This article was first published in the May 2012 Singapore edition of Accounting and Business magazine.
In times of economic downturn and volatility, the casualty rate among Singapore’s small and medium-sized enterprises (SMEs) is high. Operating on the margin, with the smaller ones literally running on a hand-to-mouth basis, these enterprises may be nimble compared with their large counterparts, but they are also extremely vulnerable. But leaving them to sink or swim simply is not an option when they make up 99% of Singapore’s enterprises, employ 70% of the workforce and account for 60% of gross domestic product (GDP).
Singapore has to pay attention to these SMEs and not just keep attracting foreign companies, according to trade and industry minister Teo Ser Luck; the local business sector has to grow so that it will continue contributing to the economy and the job market. ‘We need more of our own champion companies to survive. How do we keep them intact? How do we keep the whole sector vibrant?’ he asks.
The question, posed during a recent Institute of Certified Public Accountants of Singapore (ICPAS) forum on growth for small enterprises during market uncertainty, is one that has troubled not just policymakers but companies themselves for some time. SMEs today face increasingly difficult challenges, says Ho Meng Kit, CEO of the Singapore Business Federation (SBF). ‘Rental and other costs have eroded profit margins, and foreign labour constraints are making it even more difficult,’ he says, adding that because SMEs make up such a large proportion of SBF members, ‘SME issues are the issues of the SBF’.
And the biggest issue right now, it seems, is that of the bottom line: costs, costs and more costs.
Too expensive to succeed?
Cost – rental, operating and manpower – is what kills SMEs, say business owners unanimously. In recent years, a number of homegrown success stories have gone out of business for reasons that included costs outstripping their business model’s ability to compensate. In 2009, music retailer Sembawang Music declared bankruptcy, with owner and founder Dave Boo citing skyrocketing rental costs as the straw that broke the camel’s back. And in 2011, major book retailer Page One closed its Singapore outlets because rental was ‘not viable’ – although it retained stores in China, Hong Kong, Thailand and Taiwan.
The recent increased curbs on low-cost foreign labour have emerged as a particularly sore point with many SMEs. For example, an ICPAS survey of SMEs and small and medium-sized practices (SMPs) found that SMEs have a median ratio of one foreign to four local employees.
Lawrence Leow, immediate past president of the Association of Small and Medium Enterprises (ASME), also says that many companies are concerned by the curbs, although they do see the need to reduce reliance on foreign talent. It is certain, however, that the government’s measures will increase the burden of both cost and talent attraction/retention on SMEs.
In this environment of persistently rising costs, the smallest SMEs will be hit hardest, says M Nazri, CEO of research consultancy Vector Scorecard Group (VSC). The challenge for microenterprises, he points out, is that such SMEs are not considered bankable despite having viable projects. As a result, a recent VSC study found that Singapore’s smallest companies suffer a total estimated financing shortfall of up to S$1.5bn, and their survival is commensurately affected.
‘A lot of microenterprises need bridging investments because of funding gaps in their cashflow. These gaps may span just one or two weeks but are enough to make them collapse,’ says former SBF CEO Teng Theng Dar, who also chairs VSC’s panel on international business and strategic assessments.
On top of this, adds Gabriel Low, regional financial controller at GEA Westfalia Separator and a member of ACCA’s Global Forum for SMEs, the growing stringency of regulatory oversight is increasing the burden of compliance for SMEs, especially in view of their limited resources. The multiple layers of costs, in his opinion, are a potentially serious long-term problem, warning that they ‘may kill off the future SMEs by making it too expensive for entrepreneurship to succeed’.
A helping hand
Under Budget 2012 initiatives, the government is expected to provide up to S$400m in financing for SMEs annually. Experts say that the Budget’s incentives are both attractive and generous, but still fall short. Tay Hong Beng, head of tax at KPMG, points out that while the various initiatives do benefit productivity and innovation, there is a dearth of short-term measures to help SMEs tide over difficult times. ‘Also, what is more important is perhaps to communicate with SMEs so they can fully understand how they may benefit from these enhancements,’ he says.
In fact, many small ones still do not access government schemes, either because they are not aware of them or because they find too many barriers in the way. Minister Teo pointed out as much during the forum, observing that while bigger SMEs have no problem accessing schemes, small ones often do, and yet they are the ones most in need of government assistance. ‘Those that are really in need are not necessarily those that you hear about or read about in the papers,’ he said.
Chung Lai Thoe, director for enterprise services at Spring Singapore, admits that reaching out to those SMEs is a challenge for her agency, tasked with developing the country’s economic growth and productivity. Spring is currently focusing on education for the microenterprises, the most vulnerable subset of SMEs and the least likely to access government assistance.
Some SMEs, Chung explains, are aware of the programmes but too busy with day-to-day business to take them up; others may not be aware of them at all, or may not know how to apply for assistance. Statistics from the ICPAS survey bear this out: according to Evan Law, acting CEO of ICPAS, 63.5% of SMEs are not even aware of the assistance schemes available.
Other ways in which the current Budget incentives need refinement to suit SMEs include the further scaling down of tax incentives, and the reduction of paperwork. Ajit Prabhu, head of tax at Deloitte, points out that many SMEs may not make sufficient profit to genuinely benefit from tax credits, while others may have such low expenses that they do not qualify for cash grants. In addition, says Benedict Soh, executive chairman of Kingsmen Creatives, more leeway needs to be given for training. ‘Not all companies can send staff to the approved courses, because those courses are very generic,’ he points out. ‘The majority of companies need a lot of specialisation, and the training needs a lot of customisation.’
On the whole, most companies believe that while Budget 2012 is a move in the right direction, its present form is more suited to large corporations and requires some tweaking to better meet the needs of SMEs. In the meantime, says the ASME’s Leow, it is a wake-up call for everyone. ‘We only started to talk about raising productivity and lowering costs when there was a downturn. But this budget forces us to think about our business model and our strategy.’
In the long term
Strategy does indeed seem to be key for businesses that want to survive in the near future. The SBF recommends that SMEs focus on the two main areas of managing costs and increasing productivity, and offers several suggestions. Ho Meng Kit points out that there are many overseas opportunities for local businesses to grow their markets, especially in the Association of Southeast Asian Nations (ASEAN), where strong inter-country relationships and lower-cost environments outside Singapore allow a better chance at survival. ‘The economic fulcrum has clearly shifted from the West to the East, and being located right in the middle of Asia, we have an advantage,’ he says.
Other SMEs are changing their business model to reduce costs. Leow says that some companies affected by the manpower quota have begun subcontracting work to lower-cost neighbouring countries, or relocating their low-value operations out of Singapore. However, he cautions, these companies need to exercise moderation. ‘I would urge companies to keep their main operations in Singapore,’ he says. ‘A lot of companies want to come to Singapore, so it doesn’t make sense for them to relocate away. We have a very positive environment for doing business.’
Experts point to mergers and acquisitions (M&A) as another way for SMEs to pool their resources, especially those in labour-intensive, low-cost industries which will be especially hard hit by the new restrictions on foreign labour. Chiu Wu Hong, tax partner at KPMG, suggests that companies contemplating M&A take advantage of the refined M&A scheme in Budget 2012, whereby the government grants a 200% tax allowance on M&A transaction costs up to an expenditure cap of S$100,000.
In addition, he says, SMEs left short on manpower can look into tapping the pool of retirees and women who wish to re-enter the workforce. ‘SMEs which hire older workers can make use of the subsequent payouts to lower their business costs,’ he says, citing incentives for companies that employ Singaporeans aged 50 and above.
The other side of this is diversification, which allows companies to share certain costs across their various businesses. A fair number of SMEs are practising this: DIY retailer Home-Fix, for example, has expanded into five other companies which share the same premises and accounting team.
And, of course, there is productivity. Lau Tai San, managing director of Kim Ann Engineering, says that SMEs will have to embark on more productivity improvements than they may have ever considered before, from upgrading the skills of their workforce to investing in technology. Citing his own company’s experience, he says: ‘For many years, we have not spent a lot re-engineering our productions processes and methods, which would have made our job easier.’ The reason, he explains, was cost. But in the current environment, SMEs will simply have to bite the bullet and absorb these costs over the short term.
The bottom line, says Ho, is that SMEs are in for a hard time, and there is no avoiding it. ‘Small companies must adapt to the changed environment in Singapore and face the hard truth that they do not have a lot of time to restructure.’
*SMPs are SMEs, too
Small and medium-sized practices (SMPs) are SMEs, too – although this is often overlooked. And the accountancy sector, according to the National Productivity and Continuing Education Council, has the potential for productivity gains. They, too, can tap the National Productivity Fund for initiatives such as training and technology adoption – and they will need to.
‘SMPs need scale and scalability in a highly competitive and resource intensive industry,’ says Kaka Singh, president of ACCA Singapore. ‘They need requisite manpower, expertise and funding to serve the modern SMEs and SCMs (smaller components of SMEs), some of whom are the smaller listed companies.’
The solutions that work for other SMEs apply equally to SMPs, he adds. For example, cost has to be offset by productivity; manpower issues may mean that in order to gain the required skills, SMPs may have to consolidate into larger firms with at least five partners.
‘There will be fewer auditees but more regulations and audit standards, and higher technical expertise of the audit team,’ Singh predicts. ‘Unless the SMPs are comfortably large enough to serve the modern SMEs/SCMs, they are not likely to meet the current regulator’s expectations on quality standards.’
Mint Kang, journalist