If you ask anyone as to what’s holding back micro, small and medium enterprises (MSMEs) from scaling up and becoming successful large corporations, chances are that almost everyone will blame the lack of adequate funding.
Such a response would hardly be surprising. Funding is, after all, a major hurdle. In recent months, many MSMEs have either shut shop or significantly reduced their operations due to lack of funds.
But the less spoken and, unarguably, the single major cause for MSMEs not experiencing a break-out growth, even if they are well-funded, is lack of mentorship. In India, unlike in Israel where mentorship is a strong culture (no wonder it has come to be called a start-up nation), this concept is still in its infancy.
Some industry bodies such as Coimbatore-based CODISSIA have been conducting knowledge-sharing sessions to help early-stage entrepreneurs deal with the potential challenges they tend to face while running their businesses. But the practice of having a dedicated mentor, a friend, philosopher and guide, who by virtue of his/her experience handholds entrepreneurs and help them navigate pitfalls they typically face is sorely lacking. Their presence is akin to GPS helping a traveller reach an unfamiliar destination.
In the absence of a mentor, the entrepreneur who is good in making a product or developing technology, gets bogged down by lack of knowledge in other areas — be it labour relations, accounting, fund raising or even marketing. This acts as a millstone, weighing down the enterprise and preventing it from achieving its true potential.
Talk to a cross-section of MSME owners and it soon dawns that financing is an area they need the maximum help. While it is true that conventional sources of funding, bank/NBFC credit, to the MSME sector have declined in the recent past, new-age funding avenues have opened up.
Angel investors, private equity funds and venture capitalists are keen to fund small enterprises. But lack of knowledge is preventing entrepreneurs from tapping these sources. They keep knocking the doors of banks who lend only on the basis of collateral. A mentor would have shown them the way. He/she would have also explained that the new-age funding may not work for all.
New-age funding
There have been instances of MSME entrepreneurs going for new-age funding without realising the expectation of those investors who typically seek higher returns and a clear exit strategy in a few years. Not all businesses, except those that can grow rapidly, lend themselves to Angel or VC funding.
Even when it comes to conventional funding options, entrepreneurs need to distinguish between the type of financing — fund based (overdraft, cash credit, bills finance, demand loan or term loan) or non-fund based (letters of guarantee or letters of credit) that will suit their need. Many a time they access the wrong financing option and end up in a financial crunch apart from paying a higher cost.
Often MSMEs find themselves in a financial crunch by not estimating their funding needs properly. Entrepreneurs tend to focus on their immediate needs rather than plan for a year or more.
They fail to constantly monitor the receivables, stocks and payables and, consequently, get into trouble even if one debtor delays the payment. Forced to borrow at high rates to bridge the shortfall in cash flows, they end up in a debt trap. A mentor would have suggested a buffer when it comes to cash flow to deal with temporary mismatch of funds.
The most common mistake businessmen make is not maintain accounting hygiene, pay taxes properly or realise the benefits of a clean balance sheet. They inevitably mix-up personal and business funds and this diversion of funds hurt them dearly when they approach institutions for funding. A mentor would have sensitised the businessman about these things.
Funding apart, a mentor can help the entrepreneur comply with law, adopt best practices when it comes to handling labour, manufacturing process and caution him/her about technological changes that could impact the business.
In other words, a mentor identifies an entrepreneur’s strength and helps to bridge the gaps in expertise.
The recent reduction in corporate taxes has only increased the importance of mentors. With firms taxed at 30 per cent and corporates (those that are incorporated after October 1, 2019) at 15 per cent, many MSMEs would want to convert themselves into a company. After all, lower taxes will enhance their cash flows.
But such a move will come with higher compliance needs and even higher non-compliance costs. A mentor will be able to help the entrepreneur take a call if such a move is indeed beneficial in the first place.
Firm vs company
But running a company is very different from managing a firm. When there is a credit crunch a firm can borrow from any known person but that cannot be done by a company. A private company will need a company secretary and an auditor. They do not come cheap.
A company needs to maintain its book of accounts properly and submit various returns periodically. It will be an enormous burden on entrepreneurs who are not up to it.
Finally, a culture of mentorship will not evolve in the country unless successful businessmen allocate quality time and effort to help others find their feet. They should see this as their pay back to society. Taking a few entrepreneurs under their wings will help in a big way. After all, the MSME sector is the second largest employer in the country after agriculture. It accounts for a third of the manufacturing output and 40 per cent of the country’s exports.
At a time when big industries are automating and shedding jobs, the MSME sector is the only hope for the millions of youngsters who are entering the job market every year. They alone can ensure that India’s demographic dividend does not turn into a demographic nightmare.
Also, a vibrant MSME sector will result in economic buoyancy and fuel GDP growth. This is an outcome a ‘been there, seen it all’ businessmen can live with.