variances. Are revenues lower than projected? Are costs, particularly those influenced by inflation like fuel and utilities, higher than anticipated? Adjust your budget to reflect current realities and future projections.
2. Assess cash flow: Cash is king for SMEs. Analyse your cash inflow and outflow patterns. Are customer payments timely? Are you managing supplier payments efficiently? Calculate your cash flow runway – how many months can your business operate with its current cash reserves? In South Africa's environment, where payment delays can be common, robust debtor management is crucial. Consider offering early payment discounts or implementing digital invoicing to accelerate receivables.
3. Review key financial statements: Income statement: Examine your gross and net profit margins. Are they shrinking? This could indicate rising input costs or ineffective pricing strategies. Balance sheet: Understand your assets (what you own) versus liabilities (what you owe). Are your debt levels manageable, especially with current interest rates? Cash flow statement: Provides a clear picture of how cash is generated and used within your business. Look for trends and potential bottlenecks.
4.   Evaluate debtor days and working capital: Debtor days: How long does it take for your customers to pay you? High debtor days can severely impact liquidity. Working capital ratio: Do you have enough short-term assets to cover short-term liabilities? This ratio is vital for operational liquidity. Adjust for any seasonality in your business.
5. External conditions: Interest rates: With current prime lending rates, assess the impact on existing loans and any plans for new credit. Explore fixed-rate options if suitable. Load shedding contingencies: Although greatly improved, consider any residual costs of power backup solutions (generators, UPS maintenance) and potential productivity losses that still affect your operational expenses and break-even point. Inflation and rand volatility: How are these impacting your procurement costs, pricing, and profitability? Re-evaluate goals and forecast:Based on your financial review, are your initial business goals for the year still realistic? Adjust your targets and create a rolling forecast for the next six months, incorporating anticipated revenue, expenses, and capital needs. This foresight allows for proactive decision-making.

"This mid-year financial health check isn't just about identifying problems; it's about empowering small business owners with actionable insights," Rossiter said.

For those who identify financing gaps or require funding for strategic growth, Lula remains committed to providing flexible, tailored solutions to support their journey toward a successful second half of 2025.

BUSINESS REPORT

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