Engineering and auto-component makers typically carry 45–90 days of receivables because their OEM customers (Tier 1 suppliers, large original equipment manufacturers) dictate 60–90 day payment terms by contract. A ₹50 lakh revenue business on 75-day terms carries ₹31 lakh in unpaid invoices at any given time.
That capital is yours—it funds material, labour and overhead—but sits on a customer's balance sheet. This article diagnoses where cash leaks in your cycle, quantifies the cost, and sets out concrete steps to negotiate, structure and collect faster without hiring a recovery agent or taking debt.
Advisory
A ₹50 lakh business on 60-day terms versus 30-day terms carries an extra ₹25 lakh in receivables. At an implicit financing cost of 8–12% per annum (the rate at which you could borrow), that's ₹2–3 lakh per year in lost margin. Most SME owners do not calculate this because the cash drain is gradual—it appears as 'working capital tension' rather than a visible cost line. The lever: map your top 10 customers by revenue and receivables days (Days Sales Outstanding, or DSO). If customer A is 90 days and customer B is 45 days, and both are the same volume, customer A is costing you ₹1 lakh+ annually in implicit financing. That conversation changes negotiation posture.
Most component maker contracts are verbal or silent on payment terms; the buyer's purchase order (PO) terms—typically Net 60 or Net 90—become the default. The Micro and Small Enterprises Development Act, 1991 (MSMED Act) mandates payment within 45 days for MSMEs, and interest accrues at 1.5% per month (18% per annum) if breached—but only if your invoice says 'MSME supplier' and you actually raise a claim under Section 16. Few SME owners structure their invoices this way. Lever: embed explicit terms in your quotation and proforma invoice: '30 days from invoice date, post-GR (goods receipt)' not 'as per buyer's PO'. If the buyer counters with 60 days, negotiate a 2% early-payment discount for 30 days (e.g., '₹100 in 30 days, ₹102 in 60 days'). This reframes the decision: the buyer's finance team calculates IRR, not the procurement team's convenience.
In most component shops, goods are dispatched on day 1, the goods receipt (GR) at the buyer's plant happens on day 3–7, and the invoice is raised on day 8. The buyer's payment clock starts from GR date (per their standard terms), not invoice date. So 'Net 60' becomes Net 67–68 in practice. Second issue: the buyer flags invoice mismatches (quantity, part number, price) 2–3 weeks into the GR cycle, blocking payment until resolution. Lever: coordinate with the buyer's goods inward team to confirm GR timing in advance. Raise the invoice on GR date, not dispatch date (requires ERP alignment; manual tracking if not). Use a simple bill-of-material and part-number standard that mirrors the PO exactly—mismatches add 10–15 days of disputes.
Most SME makers lose ₹50–150 lakh annually to avoidable working-capital stretch: receivables that remain unp
Frequently asked questions
At 8–12% implicit financing cost, every ₹25 lakh in extra receivables (e.g., 60 days vs 30 days) costs ₹2–3 lakh annually in lost margin. Calculate your top 10 customers' DSO to quantify the impact per customer.
The MSMED Act mandates payment within 45 days; if breached, 1.5% monthly interest (18% per annum) accrues automatically. Use this clause to negotiate and enforce faster collection from large OEM buyers.
Map receivables days and implicit cost per customer, structure early-payment discounts (e.g., 2% for Net 30), and embed payment terms explicitly in written contracts rather than relying on PO defaults.