Category Archives: Finance

Promoting alternate platforms of MSME Finance

The Small and Medium Enterprise sector (SME) contributes to more than 45% of the GDP besides 45% to the total manufacturing output and 40% to the exports. The Annual Repo of Ministry of MSME 2015-16 states that MSME require about INR 44 trillion of which 35 trillion is debt demand and 9 trillion for equity. The 4th All Indian survey of MSME’s indicates about 90% of their financial requirements is met through informal sources. Public sector reach and access to finance for MSME is limited..  Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) set up by Govt. of India and SIDBI, was expected to drive credit based on the viability of the project rather than on collateral. However, data indicates that less than 6% of the loans were disbursed to start-ups and Small and tiny businesses. Many a needy entrepreneurs could not access the credit as on several parameters such as DSCR, leverage, etc, their business plans fell short of the traditional lending norms.

Government’s latest initiative like Startup India and Standup India need more pronounced support for IP, scaling up and capacity building. Amongst alternate platforms of SME finance, Peer-to-peer (P2P) lending and merchant finance show huge promise. Peer to peer lending platforms have succeeded growing rapidly by using technologies, eliminating the middlemen and allowing the borrowers and lenders to communicate directly. P2P institutions adopt an online reverse auction approach.  Most marketplace lending platforms do not require collateral which is a boon especially for service-oriented businesses. SMEs can also benefit from the fact that their performance on these platforms can be driven by various non-conventional data points. What regulatory changes are required to drive development of P2P lending. US administration under President Obama has implemented Regulation A+ route for crowdfunding. Regulation A+ provides an exemption for US and Canadian issuers seeking up to USD 50 Million in a 12-month period from filing reports with the SEC. Since these securities are unrestricted they can be traded in the secondary market. Listing on India’s SME Exchange would cost about 0.49 per cent of the total offered amount which is one of the cheapest for SME Exchanges worldwide. It is likely that an Indian adoption of Regulation A+ could prove to be even more economical for SMEs. To encourage P2P lending spread governments across the globe are pursuing innovative changes on personal tax front. UK laws now allow earnings to be treated as personal savings allowance and exemption from tax up to GBP 1000 for basic tax payers and GBP 500 for higher tax payers is allowed. This allows them to net off losses from loans if any.

E-commerce giants in India such as Amazon, Flipkart, ShopClues and so on have been aiming at expanding their sellers base by providing a range of services, including financial support. SMEs who supply for e-commerce platforms can now receive loans for working capital requirements either from financial institutions or sometimes from the e-commerce platform itself. To promote India GI and cultural products government can consider special purpose programs by rerouting marketing subsidies offered at various level to all major platforms. Such an initiative would help increase the reach and profitability of many India centric product companies.

Aishwarya Nair, BCom (Professional), CIMA, Junior Consultant (Finance)

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Are you measuring your start up performance rightly???

Do you know the most common reasons for failure of startups? CB Insights report (July 2016) based on 166 startups reveal some interesting insights including running out of runway and poor finance management as primary reasons. These startups could have survived had they implemented effective performance management system to keep their heads up. Running a startup is akin to successfully landing an aircraft. The pilot needs to have right information about length of the runway, visibility, height and should know when he should switch to fly by wire. A plethora of measures only adds to complexity and confusion. What is needed is a simple set of integrative financial and non-financial measures (leading not just lag) to avoid a crash.

What are the key financial aspects every startup must track? Do you know which lead measures can help you decide immediate corrective actions? The most important financial measures include revenue growth and revenue indicators such as bookings which your customer is obliged to pay over the course of your contract, billings which are collected in advance at the time of booking, and gross merchandise value of transactions. Another key element to be tracked is cash in the form of net cash burned as well as cash earned. Your startup could be a brilliant idea but wouldn’t be able to survive long enough to become profitable if you can’t manage cash efficiently. Due to this reason, it is equally important to monitor account payables and reduce pressure on your cash balance. As a startup, tracking the maximum earnings decline ratio for each quarter is the most effective signal to save the business before it drowns. Finally, as important as it is for your startup to build traction and deepen revenue streams, be aware of how much you’re spending to attract more customers. Monitor the customer acquisition cost as well as the customer acquisition payback period so that you don’t end up burning a hole in your pocket.

Do you know the non-financial metrics that would help you in making better sense of the financial measures? The Pirate Metrics devised by McClure is a powerful customer-centric tool that could be used. Rate of Acquisition, Activation, Retention, Referrals, and Revenue are good measures of dynamism of your startup. Measure customers acquired through discounts as well as freebies as these tell you about your customer acquisition. Knowing the percentage of active users will provide better insight into your business performance by eliminating the accidental one time users or first time users. Percentage of orders that required rework, the delivery time per order and percentage of deliveries achieved on time are key measures you must have to capture operational excellence. How does your business measure customer satisfaction and loyalty? The net promoter score is an excellent tool to gauge customer satisfaction. It measures how likely it is that your customers would recommend your product or service to others. Make sure you bean count time to hire, cost to hire and quality of hire to know how good your HR team is supporting your startup dreams.

Finally, remember the measurement must be to drive managerial effectiveness, ownership and accountability at different levels. Remember to keep your cost of running the measurement system low. What you do not need for a startup is a superfine measurement system that comes with a huge cost of collecting, collating and making sense of data. What you need is simple guideposts that tell you whether your direction is right and the speed is right. Keep it simple and stupid (KISS!!).

Aishwarya Nair, Junior Consultant (Finance) and Sai Vinoth T R, Asst Consultant (Sales and Marketing)

CSR audit and management through RBM

Recently the Government of India has promulgated an order as per the Companies Act 2013 that stipulate companies with a turnover of Rs. 1,000 crore or more or net worth of Rs. 500 crore or more or net profit of Rs. 5 crore spend every year at least 2 per cent of their average net profit over the preceding three years as a part of CSR. According to the Indian Institute of Corporate Affairs, of the 1.3 million companies in India, about 6,000-7,000 companies are covered under the new CSR rule, expecting an annual CSR spending of Rs 15,000-20,000 crore by India.CSR is the commitment of businesses to contribute to sustainable economic development by working with employees, their families, the local community and society at large, to improve their lives in ways that are good for business and for development (World Bank). Companies realize CSR can be successfully used to 1) create brand awareness, 2) increase employee participation and bonding, 3) improve community relationships and 4) ensure corporate accountability. Many companies are pursuing CSR as an obligation rather than focussing it as a strategic program with long term benefits. Most common statement one hears in the corporate corridors is that they have engaged an NGO to distribute food or plant trees or blood donation camps. Managing CSR must start with what are your corporate objectives?. What social activities are consistent with your founding principles and business?. What values do your want your employee want to enshrine and be associated with?.  

We suggest companies first do a CSR audit and then use RBM to manage the CSR process incorporating the best of GRI G4 and ISO 26000:2010 guidelines. CSR audit can be done by internal resources or external consultants. The first step in CSR is to assess your current practices and any violations from your CSR charter. Start with your mission statement, and CSR mandate and check whether any of your vendors, employees have violated any of the principles. Do an RCA and identify approaches to stem the outlier. Evaluate how your customers and employees think about your company, competitors and how your business plans are consistent with the mission mandate. Assess positives and negatives, the trends and directions to chalk out the next steps. Once an CSR as-is evaluation is done, share it internally to get feedback on the status and what areas could be improved.

Next, do a benchmark analysis covering industry-wide ethical practices, corporate code of conduct best practices, what social cause programs have yielded the best results and why, what have not worked, what are the trends, etc. Forecast the next 5 years investments set-aside for CSR activities, what CSR activities can add value to the society and the organization in terms of impact and branding. Identify which NGO activities and plans align with your short-term and long-term goals. Use Result based management (RBM), a strategy management tool for planning and performance evaluation to align the investments across various projects of different NGOs. RBM helps to measure the result of the activities periodically and emphasize more on what is to be accomplished. RBM has various dimensions. Results are realistic, risks are identified and managed and appropriate indicators are used to monitor the progress of the expected results. These indicators help the organization in assessing whether or not the activities are yielding the desired results. RBM helps to bring clarity on the purpose of the programme and the desired results from the very beginning. RBM captures the progress of activities in short, medium and long term, thus helping your company know how CSR is working, what activities are yielding the most and what partner activities are most promising. CSR is an important element to just outsource, own and manage it to see better business impact.

 Pratibha Sharma and Deepesh M 

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Why PE Investments Fail?

Private Equity investments provide a sense of security and an initiation to growth to many companies worldwide. They are known to build and grow companies. Private Equity (PE) is an investment which is realized in the long term. This long term focus is aligned with the interest of both the investor and the company to succeed and grow the company.  But these notions are turning out to be fictitious considering the current scenario. According to some studies conducted, 16% of the companies shut down in the seeding stage and only 21% of the companies later go ahead with angel fund.

Prodding further on this, it becomes essential for PEs to analyze what could be reasons for such failure considering both the parties get into such an agreement with a win-win scenario in mind. PEs invest in the companies with an intention to develop and grow the company within a short period of time, making it lucrative for potential buyers and realizing maximum return on investment. The companies too, in an urge to succeed, rush in with their strategies with an aim to build and grow this company. These companies give in to the pressure of the PEs to perform better and falter to execute the strategies in the right manner while hastening the process. Some companies fail to understand the actual market requirement and do not optimally utilize the resources available with them. The PEs too, are not often very well equipped to mentor, monitor and strategise the growth path for these companies.  PEs who invest in varied industries often lack the complete understanding and expertise required to succeed in those industries. They work on the simple rule of thumb of return on investment to determine the success of a company. Companies’, who have just taken baby steps in the market and are yet to establish themselves, need someone to back them up with the required know how and strategy to run the business and succeed.

 This indicates that today companies not only need investment to build and establish themselves, but they also need profound levels of expertise to align, hold up and lend a hand in bringing the required changes. These companies need someone to analyze the strengths and weaknesses from a third party perspective, understand the market conditions, provide expert opinion on the functioning of the company and be those extra pair of hands that could facilitate in bringing about the right changes in the company.  PEs along with the association of such specialists could be rest assured about the company’s progress. This will enable them to transform the company and move towards accomplishment of the set objectives. To keep up the focus on organization’s goals and increase its opportunity to grow, an independent voice and an unbiased view by an expert which is not influenced by both the parties of interest (PE or company management) is essential. This provides the required perspective in decision making. Organizations are facilitated to strategise and put their plans into action. PEs aligning with such specialists brings about the right mix of investment backed with expert advice fulfilling the purpose of the business.

Pratibha Sharma.

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The “ACE “Strategy of Cost Management

The “ACE “Strategy of Cost Management

Every organization desires to reap in maximum profits from the business and run it with efficient and optimum utilization of resources.  Success or failure of a business is attributed not only to the revenue generated but also by management of that revenue. Cost Management is a concern and a prerogative of every CFO in an institution. Be it in good or bad times, effective management of costs leads to escalate the organization profits and at the same time sustain during difficult times.  All organizations strive to put the right processes and strategies in place to generate maximum benefit from available resources. Finding new avenues to boost sales and ways to slash costs are on the business objectives at all times.  So, what are the ways to reduce cost? Based on working and understanding different organizations, every company irrespective of their size needs to adopt the three key aspects to lessen their costs and increase efficiency. The” ACE strategy”, as we call it would be an approach of Automation, Consolidation and Elimination. Look for Processes or activities which can be automated. This reduces the time taken to perform, manpower cost and manual errors leading to re-work. Consolidation is an integral part of the strategy as it reduces duplication of work and aggregates activities/resources with similar tasks thus reducing the cost and time. Try and eliminate all the activities that prove to be adding least or no value to the company. The organization should always spend on value adding or revenue generating activities/resources. These three aspects of management encompass a large portion of efficient cost control.  Understanding the dynamics of the business and adopting simple ways to manage current commitments as well as prepare for future contingencies is what every organization should be well equipped with. Targeting the top line with constant vigilance on the bottom line should be the focus of every organization.

 

Pratibha Sharma

Senior Assistant Consultant – Finance and Strategy

 

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Effective Revenue Management in Companies

In today’s world where companies are under immense pressure to highlight the revenues and profits, they are also under constant scrutiny to project actual revenues earned for the services provided. There seems to be a gap which is leading to a major concern among industries to identify the reasons for the companies not getting their due. Statistics say that approximately 5-7% of the revenue is lost due to revenue leakage. Identification of revenue leakages would be a prime focus to attain sound financial performance. Revenue leakage could occur due to misappropriation of funds by the staff, errors in documentation or recording transactions, lack of trained staff and operational issues in control systems. An event which could have an impact on the revenue could hinder the performance and growth of the company. Effective revenue management is necessary to ensure every process is followed, practises are consistent and the revenue is complete, timely and accurate. It becomes very essential for every company to understand where and how they are losing money. The processes need to be streamlined with appropriate controls in all the areas of the revenue cycle. Consolidating and co-relating all revenue related information and constant reconciliation could identify and minimize potential losses and associated risks. Automation of processes and industry best practices like Six Sigma, ISO and CMMI could also prove to be a method by which standardization of activities and processes could be brought about in the organization. Effective communication of risks and flaw in the operations to the management would enable them to make informed decisions. Management of revenue with effective and efficient approaches could pave the way in focusing on new avenues for revenue growth and build competent organizations for a better tomorrow.

Pratibha Sharma
Sr. Assistant Consultant (Finance & Strategy)

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Plan to Execute it Right !

Plan to Execute it Right !

‘Planning is bringing the future into the present so that we could have a better tomorrow’.

April is a crucial month for many a companies to religiously revisit their business plans of last year and dwell on how to conduct business in the current year. Few companies use this annual ritual to create a path to growth and exploring windows of opportunities. Few companies discuss what failed last year and what to buttress in the following years. Success of the business plans largely rests on the 3 Ps of a company: People, Process and Products/Services. Most plans fail because of two reasons. Firstly, not identifying the right resources who would own and implement the plan. Secondly, not eliminating the bottlenecks that inhibit change. These failures occur because of “core rigidity, sticking to older ways and means of doing things even when the purpose and environment has changed.  The major culprit causing this is the planning process itself.

In many companies the ideas flow from top, they are never questioned because of fear and rebuke. Another major cause is the subjective evaluation of performances and outcomes.  Many companies carry senior resources on their roles who have neither the energy nor the commitment.  Inability to control Smart Alec, Yes men, who like to be part of all strategy making but no responsibility is another jaundice that affects the low performing companies. Alignment of resources to the objectives and strategies of the plan is essential to achieve success. Make necessary business changes to derive desired benefits.  Implement Process changes to bring in agility, clear ownership and reduction of waste. Cut down information latency, bring in continuous flow of information and efficiency in the activities of the organization. A good implementation strategy is breaking the plan into small buckets and to ensure the change is sustained. Finally, no plan works if there are no reinforcement mechanisms. Measure, control and direct to create an impact and achieve success with the desired change!

Pratibha Sharma

Sr. Asst Consultant (Strategy and Finance)

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Performance Measurement in NGOs

‘Performance Measurement in NGOs’ is an article written by our consultant Ms. Pratibha Sharma,. This article was was published in ‘The Management Accountant’  journal brought out by the ICAI in December 2012 issue.

Below is the link for the article.

Performance Measurement in NGOs

 

 

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To De-risk, Diversify

‘Don’t put all your eggs in one basket’. Most companies swear by this phrase in the software industry today. The mature companies are expanding their market and exploring the existing products whereas the emerging companies strive for a wider portfolio with a gamut of products catering to multiple needs of the customers. The strategic shift of the companies from a single or few product / solutions to an array of products/ solutions demonstrates the focus on risk mitigation. The companies are constantly innovating and developing products to be at par with technology, gain competitive advantage and increase the predictability of revenue. One aspect of profitability gaining significance is the increase in revenue streams to augment the opportunity in the existing market and open doors in the unexplored market. This reduces the reliance of revenue from one product/service and there is an alternate arrangement for growth and disparate income, result of a wider portfolio.

Considering the transaction costs and the investment required in developing a new product, companies are now looking at an extension, version or division of the existing product to enhance the product and fit the requirement scale of a larger customer base. Extension of the product would mean the enhancement and improvement of the existing product to suit the current market need and technology. Versioning the product could create a market for the product at multiple levels. A comprehensive product is separated and developed into individual products to facilitate the ease of selling and quicker revenue generation. Though a risk mitigation strategy the company has to constantly drive these products and evolve itself to excel and compete.

Discovering a new path to growth is a well known risk mitigation approach by most of the informed and vigilant companies. Re-examining the path taken and exploring new avenues to growth is a strategy to look out for. Companies need to have a broad perspective and bring out the best in what they have to offer to ensure consistent revenue and increased profitability.

Pratibha Sharma

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Cost allocations- Easy method is not always right

After being a witness to a company’s boardroom profitability review, I began to wonder whether the current economic condition has given rise to a renewed focus area of cost management. Cost allocation is a managerial accounting process of assigning of common costs to cost objects. One key observation during our client’s SBU profitability review meeting was that each of the SBUs had a diverse product/service lines with widespread disparity in their profitability. The company was following a common cost allocation approach a deep-rooted belief that all costs must in some manner be fully allocated to the revenue generating units of an organization. This approach assumes that costs are proportional to the output which may be far from truth. For example, Cost of unbilled Resources who are not assigned to projects was being allocated on a lump-sum basis to all the SBUs. As a result of this, SBUs with lower headcount were undercosted and SBUs with higher headcount were overcosted. This was one of the reasons which had led to the widespread disparity in profitability across the SBUs that led to their goals go out of reach. Bad information was leading to bad decisions. Lump-sum allocation method is easier to implement, it ignores changes in activity levels. Lump-sum allocation method provides a very little tie-up between costs and volume of products / services actually consumed.

On the other hand, finer allocations based on actual activities involved in a process/SBU may reveal the right costs. Activity based costing (ABC) is a method that leads to lesser undercosting or overcosting of products / services. Activities in ABC could range anything from processing purchase orders, producing software using certain employee headcount, setting up machinery /equipment, inspecting finished goods, packing customer orders, etc. Although ABC implementation is costlier, the benefits derived far outweigh the costs. I would like to conclude that ABC employs the activity concept thereby providing satisfactory data to end-users such as how product/service is produced, how much efforts is needed to perform an activity and finally how much money is spent on performing this activity. Using the ABC model, it has been proven that concealed losses and pricing decisions can be analyzed.

-Pratibha Sharma