Eye on the cash crunch

  • Corporate News
  • Saturday, 28 Mar 2020

Cash burn: Service-oriented businesses are bleeding dry as revenue streams are cut off. — AP

IT wasn’t that long ago that we were hanging the hopes of our economy on the SMEs. In recent years, the sector’s growth has exceeded the growth of Malaysia’s gross domestic product (GDP) and the government was targeting to push SME contribution to GDP to 45% in 2025 from 38.3% in 2018.

Today, however, the sector has been brought to its knees by Covid-19 and the subsequent movement control order (MCO) imposed by the government to contain the outbreak.

With the extension of the MCO to mid-April, businesses are effectively at a standstill for a month. Ironically, though, the bills go on. Salaries are still to be paid, rentals are still to be met and statutory contributions are still to be settled.

Small businesses are particularly vulnerable during this period given that they do not have the reserves that larger companies would have to ride out a whole month with no income. If the MCO is further extended, there is no telling what will become of the SMEs.

As it is, companies are already contemplating shuttering their business for good.

Under normal circumstances, SMEs would typically have sufficient cashflow for about two months or so. For micro-SMEs, it is even shorter at two weeks to a month.

Manpower problems: Companies that are allowed to continue operations during the MCO find it a challenge to get workers.Manpower problems: Companies that are allowed to continue operations during the MCO find it a challenge to get workers.

“When the outbreak first started, only the travel-related businesses were affected. But now, it’s everyone. They are affected because they are not allowed to operate. The extended MCO is definitely a big impact on SMEs.

“A lot of them are already planning to shut down their business because the government is insisting that they continue to pay their staff salary, ” says SME Association of Malaysia president Datuk Michael Kang.

To begin with, business was already slowing down last year in the heat of the US-China trade war. And with this ongoing pandemic, an economic recession seems unavoidable, which would mean a prolonged pain for small businesses.

MCO aside, income is expected to be minimal in the next six months, says Kang.

The government announced a slew of measures under the second stimulus package yesterday to help businesses tide over the MCO period but these measures have not been well received by the business community.

On the face of it, an allocation of RM100bil to support businesses may seem impressive but he notes that the way in which the funds are rolled out will do businesses no good. A chunk of the relief comes in the form of loans, which would further burden employers already struggling to pay bills.

Some welcome such moves like Bank Negara’s six-month reprieve on debt repayments starting April 1, but Kang points out that this does not cover a wide group of SMEs.

“The moratorium on loans for six months can help SMEs but a lot of SMEs don’t take loans from banks. Only about 30%-40% of them take loans from banks. The rest try to bear the costs of doing business on their own. So this doesn’t apply to them.

“For businesses, their costs are more than just loans. They still need to pay EPF contributions, monthly deductions on income tax, rental, all these are a burden to them.

“And during this period, a lot of them can’t get their collections. So everyone in the supply chain will be affected and will have cashflow issues, ” he says.

With little help forthcoming from the government, companies would rather lay off staff to reduce cost.

Supply chain disruption

Certain companies – those providing essential services – have been allowed to continue operations, but only a handful of SMEs are in this category. Additionally, the Ministry of International Trade and Industry (Miti) has been rather slow in processing approvals for these companies to continue operating.

“Until now, so many of them still haven’t been approved.

“And for those companies that are providing essential goods or services, even if they can continue to operate, they can’t get the workers. They rather not work. They say that workers in other companies can still get paid when they don’t work, but they can’t get double pay when they work, ” says Kang.

Such a predicament is affecting companies like Khobates Industries Sdn Bhd. Although the company is primed to benefit from strong demand for its personal care products, disruption in its supply chain is making it difficult for them to bring their products to market.

“When the Covid-19 outbreak came about, things got busy for us as we are producing things like anti-bacterial shower cream and things like that. We’ve started doing more essential products like hand sanitizers.

“There’s more interest in our products. We have people coming to us with orders and are willing to pay in cash.

“But our biggest challenge is supply chain disruption. We can’t get enough plastic bottles, for example, ” shares company director Bob Singh.

Khobates mainly outsources the manufacturing of its products to other original equipment manufacturers (OEM) and Bob notes that many of these producers have a limited number of workers.

With limited resources, Bob says a lot of these manufacturers are prioritising the production of goods for bigger brands and multinationals (MNCs).

“Miti is giving approval for manufacturers of essential goods to continue operating. But I think they should add a clause for OEM manufacturers to give priority to local brands, traders and wholesalers. Most of them are doing international brands’ products first.

“They must first benefit the locals. Otherwise, we have to cut the orders that we are getting. There is demand, but we can’t meet the demand even if we have the capacity because our OEM manufacturers are prioritising MNCs, ” he says.

Bob says the company’s buffer cash would allow it to keep up current affairs for the next one month.

“We had saved up for rainy days like this so we are still ok. And we don’t have borrowings. We are still paying salaries, our workers are not taking unpaid leave. We can last till the end of April.

“But if the MCO goes on till May, then we will have some difficulties with cashflow. At that time, we will prioritise paying our employees over our suppliers. So this will definitely affect our suppliers, ” he adds.

But Bob is optimistic that once the MCO is lifted, producers can get right back on their feet. It is only a matter of ensuring how soon materials and stocks can be replenished.

Jobs at risk

The same optimism can’t be said of those in the services sector, which makes up the bulk of employment by small businesses.

SMEs play an important role in job creation and make up about 66.2% of total employment in Malaysia in 2018. The majority of SME employment was generated by the services sector (62.3%), followed by manufacturing (16.4%), agriculture (10.7%), construction (10.3%) and mining and quarrying (0.3%).

Within the services sector, retail, F&B and accommodation make up the largest component at 63.9%. Already, they are projecting sharp declines in revenue.

The local hotel industry has reportedly laid off 4% of employees as of March 20 and the expected revenue loss during the MCO period is RM560.72mil. The retail industry is looking at a 90% drop in sales in March and restaurants are staring down the same bleak outlook.

“It has a major impact on us as we mainly rely on dine-in customers and that revenue stream has been cut completely. Any delivery or takeaway revenue is definitely not sufficient to cover our high overheads. If this drags on, I’m very sure a lot of F&B outlets will close for good leading to massive unemployment.

“It’s all about who has the cash to burn now. Once the cash finishes, the business is also finished, ” says Rhombus Connexion Sdn Bhd group chief executive officer Kent Chua.

Rhombus operates several brands including Wondermama and Dancing Fish.

But it’s not just about the MCO. Consumers will remain cautious long after the MCO is lifted and Chua says it will take months before they start patronising restaurants again.

“I think most businesses can last 1-2 months if there were no further relief or subsidies for the sector, ” he adds.

In a report earlier this week, the Malaysian Institute of Economic Research projected that the number of job losses could be an estimated 2.4 million, of which 67% are unskilled workers.

Going by his calculations, Kang says this figure is not an over-exaggeration.

“There will be a lot of lay-offs. Of course, employers know that this is really no one’s fault so they are trying to maintain their staff, but only if the government can help them do that, ”

But from the looks of it, the burden remains on the shoulders of employers to see themselves through this challenging time. So far, he says, the government hasn’t really come up with something workable for the industry.

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