Cash-flow issues 'threatening to stall SME growth'

Delayed payments from customers shooting up just as small companies shift out of survival mode: survey


POSITIVE signs have emerged that small- and medium-sized enterprises (SMEs) are shifting from survival mode to growth mode, as more look beyond cost-cutting to revenue generation.

But one looming threat that has the potential to derail expansion plans for SMEs is cash flow, as more experienced delayed payments this year, according to findings from the 2017 SME Development Survey by DP Info.

The annual survey found that more than a third of SMEs suffer from finance-related issues, which jumped from 22 per cent in 2016 to 35 per cent this year. This is the highest level since the survey began tracking the issue in 2011.

Financing issues were experienced across all sectors, but those which are particularly affected include transport and storage, information and communications, as well as manufacturing. The latter two sectors showed the biggest jumps of 16 percentage points each.

Among the 35 per cent of SMEs with finance-related issues, the proportion experiencing delays in payments from customers skyrocketed from 14 per cent last year to 81 per cent in 2017.

It has overtaken higher interest rates for bank loans as the biggest financing issue faced by SMEs, which came in at a very distant second place at 29 per cent. This was followed by suppliers tightening credit access at 22 per cent.

Ho Meng Kit, chief executive officer of the Singapore Business Federation (SBF), suggested that drags in certain sectors, such as the slowdown in the construction industry, as well as the transport and storage sector, could be the cause for the increase in delayed payments.

The gap between supplier terms and the credit given to customers, along with slower customer payments, is increasing the risk of cash flow and working capital problems, warned Dev Dhiman, managing director, South-east Asia & Emerging Markets for Experian, parent company of DP Info.

He said that it could have a domino effect that causes more problems through the SME ecosystem.

As more SMEs delay or default on payments, creditor companies start to experience cash flow problems of their own. When this happens, they delay their own payments and increasing numbers of SMEs are impacted.

"Cash flow constraints have the potential to hold back the growth strategies SMEs intend to pursue during the next 12 months," Mr Dhiman said.

Despite the financing hurdle faced, he noted that it was good news that findings show businesses still intend to focus on growth in the coming year.

Improving customer service was the most popular business strategy at 27 per cent, followed by stepping up marketing and promotional efforts at 19 per cent. Both are designed to expand the SMEs' existing client base as well as generate increased loyalty and patronage from existing customers, according to the report.

Mr Dhiman said: "SMEs are becoming increasingly customer-centric and moving away from the more inward-looking tactics such as cost suppression."

Other growth strategies include enhancing the current range of products and services, as well as international expansion.

More SMEs are also turning to investments in technology to drive increased revenue growth through applications such as e-commerce platforms, data mining of customers, and enhanced sales functions.

This year, 60 per cent of SMEs said they are using technology to reap revenue gains, compared to 48 per cent in 2015.

On the reverse, the percentage of SMEs which gained manpower efficiencies through technology has moderated from 62 per cent in 2015, to 56 per cent this year.

While manpower still remains a significant cost challenge for SMEs, its relative prominence has eased, indicating that the adjustments that SMEs have made over the years in response to the labour market changes appear to be working.

The proportion of SMEs that face difficulties dealing with manpower costs has fallen to 70 per cent - its lowest level in five years. This was significantly down from the 85 per cent registered in 2013, which was the year after the foreign labour restrictions were introduced.

There has also been a decline in the proportion of SMEs having difficulties hiring the staff they need, from 49 per cent in 2014 to 26 per cent in 2017.

With manpower less of an issue, companies can now focus on driving topline growth instead, said Mr Dhiman.

"In other words, this year's SME Development Survey shows SMEs are no longer just trying to survive, but looking for new ways to thrive," he added.

Financing issues, which threaten to be a dampener on growth, will be monitored closely to assess if support is needed to assist SMEs, said SBF's Mr Ho.

To alleviate the issue, he called on larger companies - even the government - to settle payments with SMEs faster, as well as increased digitalisation for invoicing to speed up the process.

More than 2,500 SMEs participated in the survey, now in its 15th year.