MSME cash flow challenges and how to tackle them

Nearly 40% of India's GDP comes from its 50 million small and medium enterprises (MSMEs). Additionally, these companies employ the most significant number of people in the country. Statistics like these are impressive, but they are by no means conclusive. Banks are still not used by a large number of businesses. There are many challenges that small businesses face in financing and cash flow.

The MSMEs have gradually stolen the limelight and ensured an equitable distribution of national wealth. MSME growth and promotion have also been a priority for the Government, which recognises its importance.

Small and medium-sized businesses fall mainly into the MSME category because they face difficulties finding private equity capital by using traditional methods. MSMEs are most concerned with Cash Flow Management. Finance, human resources, and marketing are some challenges they face. It is difficult for small businesses to arrange to finance, whether it is for a pharmacy or a medical store. An average small business enterprise faces a variety of challenges.

Below is a table depicting MSMEs' contribution to the Indian economy:

MSME Cash Flow Challenges: Overview

1. Poor cash flow management

When it comes to small businesses, resource availability is minimal. Fewer reliable sources are available to MSMEs in their initial tenure, which makes the cash inflow generation a challenge. It makes the business suffer from short-term liquidity and cash flow problems. Another reason is the lack of management of MSMEs with limited cash flow management experience. Furthermore, they frequently lack appropriate resources, which impedes the smooth operation of the cash flow management system.

2. Bank loans are hard to obtain

MSMEs face a hard time obtaining MSME loans from financial organisations and banks.

Providing lenders with adequate business data that could aid them in gauging a business's financial health is part of promoters' shared responsibility. However, few banks are qualified for MSME loan eligibility. The creditworthiness of these small businesses is frequently weak, resulting in the bank declining such loan requests and demands.

3. Inadequate cash flow

MSMEs are usually set up and established by founders that have not-so-wealthy profiles. So, whenever any issue arises, cash flow from one's own personal pocket remains a challenge faced by MSME. Persons from underserved social groups control a significant chunk of the company. Financial stability is a key issue that most such firms face.

4. Credit Risk

The credit risk of MSMEs is typically higher because they have less public information than large firms. Therefore, lenders can substitute the lack of information with higher collateral requirements to compensate for the difficulty in assessing MSMEs' creditworthiness. Due to a lack of collateral, Indian MSMEs can also not obtain timely and adequate financing.

The credit record is terrible, and they have minimal resources. All of these issues contribute to banks rejecting MSME loans for businesses. This is performed because many of these loans might become bad debts.

5. Lack of use of other forms of financing

Although credit growth has increased, many MSMEs do not rely on bank credit due to lack of timely credit, information asymmetry, collateral issues, and procedural delays. Therefore, alternative financing sources are needed, yet MSMEs lack broad awareness about new sources of enterprise and cash flow finance that can provide cash on time. Most firms continue to transact in cash and depend less on banking services. Some small businesses in rural areas might not even have a bank account.

What is the Risk Involved?

• Given the cash flow issues that MSME businesses confront, some of the more tenacious firms seek alternate financing. These include non-banking financial companies (NBFCs) and private lenders. These alternatives are more costly than banks.
• These losses diminish the already meagre cash flow.
• Paying off debts takes second place in this circumstance, and EMI payments are frequently delayed or defaulted.
• Delay or default in EMI incurs a penalty, which increases the expense and reduces their creditworthiness.
• Inability to obtain future financing due to poor creditworthiness

How to Tackle MSME Cash Flow Problems?

1. Be flexible with receivables

The sales process, including receivables, is likely the most critical component of a cash flow cycle. Receivable management begins with accurate and timely invoicing in an agile manner and continues with following up on payments with clients and keeping track of overdue bills.

During regular and flourishing times, companies tend to relax on receivables, which causes cash flow issues, disrupts business and supply chains, and delays supplier payments.

2. Using other sources of money

Major established business entities, such as venture capitalists, should be used to generate finance. Many huge organisations and corporations have expressed keen interest in the Microfinance sector. You won't have to worry about MSME loan suitability if you can plan cash flow through private equity methods.

3. Educating the public on government policies and programs

The majority of rural or semi-urban enterprises are unaware of government aid. The Pradhan Mantri JandhanYojna aims to provide 0 savings accounts and mobile internet access to the poorest sectors of society. Firms will remain uninformed of the different initiatives as long as sufficient information is not provided.

4. FinTech metrics

Financial technology may be highly beneficial to any firm that fits under the MSME category. Your company can become qualified for various short-term loans with the assistance of organisations that provide financial and technical assistance.

5. Be careful and diligent while dealing with payables

The procurement department, which includes payable, entails obtaining high-quality materials or services at the most excellent possible price, in the smallest possible amount, and at the correct time.

Getting your payment terms in line with those agreed upon with your clients is a crucial step toward improving your cash flow. If this is not the case, you can negotiate with the suppliers, particularly if circumstances are challenging.

6. Good inventory management

Inventory consists of items purchased for resale, resources stored for manufacture, and work-in-process. The difficulty is to keep an appropriate inventory that does not disturb the business and does not consume too much of your cash.

Managing the requirements for adequate inventory and controlling cash flow may be difficult for SMBs. To manage the inventory, operations, and cash flow concurrently, basic changes in warehousing and inventory transparency, sales forecasting, stock policies, production schedules, lead-time, and so on are required.

7. Concentrate on the payment cash conversion

Working capital management is referred to as cash-to-cash conversion. Companies typically concentrate on profits and losses while maintaining the bottom line and disregard cash flow management until it has a negative impact on the firm.

The coordinated management of the three supply chain working capital aspects - accounts payable, collections, and inventories - is critical for optimal cash flow, which may support the sustainability and longevity of your organisation.

MSMEs are experiencing difficult circumstances and urgently need to increase their financial resilience. Allowing MSMEs to manage their money better would help them scale up and empower them to make more educated and wise financial decisions for their company. Micro, small, and medium firms are the backbones of the Indian economy. They are working hard to meet society's requirements by offering various products and services. They have employed millions of Indians in rural and urban locations. Notwithstanding financial difficulties, this sector has enormous development potential.

FAQs

1. How does the MSME sector deal with challenges?

There are a number of major issues facing Indian MSMEs, including operating in underground locations, struggling with cash flow problems, dealing with scams, and facing poor working conditions.

2. How can Merchant Cash Advance solve MSME cash flow challenges?

MCAs, or Merchant Cash Advances, are quickly becoming a popular alternative form of financing for small businesses. Small businesses can use this method to obtain advance cash against their receivables.

3. What are the MSME loan manual reconciliation problems?

Manual reconciliation has various drawbacks, the most significant of which being the time and effort required to reconcile data from multiple separate systems.

4. How has the pandemic magnified the MSME loan and cash flow challenges?

The pandemic's devastating economic impact has only made banks more cautious. Furthermore, SMEs who have never taken out a loan have no credit history to back them up, making banks reluctant to lend to this sector.

5. What is the quick short way to tackle the MSME cash flow problem?

Access real-time company data from a single dashboard to generate accurate cash flow estimates and forecast future cash shortages or surpluses. Manage banking, accounting, and credit all in one location, eliminating the need to move systems. On-the-go collection and payment management are made simple.

6. How customers' non-payment risk in MSME loan sanctions?

Customers' non-payment and delayed payment cost businesses a significant amount of money. Many firms choose to write off these bills as bad debts because they lack the capacity to pursue debtors.

7. Can electronic methods adoption ease the MSME cash flow problems?

The capacity of MSMEs to accept electronic payments can speed up a collection over traditional means such as checks and bank transfers, significantly impacting the health of your cash flow.

8. Name some technologies that can help MSME tackle cash flow problems?

While developing technologies, such as automation, assist cut costs and increasing process agility to retain consumers, SaaS converts Capex to Opex and ERP, CRM, and data analytics aid in managing operations and business.

9. How can MSME analyse their cash flow profit?

Although profitability and cash flow are unrelated, it is critical to determine when you will break even in your firm. The initial objective should be to achieve the breakeven point. Once you've made your first profit, you'll be able to control your cash flow better.

10. What are cash flow-based MSME loans?

Cash flow-based loans are typically used to handle short-term operating expenditures in a firm, such as rent, wages, administrative expenses, business travel, raw material purchases, etc.