SMEs in Singapore face several issues. Because they are operating a lean machine, with very little fat to experiment with, or take a breather from, they find that they are always on the daily grind. In this article, we take a look at some of these issues and what they can do about them.
1. Cash flow
Any business knows that it is not about profitability, it is about cash flow. You can be profitable for one day a year, and for the preceding 364 days, you are scrounging around to make ends meet. This puts a huge strain on SMEs, especially when the war chest is rather lean. SMEs need better financial management, and they need better relations with their customers. Sometimes it may be better to lower margins to secure better payment terms. After all, the cost of funds may be such that they still crimp on margins. Hence, SMEs need to be more financial savvy, and work out a strong payment plan. As we have already said, it is about cash flow, not profitability.
2. Talent attraction
SMEs have a hard time attracting talent. Being at the bottom of the barrel when it comes to recruitment attractiveness, they need to create the right message to pull talent away from the big dollars of MNCs. They can do this by giving people an enlarged role, a bigger stake in the future, a contribution to a larger cause. SMEs are more nimble than MNCs and they can react to growing trends much faster than MNCs. They should therefore cash in on their nimbleness and sell that feature. Of course, they should also pay right. Which brings us to the next issue…
3. Labour costs
Because we have to pay right, which might well be a little higher than MNCs in order to get the right talent, we might not be able to have as many people as MNCs. Indeed, SMEs cannot be judged by the number of staff that they have, but on the revenue per staff. After all, if an SME can garner $1.2M revenue per employee, but an MNC can only get $1.0M revenue per employee, then the SME is in a better position, in terms of business as well as productivity. So the issue may well not be costs per se, but in how well we leverage on these costs. There is a need therefore to move further up the value chain, and that may require even higher labour costs. Yet, to do any less would lead to certain decline.
4. Inability to differentiate their products/services in the market
There are many me-too products and services. After all, if the market is huge, getting even a 5% share is better than getting a 45% share of a much smaller one. However, in a small-share market, your margins are also small. Ultimately, when a cost leader comes in, me-too margins get wiped out, and they leave the market. There is a need to start differentiating products and services to stay ahead of the market. There is also a need to become more cost-efficient, and that will come only when there is a sizeable market share. Hence, SMEs must either increase market share to stay one step ahead of the competition. Either that, or become totally differentiated, maybe even entering a different market. Innovation and change are definitely the order of the day here.
5. Environmental fluctuations
When Switzerland devalued their currency, Singapore also followed suit. This created a situation where Singapore products are now more affordable, thereby leading to higher orders. Unfortunately, when the US announced that they might be increasing interest rates, the exchange rate fell against the Singapore dollar, making Singapore goods and services more expensive again. When SMEs deal with foreign markets, they have to contend with rising and falling margins, due to interest-rate and exchange-rate fluctuations; issues not of their own doing. Environmental changes can be a big concern. But because of their size, SMEs are not able to take positions big enough to hedge these fluctuations. This leaves them vulnerable, and all alone. Banks and associations can better help through some form of aggregation. Risky, perhaps. But very important.
SMEs do have unique issues that hold them back from growth. Yet they have several other solutions up their sleeve, as outlined above. They also have one more that we haven’t spoken about: strategic partnerships. SMEs need to accept that they don’t have the answers to all issues faced by their customers, and if they can form collaborations with others who are non-competing and yet complementary, they can overcome their limitations better, offering greater reach and better growth. All they need to do is to play a bigger game.