Decoding Cash Conversion Cycle: How MSMEs Can Reduce That?

In the MSMEs, one of the major problems is that working capital remains trapped in the business. One of the critical problems that the MSME faces is the issue with liquidity, and that creates problems in making payments to the suppliers. 

However, now there are ways where a business can get a working capital loan, which is provided with the support of a government scheme so that production doesn’t get slowed down. One can get a loan agent who can connect the lender, and they can wire the funds to the business. 

It’s the working efficiency of the business to determine how quicker it can collect funds from the customers and how better the business can convert cash into the operating cash flow. 

Understanding the Cash Conversion Cycle 

The cash conversion cycle is a metric for a business that shows how efficiently a company can get cash into its account from the customers so that it can fund the next round of production. 

It’s one of the key metrics that points out how a business can manage its profit, and that gets reflected in the cash flow of the business. When a company books a profit, that becomes visible in the P&L of the business. However, it doesn’t imply that the company has received the cash from the customer. 

In that case, one needs to look at the operating cash flow of the company. Therefore, the cash conversion cycle is the days that a business takes to convert the profit into cash flow. Hence, the lower the CCC (cash conversion cycle) better the cash flow management of the company. 

Steps to Implement to Shorten the Cash Conversion Cycle 

A business must strive to lower the cash conversion cycle so that an MSME can get liquidity and strategically manage the business. Here are some steps a firm can implement so that they can build better and increase efficiency in the business. 

Here is a list of principles one can apply in their business so that they can increase output from each unit and convert profits into cash. 

• Optimizing the Inventory 

When it comes to managing the inventory the role of any organization is to keep track of it so that no extra production is there. Here, a business needs to focus on inventory research, and through that, they can conclude how much item is needed. 

A business can implement techniques like Just-in-Time (JIT), which is one of the efficient methods to create a balance in the churn rate. 

• Using Better Payment Collection Methods 

Payment collection is the technique that allows a company to send payment on time. Therefore, in many high-volume or margin products, one needs to check the profile of the customer and purchase history so that there is no charge for monetary losses.

Even for the manufacturing company, there are now accounts where one can receive payment for large volumes without any complications. The use of digital infrastructure is another efficient way to check and get payment quicker, which helps in the liquidity of the business.

• Avoid Paying Invoices Immediately 

The next step for a business is to create a cycle that states that on that particular date, the company clears all the pending invoices. One of the key concerns for a company is to get the payment from the next business cycle so that there is no liquidity crunch in the business. 

In case a company can’t solve the liquidity matter then the promoters can check for finance DSA app where one can get the right DSA who can guide the business to get a perfect lender for working capital supply.

• Negotiate Better With Vendors 

The next task for a business is to try and negotiate better to get better payment dates and regular payments. It needs to state the tentative date the company should make and the date of receiving products.

Even to consider something some of the core vendors, one must focus on sending on-time payment collection messages so that the entire thing can help the company to solve further problems. 

• Use Specialized Software for Accounts Management 

Finally, it’s useful to include proper software in the backend and accounts collection methods so that a venture can recover the funds and keep track of the profits. 

These steps are crucial for any MSME business to find success in the respective industry. Hence a small business can apply these steps and get better liquidity in the business.