Financial planning - a must for SMEs

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Bikky Khosla | 30 Aug, 2011
Recently a RBI Deputy Governor has cautioned the banks that they should be careful while granting loans to small and medium enterprises. The comment is unfortunate, particularly the timing hurts as the SMEs are reeling under pressure from high credit rates and high inflation, although the thinking has some validity from a banker's point of view.

But Indian SMEs always find it troublesome to secure finances even at the best of times. While their capital base is weak, sometimes even to the level that they often find themselves in a position unable to offer appropriate collateral security, big banks always seem to refrain from advancing even medium-term loans for buying equipment and machinery. As a result, most SMEs find it easier to follow the conditions of local money lenders than those laid down by commercial banks.

Despite several credit recommendations by the Reserve Bank of India (RBI) and promises by the government, it seems that the situation is not going to change much in the near future. And in this scenario, financial planning is a must for SMEs to have some fair idea about how to make the best of the available resources.

I never believe that it is easy or even possible to start and survive a business without external loans, but here my point is that SMEs should have a very clear and careful financial planning, right from starting up the venture throughout its whole life-cycle. For a start-up, for example, no matter whether it manages the initial capital from banks or through personal borrowings from friends and relatives, it is important to be clear about when the cash flow will start or when will it start earning profit.

For any business, it is essential that long-term and short-term capitals are fully utilized. While long-term finance should be utilised for acquiring fixed assets and partly to finance current asset, the latter should be used for acquiring current assets like raw materials, stock in process, finished goods, trade debts and investment.

Besides categorising the needs into long-term and short-term requirements and dividing the financial needs accordingly, a SME must also try to plough back a good part of its earnings into the business to ensure growth and stability. Such a policy will not only pay rich dividends in future but also help getting loans from external sources in time of distress or when you want to go for expansion.

Coming back to bank financing, I would like to suggest the SME owners to collect detail information about all available special loan schemes designed particularly for the small scale enterprise sector. Also, never accept defeat easily even when a bank does not show a helpful attitude. Just try another bank or another branch or if possible wait and apply again after some time when the previous manager changes.

While dealing with a banker, approach tactfully and try to know what he is thinking and looking for. Keep in mind that tall talks does not carry you very far and you must have concrete plans and past performance. For bankers, your business plan speaks volumes. So, have a look at your business plan again and go for any improvement if it requires.