Diversification - the key word that SMEs need to focus on in 2023

As we head into 2023, Irish businesses are once again bracing themselves for a range of significant domestic and international hurdles to jump, most of which are out of their control. Rising interest rates, high inflation, spiralling energy bills, ongoing supply chain disruptions and a significant talent squeeze are all part of the heady cocktail SME’s are contending with on a daily basis.

So, while there is a lot for SMEs to be thinking about to ensure 2023 will be a good year, we’ve whittled it down to just one word - Diversification. By taking the simple step of reviewing and diversifying two key areas, SME’s will be on the road to futureproofing their business for years to come.

The first item for review is revenue stream to ensure there is no over reliance on one or two key sectors or customers. Diversifying revenue stream will help reduce any potential exposure to bad debt, which occurs when businesses write-off sums of money if customers cannot or will not settle invoices in full. This may be due to payment disputes, protracted default or, in some cases, the insolvency of another business.

Over the past few months, we have seen a number of sectors such as hospitality and retail taking a significant hit due to rising energy prices and inflation. This has resulted in many businesses having to close their doors for good. Recent statistics published by Deloitte Ireland show that in excess of 500 corporate insolvencies were recorded in the country in 2022, a 29% increase on the previous year.

An expected consequence of these closures is an increase in bad debts suffered by suppliers. PwC’s Q1 2023 Insolvency Barometer estimates that there was €1.8bn of debt owing from businesses that failed in 2022. This is borne out by our own research which shows that one third of SMEs in Ireland have had to write off bad debts in the past 12 months, mainly due to customer non-payment or insolvency, with €18,543 the average amount written off. The issue has been most problematic in the wholesale sector (43%), followed by the business and professional services sector (38%) and transport (38%).

Looking ahead, PwC is also predicting that the direct economic impact of business failure will be significantly higher in 2023 compared to 2022 levels. As a result, we’re likely to see this pressure translate into even greater sums of bad debts, as payment disputes and defaults start to kick in. As a result, it would be prudent of SME’s take a number of steps to ensure they don’t fall foul to non-payment such as updating credit control systems, completing full background checks on all customers before extending credit and ensuring strict payment protocols are enforced.

By reviewing their revenue stream and subsequently diversifying their customer base to ensure they are not depending too heavily on a small number of industries that may not be able to make their payments or worse, close down, SMEs can help futureproof their business.

The second key area for review and diversification is short-term and long-term financial funding solutions. Cashflow is a significant concern for small and large businesses at the moment, and this is likely to get a lot worse before it gets better as invoices take longer and longer to be paid. Our recent survey revealed that chasing unpaid invoices is the top financing problem for businesses, mentioned by almost a third (32%) of respondents. Construction was the main sector to state that this was their key issue (45%) followed by transport (38%).

The knock-on impact of this is that businesses are turning to totally unsustainable funding options to keep their business going on a daily basis. Our research shows that a staggering one third (30%) of SME’s are currently using credit cards, and over a quarter (26%) are relying on overdrafts to facilitate their daily cash flow requirements.

Given the fact that credit cards and overdrafts require a business to take on even more debt – at a time when they don’t need it - SMEs should be considering more sustainable solutions such as Invoice Finance, a facility that offers businesses access to money outstanding from their unpaid invoices, helping them to access income they have already earned but not yet received. This gives a company the option of using their own funds to improve day to day or seasonal cashflow fluctuations or finance bigger growth plans without having to borrow money.

Unlike a loan or overdraft, Invoice Finance does not involve ongoing monthly repayments. This revolving credit option means that once your invoices are paid, you can just continue the cycle – upload your invoices, draw down, use the funds and simply repeat.

In addition to assisting with cashflow, it’s worth noting that Invoice Finance can also be utilised to fund a range of other growth scenarios such as investing in infrastructure or equipment, funding Research and Development, financing an expansion, Mergers and Acquisition activity or simply stabilising a business during turnaround.

However, to engage in growth opportunities, SME’s need to truly understand their revenue position. The only way to do this is to sit down and spend time doing your cashflow projections properly. This fundamental information will support any decision required on everything from purchasing new equipment, growth and expansion plans to exploring new markets.

However, despite the heady cocktail of economic challenges ahead and the strong headwinds still blowing, SME’s are still positive about the future. 87% of Irish SME’s told the Bibby Financial Services survey that they are confident about business prospects and opportunities over the next 12 months. 54% of all SME’s expect their turnover to increase over the next year, 38% say their turnover will stay the same while only 9% expect a decline in sales. Of those predicting an increase in turnover, almost three in four expect an increase of up to 10%.

SME resilience also shone through when asked about opportunities in the year ahead. Attracting new customers (69%) and taking on new staff (37%) are seen as the biggest opportunities in the next 12 months. 23% say trading internationally is an opportunity, while 12% cite Mergers and Acquisition activity as a prospect.

These figures truly underline the resilience of Irish SMEs and their continual ability to adapt and change and really highlight the pivotal role they will play in cementing Ireland’s economic solidarity over the coming months.