Working Capital Under Strain

Rethinking Trade Credit in J&K's Distribution Networks

Swastik Sharma

swastiksharmawork@gmail.com

If you step into any bustling wholesale market in Jammu or look at the retail distribution networks spreading throughout Srinagar, you will straightaway come across the informal currency that actually drives local trade: trade credit. For local distributors, wholesalers and stockists, providing payment terms of 30, 60 or even 90 days is usually a strict necessity if the products are to be placed on retail shelves. If trade credit were to disappear, the rate at which goods move from regional warehouses to local shops would come to a sudden and severe stop.

If a distributor offers a retailer a 60 day credit term, they are in effect giving them an interest free short term loan to help with the turnover of their inventory. As a result, strong and long term distribution channels are developed and huge customer loyalty is gained, which in turn creates a solid competitive advantage over other suppliers. Proper use of credit allows the company to expand its market presence and increase retail penetration; incorrect management, however, gradually cuts off the operational flexibility and ruins profitability.

The practical ripple effect of extended credit terms often stretching well beyond the agreed 90 to 120 days creates a severe operational cash squeeze that threatens the very survival of medium sized distributors. On the one hand, big national manufacturers and large brand principals insist on strict financial control and often ask for advance payments or will only allow seven days to pay their invoices. On the other hand, local retailers, who have to cope with varying daily sales, require long credit periods. As a result, distributors, wholesalers and stockists are compelled to function as financial buffers without being reimbursed. They take on the working capital difficulties of the whole supply chain by using their own funds or drawing on high interest overdrafts to cover the time gap between when they pay their suppliers and when they finally receive payment from their buyers.

It is crucial, however, to differentiate between structural payment delays and deliberate default. In the vast majority of cases across J&K, a delayed payment from a retailer is not an act of malice or intentional evasion. Rather, it is a result of market friction and of working capital being tied up at later stages of the supply chain. If goods remain on the shelves longer than the 60-day credit period, the retailer's cash gets stuck in unsold stock and prompt payment becomes mathematically impossible. The capital that ought to be used for buying new stock, negotiating bulk discounts, or expanding into new areas stays tied up in the market and thus gradually diminishes the supplier's purchasing power and their overall operational condition.

The data provided by the Ministry of Micro, Small and Medium Enterprises (MSME) and the J&K Economic Survey show that the region's economy is largely made up of micro and small retail businesses, which are closely linked to the highly seasonal agricultural and tourism sectors. Ahead of the severe winters, supply chains see a huge accumulation of inventory since stock is sent to remote areas before the transport routes are closed. Because of this geographical situation, credit cycles are artificially lengthened, as retailers take more time to liquidate their large winter stockpiles. Moreover, the Reserve Bank of India's (RBI) current efforts to keep an eye on the credit situation of MSMEs and the large number of payment delay complaints recorded on the MSME Samadhaan portal across the country indicate a systemic strain on working capital that is particularly severe in areas that are both geographically and logistically difficult, such as J&K.

A great many of the local distributors, wholesalers and stockists depend largely on a small number of high volume retail customers or on well known regional supermarket chains in order to generate their top line revenue. Since the loss of one of these important accounts could lead to a severe decline in monthly sales, they are extremely reluctant to impose strict credit terms or stop supplying goods when payments are late. In the area, the traditional business culture places a strong emphasis on "relationships rather than contracts", which makes it both psychologically and commercially difficult for a supplier to send out legal notices or charge late fees without permanently harming a key business relationship.

Credit terms should be established by the suppliers in a flexible manner, considering both how fast the products are sold and the retailer's own financial situation. For products which are sold quickly and bring the retailer immediate cash, shorter credit periods should be offered, while for those which sell more slowly and are premium items longer credit terms should be given. Furthermore, inventory should be released in phases. This helps to keep the retailer's invoice amounts within limits, makes sure that the quantity of stock supplied corresponds to actual consumer demand, and greatly reduces the risk of bad debt.

Business owners ought to begin talking openly with their partners about the actual situation concerning cash flow and should offer timely payments as a means of making sure that the supplier can keep up a continuous and priority supply of stock. As a way of encouraging faster payments without damaging the relationships, dynamic discounting can be implemented by giving a small but attractive discount on invoices which are paid within 15 days. Moreover, businesses need to formalise their invoicing and purchase order procedures; by making sure that all trade documentation complies with the provisions of the MSME Development Act, they effectively safeguard their legal right to recourse. It is also possible to make use of modern systems such as the Trade Receivables Discounting System (TReDS), where appropriate for corporate buyers, to help formalise and convert trapped receivables into cash.

Trade credit will always remain a permanent feature of the commercial situation in Jammu and Kashmir, and it is therefore pointless to dream of having a system based entirely on cash and carry transactions. If the focus is changed from simply passively collecting debts to actively managing working capital, both suppliers and retailers will be able to relieve the widespread pressure on cash resources. The key to gaining control over trade credit is to apply strategic inventory management, carry out customer evaluations based on data, and agree on cooperative financial terms; this is the surest way of turning vulnerable local trading businesses into resilient, sustainable, and highly profitable enterprises capable of doing well in any economic period.