Mohit Sahney

Mohit Sahney, Managing Director & CEO, Finova Capital.

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5 Ways SMEs Can Ensure Optimum Cash Flow While Scaling Up

According to a report published by CII, the SME/MSME sector in India is comprised of over 51.1 million units, and contributes nearly 7 per cent to the country’s manufacturing GDP.

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The Small and Medium Enterprises (SME) sector in India has grown leaps and bounds over the past decade owing to several factors like increasing availability of growth opportunities for such businesses, and adoption of innovative technology. The rapid development being witnessed in the sector is also leading many stakeholders to invest in small businesses, and further contribute to the sector’s growth. The Indian SME sector also happens to be one of the fastest growing markets in the country, and also contributes significantly to the nation’s Gross Domestic Product (GDP).

According to a report published by CII, the SME/MSME sector in India is comprised of over 51.1 million units, and contributes nearly 7 per cent to the country’s manufacturing GDP. Another report suggests that MSMEs contribute nearly 8 per cent to the country’s GDP, 45 per cent of the manufacturing output, and 40 per cent of the exports. The sector also provides employment to more than 120 million individuals across the country. Moreover, it is touted to be a market full of potential to nurture talent, entrepreneurship, and innovation across multifarious industries.

Financing in Indian SME sector

In terms of financing, the Indian SME sector had to face some challenges regarding access to financial assistance or credit instruments due to lack of awareness and poor policy implementation.

However, these days, many SMEs in India are now receiving financial support from various banking institutions and Non-Banking Financial Companies (NBFCs) to further expand their business reach across a wider spectrum. Apart from these, there are several other ways for small enterprises to optimize cash flow while upscaling business operations. Let us explore how using the following methods can help small businesses in improving their financial situation:

 SMEs that experience seasonal shifts in cash flow should have the option to choose seasonal credits/loans from banks so they can continue to run efficiently even during lean months. Such credit instruments can also enable low income SMEs to pay off their expenses without affecting any of its business operations.

 Another approach that can help SME owners in optimizing their cash flow while upscaling the business is applying for loan top ups periodically with their lender. This will allow them to avail the bare minimum whenever required rather than taking a massive loan at one go and not being able to repay it in time. As soon as the seasonal cash flow or one-time bullet payment is received from the vendor, SMEs should use the same to part prepay any high-cost loan to avoid any financial hassles.

 Some SME owners/managers usually have a tendency to not be concerned about collection of receivables when sales are strong. This is a serious mistake because they do not realize that a business can be strapped for cash as soon as sales start to slow down, and the cash conversion cycle is affected.

 To avoid the aforementioned situation, SME owners should regularly oversee their cash conversion cycle by keeping track of their debtors & creditors. They should also set measures to determine the total time taken to receive payments from their customers, and also make timely payments to their suppliers.

 Lastly, SME owners should keep track of their daily idle money. Rather than putting the money in the bank, they should keep it in debt funds, even if it is for one day, especially when sales are low.

These days, some NBFCs have begun to make finance available for SMEs at a reasonable cost, and deliver in a transparent manner. Such companies provide innovative, affordable & customer centered credit in time bound fashion to micro, small & medium enterprises via friendly professionals, efficient products, relevant policies, and robust processes to catapult small businesses to new horizons.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house

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