Concerns of MSME’s & start-ups post Covid-19

At the closure of last quarter of 2019, most of the small business owners in India were bullish about their businesses, they were thinking towards expanding and growing in coming months. I remember sitting with one such owner by far the biggest manufacturer of white goods in Northern India, he was looking to relaunch one of the products with much fanfare in 2nd quarter of 2020, but that was his plan but with COVID-19 cases on rise, Indian government decided to have a total lock down and everything was put on hold, lock-down was like a bullet piercing through all the plans for MSME’s in India.

This year multiple MSME firms with less than 500 employees have already seen a huge shrunk in their business revenue. Small and midsize businesses are working hard to grow their businesses, but analytics have shown to companies that there are gaps in company’s accounting or operational processes that in past have led to problems such as revenue leakages. Lost revenue is not something that MSME, can afford to ignore. For example, an organization making INR 50 Lacs in revenue can experience leakage of up to five percent, or almost INR 2.5 Lac in preventable losses.

Most of the business owners (MSME’s) manage their costings single handily and rely on their close coterie of family and friends who have helped them while they were building up their business, but they do not cross check what are they loosing. Importance of developing a fraud detection and prevention system is very important. In most companies, fraud is identified only after it had occurred, and the management was unable to prevent it on time. Fraud detection is the best bet for eradicating it from the environment and preventing a recurrence and sending a strong message within the small organisation.

Knowing your employees personally and feeling you can trust them with a level of autonomy is often key to small business success, growth, and liberating the business owners, from the day-to-day running of the business. As employees who feel empowered by responsibility, are more likely to be productive and have higher engagement with their work. However, the (often overlooked) flipside of these trusting relationships is the potential for fraudulent activity. Small businesses unfortunately, can be particularly vulnerable to falling foul of these trusting relationships. The more informal systems of small businesses, with lower levels of checks and balances, are vulnerable to exploitation and misuse by employees.

Fraud against small business almost falls into one of five categories:

  1. False invoicing
  2. Transferring money to another bank account
  3. Cheque fraud
  4. Payroll fraud
  5. Theft of cash.

Most of these breaches of trust are unsophisticated and carried out by a single person from within an organisation.

Small-business owners wear many hats at one time and push themselves and their employees to multi-task, and small companies are unlikely to have an internal audit department. But these MSME’s can take below mentioned small steps which can minimize their risk and can highlight anomalies to identify fraud.

  • Conduct crosschecks and audits

MSME’s should put crosschecks in place for deposits, bank withdrawals, invoicing, and other key financial transactions. They should schedule regular internal audits. If MSME’s can afford they should hire an external professionally qualified auditor to undertake such audits. Employees are less likely to consider or commit fraud if they are aware that the company conducts regular audits. It is always better still to conduct such audits specially if that is a surprise one.

  • Divide responsibilities

Never let a single employee handle all or majority of financial responsibility. Separate the financial functions between your team so that no single employee has complete financial access. Create and follow a concept of maker and checker, where one person is making and another person is checking.

Most of the MSME’s keep their personal and professional accounts with one person, most likely office accountant. It is always better to separate your personal accounts from your business accounts.

  • Use technology wisely

Technology can be used and abused, even within a business. In my experience I have observed numerous instances where a trusted employee/s who has access to the business owner’s bank login details, including his personal accounts, to pay bills have misused them. All the major banks have the technology to separate payment creation and authorization functions. They do charge a small fee, but using this system is cheaper and less stressful than recovering in case you lose money to fraud.

  • Due diligence of potential employees

Even when you are excited about bringing someone new into your team, do your homework. If you are hiring someone that will have access to company cash, credit cards, bank accounts, company books and sensitive data, do a complete and thorough background check. Take help of a professional (if required).

  • Monitor employee behaviour and annual holidays

In my experience I have observed that most of the employees working with MSME’s seldom take a leave or ask for one. A loyal employee who has not taken a sick day or leave in years may seem ideal. Unfortunately, this can be a sign of hiding some form of fraudulent activity. Be aware of those who always start early or work late and are reluctant to take time off. This is an alarm bell for business owners, and they should take help of professional firms.

  • Create a clear corporate culture

Every MSME company dreams of becoming a big corporate but for doing that they should have created a code of conduct, and a clear statement of company’s attitude to fraud (including that employees found doing illegal activities will be prosecuted). This sends a strong signal to everyone that you are proactive in the prevention of fraud for your business.

Although it is not possible to completely protect your business against breach of trust, taking these steps is a good place to start. Being aware of your vulnerabilities and creating robust systems is not only useful for compliance, it is a great way to minimize the risk of loss through fraud.

Take these small tips with you to become a smarter consumer and avoid fraud:

  1. Inculcate KYC so that you know who are you dealing with: In any transaction you conduct, make sure you do a basic KYC and to cross check about the supplier partner, company, or organization and if they are credible and trust worthy. Be especially wary if the entity is unfamiliar to you. Always call the number found on their website’s contact information to make sure the number legitimately belongs to the entity you are dealing with.
  2. Always make payments the safest way: Usually credit cards are the safest way to pay for any online purchase because you can dispute the charge if you never get the goods or services or if the offer was misrepresented. And if someone makes unauthorized charges from your account, most credit card issuers will blacklist them and will remove them completely if you report the problem promptly with proof.
  3. Always safeguard your personal information: In today’s evolving world personal information is like money kept in vault but someone needs to open the vault and take the money. Crooks pretending to be from companies with whom you do business, may call you or send you a personalized email, claiming that they need to verify your personal information. Do not fall into the trap and provide your credit card or bank account information unless you are actually paying for something and know whom you are sending the payment to.

Always be suspicious if someone claiming to be from a company with whom you have an account asks for any personal information that the business already has.

  1. Stay safe while being online: Do not share or send any sensitive information such as credit card numbers by messaging services such as whatsapp or messenger or email because they are not secure. Look for clues about security on web sites when you are asked to provide your financial or other sensitive information, the letters at the beginning of the address bar at the top of the screen should change from “http” to “https” or “shttp.”. Your browser may also show that the information is being encrypted, or scrambled, so no one who might intercept it can read it. But while your information may be safe in transmission, there are no warranties that the company with whom you are sharing the information will store it securely. One needs to check what such web sites say about how your information would be safeguarded in their data.
  2. Be cautious about unsolicited emails: They are often fraudulent. If you are familiar with the company or charity that sent you the email and you don’t want to receive further messages, send a reply asking to be removed from the email list or just click on “unsubscribe”. However, responding to unknown senders may simply verify that yours is a working email address and result in even more unwanted messages from strangers. The best approach may simply be to delete such emails.
  3. Resist pressure: Legitimate companies and charitable foundation will be happy to give you time to decide. It is probably a scam if they demand that you act immediately or won’t take “No” for an answer. Some scammers may also demand you pay off a loan immediately or damaging consequences may occur, always take time to investigate who is requesting the money before you pay up.
  4. Avoid Shoulder surfing: Most of the startups work from cafes and use unsecured WiFi networks for their day to day work, fraudsters always keep an eye and are look out for such individuals who are easy targets. Fraudster will simply take a seat next to your and will monitor your moves and keep an eye on what are you doing. Shoulder surfing is a type of data theft where cyber criminals steal personal information or confidential information by peering over the target’s shoulders. This act is much more common than you would ever imagine. Always check your surroundings whenever you plan to do a financial transactions in public.
  5. Do not believe promises of easy money: If someone claims that you can earn money with little or no work, get a loan or credit card even if you have bad credit, or make money on an investment with little or no risk, it’s probably a scam. Often offers that seem too good to be true, actually are too good to be true.
  6. Fully understand the offer: A legitimate seller will give you all the details about the products or services before selling the product or services, legitimate companies will always provide you with total price, its delivery time, how refunds can be generated and their cancellation policies, and companies terms of any warranty, contact your seller if such details are missing. If they are unable to provide such details, you may want to investigate further or drop dealing with such partners.
  7. Activate DND (Do not Disturb) and get off credit marketing lists: Marketing caller lists offers pre-approved offers such as loans or credit cards. Such data is goldmine for cyber criminals, who are ready to pounce and steal them as they would like to apply for credit in your name. Get off such mailing lists and never share your phone numbers or emails with random people or shops. Removing yourself from these lists does not hurt your credit score or your chance of applying for and getting a credit card or loan when required.
  8. Check your credit reports (CIBIL) regularly. If you find accounts that do not belong to you or other incorrect information, follow the instructions for disputing such line items. If you were denied credit because of information in a credit report, you can ask the credit bureau that the report is not correct.

You can get your credit score checked on CIBIL, EXPERIAN, PAISABAZAAR and other websites online for free but I must share that even Experian and PaisaBazaar use these to build there own data which can be used as per their convenience.

What can be done

Small and midsize businesses need to keep a very close eye on revenue leakage as they prepare for a stronger year ahead. The use professional firms and an enterprise resource planning (ERP) system can plug many of the holes within small businesses that currently rely on spreadsheets or manual forms to manage invoicing, pricing, and expenses. There are five common contributors to revenue leakage that ERP systems can help flag or eliminate.

Incorrect data entries: It is not uncommon for manual errors to creep into invoices created using spreadsheet software, for example, an INR 1,000 product is entered as costing INR 100. If the order is for 50 products, and the error is missed, that represents an INR 45,000 loss in revenue. A professional eye or an effective ERP system eliminate this type of error as the correct cost information flows from the sales order to the invoice generated.

Unsent invoices: Sometimes busy owners of small companies forget to create and send an invoice. And let us understand, if a client does not receive an invoice on time, most likely he is not going to raise a hand to say, “I want to pay you.” An effective system not only generates invoices, which are date and time-stamped, it also reports on the status of invoices sent and receivables.

Unclear payment time frames: An invoice manually created using spreadsheet may have the right due date for payment. However, separate spreadsheets track the due date and payment status of invoices. Missing or incorrect information may result in the business failing to follow up on collecting past-due payments. By contrast, businesses can take help of professionals or use of an effective system to run reports on invoices, due dates, and payments received to trigger appropriate courses of action.

Unmonitored profitability: Top line revenues may be increasing, but the bottom line can be hit by any number of factors. Perhaps the cost of a component within a product has risen. Or despite overall business growth, products are not selling well. Or the cost of providing a service is higher than anticipated. Effective understanding and enterprise systems can generate reports about costs versus revenues to help business executives decide whether to reprice or retire offerings that are losing money.

Unchecked generous discounts or offering sales incentives: Discounts and rebates can be powerful tools for getting customers to buy upgraded product packages, make high-volume purchases, or auto-subscribe to services monthly. However, eager managers or sales reps risk making these incentives so generous that they cut too deeply into the business’ profit margin to be profitable. Understanding and analyzing these would provide an analysis of sales, including any discounts or rebates, versus costs to help business owners and executives come up with policies for offering incentives. Equally important, the system can then be used to enforce those policies, for example, only allowing a discount of up to 15%.

In the past, many small businesses found the cost, time, and effort to implement ERP software too daunting. However, a newer generation of cloud-based, or software as a service (SaaS), ERP solutions has significantly lowered the time and effort to get up and running while providing affordable, monthly subscriptions. As a result, companies that move from spreadsheets and manual entry to a SaaS ERP solution to stem their revenue leakage realize benefits within months rather than years.

MSME sector of India is the backbone of Indian economy contributing to approximately 45% of industrial output, employing over 60 million people, creating over 1.3 million jobs every year and producing more than 8,000 quality products for Indian and Global markets.

With approximately 30 million SMEs in India, 12 million people are expected to join the workforce in next 2 years. With this huge potential, backed up by strong government support; Indian SMEs continue to post their growth stories. Despite of this strong growth, there is huge potential among Indian SMEs that remains untapped. Once this untapped potential becomes the source for growth of these units, there would be no stopping for India posting a GDP higher than that of US or China and becoming the world’s economic powerhouse.

Disclaimer: This content is meant for information only and should not be considered as an advice or opinion, or otherwise. The views mentioned are of author only and should not be construed as an opinion, advice or otherwise of CAC.

Article by Hurrmeet SG Vohra


Corporate Analyst & Consultant Private Limited

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