Financial management is critical to operating a sustainable business. In order to implement – and effectively follow through – a sound financial management system, SMEs need to have financial discipline, flexibility and the knowledge to navigate and respond nimbly to changes in the business environment.
Having sound financial management
One of the key concerns for most SMEs is cash flow management, or more specifically, the ability to generate cash quickly enough from customer invoices. “A good financial management system can help SMEs execute effective receivables collection strategies to maintain sufficient liquidity,” says Mr Piyush Gupta, Deputy Chairman of SPRING Singapore (now Enterprise Singapore1) and CEO of DBS Group.
SMEs typically face cash flow challenges due to several reasons. They could be caused by factors such as lumpy cash cycles (e.g. large upfront capital required for projects) or unexpected expenses. It could also be due to delays in payments from customers, or accounts receivable. This has a trickle-down effect on account payables, such as loan repayments, staff salaries and supplier payments.
One way to avoid cash flow issues is to have a proper system to manage working capital (which are used for day-to-day operations). This involves close monitoring of inventories, accounts receivable and payable, and cash. “It’s important for SMEs to understand that a disciplined cash flow management system can help them achieve long term profitability and sustainability,” adds Mr Gupta.
Prompt payment of accounts payable is also important to avoid late payment charges, losing out on supplier discounts or being subjected to tighter credit terms. Taking a more proactive approach to accounts receivable can help a business bring in customer payments faster, and reduce the risk and cost of bad debts. This includes drawing up – and implementing – payment terms, such as the payment period, discounts for prompt payment, and interest charges on late payments. This way, businesses will be able to free up cash and strengthen their working capital to invest in new growth opportunities, equipment and developing new products.
“For all of these to work, SMEs need to consistently monitor key processes, such as invoicing, collections, payments and reconciliations,” Mr Gupta adds. One way to do so is for companies to adopt technology tools, such as a financial dashboard. A financial dashboard monitors key performance indicators such as profitability, liquidity, and other relevant indicators to assist management in making informed discussions. This will help companies to identify issues and allow them to take steps to get back on track.
Supplementing working capital needs
To supplement working capital, SMEs can explore funding options, such as equity or bank financing.
For instance, companies with 10 staff or less or have annual revenue of less than $1 million can turn to the SME Micro Loan, which offers up to $100,000 to fund daily business operations. For larger companies, the SME Working Capital Loan (WCL) is available, offering funding of up to $300,000 per company. Those requiring trade working capital can consider tapping on the Loan Insurance Scheme to access trade facilities.
There is also the SME Equipment and Factory Loan, which facilitates access to funding for companies looking to purchase equipment for automating processes or upgrading current premises and equipment.
Other than traditional debt or equity financing, SMEs can also consider alternative sources of funding, including equity crowdfunding and venture debt.
Also called crowd-investing, equity crowdfunding is a method of raising capital from broad groups of investors. In return, investors receive shares in the company. Clearbridge BioMedics, a local medtech startup, is an example of a company that has managed to leverage on the powerful network effect of this kind of financing. Through an online capital-raising platform, the company was able to access multiple venture capitalists from all over the world to help with its expansion.
The SME Venture Loan, launched in April 2016, is also a way for innovative and high-growth enterprises to access funding. Eligible companies can apply for venture debt funding of up to $5 million each for various purposes that can help them in business expansion plans, such as working capital, asset financing, project financing, or mergers and acquisitions (M&A).
Achieving continuous business growth through M&A
Growth can be divided into two main types – organic and inorganic growth. Typically, enterprises expand through organic growth, which means growing internally through customer base expansion, product development and increasing sales to boost cash flow.
Meanwhile, inorganic growth refers to growing through M&A – a strategy that companies can also consider. One company that has used this strategy is Nordic Flow Control Pte Ltd. In a span of a decade, it has acquired three companies, which allowed it to manufacture its own line of products and solutions, expand its services locally and globally, and diversify into other industries (read more about it on page 12). These different investments reduce the company’s exposure to total risk in a particular industry and increased its debt capacity, which in turn is beneficial to its cash flow growth.
Ensuring financial sustainability
Managing financial resources to make better financial decisions is necessary for SMEs looking to accelerate growth. This can be achieved through an efficient management of cash flow and working capital – both of which are critical for business survival and long-term financial sustainability.
Mr Gupta advises SME owners who are experiencing growth or financial stress to seek external assistance. “If need be, they can discuss their growth plans with a trusted banker, so that they can better plan their funding and financing structure,” he says. “SMEs can also approach SME Centres for a free business diagnosis, advice and guidance on the various funding schemes.”
Companies can also take the initiative to invest in a sound financial management system and start by planning and forecasting their finances, understanding the risks in their business processes and implementing an effective corporate structure to support their growth. SMEs can tap on the Capability Development Grant (CDG) if they would like to upgrade their financial management capabilities in these areas.
When asked how SMEs can prepare for the future economy, Mr Gupta says: “SMEs need to be equipped to make quick, informed decisions about how to adjust and optimise their financial resources according to changes in market conditions. This will enable them to boost long term profitability and growth, and gain easier access to future capital market activities.”
1SPRING Singapore merged with IE Singapore to form Enterprise Singapore on 1 April 2018.