How can an SME business owner build a resilient business with the help of a CFO

Credit and Finance for MSMEs: The SME owner needs to decide decide the trade-off between investing cashflow in initiatives that give reasonably certain benefits in the short term (increased credit to improve sales) versus ‘risky’ areas that could have a long term benefit (capex in new manufacturing plant or branding spends).

How can an SME business owner build a resilient business with the help of a CFO
The SME Business Owner needs to focus on the current quality of earnings and how this can be improved over time.

By SVenkat

Credit and Finance for MSMEs: A good CFO is a protector of capital and an enhancer of enterprise valuation. In this context, a CFO has a critical role in helping a small and medium enterprise (SME) owner in building a resilient, scalable, sustainable business with a strong focus on stable and predictable profits and cashflows. Here are the five things that an SME owner should expect from a CFO while building a resilient business.

Also Read: Govt doubles down on defence purchases from MSMEs; buys goods worth this much amount

Measuring business levers

A good CFO understands that financial performance in the form of profits and cash flow is merely an outcome. These outcomes can be enhanced only through the proactive definition, measurement, monitoring, and improvement of ‘upstream’ operating metrics. The SME business owner needs his/her CFO to take active involvement in measuring salesperson productivity, marketing spends outcomes, reducing purchase costs, improving input-output ratios, monitoring actual achievements against defined KPIs for senior leadership, customer NPS scores, customer retention analysis, cost of acquiring new business, channel level profitability, shop floor efficiency, labour productivity etc. A CFO does not necessarily need to drive performance himself/herself, but the SME owner needs the CFO to provide clear, easy-to-read, real-time, self-access dashboards, with a clear ‘call to action’.

Capital allocation

The SME owner needs to decide the trade-off between investing cashflow in initiatives that give reasonably certain benefits in the short term (increased credit to improve sales) vs ‘risky’ areas that could have a long-term benefit (capex in new manufacturing plant or branding spends). RoCE is a key metric for any business and efficiency in capital utilization is an area that the SME owner needs a CFO to have a clear view on. Most SME business owners work hard in climbing the performance ladder but do they have the ladder on the right wall? The CFO, wearing his strategic hat and role as the ‘capital allocator’ helps decide which is the right wall against which the ladder needs to be set up i.e. on which initiatives an SME business owner should place his/her ‘bets’ for the best risk-adjusted returns.

Managing risk

Good CFOs have moved beyond the traditional definition of risk, viewed purely through the lens of statutory compliances, insurance renewals etc. A CFO needs to provide the SME business owner with a risk matrix that identifies all business-related risks including branding, reputation, supply chain, technology disruptions, consumer preference changes, cost of capital, governance and controls etc on a matrix of scale of impact and probability of impact. For example, the SME business owner and the CFO need to consider: (a) is our revenue growth overly dependent on a small base of customers (customer concentration risk) (b) do we have alternate sources of supply, both domestic and imports, for all key materials (c) is our product recall mechanism adequately robust and tested in case there is a defect/failure in the market (d) do we have a strategic view of how our business will be impacted by technology over the next 3-5 years and do we have a clearly defined response to these changes?

Quality of earnings

The SME business owner needs to focus on the current quality of earnings and how this can be improved over time. The CFO should actively help the SME owner to understand key components of quality of earnings (a) repeatability of revenue (b) quality of customer logos (c) customer retention rates (d) profitability of key accounts (e) clean accounting and reporting practices (f) clear competitive positioning in the market (g) ability to upsell revenues to existing clients. In their quest for scale, business owners run the risk of becoming overly tactical. For example, there will be pressure from sales teams to go after poor-quality customers to achieve revenue targets. The CFO needs to have the gravitas and ‘weight’ in the company to be able to veto decisions that dilute the quality of earnings. 

Cash, cash, cash!

SME owners in India lack the support from ‘head office’ that Indian MNC subsidiaries enjoy. They also lack the balance sheet strength of large Indian conglomerates to raise debt from banks or equity from their public shareholders. It is critical, therefore, for the SME CFO to keep a hawk-eye on cashflows and not get carried away with profits accounted in the P&L. A CFO needs to build a strong cashflow forecasting mechanism, with tight control over working capital management. Conservatism and putting away a pool of cash for a rainy day is a good trait in a CFO. Several SME business owners who followed this principle benefited tremendously during the COVID pandemic. They were able to make strategic acquisitions, retain key talent, buy materials and machinery at rock-bottom prices, invest in digitization and automation and most importantly survive and grow faster than companies that managed their cash poorly.

Considering its World Cup time, here is a football analogy. Resilience, in football, is the ability to defend well, save the shots on goal, not concede corners, keep possession of the ball, create offside traps, switching attack and defence between the right and left flanks, and continuously feed the ball to your forwards. In an SME business, the CFO is the midfielder, who knows when to fall back to defend (risk mitigator) but is not afraid at the right time to press forward (opportunity enhancer). If you are an SME business owner, how good your midfielder (CFO) is will determine how resilient your team (business) can be.

SVenkat is the founder of performance improvement consulting firm Practus

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