Surviving The Lean Times

Author: Joyce Tee, Managing Director and Group Head, DBS SME Banking

The year has started on a pessimistic note for the Singapore economy. The slowdown in major trading partners like China and Malaysia has buffeted the Republic's exports. Meanwhile, rising business costs and a persistently tight labour market are weighing on local businesses, and in particular, small and medium enterprises (SMEs).

The impact of these headwinds is showing up in the economic data. Manufacturing activity plunged to its lowest level in three years last month. The Purchasing Managers' Index (PMI) fell for the eighth straight month to post a reading of 48.5 in February, a level last seen in December 2012.

Singapore's non-oil domestic exports (NODX) also shrank by a worse-than-expected 9.9 per cent in January from a year ago, the third straight month of contraction. The Ministry of Trade and Industry has forecast GDP growth to reach just 1 to 3 per cent in 2016.

Beyond the immediate headwinds, the Singapore economy is also at a crossroads as it deals with a fast-evolving macro environment and painful domestic restructuring. To cope with these challenges, the Government has convened a high-powered 30-member Committee on the Future Economy (CFE) to chart a new course for the country.

In the longer term, the future of our economy is likely to lie with our SMEs, which employs 70 per cent of workers here and contributes nearly half of GDP. To ensure that they stay on a path to growth, local enterprises need to focus on enhancing their capabilities and internationalising their businesses. If successful, this will eventually lead to better paying jobs for Singaporeans and increase the Government's tax revenues; allowing them to increase social expenditure.

More immediately, many SMEs will understandably be eager for any sign of support from the Government in the upcoming Budget announcement. While economists expect some help to come in the form of scrapping planned foreign levy hikes, for instance, fiscal constraints mean that this year's Budget is unlikely to be as generous as last year's SG50 bumper offering.

Regardless of what is actually announced on March 24, we believe that there are many things that business owners can do on their own to help them tide over the current turmoil. Here are just three of them:

Manage your cashflow well

Cashflow is the lifeblood of any business. A company may seem profitable on paper but actually suffer from poor cash flow that can choke off its ability to carry on operating.

First of all, it is a smart practice to keep your inventory clean and lean. Indeed your stock should be as low as possible without sacrificing timely delivery to your customers. Also, ensure that you are enforcing your payment terms with your suppliers, and do act quickly if they start falling behind with their payments. It might be useful to dangle some incentives in front of them to encourage prompt payments.

You can also improve your cashflow by managing your salary costs. Keep a close eye on overtime wages to ensure that they are under control. You can also consider flexible work schedules to possibly reduce some fixed salary costs.

To help business owners better analyse their cashflow situation and identify opportunities for improvement, DBS offers an easy-to-use self-assessment tool to help you on your way (Working Capital Tool). SMEs who want a more in-depth assessment can simply make an appointment with our relationship managers, who can assist them in for a one-on-one session using our proprietary DBS Working Capital Tool.

Invest in your business capabilities for the future

It may seem counterintuitive to boost your spending during a downturn, especially in the face of falling revenue and weaker cashflow. But investing in new product or market development will help your company grow again when the eventual rebound comes.

This will give you an edge over your competitors, many of who may not have had the courage to take make this important step. You will emerge from the slowdown in a much stronger position.

There are several government assistance schemes that can help you defray the costs of R&D. These include IRAS’s popular Productivity and Innovation Credit (PIC) Scheme and SPRING Singapore’s Capabilities Development Grant (CDG). However, these schemes tend to payout only after the completion of the project.

To help business owners who wish to innovate without putting too much strain on their resources, we recently launched the Working Capital Loan, which acts as a bridging loan to help tide SMEs through before the grant gets disbursed. Firms interested in tapping this loan simply need to upload the Letter of Offer from SPRING onto our online business loan application form on dbs.com and apply for a micro loan or business term loan.

Protect your business

Whether it's human capital, intellectual property, data, or any other vital aspect of your business, ensure that you have the right business insurance coverage in place to retain your company's best assets and navigate through the tough times.

This is how it works: if your business enters into an executive bonus arrangement with a selected executive, he or she can use the bonus payments to pay the premiums on a personally-owned life insurance policy. During the executive’s lifetime, he or she may access the policy’s cash value for retirement or other financial needs. Upon the executive’s death, the life insurance death benefit will be paid to the executive’s beneficiary.

Keyman insurance will soften the blow of losing an important member of a business. The company can use the proceeds for expenses until it can find a replacement person.

What I have highlighted above are just some of the strategies to help your business stay afloat during the lean times even as it prepares for the macroeconomy to recover. The Budget may offer some relief to SMEs, but ultimately business owners be prepared to navigate the choppy waters ahead with the resources and tools that are available to them.