REBOOTING MSMEs at a Glance

Managing your finances and working capital

The COVID 19 pandemic era shutdown seemed like a long cut off period with no change in the results of operations of the entity- with even the impairment quantification not being easily measured reliably. Businesses may take longer to sell their inventories and that period could be say 15 months instead of the 1 year or shorter time period assumed up until now. MSMEs should reassess their normal operating cycle and reassess their current and non-current assets and liabilities. This would be helpful in the preparation of financial statements and the new working capital would help in the better presentation of the state of affairs of the business to the bankers, suppliers and shareholders.

Task Points to ponder Comments / Next Steps
  • Have you reassessed the normal operating cycle of your entity?
  • The normal operating cycle of an entity is defined as the time between the acquisition of assets for processing and their realization in cash or cash equivalents.
  • Non-current assets and liabilities may be classified as current assets and liabilities
  • Important to consider depreciation and credit exposure
  • What is your working capital requirement?
  • Does your stock require a writedown?
  • How much reduction in turnover is expected?
  • Review the customer to whom you were supplying to assess the future order
  • Re-assess the debtor payment cycle
  • Re-assess what extra time can be obtained for payment to creditors
  • Can we postpone some payment to wages and salary and other statutory dues?
  • Analyze availability of cash flow for next three- six months to sustain even in reduction of turnover
  • Assess gap funding required for 6 months to 1 year
  • Consider giving a discount to your customer if they issue you a postdated cheque (PDC)
  • Is your PDC a proper document otherwise the benefit will be lost?
  • Have you considered bill discounting?
  • Do you see red flags in the credit payments to your supplier or customer who pays on credit?
  • Have you considered obtaining a credit report from your customers and suppliers?
  • Just-in time manufacturing is an effective tool to consider.
  • Do you need to improve your liquidity situation?
  • Would you like to avail a loan?
  • Have you considered the ‘pari passu’ clause? If you are taking a loan (with a previous existing loan) then due to a ‘pari passu’ clause the original loan security would reduce as ‘pari passu’ stands for ‘equal footing’.
  • Would you like to go for benefit in availing relaxation on working capital by banks?
  • Do you know your credit rating which can easily obtained through CRISIL?
  • Consider maintaining a good credit score which will help you get a better loan and better business
  • Have you considered asking your shareholders for equity infusion?
  • Government is prioritizing lending to MSMEs from banks by including small enterprises in the earmarked priority sector and raising subtarget limit to 10% from 7.5%
  • The Government is offering loans of up till 3 lakh crores to MSMEs without collateral at a rate of 9.25%
  • Collateral free & MUDRA small loans to encourage selfemployment
  • Are you aware about the credit support for MSMEs?
  • DRBI has allowed a moratorium period of 6 months for repayment of MSME loans and other forms of debts, together with a provision of ‘no change’ in the credit rating during the said period.
  • Norms for declaring NPA period in banks be extended to 180 days for at least next 2 years as the MSMEs need uninterrupted banking assistance to deal with this crisis situation.
  • Have an active dialogue with bankers
  • Interest rate subvention @ 3% on loans to MSMEs that are healthy and not NPAs.
  • IBC suspended for a year, Covid-19 related debt exempted from default
  • Interest from Mar – August may be added to principal from September or paid off before March next year
  • Notify the bank if the business is expecting the breach of a covenant in the near term
  • Have you analyzed the financial statements and important ratios for decision making?
  • Re-assess crucial ratios such as working capital ratio, debtor turnover ratio and average collection period, creditor turnover ratio and average repayment period, and stock/inventory turnover ratio in pre COVID period and post COVID period for remedial actions.
  • Better information leads to better decisions