Credit and finance for MSMEs: Managing finance could be as tough as raising it and small business owners often struggle in both. According to multiple market studies, the lack of access to affordable finance is among the key reasons small businesses fail to survive or grow. While every lender and business is distinct and hence there can’t be a perfect formula to ensure access to credit and manage it smartly, it generally comes down to the promoter’s ability to repay the amount and win the lender’s confidence. Nonetheless, there are steps a small business owner must take to raise capital efficiently and use it effectively to avoid situations of working capital under stress.
Bhairav Kothari, founder and CEO of SuperCFO Advisory Services, which provides CFO (chief financial officer) services around strategic planning, transaction support, audit preparation, and more, explained steps to small business fundraising and managing finance at the second edition of the ScaleUp Summit organised by Financial Express Digital last month. So, let’s dive into it.
The end goal — Fundraising to entrepreneurs is often a goal rather than a means to achieve a business goal. Hence, before looking at approaching the lenders, it is “important to decide whether you are raising funds just for the sake of it or is it a means to an end, for instance buying a company, setting up a manufacturing plant etc.,” said Kothari. In other words, introspection around whether one really needs money, why it is required, how much is the risk-taking appetite of the promoter and how the business environment is are important areas to consider.
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“Thinking of raising money in a tough environment doesn’t make sense. You won’t get the valuation you want. At the end of the day, time is money and in your venture, you need to be clear about why you need the money. Until you have that clarity, you will not get real strategic ideas to achieve your goal,” he said.
Financial forecasting — While the credit monitoring arrangement (CMA) form, which tells the projected and the past performance of a company, that helps lenders to ascertain the financial health of a business is important but what is critical is a highly detailed financial forecast model where you can map every single business parameter, said Kothari.
“It should be so detailed that by just looking at it, you know how business works. Once you build that, you can run ‘what-if’ scenarios and tell the investor what growth you can achieve if he invests in the business and what if he invests more.” Also, if a small business owner has a detailed model, he/she would understand the market, the industry, competition, etc., to validate the growth they want to achieve and analyse the strengths and weaknesses of the business as well.
For instance, “If you don’t know your competition, it can be a problem. You should know your competitor’s business better than the competitor himself so that you are aware of what should be done and what should not be done.”
Due diligence – Next comes up due diligence of the business. Proactive due diligence even before one hits the street for fundraising helps in fixing errors in businesses. “If you prepare a checklist on diligence, it can help. Many deals fall through because companies are not ready for diligence and when diligence agencies undertake due diligence, multiple issues come up which takes a lot of time and by then the deal is lost.”
Exciting presentation – Presentations are often the first step for promoters to provide investors with a look into their business before the numerous discussions that take place between the two to understand the business really well. An interesting presentation or a pitch which excites investors and gives them the confidence of coming across the next big thing is important.
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“It is important to have a very crisp presentation. It should tell investors that if they don’t write a cheque to you, they will miss a big opportunity. It has to excite them. You will only have limited time with an investor and hence you need to have your script ready. You need to be prepared with potential questions and answers also. Moreover, you must rehearse pitching your presentation before meeting the investor,” said Kothari.
Know your investor – Perhaps a very important step before pitching to the investor is knowing the investor well. Understanding his background, his areas of interest in investments, companies he has invested in and how they are performing, how much he usually invests, his behaviour with fellow entrepreneurs and investors etc., might pay off in cracking the right deal.
“Do a little bit of research on them, speak to other bankers and companies as there could be an instance where the investor had a bad experience investing in a sector and he might bring it up in talking to you. If you know the investor well, you can counter him on that point and explain how you have tackled the problem he faced with other companies in that sector. That will help you engage better with them,” explained Kothari.
Negotiations – While negotiations and counters won’t irk investors and weaken the promoter’s chance of securing an investment but key to success in negotiations is knowing what one really wants to negotiate. “There is a reason why an investor proposes something. So, understand his thought process, what he is asking and why and then come up with a suitable argument for it. Also never show your desperation that you are short of time and need money. This would lead to investor negotiating terms which would be one-sided only,” said Kothari. In case a promoter already has an investor, he/she should ensure transparency, avoid any side deals, have transparent accounting and related party disclosures, proactive discussions etc.
Delivering on promise – Once the promoter gets the money into his bank account, the real journey begins in utilising that amount judiciously for the cause it was raised. Hence, “it is very important for you to deliver on your promises made to the investor. Also, always ensure that you have a few good announcements related to the business for the coming two quarters to share with the investor. Investor funds are not a grant, he is here to have a return,” said Kothari.
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Forecasting cash flow – The importance of cash flow forecasting cannot be overemphasised in business. It helps understand if the business is making a profit and allow planning for unforeseen situations. Moreover, cash flow planning helps entrepreneurs make better use of excess cash that may be there in the business and also helps manage financial risk more effectively.
According to Kothari, “Most small businesses feel they know their cash flow very well with collections and payments data, but the rigour of planning is missing in most businesses. With whatever knowledge, intelligence, and data points you have, you must build your cash flow plan. A minimum 13-week rolling forecast is a must.”
Controlling emotions – Emotional control is often considered a skill to be successful in running and growing a business. Emotional connect with a particular business, a vertical, a team member or an employee could turn out to be negative in maintaining the overall health and scale of an enterprise. Hence, leaders must realise the time and situation to detach themselves from things that bother them and the company.
“A lot of businesses have promoter wife, his children and other relatives and so there are emotions attached. Here, we need to look at segmental profitability (assessing the profit or loss by a particular product line of a business). Also, we must take out emotions even from the positions. The business role given to you must be constantly evaluated to understand who the right person is to head that position. For that you need to take emotions out and do things logically,” said Kothari.