Cash management for SMBs — Part 2

Recently I have been talking to Mr.Senthil Kumaran, Category Finance Head at ITC Limited on the measures he’s taking to navigate this scenario.

I thought it will be good to make an interview blog with him and asked him to share his thoughts with other Business owners. He kindly agreed.

This is an excerpt from my conversation with him.

Bhargavi: Hi Senthil! The current scenario is dire than many of us would have ever experienced. It will be good to get your views on how business owners should think about managing cash.

Senthil: I will be happy to share my views on the areas a business owner could look at. First let’s discuss Cost optimization.

Cost Optimization

All costs should be revisited with a fresh perspective. We will discuss some major cost heads.

If the lockdown continues and office facilities are left unused, then, we have to explore if contracts like office rental, housekeeping and security can be renegotiated.

We may not want to stop payments as it could impact the people employed by these organizations, however, should check the possibility of any discounts and deferment of any escalations.

All fixed contracts like AMCs should be revisited — as small as even a photocopier rental. We may not want to discontinue the lease, but can try and make the lease valid for 15–18 months.

Employee costs will depend on company philosophy. While a company might not want to reduce basic salaries now, emoluments like food allowance, conveyance, food vouchers, travel expense reimbursements can be revisited.

If a company’s cash position requires basic salaries to be reviewed, then they can also see if salaries can be restructured, for eg increasing the variable component, whereby variable is linked to future sales.

“Senthil: I would also like to discuss on government representations which is important and could prove useful for companies in this scenario. They can do this directly or through their respective association / chambers. In the absence of group representations, a company can highlight their unique problems to govt authorities”

Some of the costs which could be small but for which we could ask for deferment or waiver are-

i. property tax,

ii. contract demand charges for electricity (since factories are not running),

iii. an industry-related govt. charges like APMC

Receivables

Bhargavi: Thank you Senthil for the points to manage expenses. What would you suggest to collect money from customers especially now it’s becoming increasingly difficult for vendors.

Senthil: Yes. Given the current scenario, the buyer might have a better bargaining power. This would apply to our procurement as well. I will discuss a couple of options to explore to get bills paid sooner. These are apart from the general follow up and efforts that we normally do to get bills paid.

1. Even if you have to give a cash discount to customers to get money faster and earlier than the due date, it may be prudent to do that

2. Leverage any Channel financing (bill discounting) options that are available.

We have discussed receivable management in detail in our previous post.

Force Majeure

Bhargavi: Force majeure is a term that is used widely in the current scenario. This is probably the first time an actual scenario where Force Majeure could be invoked have arisen in a long time. How are you handling force majeure and what’s your advice for others?

Senthil: Before invoking force majeure, a particular contract should be looked at from both sides and the literature of the contract regarding force majeure. In this scenario, both parties might be eligible to invoke force majeure. Both parties are bound to lose if both invokes. It’s better to renegotiate things and solve them amicably. There’s no point in spending on legal costs.

Bhargavi: Thank you Senthil! Is there anything else that you would like to share?

Senthil: I would like to discuss a couple of more things. One is managing borrowings and another is insurance.

Term loans and Borrowings

1. If there are term loans, try to restructure it to leverage the current lower cost of borrowing.

2. It is important to be on top of the relief packages announced by Govt and discuss it with our lenders. For eg. current moratorium given by banks should be availed as this will conserve liquidity.

Insurance

Another aspect which all of us should start thinking about is how do we insure against these risks. While getting an insurance for COVID losses might be difficult, we need to look at insurance as an option to protect against similar scenarios in the future.

Product insurance / Stock insurance is something that could help especially if someone is dealing with perishable or short expiry stock.

Bhargavi: Thanks a lot Senthil for agreeing to do this interview and sharing valuable insights.

Senthil: Happy to do this Bhargavi! I want to leave with the below thoughts:

Closing comments

Scenario might be grim now however it’s not all that grim for all businesses. This could pose an opportunity for many businesses especially doing exports where businesses in China and Italy are affected and not running in their full capacity. Businesses should explore if there are ancillary products/services which can be produced in this scenario.

However costs might be high to service these demands as logistics might be shut, factories might not work in full capacity and labour might have to be incentivised more to work during these times.

One should explore ways to fund business using banking perks. The cost of indirect materials also to be monitored (like the price of oil) to negotiate with vendors.

A balance has to be made to service additional demand vs doing it with a positive cash position.

Be prepared to hit the ground running when the close down is lifted.