As creditors take steps to protect themselves against possible defaults, Singapore retailers have found their cashflow being tightened significantly.
Retail companies take the fewest days to settle bills when they fall due, according to an analysis of corporate payment behaviour. But while this may appear to indicate financial strength, in reality it shows that creditors are demanding prompt payment, says Singapore information and credit bureau DP Information Group (DP Info).
According to the Days Turned Cash (DTC) National Average – a measure of the days a company takes to pay a creditor once a debt is due – retail SMEs took just 12 extra days to settle their accounts in the first quarter of this year. This compares to the average of 29 days, calculated across eight industries.
Also, 77 per cent of retail companies settle their debts on time, making them the most prompt payers of any industry.
DP Info COO Lincoln Teo says the tight payment times indicate the concern other companies have when providing credit to retail companies.
“Some companies are telling us that it is now the norm to demand prompt payment from retail companies. It is also their policy to vigorously pursue money owed by retailers.
“Several unfavourable factors are impacting the retail sector including higher wages, foreign labour restrictions, increased rents and increased competition. This has made companies more cautious when extending credit terms to a retail company.”
“This has a negative effect on the cash flow of retail companies because they are unable to tap on suppliers’ credit – a common short-term financing approach used to ease their cashflow.”
Teo says the tough conditions in the retail sector are confirmed by other research published by DP Info. According to the quarterly SBF-DP SME Index, the level of optimism of retail SME companies has been declining since the start of last year to the point where retail SMEs do not expect any significant growth in their businesses during the next six months.
Teo says the quicker retail companies respond to the tightening of credit and cashflow in their industry, the more likely they are to survive.
He offers strategies for retail SMEs to avert a cashflow crisis…
Rethink business approach: Reviewing the business approach should be at the top of the agenda for retail companies. Many will need to change to become more competitive, such as reducing their reliance on manpower and embracing online trading.
Reduce overheads: Every business practice and relationship a company has needs to be reviewed to see if it can be done more efficiently. While some costs are fixed, there are still options for savings such as finding cheaper warehousing or negotiating better rates from couriers.
Assess credit needs carefully: If a company needs an overdraft or other forms of financing to see it through a tough period, the borrower must first understand its capacity, cashflow, capital and economic conditions.
Review purchasing plans: Reduce unit purchase costs by buying in bulk once or twice a year. Make smaller and more frequent purchases so that less of the company’s money is tied up in payables and inventory.
Manage currency risks: As most retailers sell goods made offshore, they are exposed to the risk of currency fluctuations. Retailers should explore financial products such as hedging with banks to see if currency risks can be better managed.
Join a credit bureau: An SME credit bureau is a way to stay ahead of potential payment problems. Bureau members share their payment data with a central authority (the bureau), and when a party is late with a payment all other companies are alerted. This means member companies can take steps to obtain their money before the situation becomes unrecoverable.
