Ensuring cash flow during a difficult time in business
Prudent receivables management is the best tool to sustain your business now
I recently talked to a classmate friend at a metro city and heard he had started farming for his livelihood after closing his pest management company. Earlier, he was an employee at a PCO and started his PCO thinking the business offered very good margins and income.
After the advent of the COVID-19 pandemic, my friend continued services to his company's customers even though it was a challenge to continue operations during lockdowns and business restrictions. However, his company was not invoicing customers letting pending invoices reach a level of ten million rupees. Instead, the customers were calling this vendor and reminding its owner to submit invoices and collect payment. However, that PCO never generated or submitted invoices and eventually closed operations being unviable.
In the pest control industry, we see numerous new companies start business daily, hiding the converse that many PCOs are also shutting shop, unable to sustain their business. The most common reason for a PCO to close is a mismatch in the expenses and the inward accrual or a cash flow mismatch.
Accounting norms recognize only payment accruing to a company's account as sales or revenue. By that count, most PCOs have significantly lower revenues than the amount they have invoiced their customers. Not focussing on cash flow to minimize the time between expense and income makes PCOs fail. Though pest management is a low investment business requiring very low capital, it is also a cash guzzler that needs you to spend daily on technicians and materials to provide services.
There are two key strategies to having a regular cash flow in your business. The first one is to prevent delays in invoicing and collecting payments by digital enablement. The second one is when you find that a customer is not paying within the credit period or creates disputes, use India's legal provisions to protect small companies. Unfortunately, legal dispute resolution in India is lengthy and expensive and must be your last recourse only when you can't use the government's legal provisions for recovering your payments.
Your priority should be to generate invoices quickly and then make your customers pay soon after the service.
Invoicing: Most PCOs generated invoices at the end of the month, which has no logic. Your contracts should link invoicing to service completion, not the month completion. Software available now can automatically generate and email invoices to customers. It would help if you made all customers accept digital invoices, which enables you to save on the cost of paper for invoices and reduce the delay in personally submitting invoices or sending them by courier.
The credit period is between the service and the payment, not when you generate or submit the invoice. As B2B customers cleverly specify that their credit period starts when they receive the invoice, you must make sure that you agree with them.
Digital payments: Software and accounting service providers now facilitate payment gateways for PCOs to offer their customers. Popular payment gateways allow numerous options and should be the choice of MSME customers.
PCOs should discourage customers from cash and cheque payments which have high transaction costs. Cheques delay fund accrual, affect company cash flow, and risk fraud and physical loss of such instruments. Many customers issue cheques to delay banks debiting their accounts by a few days. Customers also claim the absence of a cheque signatory to delay issuing a cheque.
After your invoice submission and payment follow-up, the next step is using the legal provisions to make customers pay.
MSME Samadhan: The Government of India (GoI) legislation specifies the penalty for customer delays in payments to the Micro, Small, and Medium Enterprises (MSME), of which very few Indian PCOs are aware. Sections 15- 24 of GoI's Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 contain delayed payment to Micro and Small Enterprise (MSEs). Those sections require state governments to establish Micro and Small Enterprise Facilitation Council (MSEFC) for dispute settlement of delayed payments filed by businesses.
On receiving MSE applications, the MSEFC directs customers to pay the MSE the amount due with compound interest at three times the RBI rate for a payment period beyond forty-five (45) days of receiving pest management services. In addition, GoI's Ministry of MSME has provided an MSME Samaadhan Portal to help MSEs file their petitions against customers for the perusal of the state's MSEFC. Our experience at PECOPP Pest Control is that every customer who receives notices from the Samaadhan portal promptly pays their PCO in the future.
A PCO should specify in their contract terms that they are covered by the MSMED Act and entitled to payment within 45 days by the customer and a penalty when the customer violates such payment terms.
To summarise, we must run our pest management business prudently, matching our cash outflows with inflows. Cash flow mismatches result in delayed payments to employees and vendors and affect the PCO's reputation. In addition, excessive and frequent use of bank credit can reduce the creditworthiness of the PCO who uses them.
PCOs should look to their customers to maintain a regular and adequate cash flow. As offering pest management services precedes payments from the B2B segment, invoicing and payment must happen within fifteen days of services. The Indian MSMED Act is powerful legislation that very few Indian PCOs use to recover their dues from customers.
The Samaadhan portal is a delayed payment monitoring system that powerfully arms all MSEs, not just PCOs. All businesses need to file the status of their payments to MSEs annually and are opposed to delaying MSE payments which invoke a penalty of compound interest for delay beyond 45 days from the service date.
In 2020 and 2021, all businesses, including pest management companies, have focussed on survival as the external business environment has been challenging. However, the most critical aspect of business operation last and this year is ensuring cash flow, for which digitizing invoicing and payment and resorting to the MSMED Act provisions are tools every Indian PCO can use.