Working Capital Trends for Small and Medium Businesses

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Working Capital Trends for Small and Medium Businesses

This report collects major trends in working capital and insights into which small- or medium-business sectors are most in need for working capital assistance. India, home to more than 330,000 small businesses, is experiencing a major working capital crisis as a result of COVID-19 and will need to seek methods of sustenance for at least one quarter of its businesses moving forward. Technology trends including AI and Robotic Process Automation are contributing to growth in working capital.

Part (A): This section details major trends in working capital.

Technology-related Trends

  • Technology is becoming increasingly important in increasing working capital for businesses of all sizes (including small and medium businesses), according to a report from PwC.
  • Artificial Intelligence (AI) is directly impacting the amount of working capital for small businesses through its usage at banks. Banks and other lenders are using AI to assess small- and medium-sized businesses for appropriate loans. Amazon, Paypal, and Square are using this technology currently to effectively increase working capital for small businesses.
  • Specialist cloud-based solutions are enabling businesses of all sizes to increase working capital by optimizing cashflow. An example of such a software-based solution is Xero, which is praised by its customers for the amount of time-saving features it provides to small businesses.
  • Robotic Process Automation (RPA) is being adopted to help businesses automate their back-end processes and speed up tasks like billing, thus increasing efficiency in organizing working capital.

Business and Social Trend: India's Widespread Lack of Capital Will Lead to Closures and Unemployment

  • India's small- and medium-sized businesses are profoundly impacted by COVID-19 in such a way that will reshape the nation's economy moving forward.
  • Up to one quarter of India's MSMEs will default on their debt if COVID-19 conditions continue, in large part due to cashflow constraints.
  • From an annual revenue growth of approximately 5 percent from FY2017-2020, India's MSMEs are facing a revenue "growth" of negative 21 percent in 2021 (a total shift of 26 points), according to Crisil Research.
  • India's small business and MSME sector accounts for the employment of more than 110 million people and 45 percent of manufacturing output.
  • India's total working population is just over 400 million, meaning a sizable impact can be anticipated for over a quarter of the working population and those they support.
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Part (B): This section provides insights as to which industries or business sectors are most in need of working capital.

Retail and Hospitality Industries In High Need of Working Capital in the U.S.

  • In general, retail businesses have a higher need for working capital than most other sectors due to the need to maintain inventory in the face of demand that is often seasonal.
  • Per Deloitte, the retail and hospitality industries are highly affected by COVID-19 as a result of supply chain issues and a decline in tourism.
  • The retail trade is the 5th-largest for small businesses in the U.S. with more than 654,000 employers.
  • The hospitality trade (including food and lodging) is the 6th-largest for small businesses in the U.S. with more than 537,000 employers.

Sectors Most In Need in India Include Ceramics, Construction

Research Notes

The number of businesses engaged in different sectors in India could not be determined due to a lack of available public data. The website for the Ministry of Micro, Small & Medium Enterprises was searched, along with major organizations and media sources. Revenue data for more specific fields (such as ceramic tile production) is available and was provided.
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Quotes
  • "Micro, small and medium enterprises in India are expected to see an up to 21% decline in revenue and their operating margin could shrink to less than 5% due to weak demand, Crisil said in a media statement. “A sharp decline at the operating level will also impact creditworthiness, aggravating the liquidity stretch these units have been grappling with, particularly on the working capital front.” "
Quotes
  • "The small business and MSME sector will play a critical role in achieving India’s goal of becoming a $5 trillion economy by 2025. Read on to find out the top industry trends in 2020 that will impact a sector employing over 100 million people and accounting for 45 percent of manufacturing output."
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  • "With around 63.4 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India's manufacturing output. "
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  • "As per the official estimates, there are about 63.05 million micro industries, 0.33 million small, and about 5,000 medium enterprises in the country."
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  • "More than 110 million people are employed by India’s 63 million micro, small and medium enterprises (MSMEs). Many of these businesses were caught off guard by the lockdown. According to a McKinsey report, up to 25 percent of MSMEs in India may default on debt under the emerging scenario of an extended lockdown — but each sector will face different challenges. "
Quotes
  • "Furthermore, artificial intelligence (AI), specialist cloud-based solutions and robotic process automation (RPA) are becoming increasingly central to the optimisation of working capital. "
Quotes
  • "These systems are designed to ensure that your business financials are accurate, reliable, and easy to understand. At Summit Financial Resources, we have also seen how they can help speed up your cash flow, reduce costs, improve efficiency, and ultimately help your business grow."
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  • "We have found some great examples of companies utilising advances in AI and automation to help small businesses get access to lending services faster."
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  • "For instance, someone in retail would need a much more than someone in a service-based industry, such as consulting. This is because retail needs inventory and other operating expenses that a consultant may not need. "