Delayed receivables hinder growth of service-sector MSMEs

CRISIL has analysed the debtor-collection period of 1,400 micro, small, and medium enterprises (MSMEs) in the service sector in 2012-13 (refers to the financial year, April 1 to March 31). The study was conducted to determine the time gap between sales and receipt of payment, so as to understand the significance and extent of the challenge of stretched receivables in the MSME sector.

The surveyed industries comprise media and advertising, printing and publishing, logistics, information technology, and manpower-based services such as security and facility management. MSMEs in these segments often face delayed payments due to weak negotiating power, as many of their customers include medium/large companies and government departments/corporations.

The study results indicate that receivables are stretched the most for media MSMEs, followed by enterprises in the printing and logistics sectors. Inadequate cash-flow due to delayed collection impedes each MSME's overall growth by affecting its day-to-day operations as well as its ability to defray capital expenditure.

To manage their tight liquidity position, these enterprises depend on borrowing from banks and other sources, which erodes profitability by increasing their interest burden. Thus, timely payment to MSMEs, as per the provision of the MSMED Act, remains essential to release funds tied up in the working capital cycle.

Note: The analysis is based on the latest audited financial statements of CRISIL-rated MSMEs. Most enterprises finalise their audited financials by the end of the second quarter, after the closure of the financial year. CRISIL rates over 50,000 MSMEs in India. This fortnightly tracker presents to our readers insights on MSMEs, a key element of the Indian economy.