How to Improve Working Capital for MSMEs

Introduction

For every MSME owner improving/Maintaining working capital is always a priority and it goes without saying that it is one of the basic needs for an MSME (Micro, Small and Medium Enterprise). To run an MSMEs day to day operations without hurdles, to pay the required bills, to buy new/used inventory and to pay the employees. However, in reality managing the working capital for the requisite needs is quite difficult for businesses and can be a challenge to be faced especially for budding businesses. In this article we will look at different ways and possible solutions to improve the working capital for an MSME with different strategies and techniques.

What is Working Capital for MSMEs?

Working capital means the current asset/assets that are with an MSME owner to meet the short term liabilities of the business.In most of the common cases this can be in the form of cash reserves to meet the possible expenses. To put in layman terms it would be the difference between what you own and what you owe, ie your current assets and current liabilities. Current assets include things like cash, inventory, and accounts receivable (money owed by your customers to your business). Current liabilities include things like accounts payable (money owed to vendors), short-term loans, and accrued expenses.

A healthy working capital ratio indicates that an MSME has enough readily available resources to cover its short-term obligations. A strong working capital ratio will allow for smooth functioning of the business and its operations, focus on growth opportunities, and the capability to handle any immediate financial pitfalls.

Different Ways to Improve Working Capital for MSMEs

Here are some key strategies MSMEs can implement to improve their working capital:

• Manage Receivables Effectively:
  

• Ensure the expected incoming cash could flaw in without roadblocks

• Set a structured credit policy which outlines credit terms and payment expectations for customers in advance.

• Practice early payment discounts to incentivize faster paying customers.

• Work on your invoicing process to ensure invoices are sent promptly and accurately. Rely on automation as much as possible.

• Consider offering multiple payment options for customer convenience.

• Develop a strong collections process to follow up on overdue accounts.

• Evaluate customer creditworthiness before extending credit.

• Optimize Inventory Management:
  

• Management of inventories should be done carefully, lousy/sloppy methodologies should be avoided and latest tech should be adopted to avoid errors/mistakes.

•  Overstocking is a common enemy in inventory management and effective and proven tech should be used to avoid overstocking and to keep a track of available stock.

• New age systems are able to predict the demand for the future and can help with forecasting what is to come, what to purchase, how much to purchase etc. Artificial intelligence can help a lot here.

• Utilize forecasting techniques to predict future demand and optimize inventory purchasing.

• Negotiate better payment terms with suppliers to extend your payment window.

• Consider just-in-time inventory management where you receive stock closer to the point of sale.

• Regularly review inventory and implement strategies to reduce slow-moving or obsolete items.

• Control Expenses:
  

• A well planned budget can help avoid expenses which are unnecessary in nature.

• Should identify different areas of business where non necessary cost cutting can be done without the business delivery quality getting affected.

• Negotiating better deals with available vendors who supply materials can also save a lot of money for MSME owners.

• Explore cost-saving alternatives for operations, such as utilizing technology or outsourcing certain tasks.

• Increase Sales:
  

• Sales and marketing goes hand in hand to push a business, utilize latest digital marketing campaigns to effectively reach audiences along with traditional strategies to reach wider audiences and to get more sales..

• Offer competitive pricing and promotions to attract new customers.

• Focus on customer retention and develop loyalty programs to encourage repeat business.

• Explore new sales channels or expand into new markets for growth.

• Utilize Technology:
  
  

• Latest tech, artificial intelligence, machine learning etc can be used by MSMEs if it would help to improve the working capital of the organization.

• Effective account softwares can be shortlisted and can be used which will be ultimately cost effective.

• Using inventory management software is a basic need for an MSME and it should be a non negotiable need for every MSME to improve their working capital.

• In 2024 there are so many invoicing tools which are available in the market and should be utilized by MSMEs.- Both paid and free options are available in the market. 

• Consider Working Capital Financing:
  
  

• Working capital loans can be a valuable tool for MSMEs to bridge temporary cash flow gaps or finance growth initiatives.

• Explore options like short-term loans, lines of credit, or invoice factoring.

• Carefully evaluate loan terms and interest rates before applying.

How to Apply for a Working Capital Loan

If you decide to explore working capital loans, here's a general process to follow which works for most lenders.

• Gather your financial documents: Prepare a business plan in advance, financial statements, tax returns, and personal credit reports.

• Research lenders: Since the options have increased by multiple folds in the market in a short span of time it is necessary to consider all the unique options available before picking. NBFCs would definitely stand out for small business owners as they provide msme loans without collateral. Other options like mainstream banks, govt bodies can also be considered as options if applicable.

• Choose the right loan: Consider factors like loan amount, interest rates, repayment terms, and any hidden fees.

• Submit your application: Complete the application form and provide all required documentation.

• Wait for approval: The lender will review your application and creditworthiness before making a decision.

Conclusion

By implementing above strategies, MSMEs can improve their working capital management and achieve greater financial stability. It is important for an MSME business owner to keep in mind that long term survival and sustainability of a business can only come from a healthy working capital and it should be one of the primary priorities. MSMEs shouldn’t be hesitant to turning to lending providers like NBFCs who could provide business loans as such capital especially when collateral free can add a lot of value and could help speed up the growth of the business.