Robust financial controls can improve the sustainability of organisation as well as support the growth ambitions among SMEs in India

Recently I had an interaction with one first generation entrepreneur who is undergoing financial distress. He explained his growth story and his own take on reasons for his distress. He has been undertaking much specialised custom made solution for very large companies in different verticals. He started without any capital, leaning solely on his intellectual capital. The growth was very good. He did not take any loans from formal sources like banks till recently. He was by and large dependent upon private money lenders for meeting the financing needs. Every time when he decided to borrow from banks, the proposal was not receiving good review as he did not have proper financial and other documents required to make banker accept his proposal. However he had been restless and went on to borrow from private sources. He used to decide to borrow instantly on ad-hoc basis. As macro- economic situation turned bad in last two years, large companies started delaying their capital investment plan. This had affected him badly. In turn his cost of private borrowing complicated the situation and slipped to distress.

SMEs should borrow loan amount just enough to meet the need of the business and it should be guided by the cash flow projected. It is the core of the sustainability.

Recently Reserve Bank of India came out with guidelines on S4A (Scheme for Sustainable Structuring of Stressed Assets). The scheme involves identifying an appropriate level of debt that can be sustained by the firm in distress and carving out the balance which unsustainable, as equity capital.  Though S4A is not applicable to SMEs, we would like to dwell upon the subject of sustainable debt level as excessive borrowing among the SMEs is becoming a serious problem in India and many of the long-standing businesses are nearing collapse or collapsed under the unsustainable debt load. Among large corporate also, we have seen the failure of many highly successful entities due to unsustainable debt despite having best professionals to advise and having survived for decades.

Successful growth strategy requires one to analyse the opportunities and challenges critically and prepare a strategic plan methodically. It is commonly observed that majority of SMEs in India do not give due attention to nuances of growth as much as start-up stage. 

I would like to narrate a case of one entrepreneur in Pharmaceuticals business who suffered losses  in the late 2000s. He was very successful in his first venture. He grew business from scratch and it became a successful. He felt the need for second unit. At the same time large reputed brands in pharma space started outsourcing manufacturing to small scale industrial units. This opened new opportunities for him. He set up new unit about 20 kms from the first  one. The production started. However the work pressure multiplied as he was alone handling end-to-end of the business in two locations. There was lot of attrition at all levels. The productivity declined so is profitability. The cash flow was not enough. Bank loan started becoming stressed. The business started sliding. Interest burden and repayment of installments became burdensome. The firm eventually failed and bank started recovery proceedings.

Every Entrepreneur should create a contingency plan to ensure sustainability of his venture beyond himself. Otherwise, it will lead to unbearable misery to his family if untimely death or disability strikes him.

Recently I met one entrepreneur who is having a turnover of less than  Rs. 10 crores. Having established himself and now he is looking to raise the turnover to Rs. 100 crores. The only hitch is financing the growth planned and thus Fundraising strategy was the focus of discussion.   He has been in this business for last 15 years, building the business brick by brick. There is pride, josh, vibration and plan to scale up and of course restless-attributes commonly seen in all successful entrepreneurs.  He is around fifty and his wife is a homemaker, and sons are studying.

When going gets tough, many entrepreneurs look to salvage their entrepreneurial journey and diversify to other areas. However, those in distress avoid or make such move cautiously and after meticulous planning. Otherwise, it may lead to further worsening of the situation.

A few months back, I had an opportunity to interact with an entrepreneur who has established series of educational institutions in his hometown.

 A good Financial Advisor can create a financial strategy to an SME such that risk is mitigated, profit is maximised and experience greater harmony between personal finance and business.

One successful businessman decided to start a resort near Bangalore in the year 2000 for which he decided to use his own property spread over 15 acres. The place is surrounded by rich greenery and located on a prominent highway. He started working on building the projecting brick by brick from his savings from other business. As the time passes, the liquidity started drying up whereas project remains incomplete. Having no other option he approached the bank and bank agreed to extend a loan of Rs 10 crores. Upon submission of application and due to the urgency of the project’s need, he was advised to take a loan Rs 5 crores. He was orally assured to sanction additional Rs 5 crores later. For various reasons, Bank sanctioned additional limit of Rs 1.50 crores that too with considerable delay instead of Rs 5 crores. The project could not reach the finality and remain incomplete. The confrontation began between them. Bank went on to auction the project. It became the matter of litigation and still, the case is going on in the court.

SMEs are the backbone of Indian economy. Industrial ecosystem reorienting to increase the share of outsourcing to SMEs. Going forward, focus on core competency and internet have driven evolving manufacturing ecosystem will expand the opportunity for outsourcing, so is the proliferation of SMEs.
However, the business climate is filled with uncertainties and intense competition. To remain relevant amid a tough economic environment, risk management in businesses is more important now than ever. Various tips and strategies are listed under RISK TOOL KIT FOR SMEs.

Insolvency code will boost confidence among entrepreneurs by taking away the fear of failure by offering support for turnaround or liquidation in a non-threatening way. It will enlarge the lending basket for SMEs.

INTRODUCTION:

Parliament recently passed Insolvency and Bankruptcy Code Bill that seeks to update and consolidate existing laws in this regard. The bankruptcy law is widely hailed as a landmark by the industry as it will improve ease of doing business in India by expediting resolution of stressed assets and streamlining the process of liquidating a business. Distress situation appears in any individuals’ life. Equally, it can appear in any business. Compared to large companies,  SMEs are very vulnerable to distress as the capacity to endure the distress is not there or very scarce.  Secondly, distress need not be self-inflicted; it can be due to changes economic scenario, distress in key buyers’ business, a shift in customer preference etc. Distress Management is an important exercise to nurse back the enterprise to a productive state. Legal cover in the form of Insolvency and Bankruptcy code is a great support to manage the distress. (What is distress Management?)

Does our company have a business strategy that makes sense within the context of changing general industry characteristics and economic environment?”

Introduction:

Industry within which a company operates is important to analyse the total risks the company exposed to. The studying industry provides insights to help you answer the above question.

ecently Deccan Herald has reported a serious fraud happened in a Bangalore-based private company which likely to push the company to the brink of collapse. (http://www.deccanherald.com/content/539095/cid-ordered-probe-multi-crore.html)

The brief of fraud:

It is reported that 11 officials of the company have misappropriation of funds of Rs 200 crores. Bank staff were also suspected. They used cheques and documents forging signatures of MD of the company.