Monday 22 October 2018

Richard Curran: SMEs bullish on 2018 but return to good times will bring fresh set of challenges

A weak sterling is bad news for Irish companies that import into a Britain still struggling to come to terms with Brexit. Stock photo
A weak sterling is bad news for Irish companies that import into a Britain still struggling to come to terms with Brexit. Stock photo
Richard Curran

Richard Curran

Small business remains the backbone of the economy. It is a hugely scattered sector that includes everything from the self-employed man with a van, to the software developer who has a few clients, all the way to the food-exporting firm that might be worried about Brexit.

When things are going well for small business, they are often going well for the economy as a whole. As small business owners look towards 2018 they are in pretty good form. The economy is growing at a steady clip. People have more money in their pockets and they appear to be spending it.

The primary driver of this good news is that more people are at work. More working customers for small business means better prices and better business. The numbers at work in the third quarter of last year had increased by another 48,000 compared to the previous year and people employed is now pretty much right back where it was at the height of the boom in 2007 at around 2.2 million.

But business is never straightforward and there are a whole new set of challenges arising for SMEs - ones that come with better times rather than recessions. Here are several key challenges facing SMEs in 2018.

1 Wage demands: In such a buoyant jobs market, employees often want to move around for a better job. Managers at SMEs will have to manage staff retention as inevitably some of their better staff decide it is time to move on. The most obvious way of doing this is through wage increases. It isn't just about dishing out bonuses to key staff who are about to leave.

It is inevitable that wage demands will increase this year. Some businesses will have the funds to meet this but others may find it tough.

2 Hiring talent: One problem here feeds off another. If you want to hire better people you will not only have to find them, or them find you, but also pay them more. The jobs market is now pretty well close to full employment, which means more power in the market falls to employees.

As the jobs market continues to heat up in 2018, the country will inevitably have to rely on inward migration to fill many of the positions.

Some of these may come from returning Irish emigrants, but the figures to date do not reflect a mass return of emigrants to Ireland just yet.

Equally, during the last jobs boom we saw a huge increase in the number of workers coming to Ireland from Eastern European accession states like Poland, Latvia and Lithuania. Figures show that last year the net inward migration from these countries was just 2,500, so there may not be the same enormous pool of labour available.

This is because the economic situation in many of these countries is a lot better than it was 15 years ago as living standards and job prospects have improved.

SMEs will be fearful that they will have to compete with everybody else to find and hire the best talent. It is a good problem for a business to have and not one they should complain about too loudly, but it is a very real problem which will hold back the progress of some businesses.

3 Brexit: Brexit might not seem like a real problem just yet, but it depends on the business. Some companies, especially in the food sector, are exporting to the UK and want to make decisions this year based on Brexit, but are unsure how it will all play out.

Smaller exporters to the UK may have an opportunity to acquire a business or a processing facility in Britain which would reduce much of the risk of a hard Brexit. It might also mean they are not creating jobs at home, which many of them will find hard to stomach, especially in smaller towns around the country. The big fear is that they take the plunge, shed some jobs in Ireland, ramp up operations in the UK, only to find that Brexit either doesn't happen or is so watered down, they could have kept the jobs in Ireland.

It is a very real dilemma for some exporting companies and one they face in 2018 because leaving it another year could be just too late.

4 Sterling: The sterling issue is linked to Brexit but warrants a different look. Weak sterling is the manifestation of tomorrow's Brexit today.

Some Irish companies were stung and ill-prepared when sterling collapsed after the Brexit referendum vote. They have had time to adjust now and the rate has come back a bit.

However, as long as Brexit remains on the table, sterling is likely to stay weak. Currency hedging is one option, but many businesses seem reluctant to do this. They see it as not their core strength and question why they are taking a position on currency, which is simply not what they do.

Yet, sterling fluctuations have the power to wipe out thin margins for some small Irish exporters.

5 Regulations and bureaucracy: Small businesses complain that they continue to face increased regulations, which in turn can lead to delays and additional workloads to comply.

If anything, the world is becoming a more bureaucratic and regulated place. Important regulations can look fine on paper but the burden of compliance for some smaller firms can be costly. This always features high on the list of concerns for SME owners, in good times or in bad.

6 Rising rents: As property prices go up, so too do commercial rents. Any business caught in a rent review or the end of a lease right now may well be facing a big financial hit as they take a look around Dublin in particular. Estate agents are reporting that more and more companies are moving out of the Dublin City Centre area and moving out to the suburbs because of rising rents. Some SMEs may have battled through the recession with what they believed was a high rent only to find the landlord is looking for a lot more now. Office rents in Dublin are now around 2006 levels, and rising rents are even becoming prohibitive for some large employers, never mind SMEs.

7 Banks and debt: Irish SMEs are still paying some of the most expensive interest rates in the eurozone. A lack of competition in banking and legacy debt issues for SMEs has left them quite cautious about borrowing. The really good businesses have become debt-averse while others are still sitting on ticking debt time bombs that were never fully dealt with in the recession. We saw during the crash how perfectly viable businesses went to the wall because unsustainable legacy debts dragged them down. Those issues have not all gone away.

It is certainly good news that banks are out there willing to lend to SMEs again but many good operating businesses will not be able to avail of that financing because of past mistakes.

Others, will just not want to touch it.

8 Higher business costs: SMEs say the cost of doing business is getting higher, which in turn puts pressure on their own costs and margins. Whether it is dealing with the public sector, higher service costs or factors like wages or rent, it is inevitable that business costs will rise in a thriving economy. When things are going well everybody believes they can squeeze a little more out of everyone else. Higher wage demands will also drive this up.

Many of these problems are good ones to have because they show how the economy has turned. These are the challenges of managing in good times rather than surviving in bad.

The reality for many different SMEs will vary. Some are retailers worried about the threat of online, while some small towns in rural Ireland are worrying about their own future for similar reasons. Technology is presenting new SME opportunities but also putting pressure on some companies to rise to the challenge. A recent Small Firms' Association survey found that just 4pc of respondents reported that business was declining. This is a very positive start to the year. Hopefully, SME managers have learned from the boom/bust era and how not to turbo-charge economic success into failure.

Indo Business

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