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Business Advice

Retail sector SMEs face cashflow challenge

Double whammy of rental hike, labour crunch on horizon.
The Business Times - October 5, 2012
By: Nisha Ramchandani
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Retail sector SMEs face cashflow challenge

SMALL and medium enterprises (SMEs), especially those in the retail sector, need to better manage cash flow against the backdrop of increasing costs and stiffer competition, according to consulting firm Vector Scorecard Asia-Pacific.

Citing a study carried out with Crimson Logic, Vector - backed by the investment arm of Spring Singapore - said that the retail industry had experienced "a fairly high level of revenue growth", even though costs have escalated over the past three years as companies in the sector have expanded their operations.

Average sales growth for the retail sector was 17.5 per cent per year in the past three years, outpaced by costs which grew at an average of 20.7 per cent annually. The average profit margin (after tax) worked out to 4.8 per cent of sales, though after-tax profit on an absolute basis fell 2.33 per cent each year.

The study also showed that retailers had "fairly high risk exposure to obligations" since the liabilities-to-equity ratio is 105.1 per cent on average, Vector noted.

At the same time, with tightening foreign worker quotas in recent months, retailers could see operating costs go up by 10-15 per cent, Vector reckoned.

"There are two main costs that make up at least 80 per cent of a retailer's total operating costs: rental and labour wages," said Nazri Muhammad, Vector group CEO and head of global advisory services.

He added that with interest rates likely to hover below 2 per cent over the next few years, property investors will continue to buy commercial and retail space.

"They are chasing for yield and may likely continue to adjust rent upwards for existing retailers in the next two years at least. This may cause some cashflow issues for SME retailers when the landlords start to increase (rental charges) by 15-30 per cent each year, depending on location," he said.

Vector highlighted some areas that firms should look at to strengthen their operations. This includes studying the structural drivers in the industry and company that can impact its revenue-cost structure, evaluating the trends seen in fixed and variable costs over the last two years, as well as measuring marketing and business development costs against sales performance.

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