Every business operates within an economic environment and are therefore susceptible to the changes that takes place in the economic policies overtime.
This makes it highly important for businesses to be informed on various ways these policies affect their sales, profitability and overall objectives.
Although, government policies may come in different forms, this short article will only address the implications of Fiscal and Monetary Policy to Small and Medium Enterprises (SMEs).
Fiscal and monetary policies are tools government usually employ to steer the economy towards a particular direction within a period of time.
Specifically, fiscal policy involves the use of revenues and government spending to control the economy. On the other hand, monetary policies involve the use of various monetary tools such as interest rate by the government to control the economy.
It is usually employed to influence the level of money in circulation within a given period so as to achieve a particular economic objective.
Fiscal Policy
Tax collection and government spending are important tools employed by the Federal Government to influence the demand and availability of goods and services; investment; business activities; job creation and pave way for long-term economic growth.
For SMEs, fiscal policy affects consumer demand, cost of doing business, investment decisions and the ability to compete.
Consumer Demand
Tax-related policies affect SMEs through its influence on the disposable income of the citizen. Disposable income is that fraction of your income that is available for spending after tax has been deducted.
Fiscal policy affect businesses by changing the amount of disposable income people need to spend on goods and services.
Higher taxes, or an expansion of taxable items, lowers consumers net income, making them spend less or limit expenditures to necessities. Lower taxes leave more money in consumers’ pockets to spend on goods and services SMEs offer.
So, next time you want to make strategic decision and market plans, it is important you factor in the likely impact tax has on the viability of such plan, giving attention to your target customers’ pocket.
In summary, when taxes are increased and government cuts its spending, people have less money to spend on consumer goods, resulting in cut of programs and jobs.
In this regard, you need to understand if the demand for your product is tax sensitive or not as well as the degree of consumers’ sensitivity to tax in terms of the demand for your product and services.
Cost of Doing Business
In a typical situation where government results into the sale of financial instruments such as bonds as a fiscal means to finance its spending while SMEs are also scouting for the same limited fund in the economy, fund holders tend to redistribute their funds among alternatives to obtain the highest return on investment.
As a result of this, interest rate on loans and credits tends to increase. When fiscal policy results in higher interest rates, businesses pay more for lines of credit. An increase in the cost of borrowing across the economy will affect the cost of doing business since entrepreneur has to now compete with the government for the available capital in the economy.
Another way through which fiscal policy affects cost of doing business is through various import and export policies. This could come in the form of an increase in the tariffs levied on raw materials. This will translate to a higher cost of producing the affected products and service and could lead to a higher cost of doing business in the economy.
Tax is another channel through which fiscal policy affects cost of doing business. An increase in tax on corporate earnings by SMEs forms an integral part of business expenses. Thus, increased tax results to increased cost of doing business. Lower corporate tax rate helps free up cash to reinvest in facilities and merchandise selection.
As such, it is important that you also watch out for the impact of tax on your cost of doing business so as to make adequate plans toward maximising your profit. You may also want to employ the service of a tax consultant to know how to properly structure your business to take advantage of government tax policies.
Next article will be on how monetary policies affect SMEs and how you can harness the policies to maximise your profit.