Impact of blocked funds:
More than 70% of SMEs suffer from funds that are blocked in their business. Funds are blocked mainly in the form of excess inventory and stuck receivables. SME owners see profits in their excel sheet but are not to be found in the bank account. These blocked funds run into crores in most cases and the sad part is that the business owner is not completely aware of how much funds are blocked and how to find them. Even though they know how much funds are blocked, they are unable to act on them as most of them do not know the root cause of why the funds are getting blocked.
All these lead to cash flow issues which impact growth at a mild level and closure of business in serious cases. At a personal level, it sucks the bandwidth of business owners thus not allowing them the time to focus on future business strategies.
I have been coaching many SME business owners, through my personal coaching and webinars, on the importance of assessing the impact of blocked funds as a first step towards solving this menace. I would like to share, through this article, the impact blocked funds have on your business.
THE TRUE IMPACT
A lot of business owners think that blocked funds just increase borrowings and interest costs. While this is one significant impact, it does not indicate the damage that blocked funds cause to a business. Blocked funds have a spiraling impact on the business and its profits and cause exponential damage to current and future business prospects.
You will be surprised to know that even if blocked funds are just 20% of your working capital, it impacts your earning potential by 60%. When it is 50%, the earning potential is impacted by 1.5 times. This is assuming a conservative gross margin of 30% and net margin of 10%.
Let us see how!!
Blocked funds are essentially profits that are not in your bank account. This means that you are taking a long time to realise cash for the working capital that you have invested in the business. Thus you are not able to rotate the money as fast as you should which impacts the overall turnover of your business. And when the turnover does not increase but your fixed expenses increase, there is immense pressure on the profitability of the company.
On the contrary, if the blocked funds were to be released it becomes available for reinvesting. Releasing blocked funds also reduces the overall cash rotation cycle resulting in a significant increase in your turnover. Any addition to turnover has an exponential impact on net profits since there are hardly any additional fixed expenses against it.
Below is a representation of the impact of blocked funds:
As an immediate next step, I would encourage all business owners to work out the extent of funds blocked in their business. Your finance team or your consultants can help you do that. Awareness is key before solving any problem and this will be a step in the right direction.
Signing off till we meet again in my next blog