Optimizing Working Capital Management: Impact of Cash Conversion Cycle on Profitability of MSMEs in Bihar Post-GST Era

Abstract

Small and medium-scale business units have long served as indispensable pillars of India's economic fabric, channelling productive energy into employment creation, manufacturing output, and grassroots entrepreneurial activity at a scale that larger corporate entities rarely match. Within Bihar, a state whose economic trajectory continues to be shaped largely by informal and small-scale business activity, Micro, Small, and Medium Enterprises occupy an especially prominent position — generating livelihoods, circulating local capital, and fostering entrepreneurial aspiration across both urban centres and rural hinterlands. Yet these enterprises routinely grapple with a challenge that receives far less attention than it deserves: the effective stewardship of short-term financial resources. Managing current assets and current liabilities with precision is not an incidental concern for small business owners — it is the operational heartbeat that sustains daily functioning and determines long-run financial health. The nationwide rollout of the Goods and Services Tax framework beginning in mid-2017 introduced a paradigm shift in the indirect taxation environment that reverberated through every tier of the business ecosystem. For larger, well-resourced enterprises, the transition — though demanding — was broadly manageable. For MSMEs, especially those concentrated in states like Bihar where digital literacy, institutional connectivity, and access to professional accounting support are comparatively limited, the GST shift imposed layered operational burdens. The reconciliation of input tax credits, the discipline of periodic electronic return submissions, and the liquidity drain caused by extended waiting periods for tax refunds collectively tightened working capital availability at precisely the moment when enterprises most needed financial flexibility to absorb transitional disruption. Situated at the analytical core of working capital management is the Cash Conversion Cycle — a metric that distils the temporal journey from raw material procurement to cash receipt into a single, interpretable figure. This cycle draws together the duration for which inventory remains unconverted, the period over which trade receivables remain outstanding, and the interval across which supplier obligations are deferred. When an enterprise succeeds in compressing this cycle, it releases trapped liquidity and enhances its capacity to reinvest in operations without relying on costly external borrowing. Conversely, an elongated cycle signals stagnant capital and diminished profitability — consequences that small enterprises operating on narrow margins can ill afford, particularly when formal credit channels remain inaccessible or prohibitively expensive. This paper sets out to examine, in a systematic and empirically grounded manner, how the constituent elements of the Cash Conversion Cycle influence the profitability of MSMEs functioning within Bihar's post-GST economic environment. The study focuses on three established profitability measures — Return on Assets, Return on Equity, and Net Profit Margin — and probes their sensitivity to changes in inventory holding periods, debtor collection timelines, and creditor payment practices. In doing so, it acknowledges Bihar's unique combination of regulatory context, infrastructural realities, and sectoral composition as variables that meaningfully shape the working capital dynamics observed on the ground. The investigation draws on a combined methodological approach — marshalling panel financial data from a representative cross-section of registered MSMEs in Bihar alongside qualitative testimony from enterprise owners and financial practitioners — to build a textured and credible analytical picture. Regression-based modelling applied to data spanning the post-GST window from 2017 through 2024 provides the quantitative backbone of the inquiry. Ultimately, this research aspires to deliver findings that carry genuine practical weight — equipping enterprise managers with sharper financial decision-making tools, offering lenders a more nuanced understanding of MSME credit risk, and supplying policymakers with evidence to inform targeted interventions that can meaningfully strengthen the financial resilience of Bihar's small business community.