Initially it was the US-China trade war, then domestic political adjustments and now the COVID-19 pandemic – these crises have caused continuous challenges to the businesses in Malaysia. The COVID-19 pandemic that led to movement control order (MCO) in the country added pains and difficulties to the economic situation, particularly the SMEs.
The SME sector, being fragile supported by limited capital and reserves, has been struggling since the commencement of the MCO.
Based on a recent survey on the SMEs, only about one-third of the respondents maintained sufficient cashflow for month of March with another one-third to sustain for another month. This situation is critical because if the situation is prolonged, more than half of the existing SMEs will have to close down their businesses soon.
The government has, through both the Economic Stimulus Package and Prihatin Rakyat Economic Stimulus Package totalling RM250 billion, will introduce various measures to ease the financial burden faced by individuals and businesses due to COVID-19 pandemic.
Despite the government’s effort to do whatever it can within its capability in providing support to the SMEs, the business community, particularly the SMEs have been screaming for more direct and effective financial assistance from the government. There is a need to strike a balance between what should be done and what can be carried out by the government.
While the businesses would like to fulfil the SME’s wish-lists, the government has its limitation due to limited resources. The government needs to ensure it has the means to provide what is deemed essential to the business community.
Having said this, there are still possibilities where the existing stimulus packages can be further enhanced with new measures to be introduced in assisting the SMEs, in particular.
In addition to the enhancement of measures that were already announced by the government, there are potential initiatives that could be considered. This tactical plan will be discussed across three broad stakeholders, namely the government, business corporations and SMEs themselves as follows:
The recently announced economic stimulus packages by the government were initiated at the federal level. These are respectable initiatives but with rooms for enhancements, particularly for the SMEs. The federal government, through various government agencies, can provide further reliefs to the SMEs.
For instance, instead of offering tiered discount on electricity usage for the businesses, it would be more sensible and effective if this discount can cover a wider range of usage. A broad discount of 50% over total usage of electricity by the SMEs until end-2020 will be meaningful and helpful to the SMEs.
On the wage subsidy initiative, the condition of 50% drop in business revenue should be removed. With exception to tourism and travel related sector, many businesses only started to face significant impact when they have to stop operating due to the MCO.
As a result, many SMEs are struggling due to tight cash flow. It may be difficult for many SMEs to show such significant drop of revenue between now and pre-MCO.
Furthermore, the validation of such condition will take time for pay-out of the subsidy. Therefore, subsidy on wages should be applicable to all SMEs without condition.
On the deferment of monthly loan repayment, this is indeed a good initiative for the SMEs. It will help SMEs to save their cash for other business purposes. It would be better if banks can further reduce existing interest charge for the existing loans, say by 1% to 2% per annum for the next six months.
Banks may choose to offer discount of interest rates only to SMEs that have maintained well conducted accounts with them for over the last three years. The banks would have made some profits from these SMEs in the past, hence be able to “re-pay” part of the profits to the SMEs.
Furthermore, the government guarantee fees charged on SMEs by Credit Guarantee Corporation (CGC) and Syarikat Jaminan Pembiayaan Pinjaman (SJPP) for both existing and new credit facilities from banks, should be waived for at least 6 months. This will provide additional relief to the SMEs that require bank financing to support their business operations.
Additional Measures by Federal Government:
The federal government needs dwell deeper into critical requirements of the SMEs in terms of cash flow to fund their basic operating expenses such as staff salary, rental, bank interest that continue to accumulate despite deferment of repayment of instalments, etc. Rental subsidy for business premises used by the SMEs should be considered for the next six months.
Even with the upliftment of MCO, businesses are expected to take few more months to pick-up but operating expenses remain consistent. The recent cut of Statutory Reserve Requirement for banks from 3% to 2% by Bank Negara Malaysia is commendable as it released approximately RM30 billion worth of liquidity into the banking system.
In addition to this, BNM had also reduced the overnight policy rate (OPR) twice this year to 2.5%. The banking system can tolerate lower OPR during this time. As such, BNM can consider to further reduce bank’s OPR by another 0.5% in easing interest expenses for businesses during this trying period.
The government should also consider allowing SMEs to suspend the employer’s portion of EPF contribution for a six months period. The staff would not be impacted by such suspension as the contributions are meant for the staff’s retirement accounts. And the loss to the staff will be minimal which is 12% of monthly salary – a small sacrifice in saving the employers from collapsing.
The additional funding for these additional initiatives can be partly sourced from existing funds currently owned and managed by various government agencies like HRDF and SOCSO. These funds, added up to billions of ringgit are sitting idle at this moment. The government can make full use of these funds for immediate application for SME relief purposes.
The government can choose to repay them when the country economy improved in the future. The initiative to suspend the employer’s portion of EPF contributions does not require any funding from the government.
At the state government level, a few state governments have taken a proactive stance in allocating special relief funds for businesses that are operating in the respective states. These are commendable moves and SMEs will benefit from such initiatives.
Other states that have not allocated any relief funds should start to consider implementing similar relief funds to assist businesses in their respective states. These businesses are key providers of employments in the states.
Additional Measures by State Government:
Waiver of property assessment and quit rents for commercial and industrial property would provide additional relief to the SMEs. The landlords who rent their properties to SMEs can in turn transfer the savings to their tenants.
Waiver of business license fees for SMEs in 2020 would reduce operating cost for the businesses.
In this context, corporations refer to government linked companies (GLC), multi-national companies (MNC) and all other large corporations operating in Malaysia. Many of these companies have since contributed to various funds that were set up for the purchase of medical and personal protective equipment, and health care workers support, etc.
GLCs that operate profitably in the past and currently maintain large cash reserves should declare cash dividend to the government. This cash dividend will be a good source of cash for the government to implement additional initiatives for the businesses, particularly the SMEs.
MNCs and other large corporations can also play a meaningful role in assisting the government to lighten its financial burden by contributing more generously, either in kind or cash, to various funds during this trying period.
These large companies can also assist the SMEs, in particular, by settling whatever payments due to the SMEs in advance, without requesting for any early settlement rebates. This will help the SMEs to improve their cash flow that is critical to bridge over this challenging time.
After all, the SMEs have been part of MNC’s key supply chains, without which, the MNCs would also be struggling in their business operations. Helping the SMEs is equivalent to helping themselves too.
Sitting at the receiving end of various stimulus packages, the SMEs need to also take proactive measures in addressing some of the challenges faced by them. This is crucial to ensure that they can make the best of the situation and be able to overcome this difficult time with minimal losses.
What are the interim measures that SMEs can take to better manage their cash flow and overall businesses? SMEs can opt for temporary reduction of staff salary for three to six months with agreement to reinstate total deducted salary over a period of time when the business environment improved in the near future. Bear in mind that the SMEs that choose to do this must obtain the staff’s consent to participate in this programme.
On the extreme situation where the SMEs may have to retrench part of the staff to remain operational, they can consider pay reduction for all staff in order to keep every employee’s job.
Ideally this reduction of pay serves as a temporary measure with firm commitment to revise the pay upward when the business performances recovered in the future. This should be considered as the last resort, otherwise every staff would lose their jobs if the business is closed down. Again, the staff’s agreement to take on this temporary measure must be obtained before execution.
SMEs need to stay flexible, responsive, resourceful and innovative in making the best of this pandemic. The ability to quickly modify the mode of business operations to suit the current situation could be a success factor. Likely, business operating hours must also be adjusted.
For instance, SMEs that are engaged in essential goods should embrace delivery services in order to capture more business. With most people staying at home, the ability to reach out and connect with them, coupled with readiness to deliver goods ordered by the people would help the business during this trying time.
Whilst this pandemic situation has brought ample challenges to many businesses, it has also unearthed various weaknesses among the SMEs. These weaknesses include business operating model, management of financial resources that cover both cash flow and reserves, people management, among other areas.
However, this is not the right time to work on these issues.
When this pandemic situation is over, SMEs should relook at their respective business models with the aim of improving business resilience and intensifying the financial position of the businesses.
SMEs should also relook into new ways and approaches in conducting their business in the future. These realignment in business models and operations is important and essential in ensuring business sustainability in the long run.
Eddie Hu is a Chartered Banker, specialized financial and training consultant; and author of “SME Challenges and Solutions” and “Transforming Family Businesses”. Contact: [email protected].