ENTREPRENEURS and small and medium-sized enterprise (SME) owners tend to be a forward looking group.
With new deals and products to pursue, exciting markets to explore and constant change to adapt to, it is no wonder most SME owners have little time for reflection.
And yet it is a useful exercise to look back over the last few years and see what has been accomplished and how the lessons of the past can guide the decisions of the future.
If an SME owner looked back over the last five years, they will see a growing economy delivering steady increases in sales and profit.
They will also see a steep jump in business costs such as raw materials, labour and rent. All in all, the last three years have been good times for SMEs.
But if we look ahead to the next few years, the indicators are that it may be a tough road ahead.
Each year DP Information Group - Singapore's leading provider of business and credit information - tracks the fortunes of Singapore's small and medium businesses in the SME Development Survey.
The survey is like taking the pulse of the SME community each year to see what concerns are paramount in the minds of SME owners.
Looking back over the last five years, the first thing you notice is that SMEs are generating more sales.
In 2003, a fifth (21 per cent) of all SMEs were making less than $1 million in sales. By 2007, this figure has dropped to just 11 per cent.
At the other end of the scale, we see a similar story. While in 2003 only 17 per cent of companies generated sales in excess of $20 million, last year's survey saw this category leap to 26 per cent of SMEs.
So generally, there has been an increase at all income levels indicating that SMEs have done well to increase their level of sales activity over the last five years.
Of course, sales are only part of the equation - there is no point bumping up turnover if the cost of doing business prohibits a sustainable level of profitability.
When we examine the profitability of SMEs over the last five years, we are presented with a conundrum.
On the one hand, the number of extremely profitable SMEs - those earning in excess of $5 million - has increased from just 2 per cent in 2003 to 6 per cent in 2007. At the other end of the spectrum, the number of loss making companies has increased from 8 per cent to 21 per cent over the same period.
So how is it that more companies are making big money while even more are making nothing at all?
The answer lies in the emergence of a new and significant group of SMEs - the start-ups. The number of start-up companies - or those less than three years old - has tripled since 2003.
This is no doubt in response to the push to promote entrepreneurship by the Singapore government.
In another survey by DP Information Group - the Start-up Enterprise Survey - we know that start-ups can take a few years to become profitable.
In fact, 58 per cent of start-ups have yet to turn a profit. So this explains why the number of loss making SMEs has risen since 2003.
Another reason why profits can be thin to non-existent is the increase in business costs.
In 2003, the main business strategy of SMEs (51 per cent) was to introduce new services or products - a good indicator that SMEs felt positive about their future five years ago.
Fast forward to 2007 and we see only 10 per cent of SMEs contemplating expanding their product or service range.
Now, the dominant concerns are cost related - 48 per cent are targeting increased productivity and efficiency. The major concerns of SMEs have also changed.
Five years ago, the biggest concern of SMEs was cash flow - driven by the inability of SMEs to access financing through traditional lending channels.
In 2007, only 10 per cent of SMEs nominated the inability to obtain new financing as a major concern.
Much has happened over the last five years to meet the financing needs of SMEs, with both the government and the private sector introducing innovative products tailored to the needs of growing small businesses.
The effectiveness of these programmes can be seen in the survey results. So what has replaced financing and cash flow as the dominant concern of SMEs?
Not surprisingly, we see increased competition (58 per cent) and increased operating costs (53 per cent) dominating the list of obstacles to growth.
The issue of cost is biting across all industry sectors. Increasing labour costs is the top concern across most business sectors, especially construction, property, services, and food and beverage.
SMEs in these industries are saying that labour costs will significantly impact their profitability over the next two years. In the construction and manufacturing sectors, the main issue is the rising cost of raw materials or other inputs.
For companies in food and beverage, retail, and finance and services sectors, it is the skyrocketing rents that are holding back their profits.
So where are Singapore's SMEs headed? What can they expect from the next five years?
One thing is certain - the going will be tougher than the five years just past.
The US Federal Reserve is already talking about less favourable economic conditions, credit squeezes, downturn in housing markets, pressure on bank capital, slowing job creation, lower investment, weakening domestic demand and financial markets under stress.
Many commentators are talking about the US leading the world into a global economic slowdown, a credit squeeze and weaker US dollar.
This is bad news for companies who use trade or debt financing, as well as those doing business overseas and using the US dollar for their overseas transactions.
Even if an SME is well managed with good cash flow practices, they may be caught in the economic downturn if a major customer or supplier goes down, leaving the SMEs with unfilled orders or unpaid debts.
Now is the time to take precautions against these types of occurrences. Knowledge is the key to surviving in a contracting economy.
You have to know who you are dealing with and that they can deliver on their commitments. The best way SMEs can protect themselves is by using credit checks on their suppliers and customers.
Credit ratings simply indicate the probability of a company defaulting on a debt.
A credit check can sound a warning that not everything is as it seems and that the company being scrutinised may be in a precarious position. Alternatively, it can show that the company intending to get credit terms can honour them.
So the next five years may be difficult for many SMEs to negotiate, but with proper cash flow management and due diligence, SMEs can avoid the heartache of seeing debts written off and suppliers unable to deliver what they promised.
After all, to be a successful SME, you have to be able to deal with the good times as well as the bad.
Economic downturns force companies to become leaner and more efficient, so we can expect Singapore's SMEs to become stronger and more competitive - ready to reap maximum profits when the good times return.
Chen Yew Nah is the managing director of DP Information Group - a credit and business information bureau, which currently services 95 per cent of Singapore's financial institutions and some 75 per cent of leading law firms. DP Information Group publishes the SME Development Survey as well as the Start-up Enterprise survey.
This article was first published in The Business Times on 15 July 2008.
