Enduring distress is rewarding in the long run for SMEs

Many SMEs cave in before the pressure of financial distress. However remain focused on the business will help overcome the distress.

I have two contrasting cases of SMEs who took exactly opposite direction while dealing with financial distress. Incidentally, the trigger for distress is same that the sudden pronouncement of demonetisation.

Demonetisation had impacted MSME segment severely as the flow of financial transactions had been disrupted and remain persisted longer.

It is no secret that many SMEs sustaining themselves in the narrow confines of informal segment failed to cope up with the challenge and caved in. Some of those who could migrate to formal segment under compulsion had to endure with the significant delay in recovery of demand for their products and services.

Still, a significant proportion of SMEs suffered losses and going through bankruptcy like situation.

Among those two contrasting cases first one is a failed one.

He has been a successful entrepreneur and developed a strong brand equity among the clients he was working with for decades. As the business was well established the cash flow became good.

He chose to build a portfolio of real estate investment as it was appreciating in value terms.  The excitement and appreciating valuation prompted him to seek loans from banks and NBFCs to buy more assets.

Demonetisation was a body blow to him; who,  by then had created huge liabilities in the books.  Demonetisation also severely affected the business and cash flow was not enough to cover the debt servicing.

Facing the financial crisis of the proportion never experienced in the past, he just started looking for quick solutions.

At that time some unscrupulous people had approached him with the offer to raise large debt at softer terms. Attracted to the proposal, he literally threw the business to the wind and started chasing the promised new money.

The business came to a complete halt. The employees had to leave. Clients deserted him. Lenders started chasing him.

But he is still hoping for the arrival of easy debt to clear the loans and restart the business. One can infer that it is a pipe dream!

Work like a firefighter.

Conversely, the second person took a meticulous approach to recovery. He stood the ground and endured with all the humiliations from lenders including money lenders. It was like firefighting- when we kick in the door we don’t know what’s going on inside.

He increased the focus on rationalising the costs. He brought down costs in various heads and family chose to remain frugal during the challenging time.

He accepted the reality and kept communicating with all concerned about how he is doing to turn the corner. Every day was the torturous journey. He remained firm and kept his hope to revive business alive. Tough the industry was very low in generating business, he kept his eyes and ears open to get any opportunity that comes his way. Never allowed to be drawn to any allure of easy money who lay the trap to get the advance money.

His persistence paid. His visibility grew in the market. In the last six months, there is the revival of fortune in industry and he is getting more and more orders.

His monthly net cash flow is surpassing the minimum required to service the debt and thus slowly debt level is receding.

In our analysis, we found that in next six months his business will witness successful turnaround and he is already planning for expanding the capacity.

How one should act in the face of financial distress:

Regardless of what caused your financial setback, your path to recovery and prosperity will require a common set of action steps.

You may believe your situation is unique, but many have walked this path before you.

The road to financial recovery is well-worn, and the steps to come back after the financial disaster are fully proven. We summarise in the following three steps:

Accept Your Situation

The starting point for financial recovery is to stop wallowing in your misery and accept reality.

I have seen many SMEs that are likely the victim of somebody else’s wrongdoing. Yes, it’s devastating.

Still none of that matters now. What’s done is done and there is no turning back.

Resisting what’s already a fact is futile, so don’t waste your energy. Accept reality.

Living in the past only makes forward progress more difficult. Instead, accept the setback, let go of it, and commit to forward movement.

Not because it’s the right thing to do, but because it’s the best way to help yourself.

Take Inventory and capitalise on the strengths

The second step to financial recovery is to take inventory of your current situation.

You must know what resources you have, and what liabilities you face when developing your plan to come back from catastrophe.

To face the challenges, seek refuge in your own strengths. Your strength is to be exploited -be it technology, skill base, brand reputation, client base, supply chain etc

Examine critically and articulate a plan to make it work for you. For instance, if you have a strong skill base and securing inputs is a challenge, explore job work or becoming part of somebody’s supply chain to earn enough to prevent cash loss month over month during distress.

Develop Your Plan

The next step is to develop a financial plan that bridges the gap between where you are now and where you want to be.

The plan need not be very formal, yet critical parameters are to be monitored. Please put all your attention on reality: Revenues, expenses, operations, cash flow…

Conclusion:

The reality is more SMEs in India than ever face serious financial difficulty today.

The business environment may witness rapid changes due to policy decisions, global economic situation, Technology, supply chain etc. Such challenges may revisit and likely to cause harms. Distress management should be part of their armoury for any SME.

Entrepreneurs should keep hope alive and not drift away from facing the reality. Meticulous planning and endurance will lead to a successful turnaround.