How Kenyan SMEs can cope with the proposed Increased Fuel VAT

The proposal by the Kenyan government to levy 16% VAT on fuel as of 1^st September 2018 has obvious implication on the economy and SMEs. Whether or not it’s the best solution for the prognosis of debt management is still debatable and the reality is it may take effect and SMEs must not be caught flat footed.; better be safe than sorry.

They say a well defined problem is halfway solved. One must analyze the full impact of the increased tax on their business cognizant that the impact of the tax will vary from one entity to the next.  There are SMEs especially in Manufacturing, Agriculture, and transport among others who will primarily be affected because fuel is distinctly part of their input cost.

For instance a large scale farmer in Uasin Gishu or a matatu plying Nairobi to Kisumu route will experience a significant increase possibly 16% in fuel expense. On the other hand there are SMEs who fuel is not a primary input but the cost of fuel is implied in their input cost. For instance Butchery in Umoja estate relies on hired transport to fetch meat from a slaughter house in Dagoreti. This may mean an increase in transport cost that may vary depending on the transport provider.

Once this is established the farmer, manufacturing or the Butcher must draw plans to absorb the increased cost either fully or partially given the fact that SMEs may not have the leeway to increase their prices by a similar margin to be absorbed by customers whose disposable income is shrinking.

Cost absorption options may mean a reduction in a non core expenses; one that if reduced will not significantly affect the overall performance of the company in delivering value. Most companies resort to laying off staff but that need not be the case

A better cost management option would  would be to list all the expenses related to the activities of the business, move them into a metaphorical “Silo,” and then, one by one, decide whether to let them back in.

This is based on the budgetary concept of Zero based budget which enables you to break free of the budgetary practices of the past.

A lot of effort must be taken in separating out the costs that truly fuel your distinct advantage from the ones that don’t. Decision of where to cut and where to invest must be based on the need to support your greatest strengths: the capabilities that enable you to create unique value for customers.