How Indian businesses manage their cash during the pandemic
As the official number of coronavirus infections in India surpasses 3 million, businesses in the world’s second-most-populous country are looking for ways to diversify, launch new products, and innovate in order to boost cash flow.
Nearly half (47%) of the businesses surveyed by the Federation of Indian Chambers of Commerce and Industry just before the 25 March lockdown reported the pandemic had at least a moderate impact on orders, inventory, and cash flow. Almost three-fourths reported a reduction in orders. Thirty-five per cent experienced a rise in inventory, and 80% saw a drop in cash flow.
The situation worsened when India’s economy went into a strict lockdown, which continued until the end of May. When the Indian government started easing the lockdown, the official number of new cases began to rise. On 20 August, it reached a daily record of 69,652, and restrictions remain in place countrywide.
To adjust to the cash flow and supply chain disruptions, which hit manufacturing businesses particularly hard, companies took measures to reduce costs.
“Controlling fixed costs is helping in releasing cash and resultant profit,” said Rajnish Magan, FCMA, CGMA, the CFO at Beumer India, which is part of Beumer Group Germany, an international company designing and manufacturing intralogistics systems.
For example, Beumer India deferred nonessential capital expenses and negotiated with banks for better loan terms.
Jindal Steel & Power Limited (JSPL) was allowed to continue production during the lockdown because the large steel and energy producer was considered essential to the economy. But supply and production chains in the domestic market were disrupted. To avoid a cash crunch, JSPL focused on cost optimisations and export market opportunities, said Prabhat Aggrawal, ACMA, CGMA, the company’s internal audit head for real estate and overseas businesses.
“We focused on cost optimisations wherever possible, gaining and ensuring raw material availability like optimised cost iron ore and coal for production. We started boosting our exports, and we actually surpassed all our production targets as we had labour and inventories at our side and could go into full production mode,” he said.
Finding new revenue online
Businesses should also focus on generating new avenues of cash inflows, said Satya Tandon, ACMA, CGMA, a KPMG strategy consultant based in New Delhi.
“Businesses should try to find new ways of reaching out to their customers, and this includes utilising digital technology to find different avenues for long-term, financially sustainable business models,” he said.
Tandon is advising traditional companies to sell online during the pandemic, and he reports his clients are finding significant success and can minimise revenue shortfalls. “If a company during the pandemic is seeing a 50% reduction in revenue, finding new ways to reach customers might limit the impact to 20%,” he suggested.
Ensuring transparency and open communication
Businesses that are providing support to their employees and earning their trust during the pandemic are more likely to improve productivity and optimise costs. These are unusual times, and people are stressed, in general, over layoffs, pay cuts, and their health, Aggrawal said.
“It’s important for management to keep an open mind and communicate,” he said.
11 tactics to managing cash in a crisis
In a crisis, cash-to-cash conversion becomes more important than profits and losses. “Having a healthy liquidity buffer over the next 12 months is absolutely critical for companies to survive this stress test,” Tandon said.
He suggested companies reconsider enhancing short-term credit lines, evaluating existing debt agreements with banks, and highlighting value on the balance sheet — steps that can help bail out companies from immediate short-term credit issues.
Based on lessons learned from the 2003 SARS outbreak, the 2008 Great Recession, and the 2011 earthquake in Japan, Deloitte recommends these additional cash management tactics during the pandemic:
- Have a robust framework for managing supply chain risk — for example, knowing whether a customer is unable to pay.
- Understand how much cash is needed and for how long, and engage with finance partners to ensure existing and new credit lines are available.
- Focus on the balance sheet and come up with a coordinated approach to address payables, receivables, and inventory.
- Revisit variable costs, such as travel expenses, costs for nonessential meetings, discretionary spending on entertainment, and contract labour costs, to quickly reduce cash outflows.
- Reassess capital investments. Postpone those that aren’t pressing and go ahead with those that create a competitive advantage.
- Update parameters that reflect inventory levels are safe. Reduce inventory of finished goods that could go to waste.
- Work with suppliers to extend paying them without damaging relationships or putting them out of business.
- Improve the collection of receivables, including timely and accurate invoicing and discounts for customers that can pay quicker.
- Audit payable and receivable transactions to, for example, avoid paying for excessive duties and taxes or unearned discounts.
- Understand the losses that business interruption insurance will cover. The breadth of coverage can vary significantly by policy.
- Convert fixed into variable costs to increase flexibility. That may include selling assets and leasing them back.
— Swati Sanyal Tarafdar is a freelance writer based in India. To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, an FM magazine senior editor, at Sabine.Vollmer@aicpa-cima.com.