Why SMEs need professional Financial Advisor
A good Financial Advisor can create a financial strategy
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.
What went wrong?
First of all the project was not well planned in the beginning. Promoters were deploying their savings from the main business and it went to a stage wherein they could not support from their sources alone and needed bank finance. This was ill planned approach for anybody to start a project without a proper financial plan. Secondly, even when they decided to borrow, it was not approached methodically (Rg. Cash flow analysis) and ad-hocism was prominent. Thirdly when the bank offered half the amount of agreed, it should not have been accepted. For any project, financial closure is paramount before embarking on starting the work. They should have negotiated and convinced the banker to sanction the full amount agreed initially (Rs 10 crores). Here in this instance borrower moved by the urgency to meet the payment of dues than following up with the bank for the full amount of Rs 10 crores.
How could it have been managed differently? Who could have helped to prevent this sad situation which the family is fighting for the last 10 years?
The solution is-Hiring a good Financial Advisor
(Please refer to the link- Few considerations to keep in mind when your business has financing needs)
How could Financial Advisor have helped the project in that case?
At the beginning stage, the project needs to be thoroughly examined for costs of project & means of finance and the revenue potential. It is not possible for SMEs to devote their attention to finer details. A Financial advisor would study the industry characteristics from the performance of various firms engaged in the same or similar activities. He would have brought in the insight from his own experience and complement the same with industry veterans’ involvement. Further, a professional advisor works in tandem with Promoters as a part of the process of building the project report which should invariably discuss all the aspects including risks, scenarios, etc in a constructive way.
Why Financial Plan?
Financial planning is an important exercise for small business owners who normally confront challenges of meeting financing needs of their business. (Please refer to the link: Financial Planning for SMEs
A good financial plan should summarise your financial position, list your goals and explain how to reach them, show how the investment strategy will work and disclose risks and costs.( What are the attributes of the Good financial plan?)
A good financial plan will be a bedrock to launch a new project. It acts as an effective tool to engage in fund raising. A good plan can instil confidence in lenders /investors about the entrepreneurs and his business. (Please refer blog: How to build a successful fundraising strategy for SMEs).
How can Financial Advisors assist SMEs?
It is well said that business owners can be guilty of bending reality and making themselves believe that which is convenient. Appointing an advisor can help the deception stop and action begin.
Most small business owners want their business, their future and their children’s future to be in their control. This is understandable. A good Financial Advisors can assist SMEs to create a balance between self and business and also create a plan which mitigates the risks and maximise the profit. Consulting a financial advisor can help over-worked SME owners take a step back from day-to-day routines and consider the possibilities offered by various financing structures, in addition to reviewing opportunities to reduce costs and maximise returns.
How to reward a Financial Advisor? – An unsettled question in financial advisory practice in India.
In India, it is a common refrain of all the professionals that knowledge-oriented services will not be rewarded. More often it is heard among the community of financial advisors. As a result, many of them have associated with or launched themselves into fundraising area to sustain. However, by the nature of this association, they are unlikely to deliver optimal solutions as their priority will be closing transaction and move on. This relationship is purely transaction oriented and may not serve the long-term interest of entrepreneurs.
A good financial advisor brings deep experience and understanding that will help the entrepreneur to take a conscious decision. He charges for labour invested and his intellectual capital. Since he is not involved in fundraising upfront, there is no conflict of interest. He binds himself to assist entrepreneurs to find an optimum solution. Thus he creates value and guides the entrepreneur properly; so much so that it is said that a good advisor earns from savings he creates.
The fee-based relationship is better suited: It is better for entrepreneurs to look for a fee-based model, which means a financial advisor will charge for time and advice based on a fixed amount. It may be a monthly contract as well. He may also be entitled to fixed fee on fundraising transactions or any other assignment which are not usual. However, if advisor avails any commission from investor/ lender, we suggest that it should be disclosed to entrepreneur and entrepreneur should seek a suitable adjustment.
The reason fee-based is often a better option is- it ensures full transparency. A commission-based financial advisor will make money on financial products sold to you, which may be driven by profit motive which is not necessarily serving entrepreneur’s interest.
Whether you have been in business for years, or you are just starting out and exploring the idea of working for yourself, it’s hard to be an expert in everything. That is why it’s a good idea to seek guidance from an independent financial advisor – someone who can help you with the financial matters that are the foundation of every business. A financial advisor can give you advice on how to structure your company, mitigate the risk, optimise the resources, fixing the milestones, create efficient funding plan, protect your employees’ financial well-being and, striking a balance with personal finance etc.