SMALL COMPANIES CAN USE LIQUID FUNDS FOR EXTRA INCOME

                                      

IN THE LAST few years as the rate of growth of the economy slowed, small and medium enterprises (SMEs), mainly because of their size and scale of operation, have been the worse suffers than their larger peers. On one hand demand in the economy in general has dipped significantly as the larger companies they supply to have also seen little or no demand growth. In addition, the larger companies being in a position to command price, have been cutting margins and delaying payments. If these things were not bad enough, even banks have turned very selective in advancing loans to SMEs and also not showing any leniency with mon ey given to these companies.

Given tough business conditions, it makes sense for SMEs to look to manage their money in a smarter way so that their hard earned money brings in some extra returns for them.One such way out for SMEs is to use liquid funds for parking their extra funds which they might not need immediately, mutual fund industry officials and financial advisors say.SMEs can park their surplus funds, if they have any, in liquid funds for just a couple of days to a few weeks.

HOW AN SME CAN EARN SOME EXTRA CASH?

Suppose an SME has about Rs 25 lakh which the owners would not need for the next 3-4 days. Post that it will have to make some payments which will exhaust a major part of this cash. Usually companies in such a situation will keep the Rs 25 lakh in a current account that will not earn it any interest income. However, as an alternative the company can invest that money in a liquid scheme of a good fund house and earn an income which could be between 8% and 8.5% per annum for those 3-4 days.

The advantage of earning higher returns with low risk and high liquidity should make liquid schemes attractive for SMEs which are always looking for ways to make some extra money that can ease their financial conditions slightly better, financial players said.

Say in the above case if we presume that the company gets 8% return and for four days, it will earn nearly Rs 2,200. If we presume same amount of fund is available to the company every two weeks and for four days on an average, and average return is about 8.25%, at the end of the year, the company can have an extra earning of nearly Rs 59,000. Now here, if the average holding period is three days with other parameters remaining the same, in one year the company's extra earnings will be about Rs 44,000 while in case the average investment in liquid funds is five day, the same will jump to nearly Rs 73,500.

To invest in a liquid fund, people responsible for managing the finance in an SME can call up a fund house who can help the company invest the extra cash in the right fund.

LOW AWARENESS

Fund industry and finance professionals say that in general, the level of awareness among SMEs about using liquid funds for better cash management is very low. According to them, the right way for money managers in SMEs to invest in liquid funds is to test the waters first. They should invest some money in liquid funds and see if the risks and returns are worth taking. And if they are satisfied that the risks and returns are commensurate with their business, then they should make it a regular practice, MF industry players said.

Financial planners also point out that often SME owners fail to distinguish between fund that is required for their business and the money needed to run their family. This is a major mistake they commit which often turn costly in the long run.As an SME owner, they should have clear demarcation between money that they should use for their household expenses and the funds they should use for their business.