Timely payments by customers can boost SME profits by 15%: S&P

A CRISIL study on 5,000 small and medium enterprises (SMEs) reveals that SMEs can enhance profits by 15 per cent if they receive payments on time from their large corporate customers.

CRISIL estimates that timely payments from large customers will help SMEs reduce interest costs, and improve profitability by around 15 per cent, and have a positive impact on the long-term health and sustainability of India's SME sector. SMEs with large corporate customers have receivables of 90 to 120 days of sales on their balance sheets, as against 45 days stipulated by the Micro, Small, and Medium Enterprises Development (MSMED) Act.

The CRISIL study reveals that high receivables are endemic across industry sectors and locations in the the SME segment.

The smaller the SME, the weaker its receivables position tends to be. Small enterprises constitute a sizeable portion of India's SME segment and are most susceptible to liquidity pressures; it is, therefore, critical that the small entities receive payments on a timely basis from customers.

Says Ramraj Pai, director, CRISIL Ratings, ''SMEs need to understand the costs and impact of delayed receivables, and factor this into the selling price. Further, industry associations and trading bodies need to increase awareness among SMEs about the provisions of, and the redressal mechanisms under, the MSMED Act. ''

With the support and guidance of the ministry of micro, small, and medium enterprises, at the centre, and the National Small Industries Corporation, CRISIL has successfully established the unique concept of performance and credit ratings for the SME sector in India.

 As on September 30, 2010, CRISIL had more than 14,500 SMEs being rated  as outstanding.