48,259 SMEs exited the market in 2017: study

The wholesale trade sector led cessations with 8,007 entities exiting the market.

Despite a stable number of small and medium enterprises (SMEs) in Singapore, there is a high frequency and turnover both entering and exiting the market due to the adaptation challenges firms experience as customer demands evolve.

In Singapore, SMEs account for an estimated two-thirds of all employment and contribute just short of $200b to the economy. As of April 2019, there were an estimated 220,000 SMEs in Singapore, with the services sector constituting close to 80% of these enterprises.

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Data from professional services firm Aon noted that in 2017, whilst 62,113 new businesses (which includes companies, sole proprietorship, partnership, LP and public accounting firms in Singapore) were created, 48,259 exited the market. The top five industries in terms of cessation in 2017 was led by wholesale trade with 8,007 entities exiting the market. This was followed by transportation & storage (7,103), professional, scientific & technical activities (6,842), retail trade (5,144), and information & communications (3,526).

With regards to the top five industries in terms of new entities in 2017 were professional, scientific and technical activities (9,719), wholesale trade (9,876), transportation and storage (7,739), information and communications (5,425), and retail trade (5,418).

According to Aon’s 2019 SME InsuranceSurvey, which analysed insights from over 300 SMEs with a turnover of up to $100m in Singapore, failure to innovate topped the list of risks faced by Singapore’s firms. This was then followed by damage to reputation, increasing competition, economic slowdown, and cash flow and liquidity risks.

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“We see the lack of funding as a major challenge for SMEs adapting to evolving customer demands. In addition, our research identified increased competition for talent and workforce shortage as important risks faced by SMEs in Singapore,” Andrew Hare, Aon Inpoint’s managing director for Asia, told Singapore Business Review, adding that the ability to attract and retain suitable talent is paramount to the growth and competitiveness of SMEs.

“From a scalability perspective, many SMEs have limited resources. It is difficult for business owners to find time to consider and implement new ideas beyond managing the challenges of the day-to-day business,” he added.

That said, Hare believes Singapore SMEs are relatively more successful in innovating and adapting to change, although contending with the accelerating speed of change is increasingly difficult within a limited domestic market.

According to him, insurance plays a critical role in providing peace of mind and empowering SMEs to focus on the key priorities of growth and innovation, as the impact of a financial loss as a result of exposures such as property damage can be devastating to an SME.

With regards to cashflow and liquidity risk, this could be mitigated with the help of credit solutions. For example, Aon’s Credit Solutions offers Trade Credit insurance, Surety, and Bonds to ensure SMEs have sufficient balance sheet and cash flow protection. In addition, SMEs in their growth ambitions can look for M&A solutions around Due Diligence and Transaction Liability Insurance.

“Lending data shows that the relaxation of restrictions by the Monetary Authority of Singapore (MAS) has helped SMEs with cash-flow financing. However, cash flow and liquidity risks continue to be one of the top 10 risks faced by SMEs in Singapore, indicating that there is more that can be done,” he added.

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Hare further noted that it will be critical for the government to continue focusing on supporting and addressing the key risks facing SMEs. However, he highlighted that SMEs cannot just rely on government support to grow.

“Organisations who provide professional services can also play an important role in developing a sustainable environment for SMEs to develop their capabilities in managing the risks. Another key element of achieving sustainable growth is internationalisation,” he added.

Aon’s survey showed that around half of the polled firms are already considering expanding overseas. Given the relative size of Singapore’s market, SMEs must seek to achieve growth in overseas markets, he said.

With relative proximity to, and the considerable potential market size of countries such as China, Indonesia or Vietnam, overseas expansion is seen as a logical next step for SMEs, particularly for those who have already accomplished sustainable scale in their home market. Data revealed that over 60% of companies with more than $10m turnover already have an international footprint, whilst only a quarter of the companies with turnover sub $1m operate beyond Singapore.

As the need to mitigate new exposures and risks in new, often unfamiliar, territories comes as a result of overseas expansion, the ability to maintain viable operations and minimise volatility also becomes a priority. This can be addressed by employing suitable financing and insurance measures to support and underpin expansion plans, Hare explained.

“For example, the supply chain needed to provide goods and services in Vietnam is considerably more complex than that required to service customers in Singapore,” he highlighted. “Finally, operational and legal risks can be significant, and SMEs need to carefully evaluate its corporate and legal structure supports international expansion plans, in addition to the well documented and anticipated challenges of language and cultural differences.”