subject: Timely Payments By Large Corporates Can Boost Sme Profits By 15 Per Cent [print this page] Small and medium enterprises (SMEs) could improve their liquidity materially and enhance profits by 15% if they received payments from large corporate customers on a timely basis. This is a finding from a recent study conducted by CRISIL on the receivable levels of SMEs.
On an average, SMEs with large corporate customers carry receivables valued at 80 days of sales on their balance sheet: 15% of such SMEs carry receivables of more than 120 days. This has a significant impact on the financial position of SMEs, strains their balance sheets significantly and vitiates financial ratios.
CRISIL estimates that timely payments by large corporates in line with the provisions of the MSME act will help SMEs reduce interest costs, and improve profitability by about 15 per cent. This will have a critical bearing on the long-term health and sustainability of Indias SME sector.
Analysis by customer profile
As a first step in CRISILs study, the large sample of more than 5000 SMEs was classified according to the profile of their customers. Export-oriented units, and SMEs selling to retail customers or traders were clubbed separately from those selling to large corporates.
Analysis by end-user industry
An analysis of the receivable levels by end-user industry of SMEs reveals that the challenges of high receivables are endemic across industry sectors. SMEs supplying to sectors such as power, engineering and agro/specialty chemical sectors, which have inherently longer working capital cycles, appear to have the highest receivables position.
Analysis by state and city
The state-wise trend shows that SMEs in West Bengal, Maharashtra, Uttar Pradesh and Tamil Nadu, have to wait the longest before receiving payments from their customers. In terms of cities, SMEs in Nashik, Kolkata, Vadodara, Mumbai, Chennai, and Jaipur appear to have the highest receivables.
Analysis by scale of operations
A bigger worry for the SME sector, however, is the trend that CRISIL has observed in the correlation between the SMEs scale of operations and their receivables. The smaller the enterprise, and the lower the turnover, the weaker its receivables position tends to be, and the more vulnerable it is. Around 40 per cent of the SMEs with turnover up to Rs.10 million and 43 per cent with turnover between Rs.10 million and Rs.50 million have receivables of 90 days and more. The fact that smaller enterprises constitute a sizeable share of Indias SME space and are most susceptible to liquidity pressures, makes it critical that they receive their payments on a timely basis.
Corrective action could be three-pronged
What could be the solutions? CRISIL believes that a three -pronged plan of action could be considered to correct the situation. First, industry associations and other trade bodies will need to create much greater awareness among SMEs about the provisions of the MSMED Act, particularly those related to customer-payment-related issues, and the redressal mechanisms available to SMEs. Secondly, SMEs need to understand the costs of delayed receivables and its impact on their profitability, and factor this into their selling prices. Lastly, increased stringency in implementation of the provisions of the MSMED Act could help bring about a major change in timely payments to SMEs.
