Helping SMEs manage costs


Two days ago, I met a high-flying corporate executive-turned-entrepreneur. He summed up the challenges of doing business with a story. At the peak of his business, he had 35 executives. Each day, he was the first person into office. As he switched on his lights, he tells himself he has to find $10,000 today just to pay for costs. He used to travel first-class as a corporate executive but he chose to start his own venture to fulfil his desire to create something new of his own. Since his venture, he has become conscious of saving every bit of money.

I recall the early days of my new business where we were constantly tight on cash. Once we had  a $30,000 burn-rate per month and just sufficient cash for the current month’s operations. We received a series of investments despite the dotcom crash of 2000. When we used up this series of investments over the next 2 years developing new products, we trimmed headcount to survive the poor business environment. For a whole year, we operated with just enough to cover the next 1-2 months’ of operations until business conditions improved. I kept a close monitor on the company’s liquidity and pushed constantly for new sales to keep things going.

There are 2 key challenges to Small and Medium Enterprises (SMEs) in Singapore. First is a small and competitive domestic market that prevents economy of scale. This is not helped at all by government-linked companies and cooperatives fighting for the small market pie with SMEs.

Second is business cost, with rental and manpower usually contributing the most to this. Recently, manpower cost has been pushed up due to tightening labour supply and increased levies on foreign workers. A friend of mine closed her café at Biopolis as the staff levy jumped from $100+ per month to $450 per month for each staff from 1 July 2011.

A 5 July 2011 investment recommendation by DBS Vickers Securities recommended buying Mapletree Industrial Trust (MINT). In this report, amongst other reasons for the ‘buy’ recommendation, it cited:

Creating synergies from latest acquisition from JTC.  Mapletree Industrial
Trust (“MINT”) has been awarded tranche 2 of the latest JTC tender exercise
of 11 properties (8 flatted factories and 3 amenity centers) of over 2.1m
sq. ft, increasing its total portfolio size by 18% to S$2.6bn. A key
advantage is the ability for MINT to create operational efficiencies given
its leadership & experience in managing the flatted factory space.  MINT is
expected to extract the embedded earnings growth from this target portfolio
through (i) improving current occupancy level, which is at c95%; (ii)
higher rents as the current passing rent is more than 30% below JTC’s
latest posted rents
as at 1st July’11; and (iii) asset enhancement works on
certain assets to improve efficiency and/or GFA. This implies further
earnings upside in the coming years when these expiring leases are renewed
.

With the transfer of factory ownership from JTC to MINT, MINT will be able to push up rental yields. JTC may find it politically sensitive to increase rents for SMEs. The problem is passed on to a commercial entity so that it can raise rent to the higher recommended market rate. Market rate itself is subjective as the government is the biggest landlord in Singapore. Rental rates and land costs are very much under its control.

While higher rent on flatted factories is good news for shareholders of REITS such as Ascendas and Mapletree, it is more bad news for SMEs. They already face challenging market conditions and rising manpower and utilities costs. It will be hard for them to cope with increases in both manpower cost and rental cost at the same time. No doubt productivity needs to increase but when business owners are distracted by simultaneous rise in costs from many areas, they can be distracted from pursuing measures to increase long-term productivity such as investing in training and equipment as they are cash strapped.

As we aim to transit our economy and build up productivity, we should help businesses by slowing down some of the cost increases. Rental is one area the government can help. However, with more JTC spaces pushed into ownership and management by commercially-driven REITS, rentals are bound to go up.

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4 comments on “Helping SMEs manage costs

  1. This is an example of the modus operandi of the PAP government over the last 2 decades. Portray a caring side (tokenism through annual budget handouts) while sucking its citizens dry through legitimate market forces driven by the profit seeking ‘private’ commercial entities (read GLCs, ‘privatised’ but largely Temasek owned companies).

  2. I can relate to your experience as I am going through the same now. I have been running a business for 2 years now after working in the corporate sector for a year. I know I dont have enough experience but after working for a year, I realized I am not fit for a corporate culture.

    My monthly burn is a bit more than yours and all I am worried about is how to cover costs on a monthly basis. Though there are no GLCs in my area of business, but corporates with their huge resources are competing with us. Rentals and manpower are the biggest costs for a company like us even though we are pretty lean. I can still understand paying more for manpower since we need to attract the right kind of people if we are to move the company forward but rentals and lack of any support for local SMEs is killing us. Even rentals in places like International Business Park in Jurong east are crazy.

    I seriously hope that the govt understands the importance of local SMEs and gives them some kind of support to pass through lean periods. Raising money from investors is probably the only way for my company to survive.

  3. What you said has been around for so long and probably getting worst. Being the biggest landowner and landlord, the government has the biggest vested interests to create a property bubble with high land prices, high housing prices and high rents. Telling the government to help SMEs by earning less is like telling a tiger not to eat flesh. It is very frustrated and helpless. You want change but unable to do anything about it. Complain and complain and complain! What’s the use ! We know a lot of the costs increases which result in the higher costs of living comes from the government, but yet, some people still feel that without them, Singapore cannot survive.

  4. The biggest threat to entrepreneurship in Singapore is cost and GLCs..they eat up everything. In another word, the biggest problem in growing entrepreneurs in Singapore is the government policies. Unless this is changed, we will not see many coming up.

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