Boosting Financial Health
Strategies to improve Cash Flow Management for Business
How can MSMEs estimate their current situation?
Step 1: Record the Invoices raised in a month.
Step 2: Monitor the income received from the purchasers of the product.
Step 3: Now add up the expenses for the month. Split them into buckets like electricity, labor, marketing, purchases, etc.
Step 4: Add the current EMIs to the expenses.
Step 5: Measure the cash conversion days required for the business. It starts with the first outflow of money for purchases/contract signing and ends when the last penny is deposited in your bank account for the work you did.
Step 6: Add the finance cost on this working capital to get your true margin in the business, which would help you to price the products & services better.
Step 7: Once the process is established, maintain the cashflows and keep a record of the same monthly. It would improve your financial clarity and ease availing of small business loans.
How can MSMEs improve their cash flow management?
Reduce the cash conversion cycle
1. Efficient Invoicing and Payments:
Efficient invoicing and prompt payments are the lifeblood of your business. Delayed payments can disrupt your cash flow and hinder your business operations. To streamline invoicing and payments:
Accurate billing and supply: It reduces the chances of rejections. One great way to ensure this is by implementing automated or digital invoicing systems.
Offer Incentives: A standard practice in the industry is to provide a discount if the bills are cleared within a specified time frame, known as a cash discount. However, this could be slightly disadvantageous to your business as purchasers get a hint on your margins and can negotiate more on the price.
Extend your payable cycle: Negotiate with your suppliers to increase payment terms so that cash outlays are delayed.
Invoice collections: In case of some problematic purchasers, sincerely & politely follow up for payments. If there are major concerns, you can also opt for a legal recourse for recovering unpaid invoices. However, such measures should be used only in extreme situations.
2. Leverage working capital financing:
In cases where optimizing cash flow isn’t sufficient, consider financing options tailored to meet the working capital needs of your business. Working capital loans and business lines of credit can provide the necessary financial cushion during lean periods or for seizing growth opportunities.
Types of working capital loans available:
Long-term working capital loans: These are typically for more than 2 years and are most valuable when small businesses want to expand their capacity utilization or improve their margins by upfront buying.
Short-term working capital loans: These loans are structured to help you with your short-term commitments and are generally for less than 1 year. These are a perfect fit when you have major inflows coming soon.
Cash credit and line of credit: These facilities are most used to finance working capital needs. It helps with using a sanctioned amount for a given tenor wherein the businesses are liable to pay only the monthly interest.
Invoice discounting and supply chain financing: These are new loan products explicitly developed for short-term funding and are secured by the receivables. It is better than others as these are majorly unsecured and are much easier to avail.
3. General tips to manage the payment cycles & get working capital loans quickly:
- EMI planning: Once the monthly cash flow structure is ready, you have a detailed guide on your EMI feasibility. It also helps to structure the working capital loans so that the EMI date coincides with the maximum cash inflow period and ultimately reduces the EMI strain you generally experience.
- Utilizing Financial Management Tools: Incorporate modern financial management tools and software to streamline financial operations, track cash flow, and make informed financial decisions. These tools can provide valuable insights into your business’s financial health and aid in effective planning.
- Developing a Strong Credit Profile: A strong credit profile allows you to access credit at lower interest rates when needed. Building and maintaining a good credit score is crucial. Two of the most critical factors are:
Timely Payments: Ensure on-time payments for bills, loans, and credit lines to build and maintain a favorable credit score, establishing your credibility.
Responsible Credit Management: Utilize credit wisely, avoiding overutilization, and manage repayments responsibly, ensuring a positive credit history.
Sustainable business growth and financial stability are achievable through strategic cash flow management in business. Employ these strategies, leverage suitable financing options, maintain strong credit standing, and embrace financial management tools to fly your business toward enduring success.
About Red Fort Capital
Red Fort Capital is dedicated to empowering Indian MSMEs (Micro, Small, and Medium Enterprises) on their path to business growth through customized business loans. We understand that securing a business loan in India can pose significant challenges, particularly when factors like a less-than-ideal credit score, a relatively short business history, unclear financial records, or variable cash flow come into play.
As a respected Non-Banking Financial Company (NBFC), we take pride in offering a diverse range of secured business loans, spanning from 1 to 10 Crores. What sets us apart is our remarkable ability to disburse funds fast, in just 7 days. Our financial solutions are meticulously designed to cater to a spectrum of needs, including working capital requirements, equipment and machinery purchases, invoice/bill discounting, and last-mile financing, among others.