Ashutosh Kharandate, Founder and MD, Marc Consulting and Dr Krishna Kumar N G share their opinions on the happenings in the SME industry and how the SMES can leverage finance for their benefit.
For anything in life or business, the opening is very important so is the case with organizations that does well when it starts properly, most of the time mistakes happen when an organization is putting finance together, many times they put up a proposal to bank and then umpteen number of times the organization goes back to bank saying we have fallen short of funds and project is over-run meaning the business plan was not done properly initially the assessment of upfront cost was not proper.
Proper assessment should along with the exigency and the proposal be sent to the bank, the latter is okay if you don’t take up the funds but going back to the bank creates a possible NPA situation and doesn’t looks good.
Most organisations mess up with working capital too, they start well but how much working capital you require is not evident on day one as any business takes time to pick up, you should avail a working capital cycle by right assessment and should be taken up for six months.
One of the common blunders done by SMEs are mixing term-loan and working capital, suddenly there is an opportunity available to SME where they have to buy a machinery it might take a bit of time for SME to bank and ask for a term loan for the machinery, it uses it’s working capital limit to buy this machinery, which is one of the grave problems by SMEs as the working capital required for operational reasons is blocked in a long term asset. As till the time it generates money it will take time for that money to come back into the system.
Suddenly, they get an order for which working capital money is required but it is not available creating a bottleneck, banks will initially check as to what has happened to the existing cycle. This is one thing where most organisations make mistake where they move their working capital cycle to term loan. An easy solution will be when an organization goes to bank and ask for certain limits which are anyways more than your requirements. If an organization is envisaging any opportunity in upcoming months, they should make an application to the bank today as banks take time to process.
Organisations should also note that they should have sufficient cashflows to ensure business keeps running, many times SMEs make the mistake where they move the money which is required for their profit generating ventures into new ventures which creates a problem as the new business will take time to start generating rewards but your existing business which was requiring normal amount of money needs more, suddenly it struggles for finance. Here, cashflows should be securitized before jumping into any other business.
For more such insights do watch the full webinar discussion on leveraging finance efficiently and prudently.