[Introduction] The negative impacts of COVID-19 on small and mid-sized enterprises (SMEs) are beyond expectation. In China, although the epidemic crisis has been under control and the economy is showing signs of recovery, the sharply declining economic data, unprecedented unemployment rate and global economic shutdown risk indicate that Chinese SMEs could still face serious challenges in the near future as indicated by the weak economic data, historically high unemployment rate, and the surging risk of global shut-down. Given both supply and demand are shrinking and market uncertainty is increasing, how should SMEs survive and develop during the mid-late stage of the epidemic and what should our policies focus on? This article aims to provide management and policy recommendations from the perspective of cash conversion cycle.
According to the data released by the National Bureau of Statistics of China on March 16, from January to February in 2020, the COVID-19 outbreak hit hard on Chinese economy, which is shown by the sharp deterioration of main economic indicators. Specifically, for a year-on-year base, the total value added of the industrial enterprises above designated size was decreased by 13.5%, service industry production index decreased by 13.0%, the total retail sales of social consumer goods decreased by 20.5%, the consumer price index (CPI) went up by 5.3%, and the surveyed urban unemployment rate rocketed to 6.2%. At present, with the fundamental improvement of the epidemic prevention and control situation, the national economic situation begins to stabilize, and the resumption rate of industrial enterprises above designated size exceeds 90%. However, SMEs, which absorb 90% labor force in townships and stand for almost 40 million entities, have a current resumption rate of only less than 60%, well below the expectation. This means that the COVID-19 outbreak is posing a more serious threat on SMEs than the expectation.
For enterprises, outbreak shock erodes market demand. In addition, epidemic prevention and control measures deter the normal flow of people, funds, and goods. The declining supply and demand drive the operating cycle to be longer and uncontrollable. The dramatical increase of demands on working capital reflects the direct impact of the epidemic on firms’ operating activities. For SMEs, the already tight cash flows could be worse off because of the waning and increasingly fluctuated demand, the insufficient supply and production support capabilities, increasing demands on advance capital and limited financing channels, the enduring infection prevention and control, and amplified risk and soaring market uncertainty, the already tied up cash flow tensions.
Business operation could be regarded as a process of continuous and dynamic cash conversion, which is inseparable to operating activities. Cash conversion cycle (CCC) is a metrics that expresses the time it takes for a company to convert its cash investment into cash flows from sales, which approximately equals the sum of days of production cycle, days of inventory outstanding, days of operating cycle (i.e. days of prepayment and credit selling) minus days of payables outstanding. The shorter the CCC is, the less the capital occupancy will be. Conversely, the longer the CCC is, the higher the advance demand and the higher the probability that enterprises break operation because of major financial distress will be. The author would like to point out that the CCC of SMEs is normally close to their operating cycle because SMEs tend to be the suppliers of advance capital.