Profitable but always short of cash? The 45-day rule your customers can't ignore
You closed last year with a healthy profit. Your CA confirmed it. And yet, on the 28th of every month, you are on the phone chasing customers so that salaries go out on the 1st.
If that sounds familiar, you are not badly run. You are running a business where money arrives late and expenses arrive on time. That gap is the single most common problem we see in SMEs across Bengaluru and Hyderabad, from IT services firms to distributors to manufacturers.
It is also widespread. An analysis of 50 active SME fundraising mandates released for MSME Day 2026 found that six in ten businesses raising capital were doing so to manage cash flow, working capital or existing debt — not to grow.
This post covers why profit and cash drift apart, and one lever most small business owners have never actually used: the law that gives your customers a tax reason to pay you within 45 days.
Why a profitable business runs out of cash
Profit is recorded when you raise the invoice. Cash arrives when the customer pays. Everything in between — the stock you bought, the salaries you paid, the GST you deposited on an invoice that is still unpaid — is funded by you.
A simple way to see how much of your money is stuck:
Money locked in receivables ≈ monthly sales × (days your customers take to pay ÷ 30)
Take a business doing ₹1 crore of sales a month:
Customers pay in… | Cash locked with customers |
75 days | ₹2.5 crore |
60 days | ₹2.0 crore |
45 days | ₹1.5 crore |
Moving from 75 days to 45 days releases about ₹1 crore of cash. No new loan, no new customer — just money you have already earned, arriving sooner. For most SMEs that is larger than the overdraft limit they are fighting their bank to increase.
The rule most SME owners haven't used
Since 1 April 2024, Section 43B(h) of the Income-tax Act has tied your customer's tax deduction to how quickly they pay you, if you are a registered micro or small enterprise.
Here is how it works from your side as the seller:
Your customer must pay you within 15 days if there is no written agreement, or within the agreed period — capped at 45 days — if there is one. A contract saying 60 or 90 days does not stretch that limit.
If your invoice is still unpaid and overdue on 31 March, your customer cannot claim that expense as a deduction for that year. They can claim it only in the year they actually pay. On a ₹50 lakh purchase, that can mean roughly ₹12–15 lakh of extra tax for them that year.
Separately, the MSMED Act already entitles you to compound interest at three times the RBI bank rate on delayed payments, and your customer cannot deduct that interest either.
Their tax auditor reports these overdue MSME dues, so their finance team is now actively tracking them.
From 1 April 2026, the new Income-tax Act, 2025 carries this rule forward as Section 37(2)(g). The number changed; the rule did not.
The catch: none of this helps you if your customer doesn't know you are a registered micro or small enterprise.
Five steps to put the rule to work
1. Confirm your Udyam registration and category. The rule protects micro and small enterprises only. Medium enterprises are outside it, and so are wholesale and retail traders, whose Udyam registration gives priority-sector lending benefits but not delayed-payment protection. If you are a manufacturer or service provider without Udyam registration, get it done — it is free and online.
2. Get your Udyam certificate into every customer's vendor master. Email it to the customer's accounts team, not just your contact in purchase. Ask them to confirm you are tagged as MSE in their system. This is the step almost everyone skips, and it is the one that makes their finance team care.
3. Put payment terms in writing, at 45 days or less. Mention them on your quotation, get them on the purchase order, and print them on the invoice. The clock runs from the day your goods or services are accepted, not the invoice date, so get delivery or completion acknowledged in writing.
4. Chase on a calendar, not on a feeling. A reminder at day 30, a firmer follow-up at day 45 that politely references the MSME payment timeline, and a list of every overdue customer reviewed in February and early March — when their year-end tax exposure is at its highest and your leverage is strongest.
5. Know your fallback. For persistent defaulters, the government's MSME Samadhaan portal lets you file a delayed-payment case that goes to a facilitation council. Most businesses never need it; knowing it exists changes how you negotiate.
A word of judgement: this is leverage, not a weapon. With a key account, a friendly note from your finance team that says "just flagging this so it doesn't affect your year-end" works far better than a legal reminder.
The other side: if you buy from small suppliers
Most SMEs are also buyers. If you purchase from micro or small suppliers and pay them late, the same rule works against you: overdue amounts on 31 March get added back to your taxable profit. Ask your accountant for an ageing report of MSME suppliers every quarter, and clear anything approaching the limit before year-end.
Collections is only one lever
Faster collections usually release the most cash, but they are rarely the whole story. Cash also gets stuck in:
Inventory that sits for months because purchasing is based on habit, not demand
Supplier terms you accepted years ago and never renegotiated
Pricing that hasn't moved while your costs have
No forward view — most owners know today's bank balance but not what it will be in eight weeks
Warning signs that the problem is structural, not seasonal: you rely on the overdraft every month, you delay GST or TDS payments to cover salaries, or sales are growing but the cash squeeze is getting worse.
How CFO2Growth can help
Our 3-week cash flow diagnostic is built for owner-run businesses under ₹20 crore turnover. We map where your cash is actually stuck — receivables, inventory, payables, pricing — put a number on each, and hand you a 13-week cash forecast and a prioritised list of fixes.
Frequently asked questions
Does the 45-day rule apply if my customer is a large company? Yes. The rule applies to the buyer regardless of their size, as long as you, the supplier, are a registered micro or small enterprise.
My customer's contract says 90 days. Does that override the rule? No. A written agreement can set a period up to 45 days. Anything longer does not extend the limit for tax purposes.
Does it apply to traders? No. Wholesale and retail traders registered on Udyam get priority-sector lending benefits, but not the delayed-payment protection.
What changed with the Income-tax Act, 2025? The provision moved from Section 43B(h) to Section 37(2)(g) from 1 April 2026. The substance is the same.
What if a customer still doesn't pay? You can claim interest under the MSMED Act and file a case on the MSME Samadhaan portal. Talk to your CA or legal advisor before escalating.
This article is general information, not tax or legal advice
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