Awadhesh Devanand Jha | 04 Sep, 2012
"I have a fantastic business opportunity but I am not able to raise finance for it!"
"I have an order of over Rs. 10 crore but not able to get finance to produce the export orders!"
"I am unable take my business to the level I would like to because of difficulties in finding finances!"
Whenever and wherever I meet the entrepreneurs from Indian SME, I hear them say that difficulty in raising finance is the primary reason behind their slow growth and performance.
Well, if I am like any other Indian SME business person, I will node my head in favor, but despite being a born Indian and serving Indian business for over 10 years where I have seen large amount of projects being shelved due to lack of finances, I still disagree on finance being the only or major reason for the slow paced growth of the Indian SME sector (Here by slow pace I mean the expectations and capabilities of the entrepreneurs and not the entire SMEs, as the SME sector is doing well but has a potential to do magic)
I do agree that it is difficult to raise finance for the small businesses, even for those which have been in operation for decades, but I think there is a number of factors that can help their enterprises look lucrative enough for investors and get finances from them. There are some weaknesses and issues Indian SMEs need to deal with in order to become the blue eye guys for all the investors and financial institutions, and to see their business listed in stock exchanges.
So what are these fundamental issues?
Well, there are many! But to start with I would brief on some major issues that restricts the investors from getting closer to your business. And I am saying this from a perspective of an Investment Banker who happens to deal with over hundreds of financing proposals from number of companies across the globe.
1. Type of entity: To save on the time, cost and hassles of reporting, majority of SME operates as a proprietorship company and has very limited registrations with different government, tax and trade agencies. If entrepreneurs would like to make it big in long term, they must establish a private limited firm and have it registered with all the relevant authorities and do a transparent reporting. This will bear fruit in long term but would help in taking the step in formalizing your venture in the corporate world.
2. Transparency in operations: The institutions find it very difficult to get the correct financial information and data from small organizations. There is no proper mechanism of having control on such information as a lot of transactions are still in cash. If I, as an investor, investing in any project, I would like to know where my money is being invested and what is happening with my money! The managing of accounting is SME can be manipulative and this is one of the major road blocks for a private equity investors or foreign institutional investors to infuse capital for small and medium enterprises. This is not the problem with only small companies, I know listed companies with huge turnover who spend millions of lavish lifestyle by spending investors' money for their personal use and accounting it in the books of company as operations expenses. Just to give you small example, an organization spending millions on the marriage of their son and daughter and showing in its company accounting books as expenses in cocktail party!! As an investor it's not acceptable to me.
3. Too Much control freak: Majority of Indian Business is family operated and being functional from generations, but the management style is still the one man show organization type! Today's entrepreneur is too much concentrated in the day to day operation of their organization that they just don't have the time to do business development and market research activities. In an eager to handle and control each and every operation of the organization, they are not able to give the time for their core business areas and lacking behind the competition. It's high time that the delegation of authority is implemented in business so that you can focus on more important issues where your expertise lies.
4. Innovation and technology: Majority of companies are still living in the 1980 era when it comes to technology. Entrepreneurs need to understand that technology does need investment but can save a lot of operational costs in long run. It's very imperative to have a review of the current market updates in terms of technology and process followed across the globe which can save the cost of production, can increase the productivity and output and hence enhance your profit margin. In today's competitive world it is very important to be updated on the latest technology and innovation to ensure that you are not left behind from your competitors. Just because the technology is not available in your country doesn't mean that you cannot use it, Technology transfer is now very common across the globe.
5. Professional team: Further to point 3 on too much control freak, I would like to draw your attention on the quality of work force, due to control freak and to save money the small and medium business house don't hire high caliber professionals. Yes they cost much higher than the general staffs because quality comes at price! The entrepreneurs need to look these expenses as an investment which will generate huge profits in coming years. A seasoned professional can lead your company to new height in terms of product development and innovation. It is always advisable to have your disease treated with the specialist and these seasoned professionals are the specialists who can make your company reach a new arena at much faster speed. If you hire such professional to lead your organization for positions like CEO or COO, allow them to lead the team and give them the authority else they will be not able to perform. Set them free for a year and evaluate their performance and reward them accordingly, you will be amazed with the output.
6. Lack of long term vision: Most of the companies operate their business as is and whereas basis! If you ask most of the owners, they don't have any long term vision about their business; they don't have a clear business plan or budget for next 3 years. It's very important to analyze your cash flows and plan your business in advance. Entrepreneurs need to understand the market, the customer tastes and requirements and completion in the market and prepare a business plan for the organization and work towards one goal. It's very easy to buy and sell, but business is much more than just buying and selling, it's about building a solid foundation for sustainable long term business.
7. Too restricted to its core business segments: The majority of SME is too restricted to their business area which has seen no innovation or product development from years. In today's ever changing technology and customer needs and taste, it is highly essential to develop and innovate new products and services as per the market demand and consumer taste. Always be ready to change the business segment and increase the areas of products and services. I remember a businessman invested huge in the black and white film role and developing business. The cost of print developing machine was in millions and he was too happy and too restricted with this business with complete ignorance of latest development of digital world went bankrupt and his machine worth millions was sold in scrap! He didn't go bankrupt because the technology changed or the market changed, he went bankrupt because of lack of his adaptability to move with the latest development and innovation.
8. Too conservative on new markets and products: The Indian SME's need to regularly upgrade their market and products to meet the current trend and taste of the consumers and at the same time they also need to ensure that they are not too independent on one particular territory or industry. There were instances where the organization with solid product line and business has collapsed because they were too dependent on one particular continent. For example, there were number of business went bankrupt during the recession because their 90% of the business came from USA and downtrend in US affected their business so much that they had to wind up their operations. Similar instance happened due to the currency devaluation, at time when INR against 1 USD fell to Rs. 42-43 brackets, the margin of the exporters affected and despite having large orders and sales they made huge losses.
9. Running away from consultants and advisors: I meet lot of SME entrepreneurs who are doing average or are struggling and at the same time I meet entrepreneurs who are doing exceptionally well in their field; the difference in operation with the successful entrepreneurs is that despite being the Harvard, Stanford or oxford graduates, they regularly hire consultants to advise them, do a market research for them and do a due diligence of their business operation to increase efficiency, cut the cost, improve the employee confidence, productivity and enthusiasm etc. This is about new age entrepreneurs, but most of the small and medium business are running from these consultants, the reason – they charge exorbitant fees!
Agreed, but quality always comes at price! SME business needs to change their mindset in this, they need to consider these expenses as investment for their business and need to review how these investments can help them bringing their cost of production down, their profitability up and increase their market share. Off course this will not happened overnight and consultant is not going to drive you up to that destination, you need to walk on those path suggested by consultants following their direction to achieve that success. Though consultants will be very helpful to develop your business, not every consultants can be a savior for you, and someone with the very cheap price tag is definitely not the one you should spent your investment on; because it takes a lot of effort to do market research and analysis to advise you on the next step, and every business is unique in its own terms and cannot fall under same templates for the similar industry.
There are many more aspects and each of the above needs more elaboration and process flow to ensure that the effort is made in right direction.
Irrespective of what the market situation or conditions are, the Indian SME sector has enormous opportunity and a great deal of potential to make it big. They just need to be guided and supported to deliver their real potential.
About the author: Awadhesh Devanand Jha is working as Vice President of Corporate Finance in Anfaal Capital, a Jeddah based Investment Bank. His expertise lies in the areas of research and restructuring of business. He has been involved in several multimillion dollar cross border M&A's and has restructured and raised funds for number of private and public funds in the sectors like real estate, infrastructure, energy etc. Recently he has been working on raising SAR 1 bn of fund for the development of SME's in Kingdom of Saudi Arabia.