“Steps to Guarantee Business viability” for MSME
Hello friends, I am happy to publish my 2nd Article on “Steps to Guarantee Business viability” for MSME. Hope you will find it relevant and useful.
“Steps to Guarantee Business viability” for MSME
Most the MSMEs are usually started as small business ventures mostly by first-generation entrepreneurs that too with humble self-made backgrounds. They tend to look after all the areas of business operations on a day-to-day basis Initially because of the budget concern as well as lack of trust. In the majority of cases, they are not able to delegate responsibility to others with time.?
As one grows as an organisation, one must learn to build a team so they can delegate responsibility for less important tasks & routine operations to others at least initially till the time trust is built. It is important for entrepreneurs to spend time and focus on more important subjects like developing and implementing the business plan and strategy, creating a road map for business, team building, product innovation, customer service, educating themselves with the latest market trends, technologies, competitors, customer feedback to improve product quality and so on…
At one point in time, entrepreneurs must stop working like?self-employed entrepreneurs?taking care of every function during the day-to-day operations and neglecting the key management responsibilities. Doing so ends up restricting the momentum of growth of the organisation.
It is very important to adopt the practice of weekly, monthly and quarterly review/assessment of the business in the early stages irrespective of its size, by generating various data which will help management to evaluate the performance of his team members, functions, inter-functional accountability, root cause analysis of customer complaints, areas which need immediate improvement, customer feedbacks including overall financial positioning etc.,?to ascertain the overall health of his business.
In today’s world, when the market has become very competitive it is necessary to keep improving customer satisfaction and experience, focussing on business competitiveness, overall business environment & culture of an organisation, continuous innovation, research and development of products is must. Here the role of the key management team and functional heads with their active participation is very important for the sustainability, survival and holistic growth of an organisation. They all should be aligned with management’s business plan, expectations, short-term and long-term goals and objectives with specific miles stones and timelines.?
Here are some recommended steps to guarantee business viability which is a key to the success of any business venture:
A business roadmap is a plan that shows how the different aspects of business activities will lead to achieving strategic goals. Individuals in charge of specific areas and managers and executives need to overview all business operations.
Creating a business roadmap is vital in analysing a company’s performance and assessing its future potential. it is very important to plot out the schedule for accomplishing objectives and tracking progress based on the data generated.
A?business plan?differs from a?business roadmap. Business plans are long-term, while roadmaps focus on short-term goals and objectives. Business plans include information about the company’s finances, but roadmaps don’t need to be as detailed or comprehensive; they just need to give a general idea of what you should do next.
A financial forecast tries to predict what your business will look like (financially) in the future. Proforma financial statements are how you make those predictions somewhat concrete.
Pro forma statements are just like the financial statements you use each month to see how your business is performing. The only difference is that you prepare pro forma statements in advance, for future months and years.
There are three key pro forma statements you should be familiar with:
????????????????The Income Statement?
????????????????The Cash flow Statement?
?????????????????The Balance Sheet?
Following are three basic steps to create your financial forecast:
1.????Gather your past financial statements.?You’ll need to read your past finances in order to protect your income, cash flow, and balance.
2.????Decide how you’ll make projections.?Besides past records, there are other data you can rely on to make your projections more accurate.
3.????Prepare your pro forma statements.
Managing working capital is the biggest challenge faced by businesses while running their operations. Many business owners feel that acquiring clients or increasing revenue can only help their business flourish. While it is partly true, what is equally important for a business to grow is how well it manages and strikes a balance between cash inflows and outflows.?
The level of existing working capital available to a business is measured by comparing its current assets against current liabilities. It tells the business the short-term liquid assets remaining after paying short-term liabilities.?
Working capital requirements might differ from business to business, but it is an important metric to assess the long-term financial health of a business. Effective working capital management also ensures that a business always maintains sufficient cash to meet its short-term commitments.
When working capital requirements are not managed efficiently, the business can suffer from cash flow problems, affecting its ability to expand, improve processes or even operate its operations.?
Therefore, a business owner needs to know how to effectively plan business’s working capital requirements.?
The business budgeting process starts with looking backwards at your past income and expenses. The longer you’ve been in business, the easier this process will be, as you’ll have more data to look back on as you move to create your forward-looking budget.
If your business is brand new, however, you might have to do some more extensive research into typical costs within your industry or area in order to gather working estimates for your forecasted finances.?
A business budget template is an essential tool for business owners who want to take care of their bottom line. Why should you invest in a smart template from the start?
Here's how a business budget template can set you up for success:
????????????????Track cash flow, expenses and revenue.?
????????????????Prepare for regular business slowdowns.?
????????????????Allocate your budget to the portions of your business that need capital most.?
????????????????Plan for business investments and purchases.?
????????????????Project all costs to starting and running your business.?
Generally speaking, your business budget template can act as a business health scorecard if you invest in setting one up properly.
Every day unsatisfied customers cost businesses a lot of money. In fact,?studies?show that 80% of customers will switch companies after one poor service experience.
The first step to overcoming this is to admit that you have room for improvement. The second step is to measurecustomer satisfaction?to find out where you currently stand.
Measuring customer satisfaction doesn't have to be complicated or expensive. In fact, it's fairly simple to incorporate customer satisfaction measurement into your current customer success strategy.
Measuring customer satisfaction?helps you take stock of that demand, find out what your customers like, and maybe even discover what they don't like and what leads to dissatisfaction. A proper understanding of your customer's satisfaction will help you identify their specific needs.
Did you know?
·??????The probability of selling to an existing, satisfied customer is 60-70 per cent (while the probability of converting a new customer is 5-20 per cent).
·??????Over 33% of customers would consider switching due to unsatisfactory customer service.
·??????After a satisfactory customer experience, 69 per cent of customers would recommend the business to others, and 50 per cent would use the company more frequently.
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·??????Measuring customer satisfaction is the way forward for all businesses.?
Since people, today have so many buying choices and substitutes, you can no longer afford to ignore the importance of providing great experiences to your customers.
Identifying key demands along your customers’ journey, gathering feedback to improve or iterate their experiences, and applying trends will help you improve customer satisfaction – and subsequently generate more revenue and sales.
As this is a very important aspect to ascertain the health of any business, I am elaborating it in detail so as to have a better understanding.
Ways to Reduce Outstanding Receivables
As an MSME consisting of a large no of small business owners, one must recognize the importance of timely payments from customers. Late payments are frustrating, and follow-up can be time-consuming. There are certainly reasons for late payments such as misplaced invoices (they’re still “in the pile”), cash flow constraints (your customers waiting for payment from their customers) and even misunderstanding of actual payment terms. Yet it is important to have a process in place for dealing with late payments. Here are six often overlooked steps one can take to reduce average accounts receivable days outstanding.
1. Send the invoice immediately
As simple as this sounds, it is surprising how long it takes some businesses to send invoices to their customers. Unless specified in terms previously established with the customer, an invoice should be dated and sent the day service is performed. This lets customers know that you are prompt with your invoicing process. The sooner you invoice, the sooner you will receive payment.
2. Be clear about your payment terms on the invoice
Invoices lacking payment expectations actually offer customers an unlimited time to pay. Make these expectations clear, whether it be days after the invoice date or a defined due date. Even the term “due upon receipt” can be vague, leaving too much room for customer interpretation. If you can charge interest on late payments, this should be spelt out on the invoice.
3. Send a gentle reminder to the customer before the invoice due date
This is a step to be considered, especially if a customer has a history of late payments. Employing this step shows your customer that you have an invoice tracking process and are willing to keep the customer advised of the status of unpaid invoices. This technique is frequently used by larger companies, especially if you make payments using an online process. One rationale for doing this is that it’s not smart to wait for a late payment to occur before contacting a customer.
4. Initiate action as soon as the invoice is overdue
The timing of this action may be different from company to company, but certainly, any invoice that is delinquent by a week is worthy of follow-up action. A short email can serve this purpose. It should include details such as the invoice number, amount due and due date along with a copy of the original invoice in case it was lost. A professional, non-threatening correspondence provides a clear reminder of what the customer owes and when they owed it. If possible, it should be directed to a specific person rather than a department.
5. If the invoice is still unpaid, switch from written correspondence to a phone call
Sometimes people change roles in an organization or email addresses change without any notification to outside organizations. A phone call will uncover if these are the reasons for payment delays while connecting you with someone in a position to take action. The phone call, like any previous correspondence, should be courteous and professional. Anyone making this call should not show anger or frustration. Late payments are almost never a personal affront or meant to be an insult to you or the business. In fact, delinquent customers often are busy and may have simply forgotten about the invoice. It’s just business.
6. Further interactions regarding overdue invoices
If further contact with the customer is needed, alternate between written correspondence and phone calls. Listen to the causes for late payment and try to be helpful when you can. Be sure to document all phone conversions and keep email correspondence as a record of your attempts to secure payment. This will prove helpful if it eventually becomes necessary to move toward third-party collection action.?
Unfortunately, studies have shown that the longer you wait for payment, the less likely you are to receive it. According to a study, 26% of invoices over three months old are uncollectable. This increases to 70% at six months and 90% at 12 months — not an encouraging prospect for the severely delinquent.
How to Analyse Accounts Receivable/Debtor
Over the years, analysts have developed many different methods to uncover the underlying quality of a business’s accounts receivable.
One of the simplest methods available is the use of the?accounts receivable-to-sales ratio. This ratio, which consists of the business’s?accounts receivable?divided by its?sales,?allows lenders to ascertain the degree to which the business’s sales have not yet been paid for by customers at a particular point in time. A higher figure suggests that the business may have difficulty collecting payments from its customers.
Another simple method consists of examining the manner in which the business’s allowance for bad debts has changed over time. This allowance is typically reported in the notes of the financial statement, although it is sometimes included in the balance sheet. If the allowance for bad debts has grown substantially, the business may suffer from a structural deficiency in regard to its ability to collect payments from its customers.
At the same time, dramatic declines in the allowance for bad debts may indicate that the business’s management has had to write off portions of its accounts receivable altogether.
Read the Notes to the Financial Statements
Other methods of analysis are more demanding. For example, the notes to the financial statements may mention specific customers with outstanding debts. Collect these names and investigate the?credit worthiness?of each debt-owing customer individually. You can then estimate the likelihood of each customer repaying its portion of the business’s accounts receivable.
I always recommend all my MSME clients to investigate the credit worthiness of each of their existing customers periodically as well as for potential new customers before commencing a relationship with them. This will help them to reduce the risk of bad debt.?
Although this analysis can yield valuable insights, it can also be time-consuming, as the process of estimating creditworthiness can become highly complex. However, at the present time, I would strongly recommend this to keep a check on the customer’s financial health.?
Finally, another common method of analysis consists of investigating the extent to which each of the customers is overdue on their payments. This technique, called “ageing” the accounts receivable, can help answer the question of whether problems with specific customers have existed over the long term.?
There are several patterns that were common only among large corporates in the past that are now distinctly visible among SMEs; adopting a profitable exit strategy from business is one such clearly emerging pattern.?
Indian entrepreneurs today are a lot more open to exiting their business, unlike their counterparts in the previous generations. This is probably due to less emotional attachment and more commercial orientation in their decision-making. The most common motivations for exit from the business and popular exit strategies are discussed here.
MOTIVATION FOR EXIT
The most common motivation for business exit by SME entrepreneurs is to make it big by joining hands with a large corporate and thereby leave a larger legacy. Several entrepreneurs face significant challenges to scale up because of insufficient resources to meet growing funding needs in line with growth in business. The result is stagnation in business, forcing entrepreneurs to look for a larger strategic partner to grow.?
Another motivation prevalent for business exit is the threat of long-term survival due to the consolidation of the industry, with the entry of bigger players. The branded consumer goods sector in India is a classic example, where smaller regional brands have exited to MNC players, in the consolidation process. Company-specific issues, such as?‘no clear succession plan'?or?‘financial distress'?are some reasons for entrepreneurs to exit their business.
EXIT STRATEGIES
The most common exit strategy for SMEs is the outright sale of the business to a large corporate. In India, a few hundreds of such transactions happen in a year, though the scope exists for a significantly larger number. The sale of a majority stake to a large corporate to infuse capital and continue to manage the operations is also reasonably popular.?
A common misconception among SMEs is to perceive the Initial Public Offer as an exit strategy; in reality, it is just the first step in a long-drawn phase of growth and maturity for an enterprise. Buyouts by Private Equity Investors are in the nascent stage in India, but significant interest exists among global investors to enter this segment in the coming years. Another unique exit strategy, particularly popular in principal cities, is the retention of land and sale of assets/business, as land value has yielded immense results for many mid-size companies, far over profits from their core business.
CONCLUSION:
Although we prepare ourselves as an entrepreneur based on our own experience as well as educating ourselves from other’s successes/failures, one must be ready to take on any situation and circumstances in business. Sometimes there may be a force major situation, wherein we do not have any control just like Covid 19 pandemic. Continuous learning from our right and wrong decisions, failure & success, disappointments and achievement etc., only makes us true entrepreneurs.?
Every business is unique; however, I am sure the above guidelines can be of great help to MSME businesses to become sustainable, viable and scalable in today’s competitive world. There is no fixed formula to succeed but this can cater as a guideline whether you are a start-up or a growing MSME business.?
Here are two mantras for success:
“If you don’t know where you are going, Any Road will take you there”!!!
“It is much better to over-deliver than to fall short”!!!
As ever,?thank you thank you thank you?for subscribing and reading. It matters. It’s a big deal to me.
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