As it is managing cash flows is a major task. The pandemic, however, has only made matters worse.
It is universally acknowledged that the success of any business relies on how well the business can manage its cash flows. Amidst the ongoing pandemic, all businesses are facing a lot of problems when it comes to managing their cash flows. This depends on the size of the business, and also the cash reserves that the business holds.
In the coming months, a lot of businesses are going to report a lot of negative cash flows. Some of these might even fail to work as a going concern. Thus, while the future is bleak, the matter that concerns us most presently is how to survive while minimizing damage.
The article will explain how we can manage our cash flows more effectively. At the same time, it will also discuss how the government is taking several steps to help businesses who are suffering because of the lockdown.
Cash Flow Forecast
It is essential to know how much cash will be needed shortly to manage cash effectively in the present times. Forecasting needs a business to be completely aware of how much payment obligations are to met shortly, and how much collections are expected to be gathered during the same period. Things don’t end on forecasting though. One also needs to keep reviewing it constantly.
Cutting out inefficiencies
This is a really important success factor for any business. During this global crisis, businesses have got the opportunity to rethink the various inefficiencies that exist in the business. At the same time, they can lay plans to get rid of them.
To do so, it makes sense for a business to classify its expenses into three categories. These include:
1. Most essential expenses
These could include expenses like the cost of a front end employee, which then generates revenue for the business. Other expenses in this category can also include IT infrastructure costs if the business is run virtually.
Different businesses will naturally have different priorities when it comes to these expenses. However, no position can ever avoid expenses that fall under this category.
2. Essential expenses
These include electricity bills, office rent, etc. Only some of these can be avoided since these are crucial for the operation of any business. For instance, if you can work remotely and own only a small business, it might make sense to do away with the premises until the situations become better.
3. Least essential expenses
In present times, these expenses can be avoided to save as much money as possible. These include staff welfare costs, subscription to magazines and newspapers, etc.
Offering cash discounts to speed up collections
To receive collections as quickly as possible, it makes sense to offer certain cash discounts to your customers. This will help your business to get the short term financing that it needs to meet its near term payment obligations. However, the finance cost of opting for the same might be substantial. Even if you offer a one percent discount to a customer to make payment within 10 days, the APR will work out to be 18 percent.
If you think that you can manage operations remotely, maybe it is time to explore the virtual field.
An excellent example of this is the education industry. Even though virtual learning was becoming more and more popular, it cannot be denied that the pandemic was what gave it wings. From private institutes to government-operated ones, all of them are going online to make sure that students don’t miss out on their academics.
Cut down on salaries, but very sensitively
While managing cash flows, this might be one of the trickiest aspects. Naturally, employees do not approve of this measure, and it makes sense as to why they don’t support it. If you do choose to cut down on the salaries, make sure that you keep certain factors in mind, and that you ensure that your team does not end up losing its morale.
Cut the leadership salaries
Business leaders need to voluntarily take the salary cut, to maintain a conducive environment in the business. Unless and until those at the top set an example, other employees cannot be expected to be okay with salary cuts. Moreover, those at top-level management are the most highly paid, so cutting down on their salaries can save a lot of money for the business which can be later used in times of crisis.
Do not cut everyone’s salary by the same percent
This might not be a wise idea. This is because those who earn decently higher amounts might still be able to manage with a pay cut, but those who are anyway earning less might not be able to sail through. Such pay cuts might make it very difficult for them to ends meet. This is why different pay cuts for different income slabs are a much better idea.
Offer temporary leaves
Not all employees of the organization might have work in the present times. Some of them might be idle. To avoid their salary cost and save precious money, businesses can consider offering them temporary leaves. This option, however, should be the last resort, since this will lead to a total loss of income for a lot of the employees.
Initiatives are taken by the Indian government
The government has also taken a series of initiatives to help businesses in this respect. It has brought several amendments in its laws to help businesses in managing their cash flows. These include the Income Tax Law, Company Law, GST Law, Labour & other Miscellaneous Laws as well as Banking Regulations.
1. Relief under the Income Tax Law
1.1. The government has decided to give pending tax refunds to those whose amounts are up to INR 5 lakhs immediately. As estimated, this move alone will benefit 14 lakh taxpayers.
1.2. The validity period for the certificates that have been issued for the fiscal year 2019 – 2020 will be extended by three months to June 30, 2020. Thus, assessees who have lower incomes will not have to bear any burden of TDS as a result of non-submission of lower deduction forms.
1.3. The government has also extended its due dates in different areas from March 31 to June 30, 2020, to help manage cash flows. These include dates for an assessee opting for Vivad se Vishwas scheme, investments that are to be made by individuals for deductions under Chapter VIA, part B, etc.
1.4. The income tax dues whose due dates were between March 20 and June 29, 2020, can be now paid up to June 30, 2020; and that too with reduced interest rate of 95 p.a. as compared to the original rates which lie between 12 and 18% p.a.
2. Relief under the Company Law
The government has come up with the Companies Fresh Start Scheme, 2020. Under this, all companies who have not filed any of the forms that are required to be filed with the ROC in the past can file the forms within the next six months i.e. between April 01 and September 30, 2020. This can be done without having to pay any late fees/penalty, which would otherwise have been levied under normal circumstances. Naturally, this will help the businesses to save the amount of penalty which would have to be paid, had the bill not been introduced.
3. Relief under the GST Law
The government has also extended the due date for the deposit of GST for the months from February to May 2020. The extension holds for up till June 30, 2020; without the payment of interest to small taxpayers who have a turnover up to INR 5 crores. For the large taxpayers whose turnover exceeds INR 5 crores, the interest rates have been reduced to 9% from 18% on the late payment of GST.
4. Relief under the Labour and other Miscellaneous laws
i) The final deadline to file Provident Fund (PF) contribution and returns for March have been extended by the Employee Provident Fund Organization (EPFO) from 15 April to 15 May 2020. This will provide businessmen with extra working capital for a month, which will, in turn, improve cash flow.
ii) The government will be paying the PF contributions of both the employers and employees for the next three months. This holds for establishments that have up to 100 employees, 90 percent of whom earn under INR 15000 per month. This will help nearly 80 Lakh employees across the country.
iii) The Employee State Insurance Corporation (ESIC) has extended the deadline to pay the ESI contribution of February and March 2020 to 15 April and 15 May 2020 respectively.
iv) The Department of Financial Services (DFS) has allowed the payment of premium for motor vehicle third party insurance, whose renewal falls between 25 March and 3 May till 15th May 2020
v) The Insurance Regulatory and Development Authority (IRDA) has allowed payment of premium for health insurance, whose renewal falls between 25 March and 3 May till 15th May 2020.
5. Relief measures by the RBI
i) The Central Bank has extended relaxation in the maintenance of Liquidity Coverage Ratio (LCR), under which banks earlier had to hold 100% of the next 30 days of cash outflow invested in High-Quality Liquid Assets. Now, the figure has been reduced to 80%.
ii) The RBI has also restricted banks to declare a dividend for the financial year 2019 to 2020 until further notice. Thus, banks now have an adequate amount of cash in hand.
iii) The RBI has also allowed a moratorium of three months on the payment of all installments falling due between 1st March 2020 and 31st May 2020. However, interest shall continue to accrue on whatever portion continues to be outstanding during this moratorium period.
iv) The RBI has been decided, as a one-time measure, to reduce the cash reserve ratio (CRR) of all banks by 100 basis points. This reduction will release primary liquidity of about INR 1, 37,000 crores uniformly across the banking system in the country. This quick and rapid move by the RBI will make sure that the economy comes strong and stable out of this pandemic.