Towards resilience: A practical guide for MSMEs

The COVID-19 Business Impact Survey (PwC Philippines, 2020) reveals that small businesses need cash, with 44% of micro, small and medium enterprises (MSMEs) in need of better working capital management, while 39% see financing as one of their pressing needs.

With the implementation of community quarantine, many of the establishments were closed. While the Government temporarily suspended rental and loan payments, expenses and payables continued to pile up. This puts pressure on the working capital and cash position of MSMEs.

As imposed restrictions ease up, businesses are slowly resuming operations. However, without a vaccine, activities are still limited, and small businesses are anticipating liquidity issues to surface.

Based on the National Economic and Development Authority’s (NEDA) Business Sector Survey, more than 60% of MSME respondents stopped operations due to changes in working arrangements and over 70% did not reduce manpower, which means that companies have been absorbing losses. To sustain the business, many delayed payments on taxes and debt, while others availed themselves of loan facilities from Philippine Government institutions or borrowed money from family and friends.

Here are some tips to assist MSMEs on their road to recovery:

Know your cash position

Keep track of your cash flow. There should be clear visibility on the sources and uses of cash. Typically, in a tight liquidity situation or during a crisis, a 13-week cash forecast is used to understand whether there is enough cash to sustain business operations. It is advised to use the Direct Method to see where cash comes from and where it goes. Some examples of items included in the cash forecast are customer inflows or collections, payments to suppliers, payroll, tax and intercompany cash movements, among others.

A reliable and robust forecast underpins the approach to cash management and provides increased confidence in making rapid tactical business decisions such as implementing cost reduction schemes, negotiating with customers, suppliers and lenders, and exploring possible flexibilities on loan covenants.

Conserve cash through improvements in working capital

Better working capital management can lead to cash benefits. It is critical to understand the key components of working capital and see if there are opportunities for improvement. Examples would include efficiencies that can be carried out in the billing and collection process and inventory lead time or changes in the agreed commercial terms with customers and suppliers.

Here are some practical ways to improve working capital:

• Assess credit risk policies considering the current business situation and develop an agile collection method such as e-payment channels.
• Revisit supplier relationships and transaction volume to assess possibility of obtaining more favorable terms. In addition, prioritize negotiating with key suppliers.
• Track inventory quantities accurately to understand true size and value of stock, and to avoid unnecessary purchases and production. Moreover, implement different lean and dynamic supply chain strategies and solutions for each product.

Overall, it is important to understand the efficiencies and inefficiencies of the different processes within working capital to ensure that improvements would work best for the company, suppliers and customers.

Take a proactive stance to maintain or increase profitability

Too often, companies would mainly focus on reducing costs to preserve margins. While costs would certainly have to be cut particularly during unprecedented situations, MSMEs should consider other possible ways to improve revenue.

Here are some practical examples to maintain or boost revenue:

• Employ online distribution channels through partnership with e-commerce platforms or create an online shop or social media pages to further reach your target markets. This would include access to e-payment or cashless payment channels and online delivery services. 
• Improve customer experience by providing a digital platform for product or service inquiry, and an agile customer support system. Explore live video streaming to promote, sell and demonstrate products or services. 
• Identify alternative or additional revenue streams that can be potential sources of future growth.

Seek possible funding sources

The Government provided several stimulus programs to help businesses recover from the impact of COVID-19. Among those initiatives are financing programs for MSMEs such as:

• Credit Guarantee Program for working capital loans to MSMEs facing economic difficulties as a result of the crisis under the Philippine Guarantee Corporation
• Land Bank of the Philippines’ I-RESCUE (Interim REhabilitation Support to Cushion Unfavorably affected Enterprises by Covid 19) lending program
• Development Bank of the Philippines’ Rehabilitation Support Program on Severe Events (RESPONSE)

Companies who are interested to avail these loan facilities must show good credit history and provide proof that the business exists. Credible business, character, sufficient capital, collateral, and industry have an impact on the loan application approval.

The crisis has put businesses in a challenging situation, but this adversity is an opportunity for Filipino MSMEs to reflect, restart, and refocus. With the right mindset and support from the community, our small businesses can seize this opportunity and emerge from this crisis stronger and more resilient than ever.