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How SMEs can create value to build sustainable businesses

Terence Ang, a partner in RSM, says true transformation has to start at the top and percolate through the ranks, and innovation has to go beyond automation.

"SMEs need to be self-reliant and they need to realise that these schemes are temporary. True transformation will come about only if the SMEs embrace it. The grants by the government merely facilitate the change." - Terence Ang (above), partner, corporate advisory (valuation) at RSM.

THIS year's Singapore Budget focused much on the need for small and medium-sized enterprises (SMEs) to innovate and transform as a means of building a sustainable business, and it included a healthy dose of incentives and financial-assistance programmes to help them along.

Government help, however, can only do so much and go so far; for true transformation to take place, the entire organisation - starting from those at the top - will have to embrace the need for change, says Terence Ang, partner in corporate advisory (valuation), at RSM.

Mr Ang, who also heads the accounting, business advisory and solutions group's private-equity industry group, specialises in assisting growing businesses in valuation, value enhancement and mergers and acquisitions advisory, among other things.

He says: "The transformation has to be pervasive. It has to start with the tone at the top of the organisation, a behaviour and mindset change.

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"SMEs need to ask themselves why they want to transform and innovate. When they can answer this question, the hows and the whats - in terms of how to effect the change and what to change - will come naturally.

"They would also need to communicate this to the rest of their organisation, and ensure that their key people are committed to transforming."

Talk of building sustainable businesses in the SME sector comes at a time of global economic upheaval and challenging business conditions, both abroad and domestically. With SMEs being a key growth driver, their continued vitality is crucial for the local economy.

SMEs, defined as companies with an annual sales turnover of not more than S$100 million or an employment size of not more than 200 workers, now number around 190,000 here, and make up 99 per cent of Singapore's enterprises, contributing to nearly half the country's GDP.

"SMEs will be the main engine of growth for Singapore, going forward," Mr Ang says.

They face a myriad of challenges, however, most of which have been well documented over the years:

  • Costs, in terms of labour, rental and transport;
  • Competition, both domestically and regionally; and
  • An increasingly demanding customer base.

The key challenges have not changed in the last three to five years, but the focus, in terms of how SMEs can overcome these challenges, has.

Mr Ang says: "A decade or two ago, the buzzwords were 'cost control' and 'productivity'. Now, at least for this Budget, they are 'innovation' and 'transformation'."

Cost control alone does not a sustainable business make.

"Not that cost control isn't important. Cost pressures are always going to be there - and Singapore is getting more expensive. We used to be happy with a 10 per cent growth in topline revenue, but nowadays, that 10 per cent can easily go towards an increase in staff costs, an increase in rental, transportation, etc.

"So, for sustainable growth, 10 per cent is not enough."

He notes that the government is cognisant of what is needed. "The Budget was focused on long-term vitality, not short-term fixes. Its assistance packages were split into two categories:

  • Those addressing near-term concerns; and
  • Those allowing SMEs to scale up, internationalise and innovate."

Near-term support in the form of the Working Capital Loan scheme, Automation Support Package, corporate income tax rebate and assistance for certain sectors will help ease business costs during the current period of difficult economic conditions.

Ultimately, however, "SMEs need to be self-reliant and they need to realise that these schemes are temporary", Mr Ang says.

"True transformation will come about only if the SMEs embrace it. The grants by the government merely facilitate the change.

"That's why Finance Minister Heng Swee Keat focused on long-term growth - on innovation, on developing capabilities, on scaling up, and on internationalisation."

All these go towards helping SMEs create value in their organisations and giving them the means to achieve sustainable growth.

"Value creation is all about delivering value to customers through products and services, thereby creating value for the shareholders of the company.

"It is about cash flows, that is, it is about the decisions and actions companies take to increase their cash flows from existing investments. Simply put, if the rate of increase in cash flows into the company exceeds the cost of capital, value would have increased."

Mr Ang believes that innovation is at the heart of value enhancement to businesses. This comes in three forms:

  • An innovative product or delivery channel that would enhance the company's competitive advantage, increase customer demand and, ultimately, sales;
  • Innovative processes through automation, which would improve efficiency and reduce costs; and
  • Innovative policies to attract and retain the best people.

"It's more than just automation; it's innovation across the entire organisation," he says.

Equally important, but often overlooked, is the need for good corporate governance, good internal controls and succession planning.

"Having good internal controls and timely reporting enables you to monitor your business and see how you're doing and take corrective action on a timely basis.

"If you don't have a good control environment, you're not getting good information in a timely manner. So, a good set-up allows you to be more adaptable and flexible.

"And ensuring good succession planning is also important because, when we value companies, we value them as a going concern."

Mr Ang says these three attributes, while not computed in traditional valuation models, will enable companies to negotiate for higher values. "The lack of them will actually be detrimental to value."

He also stresses that value creation takes time: "I tell my clients that it usually takes between 12 and 24 months."

Internationalisation is another instinctive step that SMEs looking to scale up will take.

"It's natural (to think of expanding overseas) because Singapore's domestic market is so small, so limited, and we are expensive. And internationalisation has its benefits: increased market potential, reduced cost of production, diversification, innovation and technology."

Expanding overseas can take a couple of forms: one is organic growth, through the setting up of an office overseas or partnering people there; the other is by inorganic growth through mergers and acquisitions. Either way, it is an undertaking fraught with risks, but companies can minimise the peril to themselves.

"Know the market that you're venturing into, through proper due diligence and market-feasibility studies. Know the regulations, business environment, the culture, customer preferences. Understand why companies have failed, to avoid making the same mistakes.

"Ensure that there is a mechanism to control the overseas operations: regular reporting, standard operating procedures, regular visits from headquarters personnel or secondment of key people to the overseas entity."

It is also important to manage the post-acquisition integration process delicately and gradually; taking time to integrate the new entity's culture with the head office's, and investing the time to manage this conscientiously.

"We see a lot of acquisitions run on remote control. Those rarely work," he says.