Nobody does business in a bubble. And as businesses of every size and at every stage of their growth continue to grow, they’ll find themselves increasingly affected by the economic ecosystem they operate in.
Just as a plant species is dependent on the quality of the soil it grows in and on animals for pollination, a business depends on equity and debt to finance its operations. This equity-and-debt combo is what is known as a company’s financial structure.
In this post, we’ll take a look at trends in Singapore’s current and future economy in light of how these might affect the financial structure of your organisation, to help you plan accordingly.
But first, let’s take a quick closer look at financial structures.
Very simply, equity involves selling shares of your company to stakeholders to raise money that the company can use to run the business or pay off a debt. A company might incur debt or borrow the money it needs for its business operations.
Figuring out how much money to borrow or whether it should sell shares to raise money is the job of the business’ financial manager, who might also get advice for doing this from a good accountant.
The kind of financial structure or specific mix of equity and debt your business has will depend on its size, the vertical it belongs to and the country you’re in. And, depending on the performance of that country’s economy, your financial structure might change to cope with economic developments.
If you run a small business, for instance, your financial structure would most likely include bank loans or financing companies, while larger ones or corporations might apply for a stock exchange listing. Service companies tend to offer bonds or securities while manufacturing or production companies might turn to banks.
Now let’s take a quick look at how financial structures are affected by economic trends.
We all know how so-called economic forces such as interest rates, government policies, natural disasters, political events and supply & demand make an impact on business operations.
When the economy’s doing well, people spend more which means more revenue for most businesses. To keep up with demand, businesses expand by offering more products or services and hiring more staff.
When economic trends are on the downside, people spend less, which means less revenue for most businesses to pay back debts, which in turn affects their financial structures. Struggling enterprises are also likely to find it hard to find financing.
So what are some of the current economic trends in Singapore that affect businesses in this regard?
Surveyed analysts say Singapore’s economic growth is slowing down this year, putting the country’s projected growth at a little less than 2.5%. This projection comes as a result (or in spite) of the trends listed below. While the first few trends are more international than local, they’re still trends to watch as far as their effect on financial structures are concerned.
1. Uncertain US-China trade relations. Many analysts point to this trend as a main consideration for the lower growth projection for 2019. While an end to the tensions between them doesn’t seem to be coming any time soon, businesses back here in Singapore are keeping a watchful eye on developments.
2. Sluggish growth in China. With a 2018 growth rate of 6.6%, the slowest since 1990, China’s economy faces a lagging manufacturing sector and flagging consumer drive. Local businesses that benefit from the strong trade relations between China and Singapore may have to adjust their financial structure due to the downward trend in Chinese services, tourism and investment.
3. Brexit worries. As the UK continues to work out its departure from the EU at the time of writing, concerns abound over Brexit’s effect on European as well as British economies. Meantime, Singapore says it will be able to agree on a post-Brexit trade deal with the UK, with trade deals already underway between Singapore and the EU.
4. Tech disruptions. Digital developments are changing not just the face of industries like transportation and tourism, but also how financial structures themselves operate. Fintech, for instance, is changing the way businesses apply for financing or keep tabs on the stock market in relation to shareholder equity.
5. Outdated workforce skills. With the disruptions trend showing no signs of stopping, workers and their employers find themselves having to keep up with evolving skill set requirements—pushing businesses of all sizes to find and allocate extra resources to training. Government initiatives such as SkillsFuture are in place to help workers learn the necessary skills.
6. Weaker demand in electronics and engineering. Companies in these sectors as well as in chemicals, petrochemicals and pharmaceuticals may also have to make changes in their financial structures to cope with the industry-wide decline. The construction sector is also slowing down despite an increase in private construction projects.
7. Trade protectionism. While implemented as a means of shielding local businesses from the negative implications of globalisation, trade protectionism in Singapore is now on the rise. This has become a cause for concern in that it could limit business innovation and competitiveness on a global scale in the long term.
8. Less SGX listings. Bloomberg reports delistings have outnumbered listings on the Singapore Exchange over the last five years, with 19 leaving the exchange last year alone. And while the SGX head has pointed out how mass delisting is also happening all over the world, one securities analyst says the local delisting trend is worrying.
9. Rising inflation. Projected to hit 1.3% for the All Items Consumer Price Index and 1.8% for core inflation this year, inflation rates are expected to put the brakes on consumer spending and sentiment, with retail sales likely to remain on the downside. The expected upward spike in crude oil prices has no small role to play in this trend.
10. Strong consumer spending and IT demand. To end this list on a positive note, it will be noted that consumer spending has remained strong in spite of inflation, with government measures in place to encourage spending per household. Demand for tech solutions is also growing, which in turn has supported the information services and IT sector.
Careful long-term planning counts for so much more than reactionary measures. For businesses whose core competencies lie outside of the financial sphere, it can be daunting to design a financial structure able to withstand the march of trends within and outside of the local economy.
Count on our unique blend of business knowledge and experience drawn from years of running our own enterprises as well as helping SMEs to flourish in Singapore. Talk to us at U Ventures today to put our expertise to work for you.