Working Capital
Working capital for MSMEs: the cash conversion cycle, explained with numbers
Profitable businesses run out of cash for structural reasons, not mysterious ones. Measure the gap between paying suppliers and being…
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Working Capital
The cash conversion cycle, limit assessment and the practical levers that free up money already inside the business.
Measure the cycle before you borrow
Days of inventory plus days of receivables minus days of payables gives the number of days your own money is locked up. Multiply that by daily cost of sales and you have the working capital requirement. Borrowing without that number means borrowing whatever the bank offers.
How banks assess a limit #
Smaller limits are commonly sized as a percentage of projected turnover with a margin from the promoter. Larger limits are assessed from CMA data on the build-up of current assets and liabilities. Drawing power is then recalculated monthly from a stock and debtors statement, net of creditors — which is why late stock statements shrink your limit.
Levers that cost nothing #
Invoice on the day of delivery rather than at month end. Take a deposit on custom orders. Chase the oldest five invoices weekly instead of the whole ledger monthly. Negotiate supplier terms in days, not price. Each of those releases cash faster than a new limit.
What you will need
- Monthly stock and debtors statements
- Creditors ageing
- Projected turnover and cost of sales
- Sanctioned limit and utilisation history
- Bank statements showing the operating cycle
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Working Capital
Working capital for MSMEs: the cash conversion cycle, explained with numbers
Profitable businesses run out of cash for structural reasons, not mysterious ones. Measure the gap between paying suppliers and being…