SINGAPORE SMEs seem to have found their magic formula not only to grow sales but to sustain the rapid growth over the last three financial years.

The SME500 ranking conducted by DP Information Group early this year saw the top 500 performing SMEs chalking up $13.9 billion in turnover for their financial year ended 2007, the highest in the last five years.

And in this year's Fastest Growing 50 (FG50) ranking, SMEs garnered 32 per cent of the awards, sweeping many of the bigger boys aside.

The FG50 recognises high-growth companies based on their compounded annual growth rate (CAGR) over three consecutive financial years.

In fact, we are witnessing a growing proportion of SMEs making up the winners in the FG50 ranking, from 6 per cent in 2006, to 26 per cent in 2007 and 32 per cent this year.

A closer look at some of this year's SME winners of the FG50 award offers a glimpse of their 'secret recipe' for managing issues such as cost and competition which weigh more heavily on Singapore SMEs.

Take Jian Huang Construction, for example. This company, which has been in the SME500 ranks for the past two years, came in eighth in this year's FG50 ranking.

It was also the best performer among the five FG50 construction winners.

Instead of just riding on the surge in commercial, industrial and residential developments, Jian Huang focused on design-and-build projects in the industrial market where Reits are popular.

Among the million-dollar projects completed in FY07 are C&P Logistics Hub 2, CWT Cold Hub, CWT Logistics Hub 2, RichLand Centre, and Focus One.

Diversification and internationalisation are strategies that can help a company grow.

One good illustration is Filtec, which not only emerged as the top SME winner but also took the overall third position with an impressive CAGR of 395 per cent in this year's FG50 list.

Set up in 1999, Filtec initially started in the tyres and batteries trade, and expanded into the industrial, marine, energy and oil and gas industries following a restructuring of the Soon Aik Holdings in 2003.

Filtec has also actively explored business opportunities beyond Singapore, picking up customers in the Middle East, Africa, Europe, Asia and the Pacific Islands in the last few years.

Another SME winner that has successfully leveraged on internationalisation to grow its sales is Interactive Hub, which recorded a CAGR of 102 per cent in this year's FG50 ranking.

Established in 2002 as part of iHub Media Group, Interactive Hub is an online media sales representative for premium web publishers like ESPN soccernet, Friendster, Habbo Hotel and Garena.

With a strategy of diversifying its business geographically, Interactive Hub has established its footprint in many Asian countries, venturing into a new market almost every year since it set up in 2002.

Indeed, with a saturated local market, going overseas is the ticket to business growth and expansion. However, it is not without its challenges and risks, especially for SMEs with limited financial resources.

The DP Credit Rating system is one tool that can be used to assess the financial health and readiness of a company for expansion, here or abroad.

Companies can be classified into three risk categories: Investment Grade (DP1-DP4), High Yield (DP5-DP6) and High Risk (DP7-DP8) based on their performance in six broad risk categories: profitability, capital structure, liquidity, activity, growth and size.

A look at the credit score of SME winners in the FG50 shows that the majority (87.4 per cent) are High Yield (DP5-DP6) companies.

Only 6.3 per cent are Investment Grade (DP1-DP4), compared with 42 per cent of the FG50 winners as a whole.

Singapore SMEs have certainly grown faster and stronger in recent years, spreading their wings to explore opportunities abroad.

As higher trading activities and internationalisation may require more capital outlay, it is not uncommon for companies to tap external sources of financing.

Nonetheless, it is crucial for companies to maintain a healthy capital structure without too much gearing, and not over-commit to large deals which can cause them to become cash-strapped down the road.

Local SMEs, which form over 90 per cent of the business community, have undeniably enjoyed another good year in 2007.

This is no mean feat considering that the year was fraught with challenging issues from rising oil prices and food inflation, to the US sub-prime crisis and currency volatility.

With the global economy still facing much uncertainty, SMEs should all the more keep a close watch on their financial health and credit exposure to ride out the year safely.

This article is contributed by DP Information Group.
DP Credit Rating, introduced by the DP Information Group, is a proven model that measures the Probability of Default (PD) of companies incorporated in Singapore.

This article was first published in The Business Times on 23 July 2008.