12 tips small businesses can follow to streamline their cash flow

Small businesses are the driving force behind India’s growth, and prudent cash flow management policies are what drive the longevity and sustainability of such businesses. Whether you want to scale your operations, are interested in buying state-of-the-art equipment, or just need to meet your day-to-day maintenance expenses, positive cash flows are vital for a small business. This, however, is easier said than done.

According to a report on MSME lending by investment banking company Avendus Capital , there is an astounding credit gap of $530 billion in the MSME sector. Out of over 64 million MSMEs in India, the report states that only 14 per cent have access to credit, making it a significant challenge for small businesses to obtain the funding they need to grow and maintain operations. Small businesses must focus on more than just profitability in order to survive, let alone thrive, for example, maintaining their cash-conversion cycles. The real key to successful business growth lies in effective cash flow management, ensuring that adequate working capital and operating funds are available at all times.?

So, in order to help you manage your cash flow more effectively, here are 12 tips that you can follow to streamline your cash flow:

Maintain a Separate Business Account

Since small businesses are usually funded through personal savings, there may be instances of business expenses being met through a personal account. However, a separate business bank account helps you track your business expenses, business loans, and avail of overdraft facilities. These account summaries come in handy to analyse where the money is being spent and what your cash flow projections will be in the foreseeable future.

Expedite Collection of Receivables?

MSMEs should send invoices immediately after the delivery of products/services. In case you offer credit, conduct a credit check on your new customers, particularly for larger enterprises. Keep track of customers that delay payments and negotiate penalty terms with them. Improve your cash inflows by requesting either deposits or advance payments from your customers at the time of order placement. You can do this by offering discounted prices to move outdated inventory, or giving cash discounts for early payments.?Consider offering digital payment options, in addition to cheques and bank transfers.

Negotiate Better Payment Terms With Your Suppliers

Try to time your payables with your receivables by negotiating flexible payment options, instead of targeting bottom-shelf pricing. Also, check for any discounts on early bill payments. It helps to defer payments for as long as you can, provided you don’t incur late payment fees. Relationship management can help in negotiating better payment terms.

Improve Inventory Management

Maintain lean inventory levels that keep your business running smoothly without blocking too much of your cash. Improve supply chain management by ensuring better demand and production planning, refining production scheduling, shortening lead times, etc. Explore the possibility of inventory financing by securing business loans against it. Else, you may choose to sell off any equipment that is no longer in use, or inventory that is becoming obsolete.

Eliminate Any Unnecessary Expenses

Focus on identifying variable costs that can be reduced without disrupting business continuity. Structure your payroll and business loan’s interest expenses in tandem with your revenue streams. Look for ways to swap fixed costs for variable costs. For instance, work out of co-sharing office space instead of outright buying/leasing a space.?

Leverage Government Schemes for Financing

There are a plethora of government schemes to choose from for tiding over any financing needs for small businesses, namely?the Emergency Credit Line Guarantee Scheme (ECLGS), Credit Linked Capital Subsidy Scheme, TReDS platform, etc.?

Go Digital

In order to survive Industrial Revolution 4.0, small businesses need to continue to innovate, which requires a significant amount of cash investment and business loans. Adopt digital technologies, such as SAAS, SCM, and Data Analytics, that help automate processes and reduce costs in the long run, thereby improving cash management cycles.?

Leasing or Buying

Evaluate both options, considering the present value of the down payment and the lease payments made over time. Leasing does away with cash outflows in one go, and this money can be invested to fetch alternative returns. Anything-as-a-Service helps you avail hardware and services online on a pay-as-you-go, on-demand or subscription model.?

Set Up a Contingency Fund

Small businesses should have an emergency cash reserve in place for meeting any unplanned expenses during distressing times. Such reserves, be it in the form of personal funds, or a revolving credit facility, will tide your business over during economic downturns. Ensure to have enough cash coverage for at least three to six months.?

Invest and Grow Your Cash

After accounting for immediate business requirements, including interest payments due on MSME loans, invest the remaining cash in interest-earning accounts. Other lucrative options include Certificates of Deposit (CDs) and money market accounts. Avoid blocking your cash in long-term deposits, especially if they come in with lock-in periods, since an early redemption will cost you money.?

Consider a Line of Credit

For meeting short-term capital needs, a line of credit is a suitable option since it provides quick access to funds.?It streamlines cash cycles by bridging gaps between payables and receivables, which improves your business’s cash conversion. It can also be utilised for meeting any seasonal expenses or emergency procedures. Bank-issued credit cards can come in handy as well.

Secure Business Loans

In order to pay for large asset purchases, or for capacity expansion, a business loan is a superior financing option. This helps in spreading out the payments over the life of the acquired asset, thereby reducing any undue pressure on the cash flow cycle. Usually, such MSME loans can be acquired from Banks and NBFCs and even other finance companies, like Protium itself.

Bottom Line

These tips are by no means exhaustive. You may select any of the options that are most suited to your business needs. But remember, you will need to adopt a transformative approach that will power your business to manage its cash flows for the better in a sustainable manner.

MSME growth in India has faced numerous challenges, including economic, institutional, regulatory, and behavioral bottlenecks. At Protium, we aim to bridge this gap by using proprietary tech models to create a one-stop solution to powerful financing - Protium app. With the Protium app, you can access exclusive pre-qualified loan offers customized to your profile, banking insights, and smart financial tips. Plus, you can check your credit score for free without any negative impact on your credit score. Download the Protium app now and start your journey towards long-term growth and success.