Indian MSME Cash Flow Management: Best Practices

India’s 50 million SMEs contribute over 40% to the country’s GDP (MSMEs). Moreover, these corporations employ the largest number of the country’s workforce. These kinds of numbers are stunning, but they don’t prove anything. Even now, many companies avoid banking services, and small businesses encounter several obstacles when it comes to money and cash flow. Small and medium-sized enterprises (SMEs) are now the focus of attention and are responsible for the country’s relatively even income distribution.

The government also places a high value on developing and expanding micro, small, and medium-sized enterprises. While it is sometimes challenging for smaller and medium-sized enterprises to secure private equity finance through more conventional means, the MSME category is dominated by these types of organizations. To micro, small, and medium-sized enterprises, financial management is paramount to dealing with human resources, business finance, and advertising obstacles. It is challenging for small enterprises, including pharmacies and medical stores, to secure financing, and it’s no secret that running a small business is challenging.

Surviving to Thriving: Overcoming Cash Flow Challenges for MSMEs

The cash flow challenges faced by MSMEs (Micro, Small and Medium Enterprises) are:

1. Cash Flow Mismanagement

The first stages of a small and medium-sized enterprise’s (SME) existence are marked by a period of difficulty in generating capital inflows due to the scarcity of dependable sources. It causes temporary problems with the company’s ability to pay its bills and maintain its cash flow. It’s also due to the fact that many MSMEs are led by people who have never managed a company’s finances before. However, they often lack sufficient resources, which disrupts the cash flow management system.

2. Difficulties in Securing Bank Loans

It is challenging for micro, small, and medium-sized enterprises to secure loans from banks and other financial institutions. Part of the role of promoters is to provide lenders with sufficient information about the company so that the lenders can assess the company’s financial health. The problem is that only a limited number of financial institutions meet the requirements to make MSME loans. Small firms often have poor credit; therefore, banks are reluctant to grant their loan requests.

3. Inadequate Funds

People with lower socioeconomic status than the founders set out to create and establish MSMEs. As a result, having enough cash on hand to cover unexpected expenses is always a problem for micro, small, and medium-sized enterprises (MSMEs). Many of the company’s top executives are from traditionally underrepresented communities, and maintaining stable finances is a major challenge for many businesses.

4. Repayment risk

MSMEs carry a greater credit risk than large corporations since less information is available about them. As a result, lenders might make up for the difficulty in determining the creditworthiness of MSMEs by imposing stricter collateral requirements. In addition, Indian MSMEs struggle to secure timely and sufficient financing because of the absence of collateral. They have a terrible history of paying bills on time and very few financial reserves. It is because of all of these factors that banks often deny MSME loan applications. This is done due to the high probability that many of these loans will eventually turn into bad debts.

5. Neglecting Alternate Financing Sources

While credit availability has risen, many small and medium-sized enterprises (SMEs) still avoid using bank loans due to information asymmetry, collateral concerns, and lengthy approval processes. Hence, MSMEs require new and innovative forms of business and cash flow credit that can reliably supply funds on time. Most business transactions are still conducted using cash, and less reliance is placed on the services of financial institutions.

Calculating Risk: How to Stay Ahead of the Game

Many small and medium-sized enterprises (SMEs) struggle with cash flow; therefore, the more resourceful ones seek non-traditional funding. Private lenders and NBFCs (non-bank financial businesses) fall into this category. Compared to traditional banking, these options are more expensive.

The limited cash flow is now even lower due to these losses. In this situation, paying off loans takes a back seat to more pressing matters, and EMIs are regularly late or missed. If they are late or default on their EMI payments, the overall cost will increase and negatively impact their credit score. A low credit score makes it difficult to secure future loans.

Mastering MSME Cash Flow: Strategies for Success

The crucial strategies to follow to handle MSME cash flow challenges are:

Maximizing Your Profits with Flexible Receivables

The sales process, which includes collecting receivables, is vital to the cash flow cycle. Accurate and prompt invoicing is the first step in efficient accounts receivable management, which also includes following up with clients to collect payments and monitoring past-due balances. When business is good, firms often let their guard down on their accounts receivable, which can lead to cash-flow problems, supply chain disruptions, and late payments to vendors.

Alternative Funding Options

Capital should be raised from large, well-established businesses like venture capital firms. The Microfinance industry has caught the attention of numerous large organizations and enterprises. If you are able to arrange your cash flow using private equity strategies, you won’t be concerned about whether or not your small or medium-sized enterprise is suitable for a loan.

Spreading Awareness of Government Programs

Most businesses in rural and semi-urban areas don’t know about federal funding opportunities. To help the most disadvantaged members of society, Pradhan Mantri JandhanYojna is offering free savings and mobile internet service. If businesses do not receive adequate information, they will be in the dark about the various initiatives being undertaken.

Also Read: Navigating MSME Loan Schemes & Tax Incentives for Business

Financial Technology KPIs

Any company within the “micro, small, and medium enterprise” group may benefit greatly from financial technology. By working with groups that offer both financial and technical aid, your business can increase its chances of being approved for various short-term loans.

Handling Payables with Care

Procurement, which includes accounts payable, is acquiring goods and services at best possible cost, in the least possible quantity, and at the right time. One of the most important things you can do to improve your cash flow is to ensure your payment terms are consistent with the agreement between you and your customers. If not, especially under trying conditions, you may be able to negotiate with the providers.

Effective Inventory Control

Items acquired for resale and raw materials in stock are examples of inventory. Keeping a reasonable stockpile that won’t disrupt operations or drain cash flow is challenging. Small and medium-sized businesses (SMBs) may struggle to maintain their inventory and keep their cash flow under control. Simple adjustments to warehouse and stock transparency, sales forecasts, production schedules, stock policies, lead time, and so on are needed to simultaneously manage inventory, operations, and cash flow.

Prioritize Cash Conversion

Cash-to-cash conversion is a method of managing working capital. Until it has a detrimental effect on the company, companies generally ignore financial planning as they focus on profit and loss. Financial health and lifespan may depend on efficient MSME cash flow management, which is why it is essential to coordinate the three working capital parts of the supply chain: accounts payable, inventories, and collections.


In order to survive and thrive, micro, small, and medium-sized enterprises (MSMEs) need to strengthen their financial stability. Small and medium-sized enterprises (SMEs) would benefit from increased growth and the ability to make more informed financial decisions if given improved access to financial management tools. The vast majority of jobs and economic activity in India are supported by micro, small, and medium-sized businesses. To satisfy the needs of consumers, they produce a wide range of goods and services. They have employed billions of Indians in both rural and urban areas. This industry has huge growth potential despite current financial constraints.

MSMEBlog provides expert solutions and guidance for financing MSMEs. For more information on MSME finance, visit MSME Blog website.

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