Diversification – the big word all SMEs need to focus on in 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 SMEs are contending with.

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, SMEs will be on the road to futureproofing their business for years to come.

The first item for review is revenue stream. 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. ​

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 here in 2022, a 29pc 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 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 (43pc), followed by the business and professional services sector and transport (both 38pc).

Looking ahead, PwC is also predicting the direct economic impact of business failure will be significantly higher in 2023 compared with 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 SMEs to 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.

The second key area for review and diversification is short-term and long-term financial funding solutions.

Cashflow is a big concern for businesses, and this is likely to get worse as invoices take longer to be paid. Our recent survey revealed chasing unpaid invoices is the top financing problem for businesses, mentioned by almost a third (32pc) of respondents. Construction was the main sector to state this was their key issue (45pc) followed by transport (38pc).

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Over the past few months, we have seen a number of sectors such as hospitality and retail taking a significant hit, writes Mark O'Rourke

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The knock-on impact of this is that businesses are turning to unsustainable funding options on a daily basis. Our research shows that almost one-third (30pc) of SMEs are using credit cards, and over a quarter (26pc) 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. One option is 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.

To engage in growth opportunities, SMEs need to truly understand their revenue position. The only way to do this is to sit down and spend time doing cashflow projections properly.

This fundamental information will support any decision required on everything from buying 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, SMEs are still positive about the future. A big majority (87pc) of Irish SMEs told the Bibby Financial Services survey they are confident about business prospects and opportunities over the next 12 months. More than half (54pc) of all SMEs expect their turnover to increase over the next year. More than a third (38pc) say their turnover will stay the same while only 9pc expect a decline in sales. Of those predicting an increase in turnover, almost three in four expect an increase of up to 10pc.

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

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

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Mark O’Rourke is managing director of Bibby Financial Services Ireland