Covid-19: 10 things SMEs can do during lockdown
SMEs have been the engine of Indian economy and their role will be much more critical in the months to come once corona pandemic is controlled. To ensure that they remain resilient and strong when economic activity hits the restart button, SMEs should consider the following:
Initiate discussion for extension in contract tenor: If any performance or purchase contract is due within the next six months, particularly those backed by a bank guarantee or letter of credit, the SME may initiate discussions with the counter-party for extension of the contract period. This will mitigate any financial loss that may arise from performance risk.
Request for extension in cover period for working capital assessment: Since the holding period of debtors and inventory in most of the cases is likely to be stretched amid the present lockdown, SMEs may request banks for a temporary extension in the cover period of debtors/inventory. This will help maintain the liquidity flow and avoid a cash crunch like situation.
Review hedging strategy: Given the present forex scenario which is likely to hold for some time, exporters should consider long term hedge contracts subject to availability of hedging lines. Importers can consider short-term hedge calls in the range of 20-30 days.
Move slow on any Capex plan: Unless there is an irrevocable purchase contract for incremental capacity, SMEs should avoid fresh capex or capital expenditure plans for the next six months. This can be reviewed once the economic situation stabilizes.
Lean Inventory: Effort should be made to maintain a lean inventory position. As a generic stipulation, manufacturing entities should ideally not hold more 30-35% of their entire sources in the form of inventory (across RM, WIP and FG), trading entities should barricade it at 50%.
Convert Fund based outstanding in WCDL/FCDLs: SMEs should discuss with their banks and wherever available, should get minimum 50% of their fund based outstanding converted in short term WCDL/FCDL. This will help them reduce the interest cost by 0.25% - 0.75%, depending upon the pricing factors.
Extend LC payments within your operating cycle: Wherever needed, SMEs should request for buyers credit facility for payment of letter of credit falling due in the coming weeks or month, subject to overall tenor being within the operating cycle of the entity.
Stress testing: Though a relatively stricter measure in present times, it will have a significant positive effect on the productivity of entire system. Under this, SMEs should gradually align their activity so as to maintain at least 5% of their entire sources in the form of 'cash' or 'near cash items.'
Conserve human resource: Attrition or loss of critical human resource too has a significant financial implication in the short to medium term. Hence, SMEs should strive to keep their important people in place during these times. Benefits and incentives can be structured based upon the period of service to increase employee stickiness.
Review P&L statement for cost optimization avenues: This time offers the window to review various cost elements in the P&L statement. SMEs should utilize this opportunity to identify and discuss with domain experts on ways to optimize recurring cost items that can be done without impacting the overall productivity.