As if managing cashflows wasn’t already a difficult task for a business, the Corona Virus (COVID-19) Pandemic has made this even more challenging.

It is a well-known fact that success of a business lies to a great degree on how well it manages its cashflows and amid the times of this crisis, all the businesses are facing varied degree of discomfort in managing their cashflows depending upon their size and the cash reserve they already hold.

In the coming months, we might hear some of the businesses reporting huge negative cash flows, some might even fail to work on a going concern basis. So, it is fair to say that the future does seem bleak, but the burning question is how do we survive with the least damage being done.

This article has been written to explain a few ways by which we can manage our cash flows more effectively. We will also cover some of the initiatives taken by the Government of India (GOI) for helping businesses come out of the tight spot they are in.

Cash flow

How to manage Cash flows effectively

A. Cash flow Forecast

To manage cashflows effectively, first we need to know how much cash will be required in the near future to run the operations.

Forecasting requires complete awareness of how much payment obligations do I have in the coming weeks considering the current amount of cash reserves and expected collections in the same period.

Also, it just doesn’t end with making a forecast. The most important part is to review it continuously and making sure that we revise the forecast whenever the situation unfolds.

B. Cutting out the Inefficiencies

Cutting out the inefficiencies has always been a critical success factor for the businesses. The time of this global crisis has not only forced but also given an opportunity to the businesses to rethink as to what inefficiencies exist in their business and to lay out a plan to get rid of them.

To do the same, it may be helpful for a businessman to classify the business expenses into the following three categories: –

i) Most Essential expenses

An example of the most essential expense may be cost of a front-end employee which generate the revenue for the business. Other things may also include expenses like IT infrastructure cost, if the business is run virtually.

While examining this, we should keep in mind that different businesses have different priority when it comes to expenses. However, one thing which is certain for every business is that these most essential expenses cannot be avoided.

ii) Essential expenses

Essential expenses may include office rent, electricity, etc. These expenses are necessary for running the business but some of these can be avoided. For instance, if your business is small and can be managed remotely, then it may be wise for you to get rid of the office premises until the situation improves.

iii) Least essential expenses

Least essential expenses may include subscriptions to magazines or newspaper, staff welfare costs, etc. These expenses may be totally avoided at these times to save every penny possible in these times.

C. Speed Up collections by offering cash discounts

As it is said that “desperate times require desperate measures”, it may be wise to give cash discounts to the customers to receive the collection as quickly as possible. It will provide a much-needed short-term financing to the business to meet its near-term payment obligations. But one thing that should be kept in mind is the finance cost of the same might be substantial. For instance, if you offer 1% discount to the customer who makes the payment in next 10 days, the Annual Percentage Rate (APR) comes out to be 18%.

D. Go Virtual

If you have not explored the virtual environment yet and your business permits you to manage your operations remotely, then this is the right time to take your business online.

A perfect example of this can be the education industry. The virtual learning sector has been continuously booming in the recent years, but it had always lacked the wings that this pandemic might have provided. From private educational institutes to now even secondary schools, all are keeping up with their schedules using web applications. May be this crisis has given an opportunity for the businesses to embrace the technological use that they have been avoiding in the past.

E. Cut salaries sensitively

This might be the trickiest thing to do when it comes to managing cashflows. Cutting salaries has never been taken approvingly by the employees and obviously they are not to blame for it. Following things should be kept in mind while cutting salaries of the employees and at the same time, not letting them loose their morale to work as it is a time where their support is needed the most:

i) Cutting the Leadership salaries

As it is said that “A leader is the one who knows the way, goes the way and shows the way”, It is the time for the business leaders to take the salary cut to maintain an accepting environment among the employees. Unless, the people at the top don’t set the tone by cutting their salaries to the bone, they should not be asking other employees to take any pay cut. Generally, the people at the top management are the ones who are paid the highest and cutting down their salaries can save a lot of money which can be used effectively at the times of this crisis.

ii) Cutting everyone’s salary by the same percentage may not be a wise idea

Let’s suppose an organization proposes a 50% pay cut for all of its employees. An employee earning INR 2 lakhs a month can afford to have such a pay cut and still manage his/her expenses easily but imagine an employee who is earning INR 20K a month and his salary being reduced to INR 10K, He/She may hardly be able to survive with this much pay cut. So, different pay cut percentages for a particular class of employees may be a better idea.

iii) Giving a temporary leave

Due to fall in operation levels at these times, all the employees might not be having enough work to do. Some of them may be totally idle and to avoid their salary cost, an organization may decide to give them a temporary leave. However, this option shall be the last resort for reducing the salary cost as it will lead to complete loss of income for such employees.

Initiatives taken by the Government of India (GOI)

Now that we have already discussed about some of the measures that may help improving the cash flows of a business in the times of COVID-19. It is also important to highlight some of the initiatives that has been taken by the GOI in this respect.

The GOI has brought upon a large number of amendments containing the relief measures in the following laws to help businesses in managing the cash flows during this pandemic:

1) Income Tax Law

2) Company Law

3) GST Law

4) Labour & other Miscellaneous

5) Banking Regulations.

A. Relief measures under Income Tax Law

i) Initiation of tax refunds

The GOI has decided to give all pending income tax refunds whose amounts are up to INR 5 lakhs immediately. It has been estimated that it would benefit at least 14 lakh taxpayers.

ii) Extension of applicability of Lower deduction TDS forms of FY 19-20

The GOI has decided to increase the validity period of certificates issued for the financial year 2019-20 by three months to June 30, 2020. This will imply that the Assessees having the lower income will not have to bear the burden of TDS due to non-submission of Lower deduction forms (for e.g. 15G/15H) amid this outbreak of pandemic. In this situation, small relief like this can make a big difference.

iii) Extension of certain due dates

The GOI has extended the following due dates from March 31, 2020 to June 30, 2020 to help managing the cash flows: –

a) An Assessee can opt for Vivad se Vishwas scheme.

b) Investment for roll over of the benefit of Capital Gains u/s 54 to 54GB

c) Investments to be done by individuals for deductions under Chapter VIA, part B

iv) Reduction in Interest rates

Following income tax dues whose due date was falling between March 20, 2020 to June 29, 2020 can be paid up to June 30, 2020 with payment of reduced interest rate of 9% p.a. instead of the original interest rates as per income tax law which vary between 12% p.a. to 18% p.a.

a) Income Tax dues {e.g. Advance Tax, Self-Assessment Tax, TDS, TCS},

b) Equalization Levy,

c) Securities Transaction Tax (STT),

d) Commodities Transaction Tax (CTT)

This will provide a short-term finance to businesses to manage their cash flows in a better manner.

B. Relief measures under Company Law

The GOI has introduced Companies Fresh Start Scheme, 2020 under which it has given an opportunity to all the Companies who have failed to file any of the forms required to be filed with the ROC in the past, to file the forms within next six months i.e. from April 01, 2020 to September 30, 2020 without payment of late fees/penalty which would have been levied in the normal circumstances. This will save the businesses, the amount of penalty that would have been levied on them if this bill was not introduced.

C. Relief measure under GST Law

The GOI has extended the due dates for deposit of GST for the months of February, March, April and May of year 2020. The extension has been given up to June 30, 2020 without payment of any interest to the small tax payers having turnover upto INR 5 crores. For the large tax payers having turnover of more than INR 5 crores, the interest rates have been reduced from 18% to 9 % on late payment of GST. This initiative of GOI will benefit all the businesses in the country help managing cashflows at the time of this Pandemic.

D. Relief measure in Labour laws & other Miscellaneous laws

i) The Employee Provident Fund Organization (EPFO) has extended the deadline to file Provident Fund (PF) contribution and returns for the month of March, from 15 April 2020 to 15 May 2020. This has provided to businessman the extra working capital for one month and in turn improved cash flow.

ii) The GOI has also decided that it will pay PF contributions of both employers and employee for the next three months of the establishment that have upto 100 employees and 90% of whom earn under Rs. 15000 wage per month. The GOI will infuse an estimated amount of INR 5,000 Crore to help nearly 80 Lakh employees.

iii) Employee State Insurance Corporation (ESIC) has extended deadline to pay ESI contribution of Feb 2020 & March 2020, to 15 April 2020 and 15 May 2020, This will also provide the extra working capital for one month.

iv) Department of Financial Services (DFS) has come out with a notification to allow the payment of premium for motor vehicle third party insurance till 15th May 2020, whose renewal is falling due between 25.3.2020 to 3.5.2020. This will reduce the cash burden of insurance premiums on the businesses in this period of crisis.

v) Insurance Regulatory and Development Authority (IRDA) has also allowed payment of premium for health insurance till 15th May 2020, whose renewal is falling due from 25.3.2020 to 3.5.2020. This will help businesses who provide health insurance for their employees to defer the burden of health insurance premium.

E. Relief measures by the Reserve Bank of India (RBI).

i) The RBI has provided relaxation in maintenance of Liquidity Coverage Ratio (LCR) under which earlier Banks had to hold 100% of the next 30 days cash outflow invested in High Quality Liquid Assets. Now the percentage has been reduced to 80% to enable more outflow of cash in the economy to manage the liquidity.

ii) The RBI has restricted the Banks to declare dividend for Financial Year ended 2020 till further orders due to COVID19. This action has made available with the banks the adequate amount of cash in hand which will ease the current crunch in economy due to this pandemic.

iii) Moratorium of Payments – Term Loans and Working Capital Facilities: –

The RBI has allowed a moratorium of three months on payment of all instalments falling due between 1st March 2020 and 31st May 2020. The repayment schedule for such loans and also the residual tenor, will be shifted across the board after the moratorium period. However, Interest shall accrue on the outstanding portion of the term loans during the moratorium period.

iv) As a one-time measure to help banks tide over the disruption caused by COVID- 19, the RBI has been decided to reduce the cash reserve ratio (CRR) of all banks by 100 basis points to 3.0 per cent of net demand and time liabilities (NDTL) with effect from the reporting fortnight beginning March 28,

This reduction in the CRR would release primary liquidity of about ₹ 1,37,000 crore uniformly across the banking system in proportion to liabilities of constituents rather than in relation to holdings of excess SLR. This dispensation will be available for a period of one year ending on March 26, 2021. This type of quick and rapid step by RBI has done its part of efforts to ensure that the economy comes out of this pandemic strong and stable.

Conclusion

Certainly, these are one of the most challenging times for not only a businessman but also human beings in general. However, it is also right to say that “You Don’t Grow when Things Are Easy, You Grow When You Face Challenges”.

Disclaimer: This publication contains general information only and GAA & Co. is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

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