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Working Capital & Cash flow Management

The whole world is fighting against the corona virus pandemic. In this struggle, on one side it is important to be free from the virus and keep physically healthy, on the other side, it is also important to maintain the financial health of businesses all over the world mainly for the small and medium businesses. In India, most of our businesses are micro, small or medium enterprises. As MSMEs stare at a bigger cash flow problem ahead if the current lockdown continues by the government, there is also a possibility of them being exposed to an existential crisis. It is extremely important to ensure the flow of money into the working capital of such enterprises otherwise there will be a risk to the survival of these enterprises.

Businesses will also have to take into account the humanitarian aspects and government’s appeal regarding continuity of salary and wages during the lockdown period, and also the timely payment to MSME clause in the MSME Act. Businesses will have to very closely watch their cash flow and maintain liquidity. For this purpose, they will have to take following steps:

1. Know your operating cycle

Every business has an operating cycle which in simple term is the time it takes to convert the cash invested in the working capital to cash again. Thus if the time taken in a business from the point it makes payment to supplier for goods to realisation from the customer is say 3 months, then the business normally needs to keep three month’s sales as working capital. If the sales is say Rs. 20 crores, you need roughly Rs. 5 crore for working capital. You also need to consider not only the production expenses but also the overheads of your business while you calculate the working capital requirement. However, in this special situation you need to keep a safety margin of say 25% over the normal investment requirement as due to the lock down and subsequent recession, it may take more time for a business to sell their goods and realise money.

2. Plan your Cash Flow Budget

Apart from the working capital requirements, businesses also have to pay certain EMIs, PF, ESIS, Gratuity, taxes like GST, TDS, Income Tax etc. Allocate priority to statutory payments and other payments which are critical to continuance of the business. Make
monthly cash flow budget for the next 12 months with inflows and outflows. The inflow will typically include your sales realisation, receipts from interest, rent and other items while your outflow will include your payments to suppliers, salary and wages, Production and administrative overheads, selling and distribution exp., interest and instalments etc. You need to be conservative in respect of estimating your inflows and maintain atleast 25% more cash balance than your normal requirements.

3. Allocate Cash Balance for Liquidity

As per the cash flow planned by you, you need to keep a healthy cash balance. Allocate the cash balance in three components, hard cash, bank balance in current and saving and balance in liquid fund or short term bank deposits. The percentage of allocation will
depend upon the nature of business but you can keep your immediate requirement in hard cash, cash required in the next one month in current or saving account and surplus in liquid fund or short term deposits. This way, you will also earn some return on the cash balances.

4. Avoid Capital Outgo

In this time, if you can avoid any immediate cash outgo for capital expenditure, it will be advisable.

5. Renegotiate Contractual payments and Bank loan instalments

After cash flow planning, if you for see any liquidity gap, You may better re negotiate some contractual payments for staggering the same. If you have a term loan obligations and may find it difficult to repay in time, it is better to send a request to bank for reschedulement of the instalments and increase in the moratorium period.

6. Incentives and support from the Government and banks

It is likely that the government and banks may declare some measures to support businesses. Take full advantage of these measures.

7. Force Majeure Clause

If needed, after taking proper legal advice, businesses can invoke force majeure clause if they for see that they will not be able to perform their contractual obligations.

8. Review certain Balance-sheet items

Review balance-sheet items, if they can give you cash flow, like pending GST Refund claims, Export incentives receivables, obsolete stock, scrap and waste, old machineries/vehicles, loans and advances, Debtors, Finished Goods ready for sale etc.

9. Standby line of credit from Banks

Those businesses which are working capital intensive, you might also secure a standby line of credit against properties, adhoc increase in cash credit limits etc. for emergency use.

10. Infusion of Own Funds

The promoters may infuse their own funds in the business to reduce interest burden and provide liquidity.

Wise management and planning of the working capital and cash flow can see through most businesses in the critical period. The situation might take anywhere from 6 months to 1 year to completely normalise

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