By Tushar Bhaskar
Risk management for MSMEs: This monsoon, the talk about tomatoes has overtaken the conversation about delayed rain. From daily commuters in public transport to anchors on news channels, from homemakers to restaurant chefs, everyone is seeing red as far as tomato prices are concerned. With the power this juicy produce holds in our everyday life, the government has finally stepped in to try and rationalize retail prices.
However, for many the damage has already been done, especially restaurants and small businesses in the agro-processing industry. They are finding it difficult to maintain their profit margins and at the same time, increasing the prices of their products could lead to reduced demand. Those that are unable to absorb the increased cost of tomatoes may get squashed by larger businesses that have more resources to manage the price surge.
Unfortunately, with climate-change-induced erratic weather patterns, such inflationary trends of agricultural commodities are only becoming more commonplace—this year it is tomatoes, last year it was onions. Clearly, India’s SMEs need to learn to live with this risk and, specifically, learn to manage and mitigate this risk.
Also read: Explained: How MSMEs can undertake risk management in business
By adopting risk management strategies, SMEs in India can enhance their ability to tide over inflationary conditions. Here are some ideas:
Diversify their product offerings
By diversifying their product offerings, SMEs can reduce their dependence on a single commodity and spread their risk across multiple products or markets. This can help them navigate the impact of inflationary shocks and minimize the effects of price fluctuations of that commodity on their business. Diversification can also help SMEs tap into new customer segments.
Adopt cost control measures on a continuous basis
“A penny saved is a penny earned” is an old proverb that most SMEs live by. Inflationary shocks hurt businesses, particularly those with higher cost structures since they are not able to cut costs drastically at one shot. However, SMEs that are frugal by nature and practice continuous cost control are more likely to tide over inflationary conditions. Frugal SMEs tend to have built enough buffers against inflation or sudden disruptions in market conditions.
Manage cash flow effectively
For SMEs, cash is king!! In inflationary times, cash flow gets stretched as input costs increase but prices don’t keep up. If SMEs adopt supply chain financing (using products such as invoice discounting or factoring), they can unlock cash quickly in the trade cycle. This is particularly useful during inflationary times or to deal with seasonality when cash is in short supply. Alternatively, if an SME has long-standing relationships with banks or financial institutions, it can explore getting additional or temporary credit lines to meet working capital needs during inflationary periods.
Also read: How can an SME business owner build a resilient business with the help of a CFO
Adopt flexible pricing strategies
SMEs can adopt flexible pricing strategies to effectively mitigate and manage inflation risk. For example, one approach is to link product pricing to the cost of the input in Business to Business (B2B) transactions. By linking the selling price to the input cost, SMEs can pass on cost increases to B2B buyers. However, this requires complete transparency and trust between the counterparties. Also, in an environment where input costs are subdued, flexible product pricing based on input costs will result in lower revenue and margins for the seller.
Collaborate with other SMEs
By joining forces and forming strategic partnerships, SMEs can pool resources, share expertise, and collectively negotiate better deals with suppliers and customers. Collaborative alliances can lead to bulk purchasing opportunities, allowing SMEs to secure lower and more stable prices and prevent sudden, large price hikes. By fostering a collaborative ecosystem, SMEs can enhance their resilience, leverage collective bargaining power, and thrive in the face of inflationary pressures.
These are just some measures that SMEs can adopt to survive in an inflationary environment. This way, they will not worry about playing ‘ketchup’ with tomato prices, nor will onion prices make them cry!
Tushar Bhaskar is the Chief Sales Officer at Rubix Data Sciences. Views expressed are the author’s own.