How to use business management information to drive and measure growth
Small to Medium Enterprises are quite exposed to the changes in the external environment. In the earlier phases of their business life cycle and before maturity, SMEs fight for their survivals; some little mistakes and wrong decisions can result in devastating consequences on their going concern.
In this scenario, during the growth stage even if the managers are experiencing profits and increasing sales, significant threats stand around the corner: everything in this phase happens very fast and any organisational weakness and a weak business model could turn an extraordinary moment into a nightmare. It is essential that the SME chases profitable growth and generates cash and profit.
Some of the critical questions that owners and managers need to answer are:
Is the business profitable? Is the business generating cash? Is in the long term the financial structure (the gearin, the debt – equity mix) right balanced?
In this context, a sound understanding of the financial statement plays a central role.
Cash is different from profit: a capex investment is a cash out item and does not represent a cost , conversely, the depreciation is an non cash operational expense.
The need for financial understanding is critical and the business must be followed in at least three dimensions.
- The profit and loss to track the profitability. Is the business is able to generate profits? I.E. revenue covers costs.
- The financial statement to track the short term cash generation and to monitor the long term financial structure debt/equity mix.
- The business generate cash and the financial structure, the gearing, is balanced.
The decision makers will face the need to precisely understand and answer to the previous questions, the abrupt change in the environment during the growing stage will add incertitude that must be assessed via financial report.
Effective ways to raise capital to fund business growth
There are some fundamental questions to answer before raising capital.
Do I need external finance? Do I need debt or equity finance? Do I need short or long term finance?
A general suggestion is to look for external financing when you are at the investor ready stage. Is the company business model efficient? By reworking on the actual term and condition with your customers/suppliers, you may reengineer the cash conversion cycle by reducing the financial needs and improving the DSO, DSI and DPO.
Has the business considered to reinvest the retained earnings? By increasing the profitability and changing the dividends policies you may generate one of the best long -term funding: the auto financing.
To challenge the business model is a necessary step, because the chances to obtain external financing, in case the company presents weaknesses, is remote and unprofitable: the bank will apply higher interest rates and the venture capitalist will require harder term sheets and more control on the business.
The typical medium long term debt finance solution is a loan. The institution, a bank or a private FCA registered company, asks to repay the loan at fixed intervals against a predefined interest rate. This instrument is generally secured by collaterals such as the company’s assets and by covenants, operational constraint, such as limitation to distribute dividends before the repayment of the debt.
On the other side, long term financing could be provided by equity. Equity must not be repaid but is expensive, the company must give away a percentage of its control so that the term sheet and the conditions applied by the private equity could be quite unaffordable.
My personal suggestion is to consider a debt solution if the company is profitable, alternatively a debt/equity mix within a reasonable gearing. If the control is given away, the company should expect to lose some strategical drive and conflicts could rise from the new investor. The venture capital firm could interfere in the company management, they could impose a heavy and bureaucratic reporting.
It is very important that the SME recognises the timing of the underlying asset that needs to be funded. The rule of thumb is that current asset must be covered by current and short term financing, while fix asset needs more medium and long term instruments.
The working capital could be typically covered by short term financing such as overdraft and factoring invoices. Fix asset is covered by long-term financial instruments.
How to avoid Overtrading
Overtrading often occurs when companies expand their own operations too aggressively with evident issues in term of working capital and financing. Hyper growth represents an opportunity and a threat in the SME business life cycle. This could be a unique opportunity to scale up in a very short time but the risk of over trading is high.
The momentum here is to transform overtrading in profitable growth, but what are the steps that could minimise the risks of overtrading and ride the unique opportunity to scale up quickly?
The first and basic need is to start this phase with a ready and consolidated business model. The company should have developed a consistent and coherent bottom up strategy. Is the market we are targeting in line with our strategy? Some trade off choices between profitability and term and conditions could be suitable: focus on less profitable customers in exchange of better payment terms.
Another tactical area to focus on is the cash conversion cycle. The company should have defined its Cash Conversion Cycle. For instance the company could choose to get on board customers that pay at 60 days instead of 90, even if less profitable. Another component is to control the DSI, days on inventory. The company should operate as lean as possible. The goal is to minimise the lead-time from the receipt of the raw material to the finished good. The DPO is related to the suppliers’ payment and in general the SME tends to match it with the DSO. My suggestion is to apply the norm because it would be risky to annoy the suppliers and lose their loyalty.
In case you still face financial gap in the hyper growth phase, it is possible to access to short term external financial instruments, such as factoring and overdraft. This is expensive, could reduce the operational freedom ie the need to balance the overdraft without notice and introduces some kind of accounting complexity.
Overtrading is risky but if the SME business model is strong and scalable, it is worth taking. It represents a unique opportunity to quickly scale up organically the company.
Financial Decision Making
Any business decisions will directly / indirectly impact on the financial statements. For sake of simplicity let’s simulate the impact of a strategic and an operational choice that typically decision makers are asked to take.
What is the financial impact of a recurrent strategic decision such as a new investment in a new technology or in a new product line? The effect of this decision will be in term of capex investments and financial returns. The cash out will impact in the financial statements and the returns will flow, hopefully, as additional profit in the P&L. What about product pricing increase? This will directly impact on company revenue, in their receivable and in the cash collection.
Operational day by day decisions such as changing the collection days, will impact immediately on the financial statement and in the generation of cash.
All the managers and the decision makers need to have a sound financial knowledge to evaluate the consequences and effects of their choices. Additionally the financial reporting and planning culture should be promoted to all levels and functions, instead of being considered a statutory disclosing exercise, a waste of time keeping few qualified accountants busy.
The Importance of Business Plans
Determine the financial impact of the business decision is important, but not sufficient. The backward looking approach is fine but it becomes effective only if, complemented by forward looking actions. The importance of a control system lies in the fact that it is able to outline what did go wrong and to identify the future corrective actions to bridge the gap.
The growing stage is a complex phase in the company business life cycle, the environment is difficult to predict, there is limited visibility and high uncertainty of the future outcome. In this context there is a prolific school of thought, that recons no utility in the planning and budgeting process especially in erratic periods. Provided that there is low likelihood to hit the projections, better not to produce the budget and save the time and costs. In my opinion the more the environment is unstable the more budgeting and planning becomes key to success. In an unstable environment the company certainly needs to draw a possible scenario, a reference to follow, to evaluate the deviations of the actual results over the projection (backward view) and take actions to recover (forward view). The scenario comes from the company strategy and it will be used as an operational control system to manage the company consistently.
The likelihood to hit the financials in term of profit and cash are low but the budget needs to be accurate not precise. It does not matter that you hit the sales figures and you generate profit in the exact way you expected, but it needs to generate sales and profit in the direction to what was planned.
Without a planning process the company is basically blind and do not have any reference to compare. The company is unable to answer to its basic questions: Are we following the right path ? Are we executing and generating the right level of cash and profit?
More over the budget must be exploded into relevant and operational KPI’s and cascaded through out the organisation to grant an integrated and coordinated system of control.
All the organisation will look at the financials that are more relevant for their functions. Sales and Marketing will look at the Sales and customer satisfaction. Operation to headcount productivity and finance will keep an eye to cash collection and disbursements.
Advice for Planning and Funding a Growth Period
Do we have a growth strategy ? Is the growth aligned to our strategy and mission?
The company must follow a broad strategy, a SME simply has not enough resources, needs to be focused in some market / product. It could be that the strategy changes over time but this must be controlled , clearly communicated and cascaded thought out the organisation. At the strategic level the company should also determine different growth paths, such as should we grow organically or by external acquisitions? The latter is faster but expensive and very difficult to implement especially if there isn’t a consolidated strong business model.
Are we growth ready?
The company needs to have in place some kind of control system and some KPI’s to follow: A sound financial planning system enters in the equation in order to evaluate the profitable growth in term of profit and cash generation.
If the company is not hitting the target it needs to understand why and detect the most appropriate corrective actions. Maybe the overall strategy should be revised, may be some processes must be reengineered.
Do we have the right talents in place?
Developing a strategy is a question of people. You need the right mix of talent and skills playing the same team. On one side the visionaries able to set up the path and on the other side individual able to implement , execute the strategy and reporting the results.
Mario is a seasoned finance executive, who serves as CFO for fire & security, food, energy and clean-tech global companies. He has turn-around experience and managed to re-finance growing businesses. Mario is the Managing Partner at TML Venture Ltd. and supports companies in finding tailor-made investment solutions. His industry focus is on renewable technology, energy and food companies.
DIGITAL FINANCE: UNLOCKING NEW CAPITAL IN DISRUPTED MARKETS
Krishnan Raghunathan, Head of Finance & Accounting Services at WNS, explores how a digitally transformed finance department can give enterprises the ability they need to improve cash flow and revenue through better use of data and improved analytics-driven visibility.
Businesses everywhere are scrambling to recover lost revenues and protect cash flow. But as countries globally grapple with a dreaded second wave of the pandemic, imposing far more stringent localised lockdowns and new restrictions, it is set to be the hardest winter in living memory for many sectors.
The likelihood of winter peaks, so often the saviour of sectors such as travel and hospitality, benefitting businesses is diminishing rapidly. While many have pivoted to a greater or lesser degree, few have been able to offset the impact of falling revenues on cash flow. Even retail, riding an e-commerce boom in many regions, is finding itself in choppy waters, with 17 percent of consumers switching brands due to the economic pressures and changing priorities caused by the pandemic.
As one McKinsey article notes, “With some companies losing up to 75 percent of their revenues in a single quarter, cash isn’t just king – it’s now critical for survival”. Where then do businesses find new sources of cash to sustain their operations through the coming months?
Tapping Overlooked Cash Opportunities
For many, the answer could depend on whether they have digitally transformed their finance department. Why? Because many organisations are sitting on unidentified opportunities, funds that could be vital in shoring up businesses over the next few months or plugging the gap between operating costs and government bailouts. Yet those that have been slow to start their digital transformation journey are at a disadvantage;. At the same time, it is possible to identify these hidden seams in an analogue organisation, the process is time-consuming, manually intensive and, without the right digital tools, prone to human error.
Where deploying digital tools helps is by bringing speed, automation and reliable data to the fore. Connecting them with digital finance and accounting systems can give businesses clear insights into how money is being spent, where wastage is occurring, and where opportunities for optimisation exist.
It might be something as simple as automating the accuracy checking, issuing and chasing of invoices and late payments. This could reduce errors and invoice disputes and ultimately lead to faster payments. Accuracy and organisation are also important in billing – better records enable faster billing for work completed, and in turn, should deliver quicker payments.
It could also be around having the ability to review the supply chain and procurement data and identify where a supplier is subsidising a larger customer’s product line through drawn-out payment terms, or where a variety of vendors are on different terms across the business. Using that data and overall knowledge of the business to negotiate better terms that work for both supplier and customer can create new opportunities. It could even be to identify late-paying customers, determine the reason for late payments, and use that intelligence to develop products or financing solutions that continue to support those customers (and improve loyalty) without increasing the burden on the balance sheet.
Generating Reliable Insights for Faster Decision-making
To do any of these manually would take months, generating data slowly that would quickly go out of date. But digital finance departments have evidence they can trust to inform business decision-making. That’s because old, manual processes built around Order-to-Cash lack the flexibility and agility that businesses require in today’s markets. The fact is that even before the global pandemic crisis, the pace of digitisation across all sectors was demanding new approaches to finance and book balance.
The opportunities are significant – from cognitive credit and improved forecasting accuracy to enhanced customer analytics. All use similar tools, based on artificial intelligence and quality, trusted data. Cognitive credit can be deployed to quickly make decisions on whether to advance or restrict credit, based on individual company positions and available data. Doing so enables businesses to either capitalise on opportunities (for instance, agreeing credit for a supplier that has run out but is a supportive and integral partner) or avoid risk (in the cases where a business might be in administration).
With more accurate forecasts, businesses can better manage their currency purchases and deposits, selling currency that is not required or buying more where predictions identify an upcoming demand.
It is the same with customer analytics – with a greater understanding of customer needs, businesses can make decisions based on the right mix of the product (and how it meets demand) and supply chain suitability (such as production costs and location in relation to customers).
In many ways, the events of the past year have accelerated the process. In doing so, the problem is the pandemic has also accelerated the speed at which failure to act can lead to obsolescence. Therefore, it is vital that businesses, and more particularly their finance and accounting departments, kick start their digital transformation. This will enable them to deploy the tools and analytics that is needed to capture data, generate insights and drive fast, accurate decision-making to uncover previously untapped sources of cash and reverse revenue degradation.
The Importance of Digitally Enabled Finance Teams
Forward-thinking CFOs have already begun the process of digitising their departments, but for those that have been slow to start, now is the time to push forward. It is only through digital tools and analytics that finance leaders can identify both the internal and external opportunities to recover revenue and improve cash flow. Whether that’s releasing working capital, minimising revenue loss and accelerating revenue recovery, reducing total cost of ownership or enhancing customer retention – only digitally enabled finance teams will be in a position to capitalise and, ultimately, bolster business performance during what will be a trading period like no other.
About the author: Krishnan Raghunathan
Krishnan Raghunathan is the head of Finance & Accounting (F&A) practice and operations at WNS. He also leads the international delivery locations in China, Costa Rica, Spain, Sri Lanka, Romania, The Philippines, Poland and USA.
Prior to this, Krishnan was Chief Capability Officer for WNS, in that role he headed Horizontal practices across Finance & Accounting, Customer Interaction Services and Research & Analytics, Transformation & Process Excellence, Program Management (Transitions) and Solutions development.
He has more than 27 years of experience across Finance & Accounting, Business Process Management, Sales Solutions and Capability functions including 7 years in Accounting practice.
Before joining WNS in 2013, Krishnan led several challenging roles at Genpact, supporting strategic deals and consultative selling. In addition, Krishnan was also the business leader for a number of industry verticals at Genpact, including hospitality, transportation, logistics, media and professional services
Krishnan is a Chartered Accountant, a Certified Six Sigma Green Belt and a trained Six Sigma Black Belt
NAVIGATING SUDDEN DIGITAL ACCELERATION – HOW MERCHANTS CAN KEEP UP IN A NEW AGE OF PAYMENT INNOVATION
James Booth, VP Head of Partnerships, EMEA at PPRO
Recent months have brought momentous change for businesses across the globe. Needless to say, the pandemic has had a colossal impact on the retail sector in particular. For certain industries, the crisis has catapulted society further into the digital world; technology that was predicted to be adopted over the coming years is now on track to be embraced in mere months.
However, local lockdowns for example in the UK continue to force shoppers away from brick-and-mortar stores and onto online platforms to purchase a range of goods. As a result, we are seeing new user groups embracing e-commerce and digital payment methods at a much faster rate than anyone ever thought possible. These new consumer habits are taking root and are likely to become preferences that persist long after the pandemic.
As we continue to hurtle into a new digital era, there’s an unprecedented urgency for merchants to be proactive – offering a range of new payment offerings. As digital payments increase, offering preferred payment methods can unlock a whole new world of opportunities. The retailers seeing exponential growth are the ones who have tailored and localised their payments offering to a global audience.
The pandemic has propelled demand for Local Payment Methods
Today, consumers have an even greater desire and need for frictionless shopping experiences. Social distancing is facilitating the surge in e-commerce, increasing demand for digital payment methods over traditional cash and card payments.
Before the pandemic, the world was already on route to becoming a digital-first society. Some regions were ahead of others; for instance, from the PPRO Payment Almanac, 56% of online transactions in China were already conducted via e-wallets, compared to 25% in the UK. However, now we are seeing increased demand for these types of payments across the globe.
Catering for a new online customer
Whilst typically the global digital payment revolution had been led by Gen Z and Millennials, elderly consumers are set to drive the e-commerce market post-crisis. In fact, a recent study by Mintel revealed that 43% of those aged 65 and older have shopped more online since the start of the crisis. This is a stark contrast from back in May 2019 when just 16% of the same age group shopped online at least once a week.
Ongoing consumer needs for increased convenience and safety during the pandemic, have sparked a shift towards online shopping and away from brick-and-mortar. For example, groceries have seen a meteoric rise in online ordering; according to PPRO’s cross-border engine, online purchases of food and beverages are up 285% since the start of the pandemic.
With new curbside and buy online pick-up in store (BOPIS) programs, the typical cash and card payment methods will be harder to maintain. Now, merchants must offer e-commerce, and implement digital payment options at checkout. Recent data shows up to 80% of shoppers across Europe’s three largest markets (UK, Germany and France) will now make at least half of their purchases online.
We are also seeing the rise and popularity of pay-later apps like Klarna and Afterpay (Branded ClearPay in the UK) to help offer relief from the economic impacts of the virus. Just last month, Klarna was crowned one of Europe’s biggest private owned financial technology providers – with nine million consumers in Britain having used the service, and 90 million users worldwide.
Shoppers need flexible payment options. For merchants, extending many different payment options that cater to different consumer groups can provide diversification and enable growth.
Get ahead, or get left behind
This sudden digital acceleration puts merchants at a crucial crossroads. Embracing new innovations in payment methods has the power to open brands up to a wealth of new customers, whilst satisfying the changing needs of their existing customer pool. On the other hand, failure to offer a variety of digital payment methods can severely limit brands – therefore impacting future growth and success.
As businesses continue to navigate the ongoing ramifications of the pandemic, merchants will eventually face a digital arms race to create the best possible online experience. Those who understand this and make the checkout experience a top priority will succeed, and those who stick to their guns will be left behind. The failure to meet customer preferences during the payment process means many customers will abandon baskets at the very last hurdle. In fact, a study by PPRO 44% of UK shoppers abandon a purchase if their favorite payment method isn’t available.
While recent events have put huge strain on both global economies and consumers, it has also birthed a new age of payment innovation. New offerings such as the rise of Facebook owned, WhatsApp payment features or PayPal and Venmo enabled QR code checkout are showcasing the acceleration of this trend. Financial technology is helping to keep humans connected and provide access to the goods and services they need. Digital adoption will only proliferate, so merchants must act now to get ahead of the curve.
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