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Financial Planning for SMEs & Personal Finance and Fund Raising

A good financial plan is a road map that shows us exactly how the choices we make today will affect our future- Alexa Von Tobel

Small business owners are often so busy with day-to-day business tasks, that they neglect both their business’s financial planning needs as well as their own. That is a huge mistake.

Generally, the poor financial discipline of owners is the main cause underlying the problems of SMEs. It is in turn emanating from poor financial planning and lack of understanding of implications of wrong moves. Though financial plan is used by many SMEs, many look at financial plan just a document to raise loan or equity.


A financial plan is a vital tool that helps entrepreneurs to manage their businesses more effectively. It is important document which enhances self awareness, steering their way around the pitfalls that cause failures, protects him from many evils, explains risks and helps strike a balance between business & personal life.


Components of Financial Plan are:

(1) Liquidity management and cash flow management.

(2) Long term asset acquisition – which shapes the long term course of business.

(3) Funding, capital structure and cost of funding.


What are the attributes of Good financial plan?

It is essential for small business owners to get better understanding of various elements of good financial planning. The link Self Help Questionnaire on financial planning for Small Business Owners gives good insight into gaps in present financial discipline in your organization.


SWOT Analysis-Improve the self awareness: As the business grows, the risk appetite will grow, and new ideas will start emerging within and outside the organization including expansion, extension to new geographies, diversification, etc. These are all leading to more aggressive financial model involving higher borrowing and high risks to returns, etc. It calls for one to improve the self awareness by clearly demonstrating to himself where he stands vis-à-vis evolving business environment.


The answer  is SWOT Analysis .  SWOT ANALYSIS FOR SMEs


Personal Finance:


For most small business owners, personal life and business life are practically inseparable. It is not uncommon to see small business owners invest all of their savings on their own business. After all, it’s the business they know the best. The problem with investing solely in your own business is one of risks, because for every immensely successful business, dozens more either fail or return only modestly. 


Secondly, it is obvious to come across that the life of a SME owner is a long and crowded road. Developing customer relationships, managing employee issues, recovery of bills and paying creditors are time-consuming tasks but necessary to keep the operation running and finances sound. Unfortunately, business owners often neglect their own personal financial goals. Among owners it’s more common to put off planning for their own financial future until later in life when “things settle down,” or until there is more clarity about what the business can reasonably achieve. This delay can cost them dearly, much as an undeveloped business plan may harm business growth.


It’s Your Business—and Your Life– Pursuit of your ambition should not blur your responsibility to build a safety net for self and family. Tips for Personal financial planning for SMEs


Fund Raising:


One of the biggest challenges for entrepreneurs and small business owners is finding the funds necessary to launch – and eventually grow – their businesses. Fund raising is an important exercise and carries both positives and risks. It increases reach of the market, and enhances the visibility for business. However flip side is risk of default if business does not reach the desired milestones. 


Before going for fund raising, one need to invariably do homework how the money will be repaid. One should avoid borrowing funds without having clarity on financial model in all the three scenarios- best, normal and worst case. In initial days, it is desirable to do business without any external monetary support till the cash flow cycle becomes clearer- bootstrapping.


Few considerations to keep in mind when your business has financing needs


Generally Bank loan is most preferred source of funding, However one has to mindful of many delicate issues before approaching bank.


10 Questions to Answer Before Applying for a Bank Loan


A closing word: One point should be clear when it comes to financial planning for the SMEs: the  do-it-yourself drive that helped you start your business will not serve you well when it comes to managing the many financial issues created by that business.  This is where professional expertise often becomes necessary.


Exercise your privileges as Boss and seek service of  qualified business  financial planning professionals.  Their advice can make all the difference in improving your chances of business success. However be part of whole exercise. No Blind Faith.


Transition Management


Managing Change in the journey of entrepreneurship for SMEs

One thing’s for certain, change is part of running a small business. No sooner do you get comfortable doing one thing when something changes and you need to adapt. In small business, that’s the way it is, and your capacity to manage change is vital to surviving.


Transition Management is a process to enable a business to adapt to changes –be it internal / external to enterprise or very personal reasons of entrepreneurs. Planning for transition is something very compelling. Because it is way of assuring everybody be it family members, employees, other stakeholders, that they have no reason to fear threats or feeling deprived of opportunities.


To understand the normally found growth habits of enterprise please refer Five Stages of Growth of small business


There are four noticeable transition stages such as :

        1. Start Up: Beginning of entrepreneurial journey

        2. Growth Planning-Expansion of existing business

Diversification to new area

Adding new locations

        1. Succession Planning-Passing on the baton

        2. Contingency planning-To meet the unforeseen eventuality-sudden demise of promoter, serious illness,

These stages are explained in detail in Transition Stages

Why Transition is so important? Please refer Business Transition Planning FAQs


Transition is a process. Goals can be different:


For a firm to grow, the management must consider its market shares (market segmentation), competitions, innovation, and reorganization of the work force. Inability of management to understand its organization development problems can result in a company becoming “frozen” in its present stage of evolution or, ultimately, in failure, regardless of market opportunities. On the other hand for an entrepreneur to scale through involves lots of challenging tasks, as many barriers create bottlenecks.  Those who opt for taking the business forward may have to do it carefully roping in experts and crafting a strategy.


However, transition need not always be growing the business. Because challenges at family and personal life invariably have bearing on business owner’s motivation to engage in the business. For instance, however successful the business is, it is not necessary that founders continue to grow it. The reasons for growing/not growing the business are purely emotional and personal for every small business owners.


In either case the promoters to need undertake to certain strategic measures to protect the value of enterprise and experience pain free transition.

Four things to facilitate easier transition:

1. Be clear about end result or expected outcome of the transition process

2. Accordingly prepare realistic business plan before embarking on transition

3. Evolve organisational structure and HR practice commensurate with growth

4. Draft a succession plan


Risk Management


 “Risk is like fire: If controlled it will help you; if uncontrolled it will rise up and destroy you.”-Theodore Roosevelt


Small to medium businesses are exposed to risks all the time. Such risks can directly affect day-to-day operations, decrease revenue or increase expenses. Their impact may be serious enough for the business to fail. Most business owners know instinctively that they should have insurance policies to cover risks to life and property. However, there are many other risks that all businesses face, some of which are overlooked or ignored.


Types of risks universal for all business entities:

        1. Hazard risk: Liability due to wrongdoing, Property damage, Natural catastrophe

        2. Financial risk: Pricing risk, Asset risk, Currency risk, Liquidity risk,

        3. Operational risk: Customer satisfaction, Product failure, HR related, Reputation.

        4. Strategic risk: Competition, Social trend, Capital availability


Why is risk management necessary for SMEs?


It is common to find SMEs survive on thin margin and low capital base. Obviously their risk bearing ability is quite low.   Sound risk management should reduce the chance that a particular event will take place and, if it does take place, sound risk management should reduce its impact.


Sound risk management can produce the following benefits:

1. Lower insurance premiums

2. reduced chance that the business may be the target of legal action

3. reduced losses of cash or stock

4. reduced business down time

5. reduced revenue loss


Identifying Risks and How to respond to them


Risk management starts by identifying possible threats and then implements processes to minimise or negate them.  Please see How does a business identify and manage the risks specific to business


The risk response strategy for specific risks identified and analyzed may include:

        1. Avoidance: exiting the activities giving rise to risk

        2. Reduction: taking action to reduce the likelihood or impact related to the risk

        3. Alternative actions: considering other feasible steps to minimize risks.

        4. Share or insure: transferring or sharing a portion of the risk, to finance it

        5. Accept: no action is taken, due to a cost/benefit decision


Undertake self assessment of Risks:


Every business is unique. However few risks are normally common but impacts to varying degree. We have collated the some  sources of risk and tried to estimate the impact and identified some of the remedies to overcome. Please see  RISK TOOL KIT FOR SMEs


This kit identifies some of the risks and areas where risks may emerge and it provides some strategies to manage them. However it is not an exhaustive on coverage of  risk management. You may therefore need to seek external advice specific to your business circumstances to implement suitable risk management strategies for your business.

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