A recent report by the Central Bank of Malta, based on interviews with non-financial corporations (NFCs), provides a detailed overview of the key trends and challenges that shaped the Maltese business environment in 2024. The report is based on the information that was gathered through 45 interviews conducted between October and December of 2024. This report provides crucial lessons for SMEs and family businesses, with a focus on navigating the economic landscape. Here are the points that emerged that should serve as guidance for SMEs and family businesses for 2025 and beyond:

• Acknowledge the Slower Growth: The report indicates a general slower growth in business activity in 2024, especially in the final quarter. Going forward SMEs and family businesses should not assume continued rapid growth, but should instead prepare for a more moderate pace of business.

• Understand Sectoral Nuances: The report highlights how different sectors experienced varied conditions. Service and manufacturing firms generally reported growth, whereas wholesale and retail faced stagnation, and construction saw a downturn. SMEs and family businesses need to be acutely aware of the performance of their specific sector to make informed strategic decisions.

• Adjust Expectations: Businesses were notably less optimistic about future activity by the end of 2024, with expectations for improvement dropping significantly. This calls for a more conservative outlook. SMEs and family businesses should take a cautious approach to forecasting and planning for the near future.

• Rising Input Costs Require Attention: A substantial majority of firms reported increased input costs, with labour being a major issue. SMEs and family businesses must prioritise effective cost management and control. While the rate of cost increases has slowed since previous years, it remains a significant challenge.

• Cost Pass-Through Challenges: The report underscores the growing difficulty in passing on increased costs to consumers. Businesses must carefully balance the need to recover costs with the need to remain affordable for customers. Strategies may need to include absorbing some costs to maintain a competitive edge. An element of rationalisation is also important. One cannot be everything for everyone, so one must prioritise business that really adds value and therefore that can carry increased costs, over business with lower value added.

• Invest Strategically: The report notes an increase in firms planning to invest, particularly in areas like sustainability and digitalisation. SMEs and family businesses should explore opportunities to invest in these areas to enhance operational efficiency, meet market demands and secure long term benefits. Self-financing remains common, but it may be beneficial to consider a variety of funding options.

• Address Labour Shortages and Wage Pressures: The report highlights the persistence of labour shortages, requiring firms to offer higher wages to attract and retain staff. Although wage growth is expected to moderate in 2025, SMEs need to be prepared for continued competition for skilled talent. Innovative recruitment and retention strategies should be adopted, including flexibility and improved benefits. Having said so, improving operational inefficiency remains key as the days of throwing people to make up for operational inefficiency, are well behind us.

• Effective Cost Management is Key to Profitability: Firms that effectively managed rising costs were more likely to increase profits in 2024 compared to 2023. This improvement suggests the benefits of improved strategies such as automation, bulk buying and sourcing alternatives. SMEs and family businesses should look for areas to improve operational efficiency to maintain or improve profit margins.

• Sector-Specific Strategies are Crucial:
  • Manufacturing: Manufacturing firms were more successful in passing on costs in 2024 than in 2023. SMEs in this sector should consider moderate price adjustments to cover costs while remaining competitive, particularly in areas such as food production, electronics, and consumer durables.
  • Wholesale and Retail: Businesses in wholesale and retail, particularly those in the food and beverage sector, struggled with rising costs and had trouble raising prices due to competition and price sensitivity. They should focus on efficient cost management to maintain competitiveness without relying on significant price increases.
  • Services: The services sector was more inclined to raise prices, which helped maintain or improve profitability. Businesses in this sector should continue adjusting prices to offset rising costs where possible.
  • Construction: Construction firms faced profit declines due to rising material and compliance costs. They should anticipate lower margins and work to diversify revenue streams to reduce reliance on construction-specific projects.

• External Pressures Impact Business: External risks, like EU regulations, global economic conditions, and geopolitical uncertainties, will continue to influence business sentiment. SMEs and family businesses must remain adaptable to these changing external factors.

• Address Skilled Labour Shortages as a Priority: The availability of skilled staff is a major issue hindering business success. SMEs should focus on strategies to attract and retain skilled labour, which will ensure that they have the human resources needed plus investing in technology to operate efficiently and effectively.

• Bureaucracy and Competition: Businesses should be aware of and plan for challenges related to bureaucratic inefficiencies and increased competition. They need to adopt innovative approaches to mitigate these challenges and compete effectively.

• Consider Profitability Strategies: There are several key findings about the relationship of costs, prices and profits. Businesses that were able to increase profits were able to do so either by raising prices or by increasing efficiencies and lowering costs. Many firms were able to maintain or increase profits, despite rising costs.

In conclusion, this report underscores the need for adaptability, robust cost management, strategic investment and effective human resources management for SMEs and family businesses. They must fully understand their specific sector’s conditions and adjust their business strategies accordingly in response to the current economic climate which is characterised by slowing growth and rising costs. Businesses that can successfully navigate these challenges will be best placed to succeed.

Would you like to attend a FREE online session, that gives an overview of what the likely challenges for 2025 and beyond will be for SMEs and Family Businesses and what such businesses need to do to overcome these challenges? If interested please click HERE to REGISTER. Details of this online session will be shared in due course.