Why SME (Small & Medium Enterprise) remains SME ?

Sitting in a MSME (Micro Small Medium Enterprise) pondering over this slide on Business Landscape in India -  out of 100% - 94% were Micro Enterprise, 5% small, 0.7% Medium & 0.3% Large business. Shocked, right ? But this is brutal fact. Connecting back to my experience of dealing with so many small, medium and large businesses in various segments here are the striking difference that I find between Large & Small/Medium:

1. Weak & distributed financials:

Most Small and Medium business would have created so many different business entities and firms in the name of various family members to save on taxes as advised by their Chartered Accountants. When you take advice only from your tax practitioner or CA they just look at the financials from the tax and compliance angle completely negating the point of business growth and future plans… of course can’t blame them, that's not their job neither their domain expertise. This leads to distributed and weak financials and SME gets stuck when they decide to go for large project or fund raising from financial institutions or competing with giants of the industry or going for a Joint Venture resulting in missed opportunity to leap jump and become big.

Consolidate financials and create balance sheet strength based on the business plan in to single entity that will help you to grow faster and stronger. Few bucks of taxes (if at all ) paid extra won’t matter in the long run compared to the growth opportunities. 

2. No investment in talent:

Most SME Entrepreneurs are super executors and hands on doers, that's great, but as you grow you need to get better at thinking and getting things done since you will have limited time bandwidth. Most Entrepreneurs crib about not getting the right talent but when you say that.. also consider the fact that larger companies have grown with the same talents, it's not that you are operating on Earth and they are on the Mars :) so here are the 2 major weakness in SME Entrepreneurs :

a. Your appetite to delegate and

 b. Your ability to create more leaders 

Appetite to delegate means you delegate not just Responsibility but also give them Authority to take decisions and you should be OK if people make mistakes. You need to have larger tolerance towards failure; also it should be fine if they don’t perform exactly how you would have performed as everyone would have different skills and efficiency. It's fine as far as your work is getting done and they are getting better at it. Some extra cost incurred on delegation is better if it saves your time bandwidth which will have larger value.

Most forward looking SME Entrepreneurs will attend events, workshops, Master classes, Training courses and gain huge exposure while their people are where they are... since they aren’t been sponsored anywhere. Entrepreneurs keep running faster but their people lag behind since they won’t invest in training people creating a huge gap between them and their people. So when you grow you have only One Engine that's yourself and all other Wagons. Now one Engine can pull how many wagons ?

So invest in talent, bring professionals on board, bring smarter people, more experienced and complimenting capabilities on board. May cost you in the beginning but this would become investment giving you multiples of growth. 

3. Start multiple business:

Most SME Entrepreneurs, when they taste some success in one business, start investing in 2nd business then the 3rd one and cycle goes on. They spread themselves thin rather then going deep in their first business. How many of them just cut across, penetrate and create a really large business before diversification, handful of them.  There could be various avenues in your business but most times they start feeling that other business are much more promising, remember grass is always green on the other side :) So focus, focus and focus on your business to go deep till you have exhausted all the avenues to make your current business Big.

4. Absence of Professional advisors & decision making board :

SME Entrepreneurs are always good at creating a transactional relationship but I see hardly any investment when it comes to hiring professionals and board of advisors. Other day I had sent a proposal to a SME client they liked our Business Plan Bootcamp product but they asked what do you deliver? I said Clarity in your Business Plan and he was wondering what was that ? Until they went through our bootcamp and saw business really grown quarter on quarter they didn’t know advices are so much valuable rather they didn’t know advisory service has a price :)

Second very important thing is don’t decide alone and jump into it just because you are the Promoter and the ultimate boss, create processes and structures around decision making, create a board of advisors who are independent and capable thinkers and connected to your business, have regular structured business meetings to discuss any new plans, projects before jumping into it. Participative decision making will save you from making mistakes and de-risk the business.

Invest in Professionals, Advisors and decision making boards, they will help you to scale better with may be lesser shocks. If you are proud wearing that SME badge then dump this piece of article else get cracking towards making it Big.

Keep CFO near; Profits will follow

Oh really, show me how? I think once you focus on the Sales, Profits will take care on its own and will improve only. - asked an entrepreneur CEO

If that was the case, why are most growth firms still not happy seeing their financials? There’s a lot between top line & bottom line. Let me share about 4 key avenues if kept in control that will drive your profitability:

1. Cost of Production/Sales - If you are a manufacturing company ensure the cost of production is in check, if you are trading company then Purchases and if you are a Service company then People cost, keep these costs under control. First step is to ensure you have the best person, a hard negotiator and a person who has an acute sense of numbers on this position. Don’t do cost cutting on getting the right Production Head/ Purchase Head/Ops Head, any cost cutting here would only mean chopping your profits…lets be wise :) Draw up a few key KPIs for Operations and give them target and next you keep reviewing every month rigorously. Remember what is measured can be improved.

2. Working Capital - is the number 1 weakness of most organizations, it is like a fist holding the sand; even before you realize the profits will slide from the gap. Unless Receivables Management, Inventory Control/Bench Cost & Payables are managed well you will keep struggling with cash flow. Delayed receivables, piling inventory or bench will not just take away your profits but will also take a huge toll of your time and at times your sleep as well. Ensure you have a strong finance player in your core team who can bring financial discipline when it comes to cash else you will keep struggling for life without the required oxygen.

3. Operating Cost - Budgeting, planning & decision making is most crucial when it comes to Operating Cost. Never approve any expenditure or authorize any one to approve expenditure who does not have a clue about budgets and impact of the expenditure on P&L. Most Entrepreneur driven organization or even mid-size organizations run without any plans & budgets that’s the reason you find decision making very difficult, since you will keep thinking at instance of every spend. Planning and Budgeting will relieve you from complication of decision making and delegation also becomes easier. So make sure there’s budget for every planned expenditure and you need decisions for only unplanned spends, ensure you don’t mix-up.

4. Financial Cost - There are so many funding avenues and loan products, is your finance team capable to get you the best product at lowest cost? With demonetization all the banks are flushed with funds and interest rates have started going down … has your finance team started negotiating with the bankers? Many a times, Supplier is willing to give extra discount for making earlier payments, is your finance on the top of cash flow management to take such advantages? Look at every angle and strive constantly to challenge your finance cost and am sure you will find lot of creative ways to reduce your finance cost.

If profits are on your radar, we are just a call away. 

Are Entrepreneurs sure about their compliances?

It is no secret that India has stirred huge interest among various domestic and overseas investors wanting to enter the Indian SME market. You surely understand the opportunities, and therefore the urgency to stay ahead in your business. However, one of the most challenging job is to stay updated on compliance and regulatory requirements.

How many entrepreneurs today can confidently say that they are 100% compliant? What are they doing to mitigate the risks associated with compliance?

The Government policies are evolving, new laws enacted, and amendments to the existing ones are done, etc. They are all not very simple to understand, at times ambiguous creating confusion and even more difficult to implement them. How prepared are you to handle all this?

There can be a tendency to either ignore it completely or enforce partially depending upon the entrepreneur’s discipline, enthusiasm and the will to follow through it to the last minute detail. And, whoa! Compliance becomes a huge risk!

Given the way SMEs operate their businesses, with unstructured processes, loose financial discipline and improper documentation leads to a high risk on missing compliance. Most times the accounting team aren’t able to provide the financial statements in time before the compliance deadlines so there will be no time to evaluate or discuss the same. In lot of cases even the financial statements may not reflect the correct financial performance of the business and in hush-hush the statements are filed to meet the deadlines just making sure that you keep dealing with notices from the departments and paying lawyers’ fees.

With more automation and rigor on compliance on regulatory side, there’s isn’t any choice with the today’s organization but become compliance ready. Deploying right financial process, having fiscal discipline and creating rugged documentation within the accounting team will ensure you are on the right side of law and save on severe compliance risks.

Are you compliant ready? Well, team 10CFO is just a call away in case you need help.

Does your Accountant drop a bomb?

Sounds familiar, right ?

Ok, now you don’t need to tell me that how red faced you became when you heard this. I know every growing Entrepreneur would have faced this situation and somehow you would have managed also. But what matters is what did you do after that ? How have your financial systems evolved after such a situation? What do you do to keep a watch on your cash-flow besides being conservative in spending? Have you created anything that gives you visibility of next 3 months cash cycle? Do you really distinguish between short term and long-term cash deployment while making decisions? Do you keep spare cash for unavoidable situations?

Or living on the edge of cash has become a habit for you?

Most of the times we forget about shocks once that situation is managed. But smart entrepreneur will make sure to devise a system that alerts them well before their cash crunch and still smarter ones will put in place things even before it occurs for the first time.

Here are 5 things that will make sure you don’t get caught up unaware of cash situations :

1. Daily Cash flow snapshot

Most Entrepreneurs tell me that I know my business day in day out and I sign all the cheques, so why daily cash-flow? Reviewing Daily Cash flow snapshot will make sure you have an eye on cash inflow & outflow every day. Second, it will also ensure discipline in your finance team to be on the top of cash. Third, this review will keep a vigil on avoidable cash outflow.

2. Cash-flow 12 :: Next 12 weeks cash flow forecast

I see lot of growing enterprises struggles on cash flow forecast forget the startup. If you want to do one game-changing thing that allows you to be on the top of your business, install this tool. This tool guaranteed will make sure you won’t go loose on collections nor would you spend recklessly. You would have complete grip on the cash in the business which is extremely crucial for every business and absolute essentials for startups & high growth companies.

3. Super Collection Cop

This could be anyone from your Finance team or may be a separate person if there are volumes of collection. Look out for 3 qualities in your Super Collection Cop – Communication, Smart follow-ups and Last mile runner. Great communicator makes sure they don’t trade relationships with collections, Smart follow-ups using different modes and styles using emails, text messages, voice calls so that it doesn’t become irritating for customers (though there is whole science behind collections and may be will have another blog for this) and last mile runner makes sure that collections is complete when it is banked and he doesn’t become just happy getting Post Dated Cheques.

4. No long term cash deployment that eats up your working capital

If your Finance team is not capable to draw your attention, as an Entrepreneur you just make sure every decision of long term cash deployment like buying asset, paying deposit, giving advance to anyone or doing any special deal with customer with extra credit days is backed by long term source of finance like long term loans, your reserves or excess unutilized cash over your working capital. This principle will make sure you don’t aim mountains while digging your current road.

5. Create healthy Cash Reserve

Anything between 3 to 6 months of monthly fixed cost should be kept as Cash Reserves, though this is a rough benchmark it can change based on the nature of your business, size, cash flow cycle and seasonality of your business. And I know as a Start-up you will shout how is this possible? But you need to travel towards that to make it a strong sustainable business that can ride over some slow and patchy business cycles.

In business its said that Cash is King. So be on the top of Cash, set up alerts, have a binocular view of any upcoming cash crunch to resolve in time. After all your dream was to build an awesome venture and not to loose sleep over cash.

You think only way to raise funds is from Banks & Investors?

On a mid morning my phone rings from my client in FMCG Distribution business and says that he needs 25% additional working capital within this week to buy additional stocks that Principal company wants them to keep as they are going for a Big Marketing Campaign to cash on the festive season and they anticipate huge demand. As a Distributor in a competitive scenario you don’t have much choice but to support the Principals.

There were 2 obvious choice to raise funds – one, go to the existing bankers where our client had good long standing relationship but to get additional working capital to the tune of 25% of existing working capital in 7 days even from best of the private bank is still a challenge. We applied anyway. So next choice was to go for Private Finance from friends/ associates that would be costly by about 4% but at least solve the challenge at hand. Unfortunately, due to festive season most of the Private Financiers were running a tight position not showing any positive response.

Our client, a family business was in this Distribution business for over 30 years dealing with around 2000 strong retail network and having very long standing relationships with these buyers. Most of the times as FMCG market runs on sales scheme with a pressure to achieve monthly targets. These schemes are generally in form of free products or rebates on achieving a quantitative target, so this market very well understands language of schemes and most retailers take advantage of this to enhance their gross margin on the product. While brainstorming in a meeting with the client we said if there can be Scheme on Sales why not we run a “Scheme on Advance Payment” what’s that ? asked client. We designed a Scheme on Advance Payment – where Retailer will pay 1 crore in advance against that month's purchase and our client will give additional Rebate of Rs.30 to Rs.100 per case (works to about 0.75 % to 1.5% on different products) plus they will get a Gold Coin and chance to participate in Lucky Draw – a 5 day Trip to Hong Kong/Macau” with a family. And this scheme was valid for next 5 days. The pitch to Retailer was that they sell more by passing some benefits to customers and or make some quick bucks from the idle cash lying in their banks accounts.

We selected top 20% of the strong Retailers and ran this scheme as “Star Trade Scheme” for privileged customers , some 25% of Retailers picked up this scheme and client collected more than what they required as a working capital in a weeks time and cost of raising this was lesser than the bank interest. Surprised ? Even we were... but its fun to solve business challenges and partner with our clients in their growth story.

Raising funds is just not about running from pillar to post to Investors & financial institutions, if we drill down into our financial model you may figure out hidden opportuntiies like never before.

(All numbers in this blog are hypothetical for confidentiality reasons)

Do you have “5 Point Something” to rock your business ?

You are on the driver's seat in a car race, with full focus on the speedometer of the dashboard. You are racing ahead at a great speed maneuvering every hurdle on your way; and, you are excited that you are far ahead of others. Just then your fuel blinker turns on showing you haven’t re-fueled in time; and, you won’t reach the finish line or you have re-fueled but haven’t changed your tyres in time; and, they might burst before the finish line. So what was the fun in speeding and not reaching the finish line ?

Many of us Entrepreneurial breed are like that only; we are excited by speed, growth, velocity and keep measuring our business with single dimension. It may be Revenues or Profitability or Volume while we were on target just to know that wasn’t enough to reach the pinnacle. So in our Entrepreneurial journey, while speeding we either run out of cash, talent pool, depleting quality of service or screw up delivery schedules, distribution network or vendor partner relationships and we suddenly realize the risk of being thrown out of the game completely.

To make sure we finish strong create “5 point dashboard” of our business that's based on our business plan and growth strategy. Just having an eye on top line or bottom line won’t do good.

So say for example, if you are running a Consulting Business top 5 for you could be – Monthly Revenues, Per person Revenue, Book Debts in days, Cash Reserve, Break even point or for a Trading Business – Sales Turnover, Gross Margins, Working capital to Turnover, Return on Investments, Net Margin or if you are a Cloud Technology funded venture – Number of subscribers, Volume of Transaction, Average Ticket Size, Traffic/Bandwidth usage, Burn Rate.

Idea is to develop a daily, weekly or monthly 5 point dashboard that's crucial to effectively run business & more importantly finish strong.

Is your business plan hollow ?

In my experience of listening to so many business pitches, reviewing their business plan, penetrating through Investors Memorandum there are some key striking gaps which come straight on my face. Most plans are silent on “How” of the business plan which is the most crucial component of any plan.

Recently, I was reviewing an investor's memorandum of a healthcare business where it started with Landscape of business, global positions, India scenario & opportunity, market segmentation, healthcare spends as a % of GDP on these products, global trends and thesis & thesis  of how these spends would increase by ^*&% by 2020 etc…etc. This would be like 20 pages of research and when it came to presenting about the Investee firms details it was wrapped up in just 7 pages. Surprising, right ?

But this seems to be common…in this case, it talked about firm's production capacity, marketing potential, their key strengths, financials and valuation. Is that it ? It's not about just 7 pages but I think the real substance “How” of the business plan was missing. So the big question here is – whether their business plan is hollow ?  Nope, I think their growth game is hollow, there isn’t enough thinking gone into defining "How" of the business plan. They think that just because industry is growing at x% the y% of growth will just fall into their lap

Here are few ESSENTIALS of your Growth Strategy that you should think through and have it in your business plan besides the usual B plan content :

Customer

– What’s that SINGLE KEY significant VALUE you bring to your customer?

– How are your products/services REALLY DIFFERENT from the competition?

– Why do you think you are in a BEST POSITION to leverage this opportunity?

Pricing

– What's your PRICING strategy?

– Why do you think people WILL PAY this price?

goto Market

– What’s your GOTO MARKET strategy?

– Why do you think this is the BEST WAY forward?

Talent

– Who are those KEY TALENT for your business?

– Which are the talent missing and how are going to bring them on-board especially in Startups, SMEs which are talent ridden?

Operations

– What are your KEY PROCESSES that will bring operational excellence and minimize turbulence in scaling up?

Key Financial Indicator

– What are your top 3 or 5 key FINANCIAL METRICS that you will review?

Derive key financial metrics for your business like Revenue per customer, Cost of customer acquisition, Cost of retention, Cost of servicing customer, Sales team coverage ratio, Debtors turnover ratio, working capital to sales, Order to cash cycle, Fixed Asset Utilization ratio, etc..

Team

– What are the key qualities that Promoters, Core team brings to the table?

– Why together it makes a best team?

Think through and make this a part of your business plan. It will just not make your Business Plan look great but bring depth in your Business Play.

When your business needs a CFO ?

When do I know that I need a CFO? asked a client CEO. Tt's not that difficult I said. Here are a few words and if you feel any or few of these words are your inner voice, then writing is on wall :

1. My business has great potential and is growing, but at times am not 100% confident about my business decisions, not knowing the financial impact of these decisions

2. There’s always a confusion on which direction of growth should I take? And what would be the financial outcomes?

3. I never get to see my financial dashboard ON TIME or in a manner that tells me which Product, Service, Geography or Department is making how much money.

4. I'm never able to plan my Cash Flow Cycle in ways that gives me peace of mind

5. I miss most business opportunities since am unable to raise funds at the right time

6. Growth is fine but it always comes at the cost of increase in working capital and finally my profit takes a hit

7. My Accounts & Finance team always struggle to do financial closure in time

8. I have a good team and they are close to me, now how do I put them into Performance matrix? People Performance at the top always remains a challenge.   

Now you will say that these are the concerns of every Entrepreneur. Yes, you are right. So here comes another set of questions – whether your business can afford one? At what size of business one should get the CFO ? 

When it’s a question of affordability that’s where Shared CFO firms helps you to deliver value at a lesser cost since most Small & Medium size business won't be at a stage where you need a full time CFO. You need a CFO for few hours or days a month to help you with key critical business decisions and manage your financial risks. Shared CFO brings this value at a significantly lesser cost. Regarding Size – there’s no fix definition at what size a CFO is justified, as they say – earlier the better and hiring the first CFO will always be an Investment decision for any Entrepreneur.

The only flip side is once you hire and realize the benefit of the CFO you are most likely to curse yourself for taking this decision so late. Jokes apart, if business growth with financial fitness is your priority, don’t blink.