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Can Festive Season Light Up Hopes, Sales For India's Cash-strapped MSMEs?
During the festive season, supply chain financing can empower India's micro, small and medium enterprises (MSMEs) by enabling them to access working capital quickly, say experts
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It is that time of the year when almost every Indian goes to the market to purchase something. Yes, the festive season has begun across the country and from consumers to businesses, everyone is looking forward to making the best out of it.
India's trade body Confederation of All India Traders (CAIT) has said that the current festival season is likely to generate Rs 3 lakh crore business this year as consumers across the nation are fully geared up to celebrate the season with big fanfare. Last year, the sale of festive shopping was about Rs 2.50 lakh crore, it said.
This mega festival is special as well as crucial for India's small businesses as it offers them major opportunities to generate revenue along with several great complexities, especially in managing working capital and inventory.
Amid the festive season, micro, small and medium enterprises (MSMEs), especially in retail and consumer goods sectors, witness a surge in demand for their products and services. This uptick often leads to increased sales and revenue, offering the potential to improve their cash flow.
However, cash-crunched MSMEs encounter challenges securing the necessary working capital to meet this heightened demand. About 45 per cent of such businesses need help accessing working capital during this period.
According to industry insiders, during the festive season over 60 to 70 per cent of SMEs report challenges in securing adequate working capital to meet increased demand during the festive season and payment delays from customers can go beyond 45 to 60 days, hindering their capacity to invest in growth. Studies also revealed that about 73 per cent of SMEs struggle with optimising their cash flow during peak sales seasons.
"Balancing inventory levels is another critical concern. Overstocking can tie up valuable capital in unsold stock, affecting financial flexibility. Moreover, supply chain disruptions, including transportation delays and inventory shortages, pose a significant risk. Such disruptions can cost MSMEs in the consumer goods sector an average of 25 to 35 per cent of their annual revenue during the festive season," said Manish Kumar, CEO and Founder, KredX.
Notably, the e-commerce opportunity is likely to be around USD 13 billion for Indian MSMEs, according to a report by Shiprocket, an e-commerce enablement platform. It stated that non-metro cities account for 56 per cent of its order volume. Also, MSMEs in tier two, tier three and tier four cities are expected to get more Diwali gift orders than merchants in metro cities.
Supply Chain Financing To Rescue
While the festive season brings increased demand and sales opportunities, it also strains working capital due to the need for additional inventory, labour and marketing. The challenge lies in managing cash flow to seize the opportunities while avoiding overextension.
"Supply chain financing can empower MSMEs by enabling them to access working capital quickly. India's digital ecosystem, including online lending platforms, plays a crucial role in this process. MSMEs can use digital channels to streamline the application and approval process, making it more accessible during the festive rush. This accessibility enhances their capacity to meet growing demand and seize business opportunities," said Sanjay Sharma, MD and CEO, Aye Finance.
Research showed that supply chain financing can result in a 30 per cent reduction in cash conversion cycles for small businesses during the festive season. Moreover, it reduces reliance on traditional lending channels, providing small businesses with greater financial autonomy and flexibility.
Experts added that the flexible nature of supply chain financing in providing this additional support is critical in enabling these businesses to capitalise on these opportunities presented by the upswing in sales.
On the other hand, cash flow constraints may limit their ability to accommodate increased demand, perhaps leading to missed opportunities. Supply chain financing appears to be a useful resource in addressing these quandaries.
"Supply chain financing addresses these challenges by offering immediate cash flow support, enabling businesses to meet increased demand, avoid overstocking or understocking and access affordable financing, ultimately enhancing their competitiveness during the festive season. It also closes the cash flow gap resulting from heightened operational demands by providing working capital linked to orders and invoices. This prompt financial infusion facilitates timely procurement and production to fulfil festive demand," commented Arun Poojari, Co-founder and CEO, Cashinvoice.
MSMEs And City-wise Trends
According to industry reports, the average working capital requirement for small businesses increases by approximately 40 per cent compared to other times of the year. This surge in demand results in a need for increased production volumes, extended credit terms and complexities in inventory management. Consequently, working capital requirements can escalate significantly, placing a burden on small business owners.
According to KredX's working capital festive season report, manufacturing and e-commerce industries are expected to spearhead the demand for working capital ahead of the festive season. Specifically, the manufacturing industry is projected to be at the forefront due to a significant surge in exports observed throughout the year.
Key commodities driving this demand include electronics, automotive, engineering, chemicals, pharmaceuticals and consumer durables. The focal regions expected to generate most of this demand are Maharashtra, Tamil Nadu, Gujarat, Karnataka, Andhra Pradesh and Telangana respectively.
In 2022, KredX noticed a significant surge in working capital demand from tier-two cities. Based on the noted trends, this year, tier-two cities are expected to lead with a 35 per cent increase, followed closely by tier-one cities at 20 per cent.
"Demand in terms of fashion, consumer durables and electronics has increased a lot on the tier-two side as disposable income has increased (in these places). Moreover, MSME clusters are not placed in metro towns but are in satellite or tier-two towns. That is why we see a demand on the tier two side," added Kumar.
The significance of MSMEs within the manufacturing sector cannot be understated, as they constitute an integral part of it, with 31 per cent of the 633 lakh MSMEs in India engaged in manufacturing activities.
KredX’s study further revealed that the manufacturing industry, contributing to 17 per cent of the nation’s gross domestic product (GDP) and employing over 27.3 million workers, experiences a 30 per cent increase in sales during the festive season, emphasising the potential impact of this working capital disbursement.
According to KredX’s recent study, an average consumer durable business generates approximately 40 to 50 per cent of its annual sales during the festive period, while the average apparel business sees about 35 to 45 per cent of its annual sales during this three-month timeframe. However, it is noteworthy that there exists a substantial credit gap for these businesses, estimated to be around 200 to 300 per cent, approximately.
"The demand for working capital by SMEs varies across cities, depending on the local economy and consumer behaviour. Urban centres typically experience higher demand due to greater commercial activity, while rural areas may have more modest requirements," added Aye Finance's Sharma
Debt, Delayed Payments And Growth
An estimated 5.9 per cent of the gross value added (GVA) in the Indian economy— Rs 10.7 lakh crore is locked up in delayed payments from buyers to Micro, Small and Medium Enterprise (MSME) suppliers, as per a report.
A report by Global Alliance for Mass Entrepreneurship (GAME) with Dun & Bradstreet and Omidyar Network India highlighted that payment delays to MSME suppliers have remained endemic and an intractable problem in India for more than 15 years.
Talking about how can small businesses strengthen supplier relationships for seamless operations and sustainable growth, Cashinvoice's Poojari mentioned, "Supply chain financing is custom-tailored to meet the unique requirements of small businesses and this adaptability in offering heightened support during the festive rush plays a vital role in helping them manage the upswing in demand. The digital aspect of supply chain financing expedites procedures through quick documentation and straightforward approvals, which not only streamlines operations but also saves valuable time."
Furthermore, strategic partnerships with ecommerce platforms and the integration of digital payment solutions contribute to enhanced financing accessibility. With market stability and increased confidence in comparison to the previous post-Covid year, this year's sales demand is anticipated to be notably higher, he added.
Strengthening supplier relationships to establish a robust supply chain is an ongoing endeavour that goes beyond seasonal considerations. Building strong rapport with suppliers holds true not only domestically but also on an international scale.
To achieve this goal, Kumar suggested that minimising disputes with suppliers, streamlining the payment process to reduce outstanding days is essential, implementing a sophisticated accounts receivable and payable system and relying on a diverse supplier base are critical aspects of maintaining a strong relationship.
A Reliable Future Ahead
Experts noted that the future of supply chain financing holds significant promise for small businesses. Advancements in technology, such as blockchain, data analytics and digital platforms are set to revolutionise supply chain finance. These technologies offer increased transparency, improved risk assessment and enhanced efficiency in supply chain financing processes.
According to market research, the global supply chain finance market is projected to grow at a compound annual growth rate (CAGR) of 12.5 per cent, providing small businesses with even more accessible and effective financial solutions.
"Collaborative financing models that involve a multitude of stakeholders, including financial institutions, fintech companies and ecommerce platforms, are gaining momentum. Additionally, it is expected that custom-tailored financing solutions, designed to address specific industry requirements and seasonal fluctuations, will become increasingly prevalent, offering enhanced support to MSMEs," Poojari added.
Sharma stated that the future of supply chain financing looks promising. As digital technology continues to advance, it will simplify and expedite the financing process, making it even more accessible for MSMEs. The integration of alternative data sources and machine learning will enhance risk assessment, expanding the availability of financial products.