Micro, small, and medium enterprises (MSMEs) which plough back profits into the business tend to grow faster, compared with peers that don't. CRISIL's analysis of 3,000 rated MSMEs registered as proprietorships and partnership firms shows that 41 per cent had retained profits in 2014-15. The internal accruals allowed these units to manage a prudent mix of debt and equity to fund expansion/modernisation and meet increased working capital requirements. This enhanced their image with lenders, compared with peers which withdrew profits from the business, and allowed these units to raise 20 per cent higher borrowings.
Better availability of capital, in turn, led to enhanced capacities and faster revenue growth. In fact, in the three years through fiscal 2015, revenue growth of the firms which had retained profits was double the rate logged by their peers. Operating profit margin (OPM) improved, too. In fiscal 2015, average OPM of the firms which retained profits was 52 per cent higher, compared with peers that did not.
CRISIL, therefore, believes that internal accruals spark off a virtuous cycle - illustrated alongside - which strengthens an MSME's capital base, leading to enhanced performance, and acts as a cushion against business cycle shocks.