Perfect storm lashes SMEs – so what can they do to recover?

Despite SMEs showcasing their resilience during the COVID-19 pandemic, there are warning signs ahead for 2021 and beyond – and businesses must take decisive action to succeed.
The March 2021 ScotPac SME Growth Index highlights the uncertainty, with one in three small businesses saying they will have to sell (20%) or close (14.2%) unless conditions significantly improve.

As the JobKeeper stimulus package becomes a distant memory and businesses deal with events such as severe flooding across eastern Australia and ongoing fallout from domestic and international border closures, there is no room for complacency.
SME owners are a tough cohort, though, and the Index shows they are already plotting ways to rebound. Here are some strategies that are on the agenda as they seek to kick-start growth.

Put restructuring on the radar
In tough markets, discussions with your accountant or the Australian Taxation Office are a smart move. The SME Growth Index reveals that a fifth of businesses say they will make arrangements with the ATO to better manage their cashflow, and the tax office is coming to the party with initiatives such as providing tax-free cash flow boosts of between $20,000 and $100,000 to eligible businesses, delivered through credits in the Business Activity Statement system.

Clearly, change is in the air, with the Index showing that two-thirds (64.6%) of businesses plan to examine ways to restructure their operations this year.

Another factor that may help on the financial front is the Federal Government’s new small business restructuring laws that are designed to help businesses reset balance sheets and return to profitability. Eligible SMEs with liabilities under $1 million and who are up to date with their tax lodgements can stay in charge of the business while working on a turnaround plan with an expert.

Implement cost-cutting measures
SMEs need to be lean, but not mean, as they pore over expenses relating to everything from staff numbers to operational costs. Of the 1253 small businesses that East & Partners polled for the Index, one in five (21.6%) has plans to reduce costs in an effort to boost their overall financial position.

Among the options are changes to the workplace, with one in five businesses overall – and one in four larger SMEs – indicating that they’ll move head office or downsize. While that could be disruptive, many businesses know as a result of the pandemic that working from home is now a feasible option that can minimise their office footprint and associated costs.

While smart budgeting is crucial, businesses should strike a balance between conserving cash and investing in growth. A lack of investment runs the risk of a business becoming less relevant in its market.

Embrace a working capital finance facility
Non-bank lending options should be in the mix for businesses, with the end of JobKeeper in March 2021 increasing the pressure to find reliable sources of funding. The Index reveals that 685 of the 1253 respondents are planning to invest in their own growth over the next six months, so cash flow will be more important than ever.

Significantly, the research shows that one in six businesses (15.2%) intends to use a working capital finance facility to replace stimulus funds. Invoice finance, also known as debtor finance or receivables finance, is expected to be one option that is on the table. Such a facility is ideal for businesses that sell goods or services on credit terms, letting them receive an advance on invoices already owed, while their funding can grow in line with sales. No property security is required and businesses can get an immediate cash injection to increase cash flow and cover costs such as wages and supplier payments.

Invoice finance also offers SMEs the option of full management of accounts receivables, which allows smaller entities to focus on their growth rather than wasting time chasing outstanding invoices.

While there are a range of facility available, what’s clear is that businesses should be talking to professional advisers about the best way forward. In such uncertain times, it’s also imperative to act quickly to put funding in place early, so if a business has cash flow problems it can move promptly to take advantage of new sources of funding.

While the government has tried to encourage SME access to funding through loans under its SME Guarantee Scheme, with the loan limit increasing from $1 million to $5 million, there are still questions as to whether SMEs will embrace the idea after slow initial take-up of the offer. Put bluntly, many of them are reluctant to weigh down their businesses with more debt.

Target and grow new markets
COVID-19 or not, SMEs may have to make some bold moves  if they are to prosper. The SME Growth Index reveals that 8.9% of businesses are planning to enter new markets, while 5.1% are eyeing off merger and acquisition opportunities.

This is where financing solutions such as invoice finance and trade finance come into their own. The latter facility uses a revolving line of credit to pay overseas or local suppliers in almost any currency. Having such cash flow certainty gives SMEs more confidence to take on new projects or clients while managing possible extra costs for staff, raw materials and other resources.

Plan to succeed
Confidence and certainty shape as make-or-break factors this year and in 2022 as the pandemic plays out.

It’s worrying that the Index reveals that one in four SMEs (25.9%) are unsure about what measures to put in place to plot their path to recovery. The positive news is that SMEs have choices, whether it be around funding, restructuring, cost-cutting or a range of other measures.

What’s clear, though, is that a do-little is not a viable option in the long-term.