SME growth in India and role of a CFO

A wonderful session by Vijay Kumar Sir.

For MSME sector, risk capital or Equity is the limiting factor to function.

342 companies are listed in BSE, around 100 companies trade on a regular basis and around 15 gets suspended for not following the regulatory requirement.

Every unicorn (Beyond 7500 crores) was once an MSME. India’s 58 unicorn have created 180 billion value.

Indians are 1.3% in US but are founders of 23% of Unicorn. It speaks about the entrepreneurial ability of Indians.

• SME and Employment opportunity: 40% of work force from India work for MSME, they employee about 106 million people, next to agriculture sector

• Produces more than 6000 products

• Contributes to around 6.11% of manufacturing GDP and 24.63% of service sector GSP

• 45% of the manufacturing output comes form SME

• SME exports accounts for 40% of the total exports

• Inspite of the number of people employed, GDP contribution and good manufactured, bank lending is only 16% for SMEs

• They have maintained an average growth rate of 10%

SME’s need CFOs for:

• Better understanding of financial matters

• Enable an instant access to capital needs

• Advice for financial decision

• Build credibility

• Beat competition and stay ahead

Opportunities available for CFO/VCFO in SME (growth perspective) are:

• Large companies in the MSME segment wanting to automate, be process driven, eventually plan for IPO an listing.

• Capital seeker and mid size entities intending to raise capital from investor and create shareholder value

• 2nd Generation entrepreneurs whose business would have been family driven till now and looking for process driven and professional management

• Distressed companies planning to turn around

• Startups intending to plan correctly right from the beginning

Roles of C'

CEO/COO/CIO/CMO/CTO/CRO and other CXOs - Reasonably defined and understandable.

CFO - All of what the above do.

7 Golden principles for those joining SME as CFO:

1. Get complete understanding of the financial health of the organization

Are you making money or losing money?
What are the different sources of revenue and how much revenue are you making?
What are your top 5 expenses?
Total payable and receivable?
How much money do you have in the bank?
Learn everything you can about the business.

2. Bank account: Ensure that only the CFO and CEO has access : Never should this be mixed with personal income. Use Capital for only growth initiative. It’s tough, but discipled approach in building the organization.

3. Have a good accountant or if the budget permits, outsource the work to an accounting firm. It is not about Journal entry, but a control function. You have preventive control, detective control.

Most new CFOs might not have experience of hiring the right person
Start first by reviewing different job descriptions online
Next, start slow in the interview process and learn as much as you can about best practices, and what are the important things that an account manager does
Talk to your network of peers and learn from them
Once you have a good idea on the type of person to hire, go full speed with interview process and select the best person for the job

4. Losing Money: The first order of the business is to stop bleeding. Spend judiciously, to cut expenses use 80-20 principle. If you have borrowings it will impact cash. Reduce it.

Review all expenses and start trimming where you can: This sounds simple enough, but this exercise is not for the faint hearted. You will have different people persuading to finance their project
Start with the big ticket items and walk your way down
If the company has debt, review the contract and negotiate for better terms and interest rates depending on cash flow

5. Budget. Most of the SME organization will prepare budget for the bank credit.

Built it on ground up basis, don’t be a compiler of input data, spend time with them, understand how this numbers have come and why it cannot be different, and break it up as month wise.

Don't just wait for the number to be submitted via email. Once you get the numbers, spend time with the different leaders of the company and understand ow they prepared the budget.
Being CFO means that you not only understand the big picture, but also understand the details, and how it is aligned with the overall objectives of the company
Frugality is a good virtue to have, however as the CFO need to learn how to balance things and company becomes more productive

CFO should know everything that is happening in the organization, and branding of being prudent is important.

6. Expenses Management:

Ensure a process in place for review and approval including headcount requests
Communicate across the company in your first 10 days of CFO
Approve basis budget and Cash availability

The moment you open the gates for expenses, there will be a flood. Don't spend anything unbudgeted. Very important is manpower. The decision for recruitment, headcount approval, has to be by CFO. It is a recurring cash cost for which you do not get a bank credit. You should weigh it against bank credit.

7. Familiarize yourself with compliance:

What are the different taxes, business permits etc. and when do we pay them?
How about government reports, when do you submit them?
What are the different legal tax strategies you can use?
Compliance is costly - non compliance is fatal.
Before signing any government report or other documents, ensure understanding. Asking the right question will save you a lot of trouble in the future.

If you don't comply with pollution control, there will be lock down, supply chain will be effected. Have zero tolerance approach for non-compliance. It is the law of the land. The benefit exceeds the risk of non-compliance. Every government paper you sign, you understand why and what is in there.

CFO attributes in a SME:

It is a riskier position to occupy than a role in a larger listed entity

Carful analysis of business fundamentals, strategy and products before joining; but with limitations on access to real data, particularly in private companies, the risk is apparent.

Develop a heightened awareness of the type of chief executive, with whom you work best alongside.

CFO is a partner to CEO – High risk, less reward initially, opportunity to contribute is high. There is a need for continuous education. We should not get carried away by the title, and gradually rewards will increase. Attending business school programs will help. On capital management.

The SME CFO should be holistic finance professional with a strong technical foundation and a keen commercial and analytical mind.
For finance leaders in corporate and professional services firms considering a move to a small business, the challenges and opportunities can be as interesting and diverse as the business itself.
Many corporate finance directors take the well trodden path to the CFO role in smaller and mid size organisation, with a key driver being the ability to take full ownership of a company's financial management

Capital Management:

Ensuring efficient financial management and making it a priority are essential tasks before value can be added through other activities
Private equity ownership also places a high degree of emphasis on the CFO's ability to deliver efficiency measures to improve business performance, whether through cost base transformation, improving controls or fostering a decision support culture within the business
CFOs will have to adapt to different culture, regulatory and economic environment, within foreign market while maintaining strong governance and controls and managing any currency exchange risk.
PE demands are different and higher. They have a greater requirement for a regular, consistent and in-depth financial information and analysis.

4 Roles of CFO for value:

Creating value: Developing strategies for sustainable value creation
Enabling value: Supporting the governing body and senior management, in making decisions, and facilitating the understanding of performance of the organization
Preserving Value: Asset and liability management, managing risk in relation to setting and achieving the organisations objectives and implementing and monitoring effective internal control system
Reporting value: Ensuring relevant and useful internal and external business reporting

CFO works closely with Admin, HR, M&A, Strategy, IT, Operations, commercial and legal departments.