Cash is the King! It is estimated that more than 60% of businesses are protable but die of cash crunch. It is the key and essential function of every business owner and manager to understand

the role of ecient cash ow management to keep the business running smoothly.

While, in a simple language cash flow would mean “In and Out” of cash of a business. Managing that is the art of producing efficiently, delayingpayments to vendors and collecting quickly from customers! The goal is to stay cash positive.

Tool makers are so engrossed and busy in running their operations that nance and cash flow management takes a back seat and generally do notget the required attention of the business owners.

The salient features of a Tool Room are:• Employment of highly skilled technicians• Deployment of advanced and Hi-tech precision machinery and equipment• Huge investments in machinery and teams• Longer production cycle, which means longer time to realise the investment• Thin margins• Repetitions and reworking on the tools• Uncertainty of tooling schedule as the customers’ expectations are not known till the end.

Due to the above unique characteristics, the cash flow management in a tool room is quite challenging and needs dierent skill sets altogether. The keyfactors which affect the cash flow management in a Tool Room are:1. Costing2. Scheduling of the tool room operations3. Goods and Service Tax (GST) and Tax deduction at Source (TDS)4. Funding of the cash flows

Costing: Effective management of cash flows is possible through accurate costing. Many a times, costing is at a macro level and minute details ofthe costs involved are ignored which result in not just making the project unviable but also leading to losses. The cost of multiple tooling iterations hasto be factored in the costing exercise and only then the tool price has to be quoted to the customer. Each tooling job has to be viewed as a project andthe financing and costing of the project needs to be planned accordingly.

Scheduling of the Tool Room operations: The next important aspect in cashflow management is the ‘Scheduling’ or ‘Planning’ of the Tool Roomoperations. The men and machinery utilisation has to be planned precisely so that there is no or very little idle time. One needs to know that idle time of menand machinery is a cost to the Tool Room. The Tool Room should be dynamic in its planning and always be ready with ‘Plan B” or “Project B” to ensure thatthere is minimum idle time. Tool Rooms should adapt advanced technology in scheduling and planning its operations.

GST and TDS: GST and TDS play a vital role in cash flow management. GST is payable on accrual basis i.e. on raising the invoice even without collectingthe invoice. Payments towards tool design and development are subject to tax deduction at source at 10%. This would straight away take out 28% ofthe cash ows and these are inevitable. Tool Rooms have to structure the tooling payments or the tooling milestones for payments considering theimpact of GST and TDS on cash flows. Exports are not subject to GST and tax would not be deducted at source on export payments. Margins on exports arehigher compared to domestic sales. Hence, exports contribute to surplus cash flows. Geographical diversication of the business would help in cashflow management.

Many of the Tool Rooms have production facilities which enable cash flows at regular intervals and such cash flows from production activities support thecash flows of the Tool Room.

Funding of Cash Flows: Tool Rooms should always have a credit line and never look at funding the cash flows on its own. The Government, banks andfinancial institutions have many schemes providing low cost, collateral free debts and the Tools Rooms should explore such schemes.

Tools Rooms should work on advance payment basis with their customers, wherever possible. If credit is inevitable, strict adherence to the credit periodshould be enforced. This kind of compulsions are possible only through a collective representation and forums like TAGMA should facilitate the same.

Tool Rooms should get themselves registered under Micro, Small and Medium Enterprises Act, 2006 (‘MSME Act’). As per the MSME Act, the credit periodto MSMEs cannot be beyond 45 days, even through a contract consented by MSME. With the Companies Act amendments and the stringent reportingrequirements of the details of payments made to MSMEs, the OEMs and other customers are bound to follow the credit period of 45 days. Tools Roomscan take the advantage of the above provision and reduce their working capital cycle.

Undoubtedly, TAGMA is doing a great job in assisting the industry to resolve various challenges. TAGMA should consider offering cash flow managementcourses with the help of experienced professionals like Chartered Accountants, Bankers and other finance professionals and help the Tool Makers manage theircash flow in an effective manner and have positive cash flow. After all, the CREAM philosophy – (Cash Rules Everything Around Me) drives business.

About Author:Kavitha ParameshSpecialised in direct tax, corporate law, FEMA, corporate accounting and corporate finance Kavitha is currently working as Senior Partner at T Sriram, Mehta& Tadimalla (TSMT). She has wide experience in representation before various statutory authorities, transaction structuring, international taxation, transferpricing. startup advisory, financial management, advisory on joint ventures, mergers and acquisitions.