By GT Kannan
At the core of a ripple is a drop, one that has the potential to spread but with right amount of power. Any excess force or weight; its heaviness is sure to weigh it down with no or low impact: this is very much akin to a MSME promoter loaded with aspiration to grow steadily but often finds himself striving hard with no result.
This is a classic case we as professionals meet and deal across all types of company structure; be it a Start-up company or companies in the early stage of growth, traditional long existing companies or un-influential family businesses who find themselves amidst unwarranted pressure for growth. Our focus is the drop here – on how the aspiring promoter can make steady progress to achieve sustainable growth with strategic initiatives and goal orientation…. creating the rippling effect.
The MSME segment is a blessed to be a part of vital national & international value chain. This is primarily because of its presence across diverse range of product and services that deliver on needs of both local and global markets. MSME segment is a growth driver and an important engine for economic growth. It contributes 8% of our country’s GDP, 45% of manufacturing output, 40% of Exports and holds largest share of employment.
Though the segment itself is growing at a higher rate of CAGR 20%, the fact remains that, the segment equally contributes for its own failure to achieve sustainable growth and tends to fall into debt trap situations easily. Figures across major financial and lending institutions indicate that Loans and advance to the medium and large segments accounts for nearly 50% of total bank advances and the total NPA also stands at a staggering 50% indicating that the deterioration in asset quality is driven by the medium enterprises.
Often, large number of companies’ bank loan under this section is restructured by the bankers; this is mostly due to slowdown in the pace of economic growth, impulsive expansion by companies in the boom years and lack of proactive approach and management skills at the helm.
Add to this the perennial issues faced by the sector like limitation to access bank credits, lack of long term capital access in the market and lack of resources for free flow of bank credit – though owing to the sectors own inability to achieve its optimum potential for growth.
Factors affecting growth
The reasons for the struggle by and large remain basic across the segment. A refined approach could redefine and impact the company’s operational efficiencies, along with the power of sustenance and the quality of brand building itself. These inherent flaws listed below need to be recognized and modified fundamentally to surge ahead. The most common errors persisting across varied types of company structures in MSME even today include diverse functional lapses.
- A Visionary promoter with no clarity on implementation
- A non existing or highly confusing clarity on KRA, KPI and Organization chart
- Unplanned and simultaneous implementation process of multiple functions
- Inability to instill confidence to the supporting staff in the long run.
- Indecisiveness or Decision that keep changing.
- The aptitude and attitude Gap between the Professionals and Entrepreneurs.
- Lack of performance based targets - Targets are rocket high, but performances are very low.
- Entrepreneur dreamland - Idea not rooted to ground reality and action.
- Late realization of failures - Fails to accept the reality. If they accept, it would be too late.
- Lapse in planning. Hurrying up to encash future profit of the business to their pocket
- Control freak with Inability to delegate with either too much of trust or too little trust.
- Inability to take time bound decision - No right choice in right place.
- Over ambitiousness in business
- Priority selections - (pls explain in 2-3 words)
- No real move for business growth.
- First core team always a challenge to manage for the entrepreneur
- Authority and delegation to teams is low.
- Misses out on garnering business principle in the initial stage of the growth. There is always a need to look out for money.
- Wrong hire or mismatched job role - No right professional in right place
- Heed unsolicited advice easily - Get into the net of wrong advice to make quicker money
- Lack of CSR functions - Not many people think on the various possibilities on how they can add value to the society
- Unchartered job functions and improper task segregation - The planning mechanism, deep into the problem solving, usually leave the final decision to the top executive to handle the situation.
- Ineffective HRM - Social responsibility of employees working with them are often neglected leading to many other issues.
- No scope for flexibility and change - Stringent regulations also gets into the problem for moving forward
- Over arching need for relevant process and right infrastructure - Effective IT architecture, Strong finance function and robust MIS, Managing compliance requirements in a holistic manner is mandatory.
The general trend thus observed and listed here offer a key insight into the MSME sectors plight – the writing on the wall is clear. Not all are funding issues and growth issues spin in and around the financial factor in this segment. The fact is Money is limited; limited to internal accruals and promoters’ contribution. But an organization cannot fall apart on lack of capital alone, especially with more basic and deeper issues innate in its system.
A conscious analysis of the inherent flaws and a focused effort to address these could well be the first step in crafting our own markets. These fundamentals should be considered as prequalifying aspects for fund raising, be it from financial institutions like banks locally private equity funding or angel investments globally. The challenge and questions of governmental support in this direction remain: but in competitive times, the need to create synergy between lending agencies and sector needs with strong fundamentals and right moves is a necessity. It’s this framework that will aid revenue generation and work in tandem to achieve growth financially and as a brand.
Raising Revenues –four lessons in treading wisely
1. First and foremost, there is a defined need to determine our ability to use our capability to its optimum level before one seeks high investments/ Borrowings. E.g. In the early stage of growth, the companies do not have the organizational structure to deploy large quantities of physical capital effectively. You simply cannot buy a complicated, hi-tech machine tool and hire a smart operator to run it. You need a whole organization surrounding that operator if the machine is to be put to productive use. You need reliable suppliers to provide the raw materials, buyers to take the output from the tool and use it in their production lines, managers to decide the mix of products that will be made, a maintenance team to take care of repairs, purchasing team to deal with suppliers, a marketing team to deal with buyers, a security outfit to guard the facility at night and so on.
2. Be Aware that capitalism grew through innovation, with the newcomers bringing in creative new process and technique that destroyed the business of old incumbents. Therefore, those companies that do not anticipate the speed of this change face struggle to reinvent themselves. Is borrowing the solutions here??? If so take pro active call for investments in new technology not just pump in loads of money to fight a faster growing competition.
3. Remember initially a firm grows slowly, because it takes time to build the social relationship that establishes its entity in the market. Also the organizational structure, its norms and the procedures that allow the firm to function efficiently are built in due course and most important the availability of outside finance to a new, untried, unproven organization is limited. This is exceptional to family firms because banks would accept family firms’ reputation and wealth as collateral to finance their business growth faster. Calculative risk can be taken, not allowing the situation beyond our control.
4. Last but not the least, Management must match long-term financing or short-term financing mix to the assets being financed in terms of both timing and cash flow. Long term financing is generally for assets and projects and short term finance is for supporting the operation continuity.
This is an important lesson in planning your success framework. Ever wondered, what could have been better for our country if there had not been Non Performing Assets of companies? Do you know how much is recovery on Non Performing Assets by the bankers?
As on June 2013, the figure stands at a whopping Rs.2.06 trillion is gross Non Performing Assets of Indian banks i.e. A good 3.85% of the bank advances to the industry.
The macro picture might spell lack and limit of revenue availability and resources, but a loaded drop never fails to create a good ripple and good planning, right implementation and focused missions to drive your vision is sure to ensure a rippling effect. Look within before you look out. You have the ability to create your own rippling effect too.
(G T Kannan is Founder & CEO, elEVAte Business Solutions Pvt. Ltd. The opinions are his own.)