Will Industry Potential alone be sufficient to hold on to stressed business?
Many entrepreneurs in India prefer to endure with failing business hoping that industry fortune will revive and they will be able to recover the losses. However, there are other factors merit serious considerations for the revival of an SME.
Recently I met an entrepreneur who is a technocrat. After working in the industry for few years, he set up his own venture. The product, he manufactures is much specialised and has been feeding into the industry whose fortune depends upon the Govt. investment policy.
Since the fortune of industry squarely depends upon the investment policy of the Govt, the business flow is highly volatile and sometimes waiting gets longer as much as 6-8 months to get an order.
He used to talk proudly about achievements of supporting the national mission. However, the financial situation has been deteriorating and it is becoming toxic to the future of the company. The firm has borrowed from all unconventional sources. The Board is according to needs of raising debt than having professionals to guide the company. Since banks are not willing to give a loan without directors or company’s own assets, the firm took few on the Board to secure more loans. This type of funding comes with a heavy price in the form of good will.
The level of debt is much more than serviceable from the surplus in the present level of turnover. In view of subdued order from in last 3-4 years and cost of maintaining the facilities & resources persons on the role have resulted in the extremely precarious financial situation.
What is more concerning is that kind of borrowing and cost of borrowing than the level of loan borrowed. The balance sheet depicts a convoluted financing structure.
Whether new investment announcements from Govt. become an opportunity for this company?
No. As expected, new announcements of investment have started. But this company is nowhere to capitalise the opportunity. Because they are facing challenges in other areas mainly finance such that there is no room for taking up new business. They were complaining that they are not getting support despite being well positioned to encash the opportunity.
The visibility of favourable Govt. policies towards the industry has been keeping them excited to talk about how they can turn around. Every time discussion of the survival comes, what keeps them motivated is industry fortune alone. Since he is the technocrat, it was handy for him to identify how new investments in the industry will translate into an opportunity to entrepreneurs like him.
There is no financial strength left to fall back upon. The present borrowing far exceeds the sales and closer scrutiny brings to fore that most of the recent funding was meant to cover the losses.
Whether industry potential is alone is enough?
The above case drives us to debate whether fortune of industry can make an entrepreneurial journey successful or there are another dimensions need to be addressed.
Industry potential plays an important role and is stepping stone for entrepreneurs to take up the venture. Changing technology base, changing consumer performance, regulations etc are continuously influencing the fortune of any industry as they affect demand for products.
Please read: Industry Research: An important input for SMEs
Many entrepreneurs think that financing is a severe limitation and failed them to grow their business. It is agreeable to some extent. However, the financing environment has seen the sea change in recent years in India due to the entry of NBFCs, and new banks. There are new types of products suiting to specific needs. Many enterprises are raising private equity to finance their business.
Other factors need to be reckoned:
There are other factors which are very important to be understood and appreciated for the success of entrepreneurship.
In the instant case discussed above, we observed that challenge are poor managerial bandwidth, lower operational efficiency and lack of prudent financial management.
It is commonly seen among the SMEs in India that entrepreneurs do not appreciate the importance of expanding managerial bandwidth for growing business. Rather they feel insecure to debate about reviewing the managerial strength and identifying the gaps. For them, it is foregone conclusion that everything with regard to management is right because they have been so far running the firm and hence future too will be same.
Managerial efficacy matters a lot. Entrepreneurs should be willing to onboard professionals if they find he/she can bring value. Because in the long run, it will result in improving the fortune of the firm and in turn theirs.
Secondly, successful turnaround requires behavioural changes and bringing new people is one way of achieving that.
The subject firm has been suffering from poor operational efficiency. Operating efficiency is an analysis of firm’s ability to produce the product at competitive costs in a sustainable manner. Robust analysis of cost structure is paramount for a firm engaged in the business of supplying goods and services on tender base especially Govt sector.
Prudent financial management ensures long term sustainability of the firm by demonstrating the ability of the firm to meet its debt obligations. It encompasses book keeping, budgeting, costing, cash flow forecasting, financial flexibility etc. In fact, it is a reflection of all the issues discussed above.
A well managed and operationally efficient firm is invariably a prudent organisation. Such organisations do not see constraints on fund raising in today’s context as funding basket is getting widened and further additions are on the horizon.
All the factors are important albeit in varying degrees depends upon the industry and larger economic and regularity environment.
Inability to raise fund to meet the opportunity is not necessarily due to lack of interest for potential lenders but may be a reflection of a deeper malaise within the firm. Such firms tend to resort to raising funds from unconventional sources than addressing the causes of poor perception in the eyes of potential lenders/investors. The best way forward is to address this malaise and remain attractive to lenders/investors.