DESPITE calls to move to higher-value products and services, many SMEs continue to hobble, with thin profit margins that threaten to stunt their growth and drain their sustenance.

According to a survey of 1,024 SMEs by DP Information Group (see table), 47 per cent of respondents reported a net profit margin of 0-5 per cent, little changed from 49 per cent last year.

Only 18 per cent posted a net profit margin of more than 10 per cent, while a further 18 per cent recorded profitability of 5-10 per cent.

The remaining 17 per cent recorded losses.

'Many SMEs lack the economies of scale to generate large profit margins,' said DP Information Group's managing director Chen Yew Nah. 'But in the current economic environment, it is encouraging that there was an increase in the percentage of SMEs generating profit margins of 5 per cent or more - from 31 per cent in 2008 to 36 per cent in 2009.'

Since profitability is an indication of a company's ability to accumulate reserves for expansion, low net profit margins tend to limit growth.

This is especially so for SMEs, since they typically use retained earnings or internal resources to fund expansion.

'Higher profit margins are important for growth, for sustenance and for investment and innovations,' said Ms Chen. 'SMEs need help to focus on higher-value-added components, services and unique value propositions, so they can command higher profit margins.

'Alternatively, SMEs can join together to create greater economies of scale to gain higher profit margins. Size does matter when it comes to a company's bottom line.'

Besides this, Ms Chen also suggests that SMEs concentrate on market niches instead of entire markets.

'It is important for our SMEs to focus their efforts on acquiring competitive advantages based on intangible aspects that cannot be easily acquired, even at high cost,' she said. 'These may be brand equity, customer relationships, distribution networks and strategic alliances.'

About 60 per cent of respondents in the wholesale sector fall in the 0-5 per cent profit margin category, making it the least profitable sector; 50.5 per cent of those in the construction sector posted a 0-5 per cent profit margin, while 50 per cent of those in the retail sector are in this group too.

DP Information also noted that 22.1 per cent of those surveyed reported a negative cash flow.

'Negative cash flow often reflects the ability of a company in a particular industry to convert a sale into cash,' said Ms Chen. 'So for manufacturing and wholesale, the time between order, delivery and payment is a longer cycle than in F&B or retail. This is just the nature of these businesses.

'Given the economic downturn, it is not surprising that industries with longer payment cycles are experiencing higher levels of negative cash flow.'

About 54.1 per cent of those polled reported a cash-to-short-term-debt ratio of 0.5 or less; this meant they had only 50 cents or less in cash reserves to meet every dollar owed in short-term obligations.

'Under more typical circumstances, any ratio above 0.8 would be a sign of financial strength,' said Ms Chen. 'A ratio of below 0.5 could be a negative sign that indicates too much debt or weak cashflow generation.

'However, as in other ratios, one needs to evaluate it in the context of the specific industry, a firm's history and the market. Considering a large proportion of SMEs have a ratio of up to 0.5, it is important to investigate the larger factor behind a low ratio.'

The study on SMEs' financial well-being is part of the broader SME Development Survey Report 2009 released last month.

The report also looks at other issues pertinent to SMEs, including their level of internationalisation, the impact of the global recession, and measures taken. For that, more than 2,000 SMEs were interviewed.

Not surprisingly, the recession has eroded the profits of companies here. The proportion of firms with a net profit of more than $5 million fell to 5 per cent, from 7 per cent last year. The dip is attributed to fewer wholesale and transport/ storage companies making the mark. With the manufacturing industry, the two sectors have a higher percentage of companies serving overseas markets.

'Wholesale would probably feel the impact earlier than manufacturing, which probably still has advance orders to fulfil,' said Ms Chen.