Created on 2018-05-30 12:04
Published on 2018-05-30 13:34
MSME- Why does it need CFO Services?
MSME needs CFO services to plan and then execute the plan within financial constraints and within specific time.
The entrepreneur is quite clear at the beginning about his initial inflow of finance and possible picture at end of first year in the business. As it starts rolling, the expected picture starts changing with actual numbers. While these number changes, the focus gradually gets diverted to activities that drove changes in the expected picture. Some of the drivers that drive this change in expected picture are
- Sales projection variation
- COGS variation
- Opex variation
- Capex variation
- Working capital variation
- Funding round variation
- Pricing and costing variations
It is important to note that these variations have severity depending on their value impact, the speed at which they occur, per unit level impact and the ability of the promoter to handle these variations so that the cascading effect is kept as less as possible.
The real need of the CFO services is in helping promoter to measure these variations, to report them, to prepare the response, to do all these in the time frame and within the resources, to reduce the impact of these variations on next period i.e. at least next period should have as less variation as possible and above all to do this almost every month.
The people and process mapping is very fluid in the beginning to handle the variations and keeps on accumulating unfinished tasks that cascades and create bigger variations.
Only 17% startups prepare their business plans. Normal duration of start up phase is 1000 days i.e. 3 years.
CFO services add great value at start-up stage, continue their use till start up phase is over successfully. The needs of CFO services are acute when the startup does not have business plan at beginning. When future picture is undefined, expectation gap is huge.
Remember cost of CFO services has to be compared to the potential upside that you as an entrepreneur can derive. Having right CFO services need to be combined by promoter's commitment to execute the plans. For a promoter, the business is at stake, besides money, life, career and reputation and all this has to be done on priority and with commitment.
Even if the startup has plan but variations are negative, then also the need of CFO services is severe. 90% start up fail in 2-3 years i.e. the normal duration of start up phase. This is the period in which CFO services should be used to mitigate the impact.
For businesses that have crossed 3 years, the scale of their operation and their scale up ability is important. If these businesses have merely survived then it is time to use CFO services to explore several possibilities of scaling up, opex optimization, pricing , costing etc.
Having a qualified accountant or auditor or having knowledge of finance does not bring you the exposure the experienced CFO can bring. Additionally knowledge of own business is essential but knowledge of several other businesses to the CFO can bring fresh insight to the promoter.
Another area where CFO services are critical is when the entrepreneur wants to exit or is unable to run the business viably or entrepreneur wants to retire.
Only 3 out of 10 businesses go to second generation.
The unplanned exit or closure of business gets zero value for goodwill besides leaving poor reputation with clients. It is not necessary that your second generation will be interested in managing your business. There will always new entrepreneurs willing to enter in your business. CFO services can help you to find the buyer as per your requested profile. After finding right exit, the CFO services ensures smooth transition and handovers. The exit needs proper planning at least for 5 years to get the benefit. Always remember if your business can not run without you then you will not be able to sale it.
Succession planning is another area where CFO services can facilitate smooth transition, clarity on valuation /roles, smooth handovers, early grooming of next generation etc.
Finance is not the root cause of the problems but it's poor management is.