BackWorking capital woes add to lockdown pain for cash starved companies
Firms without e-bill processing systems are struggling to pay employees and spend on other necessities
PremiumEvery time Anjani Mandal, chief executive of Fortigo Network Logistics, looks at the company’s cash flow forecasts, he worries a little more. Since the lockdown started last month, customer payments have been hard to come by.
Mandal has been struggling to manage spiralling receivables. He knows that cash is oxygen for his business, a logistics service provider with annual sales of close to ₹250 crore.
“Several customer organizations do not have online bill processing systems in place and as a result our outstanding dues have grown substantially," Mandal said. “Our payment cycle has stretched from the usual 60 days to 85."
With the lockdown now almost certain to be extended, companies are increasingly finding it hard to raise cash to pay employees and spend on other necessities.
With payments now unlikely to come soon, executives such as Mandal are trying to avail of bridge funding to overcome the current cash crunch. Working capital is the money that companies need to run day-to-day operations such as paying suppliers and holding inventories as they await payments from customers.
Industry watchers said while the current lockdown has impacted everyone, it has hurt the labour- and raw material-intensive manufacturing sector the most, prompting many to stop payments.
That is creating a domino effect on other industries.
“We are not being able to generate revenues, as costs are being locked up in inventories even though raw material is coming, leaving the overall working capital requirement higher by at least 35%," said Kartik Johari, vice president, Nobel Hygiene, a Mumbai-based diaper maker. To help ease the pain, Johari said that banks should increase working capital limits immediately.
While banks are seemingly aware of the seriousness of the situation, experts said that lenders may need instructions from the Reserve Bank of India (RBI) and the government to go ahead.
“My sense is that working capital cycles will be extended. For whatever period, there is a standstill, at least for that period, the working capital cycle will get extended," said Pallav Mohapatra, managing director and chief executive of Central Bank of India.
“The three-month moratorium announced by RBI on loan repayments may not be enough and in most cases, businesses may require forbearances up to year, by when things should be back to normal hopefully," said Sudhir Dash, chief executive and founder Unaprime Investment Advisors, a Mumbai-based investment bank.
“Ultimately, it is the credit-worthiness of a borrower that will determine whether banks will lend to them and in the current situation, given the stretched balance sheets, banks may not find it viable to renew working capital limits. Therefore, only if there are specific directions from the government, things will work out as the current measures don’t seem enough," Dash added.
“In whichever way you look at it, the cycle will be extended for most sectors. At an industry level, I believe, working capital margins are falling by 10-15 percentage points," Central Bank’s Mohapatra pointed out when asked about the measures taken. “We have framed the guidelines for easing of working capital requirements through reduction in margins, extension of the cover period on receivables and also on interchangeability between fund-based working capital and non-fund based working capital."
But even as more liquidity-easing measures are awaited, many have begun borrowing at high rates, which according to estimates, currently hover at 11-18%.
“Our working capital period cycle is typically 30-40 days including stocks and sold products in transit," said Alok Chawla, chief executive officer and co-founder, Gizmobaba.com. “This is expected to temporarily double if we want to continue at the same scale and with no schemes from the government forthcoming, we, just like many other start-up entrepreneurs are considering borrowing at high interest unsecured personal loans and taking advances from credit cards which could double the interest costs to us over the next two quarters." he added.
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