The importance of cash flow cannot be overstated when running MSMEs. While profits, sales, and expenses are all important metrics to monitor, cash flow is perhaps the most crucial. The problem with focusing solely on sales or profits is that you don’t get a complete picture of your current financial situation. Cash flow monitoring, on the other hand, is an essential part of keeping a business, especially an MSMEs, running smoothly. This is why cash flow is more important to the business strategy than profit in some ways.
Today many MSMEs are opting for cash flow-based borrowing to support their expenses and operations and meet other demands of their business. Let’s dig a little deeper to understand cash flow based-lending and the reasons behind it.
The first question you might have is, ‘What exactly is cash flow?’ Simply put, cash flow is the flow of money into and out of a business. It is not the same as profit or sales. A positive cash flow indicates that more money is coming into the business than is leaving it. If your cash flow is negative, it means that more money is leaving the business than coming in.
The issue with negative cash flow is that it can make it difficult to cover expenses and keep the business running. As a result, cash flow can make or break a company. It is possible to have relatively high sales figures while still experiencing liquidity problems and a lack of funds.
Historically, Indian MSMEs have faced a number of challenges related to cash flow. One of the main challenges faced by MSMEs is the fact that they operate on limited liquidity and have access to few resources when it comes to accessing capital. This means that even relatively minor financial setbacks can impact their cash flows, and in turn, operations. And major issues can even bring their operations to a grinding halt.
This problem is exacerbated by the fact that traditional lenders like banks aren’t very keen on lending to MSMEs because they often lack collateral and an established credit history, so they don’t have easy access to capital inflows. This can be remedied by MSME loans offered by new-age lenders like fintech NBFCs.
These MSME loans are a great solution to remedy the issues that small businesses face. They are an easy way to access capital on short notice, so that small businesses can tide over financial setbacks and sudden expenses, allowing them to keep operating without interruption. Once MSMEs take a business loan, they can use the capital to tide over sudden outflows, and also to regulate cash flows overall. This helps them seize opportunities that they may otherwise have missed.
Cash flow loans can come to the aid of MSMEs whenever they encounter financial difficulties. However, in certain scenarios, it is particularly beneficial to opt for one. Here are a few examples:
Most businesses have some form of debt, and good cash flow is critical for meeting repayment needs. A healthy cash flow ensures that your company can pay its suppliers and employees on time. Therefore, cash flow is critical in maintaining positive business relationships.
Having enough cash on hand to make purchases puts you in a much better position. You may even be able to negotiate better trade terms with suppliers if you can pay in cash, without requiring credit.
When it comes time to expand your business or invest in new ventures, you must have a positive cash flow. For example, if you want to start a new online store, you would struggle if you didn’t have enough cash.
A consistent flow of cash not only helps you build good cash reserves but also makes planning easier. For example, any future expansion plans will be contingent on the cash flow of your company. It also means you’ll have more time to make long-term strategic decisions that will help the company grow in the future.
Manage your cash flow effectively, and you’ll gain a better understanding of where your money is going, which isn’t shown on a profit and loss statement. It’s critical to understand where your money is going and why. It is not always easy to see expenditures in black and white, which is why it is critical to effectively manage your cash flow. You may be able to identify areas of the business where you can save money.
Effective cash flow management through a loan depends on finding the right lending source. Here’s how you should go about finding the right cash flow lending source for your business to regulate managing cash:
Understand your Needs: Figure out your business’s cash flow needs, including the amount of capital required and the timeframe for repayment.
Research the Lenders: Research various lenders and compare factors such as loan terms, fees, and eligibility criteria to the one that best fits your needs.
Ask for Recommendations: Ask other MSME business owners for recommendations and read online reviews to find out the reliability and suitability of the lender.
Understand Loan Terms: Carefully review the terms and conditions of any loan offers to ensure they align with your business’s financial needs.
Look for Flexibility and Support: Look for lenders that offer flexibility in loan terms and repayment options, as well as excellent customer support. Having a responsive and supportive lender can make a significant difference in managing your cash flow effectively.
In recent years, there has been a growing consumer preference for cash flow-based loans. The flexibility provided by cash flow based lending systems meets the needs of small-scale entrepreneurs and those who work in seasonal jobs and businesses as well. Small businesses, in particular, are shifting away from traditional financial institutions towards other lending options.
At Kinara Capital, we provide hassle-free and quick loans to MSMEs, who would want to focus on future cash projections rather than current investments. Furthermore, MSMEs require fast business loans to meet their cash flow requirements, and we make sure that they meet their needs through our 1-day loan disbursements.
Managing cash flow is a critical part of successfully running a business. MSMEs often end up in difficult financial circumstances because they have limited access to capital and resources. This is further complicated by the fact that traditional lenders like banks are unwilling to provide them with loans to ease their cash flows without collateral. Cash flow loans from new-age lenders like fintech NBFC Kinara Capital can be an effective tool for MSMEs to regulate their cash flows and keep their operations running smoothly. It’s important for them to do their due diligence and understand the loan terms and suitability before applying.
FAQs
How can MSMEs improve their cash flow?
MSMEs can improve cash flow by implementing efficient inventory management practices, regulating expenses, and maximizing profits. Cash flow loans are also an effective way to improve cash flow.
How can MSMEs deal with late payments from customers?
MSMEs should have clearly established agreement terms with customers. If payments do end up getting delayed, they can opt for a loan to tide them over in the interim.
How can MSMEs ensure they have enough cash reserves for emergencies?
MSMEs can ensure sufficient cash reserves by setting aside a portion of profits, maintaining a cash flow buffer, and exploring financing options like lines of credit or business loans.
What are some key performance indicators (KPIs) for monitoring cash flow?
There are several indicators to effectively monitor their cash flow. These include cash conversion cycle, operating cash flow ratio, days sales outstanding, and current ratio.
How can MSMEs use technology to improve their cash flow management?
MSMEs can leverage technology by using accounting software for real-time financial tracking, implementing automated invoicing and payment systems, and utilizing cash flow forecasting tools.
What are some strategies MSMEs can use to accelerate cash inflow?
MSMEs can consider incentives like discounts for early payment, which can motivate customers to prepay for goods or services. They can also minimize unnecessary expenses and use accounting tools to track inflows and outflows.
How can MSMEs use cash flow forecasting to improve their financial planning?
By identifying potential cash shortages or gaps, and making informed decisions about budgeting, investments, and business growth, MSMEs can improve their overall financial planning.
