GUEST BLOG: Green shoots of recovery continue for Irish SMEs

By Neil Hughes, managing partner at Hughes Blake Chartered Accountants

The European Commission has indicated that Ireland’s predicted growth rate stands at 3.5% for 2015 – which gives us the fastest growth rate in the EU – but the reality is this could be closer to the 4.8% growth we experienced in 2014.

At Hughes Blake, we work with a wide range of medium-sized trading businesses, and at the coalface it’s great to see people beginning to plan for growth again for the first time in years. It’s no longer perceived as enough just to survive – companies are beginning to refocus on investing in new offerings and on pushing into new markets. We are getting as many new enquiries in recent weeks from business start-ups as we were when the country was approaching the height of the boom, which is really encouraging.

The good news is that growth is widespread and spans nearly all sectors, including transport, construction, travel and tourism. It’s particularly strong in the food sector and in particular for food exporters. There is also growth again now in the retail space – and that’s largely down to improving consumer sentiment.

Right across the country we are seeing an increase in confidence but certainly recruitment is growing faster in larger urban sectors – with many of the firms we work with are looking to fill at least a couple of positions. That’s a great sign and it bodes well for a full national recovery.

It is important that the recovery trickles down now to smaller towns and villages. The fact that recovery is slowly taking hold throughout the country is particularly encouraging and I would have high hopes that regionals towns can rebound strongly now too.

However, it’s equally important to point out that there are small and medium firms in all counties which cannot grow due to legacy debt burdens and the weight of unsustainable upwards only leases.

We at Hughes Blake find ourselves being approached by business owners in our core markets of Dublin, Wexford and Cork, as well as from other counties, who are deeply frustrated after treading water for the last number of years of the recession. Their debts are unsupportable and yet in part because of reluctance from the banks to deal with the issue, they are in the position of being forced to watch the recovery from the sidelines.

Our concern is that for some businesses, they have survived the recession but may not survive the recovery unless they restructure and refinance their businesses.

EMPLOYEE LOYALTY

The business operators we deal with have been passing on the growth they are experiencing to their employees. It’s quite common for employees to have gone without a pay increase since 2008 and I think there is a widespread recognition that team members who stayed loyal over the course of the recession definitely deserve to be rewarded.

Of course, for businesses which are just trying to stay afloat and keep up with their debts, the pressure for salary increases is a further trigger for the decision to restructure their business so that they can go on to compete. If every business is limping in the recession then most can stay in the race – when one of your competitors starts to sprint: that is when you could become more vulnerable to falling over.

IMMEDIATE FUTURE

So, what does the next 12 months hold for Irish SMEs? There are two divergent views to take here – the one where we continue on as before, with many SMEs locked in debt which they have no realistic hope of repaying. Banks always hold the threat of enforcing their security on the loan but so far have been very reluctant to do so, creating a sort of limbo status where the true scale of the problem has remained under the surface. The truth is that 6 years into the recession, many business owners are tired and will lose morale if they are forced to go on like this for too much longer.

The other more positive view is the one where banks begin to recognise that action needs to be taken to address the issue. They begin to accept write-downs and the businesses currently laden with debt can begin to plan for expansion in line with the rest of the economy. In situations where a bank write-down is not forthcoming, or where the strain on the business is due to over-large leases or other debts, a simplified examinership can be called upon through the ISI. Importantly, it would remain a process for businesses which are fundamentally sound and which have much to offer to society if saved.

Even healthy SMEs are currently still experiencing problems in accessing credit. The situation is much improved compared with even a couple of years ago, with banks beginning to lend again. However, an abundance of caution remains, so that companies are being kept waiting to put clear daylight between their historic problems, such as Revenue difficulties, before they are approved.

Part of the problem is caused by the fact that Irish people are very attached to traditional sources of credit. There are more choices out there than bank loans, and while large companies seek private equity and raise investment from abroad all the time, SMEs have been much slower to embrace such alternative methods of raising capital.

Invoice financing is a new phenomenon to many Irish firms and is worth exploring in some cases where cash flow is an issue. Other options are crowdfunding, EIIS as a loan substitute and angel investing.

CULTURE OF INNOVATION

I think the real test of how our economy’s growth is going to be how robust and broad-based we can make the economy as a whole. Education, upskilling and retraining have a critical role in that: the battle for talent will intensify over the next five years.

In addition we need to inject a culture of innovation and exporting in our SMEs. We have become adept at running businesses efficiently during the recession; cutting costs, collecting cash and so on but we have to avoid the situation where the default for a company based here is to batten down the hatches and sell only to the Irish market, which is still overwhelmingly the case. It has to make sense for people to do business in Ireland but be continually looking outwards to opportunities abroad.

GOVERNMENT SUPPORT

The Government’s attitude to supporting SMEs has been pleasing, and there have been efforts made to highlight the range of help on offer. The ActionPlanforJobs.ie website has a useful tool which shows which of 80 Government supports could apply to the business.

Specifically from the perspective of helping SMEs which are dealing with over-indebtedness, the introduction of Circuit Court examinership was an important for SMEs to allow them to survive and thrive again. Microfinance Ireland, the LEOs, EI and the IDA are all doing a very good job and I have seen first-hand examples of the work that these agencies are doing creating jobs in the economy.

TAKING TO THE CLOUD

I personally believe it’s possible for SMEs to make more progress to reduce costs through cloud computing. Some were slow to invest in their IT set-up over the course of the downturn, and there is a cost for not staying up to date as competitors who did opt to embrace the cloud have gained a competitive advantage.

At Hughes Blake we have just introduced an IT advisory service to work with clients to stay ahead of the curve and to ensure that the set-up employed is the right one that anticipates the company’s needs over the next number of years.

Photo (above): Eric Kilby