Should MSMEs focus on revenue or profit amid Covid? Here are possible scenarios to answer that question

Updated: Jul 22, 2020 10:44 PM

Credit and Finance for MSMEs: The focus on the revenue and profit is based on the visibility of the expected trends. The exhibit outlines the canvas of the potential strategies that MSMEs could adopt based on the combination of the declining, erratic and increasing trends in revenue and profits.

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  • By Samir Sathe

Credit and Finance for MSMEs: Should MSMEs focus on maximizing revenue or profits in these unprecedented times of COVID-19? The old question keeps its newness, unfailingly. What should around 40 per cent of India’s MSMEs do when they run out of cash? In the pandemic, which has overhauled the global physical, psychological, social, economic, and political order, MSMEs stare at this question and attempt to answer it with their business acumen, experience and collaboration they expect from their customers, partners, and suppliers. I have noticed that in existential crisis situations, the entrepreneurial mind need not work coherently and may land up making wrong choices, eventually precipitating their demise. I recommend a simple framework that MSMEs need to use, to answer this question, and make their attempts more educated.

 

The focus on revenue and profit is based on the visibility of the expected trends. The exhibit outlines the canvas of the potential strategies that they could adopt based on the combination of the declining, erratic and increasing trends in revenue and profits.

In the best-case scenario 9 of both revenue and profit increasing even during COVID-19, such as healthcare and medical products, agri tech, electronic media, and entertainment, or less elastic luxury goods, etc., it would make sense to seize the opportunity to dominate the market if one is a leader or a strong challenger. The good news is that one is in the right market, at the right time. It also presents an opportunity to innovate, to dominate the marketplace.

Also read: Amazon, Flipkart-led e-commerce recovery crosses pre-Covid level; sector’s penetration jumps 1.5%

In a worst-case scenario 1, where both are declining e.g. travel, MROs dependent on airlines, event and outdoor entertainment companies, MSMEs’ options include smart surrender by exiting the business than being emotionally attached to it (in India, exits are considered a failure, which makes it harder for the entrepreneur to exit even if logic says so!). In this scenario, one also has an interesting opportunity to innovate by questioning the exiting model and start completely anew by leveraging existing assets if they can lend themselves to be effective in another market.

For example, several automotive or industrial part manufacturers cashed in on the opportunity of making PPEs, masks, medical equipment, or several distribution companies played a pivotal role in ensuring medical products reach their destinations although it wasn’t their market, before COVID-19. Some digital business-oriented companies completely changed their business discovering new customer behaviors and converted their APPs to solve some other problems of the same customers. In other cases, it could mean choosing to shrink in size, to be fitter than the pre-COVID-19 scenario rather than being slow in responding to the crisis.

Scenarios 3 and 7 which deal with opposing trends of revenue and profits, the choices pivot around identifying and prioritizing the right products and customers and working on the weak spots.

Scenarios 2, 4, 5, 6, and 8 are complex and confusing situations for entrepreneurs when the signals are mixed. MSMEs would need to be careful in dealing with such scenarios when they decide to focus on revenue or profits.

Particularly in scenario 5 eliminating erratic behaving products and customers present a dilemma and entrepreneurs should consider exiting uncertain futures as one cannot determine a response if one is not clear of the stimuli.

Three potential strategies common to all scenarios: As I wrote in my article ‘Surviving Covid: How securing cash flows before the pandemic is helping small businesses fight better’ securing cash flows appears to be a constant strategy in some way or the other. Secondly, pruning suboptimal parts of your existence also appears to be common across the scenarios. Just like waste, one does not wait for any signal, it needs to go out of the system as it gets generated. Thirdly, selecting the right customers and products is an astonishingly simple but wrongly executed strategy that MSMEs should master.

The question is whether revenue and profit is a choice, as it turns out, it isn’t. It is only about accelerating efforts on the top or bottom line as the scenarios play out. It is time for MSME entrepreneurs to deliberate on the potential strategies and go back to the drawing board and draw on your canvas, what you want to do as if they began their journey into entrepreneurship, yesterday.

Samir Sathe is the Executive Vice President, Wadhwani Advantage at Wadhwani Foundation. Views expressed are the author’s own.

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