DEMONETISATION- A GAME CHANGER FOR SMEs IN INDIA
Demonetisation is a great opportunity for SMEs in India to break away from cash-based transactions to the more efficient digital platform.
On November 8, 2016, our Honourable Prime Minister announced cancellation or demonetization of Rs 600 and Rs 1000 notes. The decision was welcomed by citizens by and large. However, as the reality sets in, many people started feeling the pinch of total absence for cash for continuing the business. Many businesses have post-phoned the supply of goods and services for want of cash which is the major means of settlement of the transaction. The present circumstances may be hurting the cash flow of the business in many ways- paying creditors, salary and other miscellaneous experiences. Many of them are at the mercy of their buyers who themselves are experiencing the choking financial chain of the business. However new drive is going to rewrite the ways the business is conducted in India.
CASH BASED TRADE SETTLEMENT- A LIMITING FACTOR
It is observed that cash-based transactions are impeding the growth opportunity for many SMEs in India. Some of them are:
- SMEs are always at the receiving end till they realise the sales proceeds. It is not uncommon to find many SMEs are paid in cash even if they are not willing to. As a result, they keep all the transactions in cash.
- Cash denominated business limit the scope for growth as it will remain entrepreneurial.
- It restricts the transparency to select few, depriving the rest in the company unaware about the financial status of the company. Such practices discourage attracting the talent, a precursor for propelling growth.
- The credit rating of such entities always remains poor. The books of accounts do not reflect upon the true state of affairs.
- Always there is a conflict with bank due to inability to make full disclosure. As a result, the majority of SMEs look to raise funds from private moneylenders or expensive mortgages.
- Cash-based transactions make financial control a non-issue and thus exposing to the risk of internal control failure.
DEMONETISATION- A GAME CHANGER
So far SMEs just resigned to fate and ignored the necessity of proper accounting and disclosures may be due to peer pressure, the insistence of buyer or industry practice Demonetisation will encourage financial transactions more transparent. That, in turn, will increase the confidence among the participants in the trade. It will enhance the visibility of your business to other stakeholders, bankers, creditors and buyers. In many ways, this will help the business to grow on a sustainable basis.
CAPITALISE THE OPPORTUNITY:
- Expect the trade to slow down for next two quarters: Experts have opined that economic growth may slow down in next two quarters. Hence ensure that you remain on guard especially with regard to spending.
- Recover the receivables even in old currency: Do not shun the old currency even if the creditors offer you (as their cash crunch may hurt you to get in immediate future due to a possible decline in GDP growth).
- Embrace online mode for trade settlement: Use this opportunity to take the settlement online. Digital banking solutions lower the cost, it is efficient and diverse needs can be met even on a mobile handset.
- E-wallets can compress the time: Embrace digital wallets like Paytm, Freecharge, Mobikwik, etc which can reduce the need for cash for miscellaneous expenses at the office. Recently launched UPI has the participation of many banks which has the ability to support all banking needs.
- Keep the record of cash transactions if IT authorities ask for: If receivable are paid in cash, receive the same and keep the record for scrutiny by IT authorities. If there is matching entries in the book that can be reconciled with Bank transactions, nothing to fear.
- Embrace supply chain financing if made available by your Buyer’ banks: Look for innovative financing solution to improve the fund flow. Being a member of supply chain financing is one such opportunity. Ask your buyers’ if you can become one to avail the facility.
- Reduce the loan or cash credit limit: As economic growth is expected to be slower, it is prudent for SMEs to keep the cash credit limit low and reduce other debts as much as possible without harming liquidity needs till green shoots visible.
- Give thrust to reduce high cost fixed rate loans on priority: Interest rate likely to reduce in the near future as liquidity in the banking system is rising. Use this opportunity to reduce the high-cost borrowing by seeking lower-priced loans.
- Implement JanDhan Yojana for employees: In order to overcome the cash crunch, wage payment and other expenses may be handled through JDY account. Enquire with employees and if they do not have, assist them to have one. The best CSR initiative for SMEs is to educate their labours on improving their standard of living.
- Revise projections: In view of the changing practice away from the cash-based settlement, the need for cash credit may go up. However, current reported and projected business levels may not justify this additional lending, leading to a mismatch. This calls for a revision of projections.
Present decision of the Govt to ban high denominated currencies is a great opportunity for SMEs in India to break-away from the past practice of cash based settlement of trade transactions. It will be forcing the entire operating environment to become transparent and SMEs in India should embrace it.