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SMEs hanging on in unforgiving climate
27 December 2009 By Nicola Cooke
In many ways, 2009 was an annus horribilis for small and medium enterprises (SMEs). It was a year when many of them cut staff, working hours or wages, and when their order books never looked so empty.
But for those who have made it through the last year - and there have been many casualties - their operations are likely to be more efficient than ever, and most will have found savings in areas they never thought possible.
SMEs are the lifeblood of many towns and villages across Ireland. There are almost 250,000 such businesses employing around 1.3 million people - or 60 per cent of the country’s workforce. About 90 per cent of these firms employ fewer than ten people.
However, the fact that most are Irish start-ups which provide cashflow and commitment to local economies has raised their importance, as increasing numbers of multinational manufacturers quit Ireland for low-cost destinations.
Redundancies, wage freezes and cuts, as well as a severe tightening of credit and a lengthening in payment periods, were the main issues SMEs had to tackle this year.
Many were forced to introduce reduced working hours for employees, and the vast majority implemented a hiring and expansion freeze.
Jim Curran, head of research at the Irish Small and Medium Enterprises Association (Isme), said that many of the association’s members were struggling to stay in business and maintain employment levels.
‘‘A lot of them let people go, but most disappointing has been the fact that there has been no government package for maintaining jobs from the government," he said. ‘‘The recent budget did nothing to enhance business or stimulate the economy."
Curran said that the €250 million employment subsidy scheme announced last June by enterprise minister Mary Coughlan, to help firms maintain jobs by partly subsiding salaries, was not accessible for most small businesses because of strict conditions, including a prerequisite of more than ten employees per company.
‘‘SMEs are the backbone of this economy and it’s time the government sat up and took notice of this," said Curran.
‘‘We need to look at improving the export policy of these businesses, but the cost of competitiveness and a reduction in rates and other charges - such as energy - must be addressed. SMEs have done all they possibly can to cut costs.
‘‘Now it’s time for the regulators and local authorities to review and reduce rates," he said.
Curran said these charges had to be addressed in the short term, as he had spoken to business owners who said they were ‘‘on their knees, and might not be around after Christmas’’.
He said that, while the review of local authorities announced in the budget was welcome, SMEs could not afford to wait ‘‘the months, or even years’’ the review may take, and said action was needed immediately.
A recent Isme survey of 500 businesses across a number of sectors revealed that 45 per cent of SMEs had implemented pay cuts averaging 13 per cent this year.
Payment terms (the length before bills are paid) have drifted from an average of 30 days in 2007 to an average of 80 days.
More than four in ten of the companies surveyed had applied for credit from banks in the last three months; 54 per cent of these firms requested overdrafts and 37 per cent applied for term loans or changes to term loans.
A total of 83 per cent of respondents reported a decline in sales levels this year. More than half had orders cancelled in the last three months, and 80 per cent said their order books were ‘‘well below normal’’.
Isme estimated that 75,000 jobs were lost in SMEs this year, and Curran said he saw ‘‘no green shoots at present’’ to indicate that 2010 would be a better year.
‘‘The confidence is not there," he said. ‘‘Brian Lenihan says we have turned a corner, but you can always turn a corner onto a worse street.
‘‘We are still reliant on the international economy, and I would be very worried about the first few months of next year. This has probably been the worst year for SMEs in 20 years."
There was much debate this year about the level of credit being provided by banks to businesses, and in June, the government commissioned Mazars to report on the issue.
Bank data showed that 14 per cent of credit applications were being turned down, whereas SMEs were reporting an average refusal rate of 24 per cent, rising to 30 per cent for businesses with fewer than ten staff.
The extensive survey looked at €34.5 billion-worth of loans to 1,076 SMEs provided by AIB, Bank of Ireland, Anglo Irish Bank, Ulster Bank and National Irish Bank. The results showed that a quarter of small business loans were either in trouble or had been placed ‘‘on watch’’ by the banks.
According to the survey, the most common reasons for being refused credit were a ‘‘change in bank lending policy’’ (around 23 per cent) and ‘‘the sector in which the business operates is no longer a sector to which the bank is prepared to lend’’ (16 per cent).
Over half of SMEs surveyed had applied for credit over the last 12months.Working capital and cash flow requirements made up most requests for loans, at 22 per cent.
Chambers Ireland has 60 member chambers representing more than 13,000 businesses nationwide. Seán Murphy, deputy president, said that most of its members were ‘‘battered and bloodied after the year, but still here’’.
The move by the government to save €4 billion in public spending in the budget ‘‘was a strong signal to employers and the public’’, said Murphy.
‘‘This sent out a confidence building signal, particularly the reduction on Vat and excise.
Paradoxically, the increase in petrol prices and the British Vat rate increasing from 14.5 to 17.5 per cent meant the recent exodus of southern shoppers to the North was likely to be much less pronounced in 2010 than it has been in 2009," he said.
Murphy said that, while delays in payments had been problematic for small business, the reduction in output by about 20 per cent - and the element of adjustment to this new normality - was a bigger hurdle, and one that caused a ‘‘serious shake-out’’ in most businesses.
He also said that, with the exception of a few foreign owned banks, viable SMEs were receiving the lending they required from banks.
‘‘While there is a sense that things will still be tough next year, there is a more positive outlook for summer 2010 than there was this year," he said.
The Small Firms Association (SFA) said that most of its members had been ‘‘in survival mode’’ this year. SFA director Patrica Callan said that most SMEs reduced staff ‘‘only as a last resort’’, and that pay cuts of 10-15 per cent had been taken instead in an effort to preserve jobs.
She said that some businesses had used the recession as an opportunity to make acquisitions in a market where property and talent were cheaper.
‘‘But having said that, only 10 per cent of businesses grew this year, and only one in 25 could afford wage increases," she said.
‘‘We are a small open economy, and it is the multinationals that make our exports look good. Some businesses have sought to make the appeal of their products more global, but there needs to be a move away from the traditional markets of the US and Britain into growing economies in areas such as Asia."
While Callan acknowledged that credit tightening had been a problem for small firms this year, she said many had reduced costs significantly and had ‘‘cut the fat’’ which had developed in recent years.
She called on other local authorities to follow the lead provided by Fingal County Council which, earlier this month, cut rates for businesses by 10 per cent.
‘‘There are plenty of other councils which have no such plans, but this is a boost for small companies.
‘‘Energy and waste rates also need to fall, and there should be a freeze on burdensome form-filling for three years.
Then we might see Ireland’s competitiveness finally back on track," she said.
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