Hong Kong Manufacturing SMEs: Preparing for the Future

110• Develop strong relationships with banksOutside of family funds and retained earnings,banks are the main source of finance for SMEs.Developing strong banking relations may becritical to receiving bank support in difficulttimes.• Establish credit linesEven though there is an expense to establishingcredit lines, establishing them in advance of needis always preferable to waiting until the needarises when terms may be more difficult.• Consider SME support programmesSME support programmes can be sources ofloans at low rates. SME managers should beaware of these programmes and the potentialbenefits of using them.• Use asset-backed financing when necessarySelling receivables, and borrowing against assetslike land, plant and equipment, and receivablesmay be used as sources of finance.• Institute strong cash management policiesWeak cash management is the most commonreason that SMEs fail. Companies should knowtheir cash position on a daily basis and tightlymonitor cash inflows and tightly manage cashoutflows.• Keep enough cash in the businessIn most cases, the primary source of income forthe SME owner is the profit of the SME. Enoughprofit, however, needs to be retained in thecompany to see it through difficult times.• Institute a minimum balance policySMEs should institute policies that require aminimum cash balance that allows them to meettheir obligations for several months.• Assess creditworthiness of customerscarefullyBefore selling on credit, a careful assessment ofcustomer creditworthiness should be performed.Otherwise cash sales should be considered.• Pursue payment aggressivelyNon-payment by customers can threaten thesurvival of the SME. Strategies for identificationand collection of debts should be in place tominimise the problem.• Take advantage of terms on payablesStretch payables to the extent possible undercontracts and seek early payment discounts tooptimise cash positions.• Understand key financial ratios and reportsand use them as management toolsTrack cash flows, interest coverage ratios,profitability ratios, etc. on an ongoing basis tomonitor performance.• “Stress test” the SME’s financial positionSME managers should “stress test” the firm’sfinancial position by projecting what the cashposition would be if the market had a significantdownturn, if a major customer took theirbusiness elsewhere, if commodity prices suddenlyrise, or if labour rates or other costs were tosuddenly shoot up. The firm should seek toensure that its financial position would be soundeven in the face of such stress.Administering and Managing the FirmMany SMEs have a difficult time administering andmanaging the firm. This is usually due to a shortageof managerial and office support talent coupledwith expanding administration and managementtasks. High priority areas include:• Ensure legal and regulatory complianceKnow the relevant laws and regulations and set upan early warning system to monitor changes in lawsand regulations. Use outside professionals whennecessary to advise on legal and regulatory matters.