Diversification – the big word all SMBs need to focus on in 2023
Irish businesses are once again preparing to face a number of significant national and international hurdles, most of which are beyond their control. Rising interest rates, high inflation, soaring energy bills, ongoing supply chain disruptions and significant skills shortages are all part of the heady cocktail SMEs are grappling with.
o While there is a lot for SMEs to think about to ensure 2023 is a good year, we’ve boiled it down to just one word – diversification.
By taking the simple step of reviewing and diversifying in two key areas, SMEs will be on their way to future-proofing their business for years to come.
The first point to check is the revenue stream. Diversifying revenue streams helps reduce the potential risk of bad debts that occur when companies write off amounts of money when customers cannot or do not want to pay bills in full.
In recent months we have seen a number of sectors such as hospitality and retail take a significant hit due to rising energy prices and inflation. This has resulted in many stores having to close their doors forever. Latest statistics released by Deloitte Ireland show that there were over 500 corporate bankruptcies recorded here in 2022, a 29 per cent increase on the previous year.
An expected consequence of these closures is an increase in bad debts from suppliers. PwC’s Q1 2023 Insolvency Barometer estimates €1.8 billion in debt was owed by companies that went bust in 2022. This is backed up by our own research which shows that a third of SMEs in Ireland have had to write off bad debts over the last 12 months, mainly due to customer default or insolvency, with €18,543 being the average amount written off. The problem was most problematic in the wholesale sector (43 percent), followed by the corporate and professional services sector and transportation (both 38 percent).
Looking ahead, PwC also predicts that the direct economic impact of corporate defaults will be significantly higher in 2023 than in 2022. As a result, these pressures will likely translate into even larger amounts of bad debt as payment disputes and defaults occur. Therefore, it would be wise for SMEs to take a number of measures to ensure they do not fail to commit payment defaults such as updating credit control systems, conducting full background checks on all customers prior to lending, and ensuring strict payment protocols.
The second key area to review and diversify is short- and long-term financing solutions.
Cash flow is a big problem for businesses, and it’s likely to get worse as bills take longer to pay. Our recent survey found that tracking unpaid bills is the top funding issue for businesses, cited by nearly a third (32 percent) of respondents. Construction was the main sector stating this was their main concern (45 percent), followed by transportation (38 percent).
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In recent months we have seen a number of sectors such as hospitality and retail take a significant hit, writes Mark O’Rourke
As a result, companies resort to unsustainable financing opportunities on a daily basis. Our research shows that nearly a third (30%) of SMBs use credit cards and more than a quarter (26%) rely on bank overdrafts to meet their day-to-day cash flow needs.
With credit cards and overdrafts forcing a company to take on even more debt at a time when they don’t need it, SMEs should consider more sustainable solutions. One option is Invoice Finance, a facility that gives businesses access to outstanding balances from their unpaid invoices and helps them access income they’ve already earned but haven’t received yet.
In order to take advantage of growth opportunities, SMEs must really understand their profitability. The only way to do that is to sit down and spend time getting cash flow forecasts right.
This essential information supports all necessary decisions in everything from buying new equipment, planning growth and expansion to exploring new markets.
But despite the heady cocktail of economic challenges and the strong headwinds that still prevail, SMEs remain positive about the future. A large majority (87%) of Irish SMEs in the Bibby Financial Services survey said they are confident about business prospects and opportunities over the next 12 months. More than half (54 percent) of all SMBs expect that their turnover will increase in the next year. More than a third (38 percent) say their sales will stay the same, while just 9 percent expect sales to fall. Of those predicting an increase in sales, nearly three in four expect an increase of up to 10 percent.
The resilience of SMEs was also shown when asked about opportunities in the coming year. Acquiring new customers (69 percent) and hiring new employees (37 percent) are seen as the biggest opportunities over the next 12 months. International trade is an opportunity (23 percent), while mergers and acquisitions are a prospect for some (12 percent).
These figures underscore the resilience of Irish SMEs and their constant ability to adapt and change, underscoring the pivotal role they will play in strengthening Ireland’s economic solidarity in the coming months.
Mark O’Rourke is Managing Director of Bibby Financial Services Ireland
https://www.independent.ie/business/irish/diversification-the-big-word-all-smes-need-to-focus-on-in-2023-42327727.html Diversification – the big word all SMBs need to focus on in 2023
