Cash flows faster in service sector MSMEs

CRISIL has analysed the cash conversion cycle of 7,300 micro, small, and medium enterprises (MSMEs) in the manufacturing and service sectors in FY 2011-12 (refers to the financial year, April 1 to March 31). The study was conducted to understand the nature and pace of the working capital cycle from the first stage, where an MSME procures the requisite raw material, to the last stage, where it receives payments from customers for its goods or services. The sample does not include service sectors such as banking, financial services, and insurance (BFSI), as these activities are not undertaken by MSMEs owing to the small size of their operations.

The study revealed that MSMEs in the service sector have a shorter cash conversion cycle of 40 days, as compared with their manufacturing-sector counterparts, which take more than 58 days to recover cash from their working capital cycle. CRISIL's analysis indicates that the key factors responsible for the longer cycles of manufacturing enterprises are: (1) they have a longer and more complex production process; and (2) their capital is invariably trapped by the need to maintain inventory of raw material and finished goods at various stages.
Note: This analysis is based on the latest audited financial statements of CRISIL-rated MSMEs. Most enterprises finalise their audited financials by the end of the second quarter, after the closure of the financial year. CRISIL rates over 45,000 MSMEs in India. This fortnightly tracker presents to our readers insights on MSMEs, a key element of the Indian economy.