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)
]]>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.
]]>Pratibha Sharma
Senior Assistant Consultant – Finance and Strategy
]]>Profitability: Profitability is the primary goal of all business ventures. Companies built to sell must focus on profit maximization, expansion of customer base and specializing in the existing product and in a wide market. The profit to sales ratio when compared to historical results and industry averages need to favourable signifying efficient management of revenue and costs. For, BTG companies the focus should be more than make profits. The major consideration should be increase in the market share, investment in R & D and best quality resources thereby enhancing the quality of the product and constant innovation in products to become a reliable and long term player in the market. Companies can use the surplus cash for growth strategies, such as investing in research and development, expanding capacity and exploring new geographic markets. The focus is therefore on creating long term growth and sustainability for the organisation.
Cost: Cost containment strategies are widely adopted to ensure organisations meet their financial targets. BTS companies must incur expenditures that have an immediate impact on the revenues and financial performance of the company. The reduction in operating cost of a company is a good indicator to the buyer on the efficient utilization of resources and management of activities. BTG companies would incur expenditures on items creating an impact over a period of time like bringing in good quality resources, research and development and expenditures required for future growth. The financial and operational aspects of growth must be balanced during expansion of business. Cost control would be on items which do not have a lasting impact and does not match the intended outcome.
Capital structure: A company’s proportion of short term and long term debts are considered when evaluating the capital structure of a company. The debt equity ratio is an indicator of the company’s internal and external liabilities. It reflects the financial position of the company as it is a measure of the financial leverage. BTS companies should thrive to showcase good profit margins to attract buyers and maintain less long term obligations and improved liquidity positions. BTG need to make strategic decisions in maintaining favourable debt equity to ensure long term sustainability.
Asset Investments: BTS firms must focus to invest on creating a value for the company and a predictable future. Any investments on assets that are yielding substantial short term returns is favourable and to signal liquidity maintain favourable current asset ratios.
BTG invest in assets based on the expectation that this investment, which is intended to last a long time, will result in continuous positive income. These organizations concentrate more on the Asset Turnover Ratio. This reflects the management philosophy of owning the resources and being less vulnerable to increase in costs and volatility in the market in the long term.
Goodwill: A business acquires goodwill through best practises, customer service, innovation and good governance. BTS strive in creating a value for the company which is associated with loyal customers, brand, continuous innovation and trust in the market. More emphasis is on creating a Unique Selling Proposition (USP) which would provide a competitive advantage and define the business. When the company is sold, the buyer pays a notable amount on the goodwill earned by the company. BTG not only focus on offering best customer experience, but also on the quality of the products, long term relationships with customers and pricing fairness. The companies build goodwill over a period of time and penetrate gradually to establish a strong foothold in the market.
Patents and Trademarks: Corporate valuation relies greatly on a company’s intellectual assets such as patents. Business enterprises perceive patent portfolios as a demonstration of high level of expertise and specialization within the company. Patents also provide licensing opportunities. BTS focus on creating patents for their organizations as it increases the overall corporate value. BTG focus on constant innovation and believe in consistently improving the product/services. Patents are a part of the growth agenda, but the prime focus is on defending the products and markets from poaching, and creating a competitive advantage for the company. BTG companies create patents to exclude the competitors from exploiting the right to make/sell, more from a technology protection perspective than enhancing the value of the firm. They end up investing in related patents and standards to cover their technological grounds.
Capacity Utilization: A firm’s productive capacity is the total output it can produce within a given time period. BTS the focus would be showcasing themselves as a company utilizing near 100% capacity. This would indicate the buyers that the organization has enough work on hand and the cost per unit is also minimised wherein there is optimum utilization of resources. The firm is assumed to be using all of its fixed assets effectively; therefore the profits should be high. Two approaches that could increase capacity utilization could be by reducing the factors of production employed or move into smaller premises/ cut down investment on facilities. For BTG, the focus is to efficiently utilise the resources and capacity expansion to facilitate future demands and cope up with new orders. Firms in expanding markets may expect to have low utilisation while they build their sales and establish themselves in the market.
Finally, as novelist Nora Roberts says…”Know what you want, and work to get it!!!”
-Pratibha Sharma
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