Why are financial advisors imperative for MSMEs?

Why, how and when should small businesses or MSMEs consider hiring financial advisors? Manu Rishi Guptha, CEO of MRG Capital answers this and many other questions for us.

Why are financial advisors imperative for MSMEs?

The pandemic was a time of a sea change for everyone. It prompted introspection about money and wanting higher returns than before, especially for small business owners.

However, for MSMEs, the changing economic landscape and markets made staying afloat a daunting prospect for them. In this scenario, financial advisors are just the right people for small businesses. They offer financial strategies and reengineering services to MSMEs who lack financial discipline resulting in lower RoIs for them.

But as most MSMEs usually work on a limited budget, hiring a financial advisor is a costly affair for them. In such a scenario, how should they choose the right financial advisors for themselves? To obtain an answer to this and a few other questions, SME Futures had a one-on-one conversation with Manu Rishi Guptha, Founder and CEO of MRG Capital, a SEBI Registered Portfolio Management Services provider.

Here are the edited excerpts from the discussion.

Why do SMEs need professional financial advisors?  

Currently, there are around 40 million+ SMEs which are proving to be the sources of product and service distribution. They have paved the way for job opportunities for millions of people in India. According to different government reports, SMEs are generating 80 million+ employment opportunities, contributing around 8 per cent to the GDP of the country. SMEs are the backbone of the Indian economy but at the same time they face myriad risks in terms of volatile demand, supply issues, commodity inflation, currency risks, etc.

A financial advisor for an MSME should not only concentrate on managing their surplus funds but should also help them in tackling the above-mentioned risks. They should help them to choose the right investment options that will benefit them by protecting their seed finances and providing them with their desired return requirements.

Also Read: BSE signs MoU with Goa govt to promote SMEs

Financial advisors not only help in investing money, but they also monitor the performance of a company’s investment portfolio. Plus, for a founder, working alongside a financial advisor will definitely help to reduce their financial stress, increasing their productivity and maximising their profits. In short, SMEs need a proper financial advisor to guide them towards not only growing but also thriving. SMEs can use the services of a professional financial advisor for:

  • Better investment of surplus cash
  • Budgeting and forecasts
  • Hedging commodity and currency risks in derivatives markets
  • Better negotiation of terms with banks and other creditors
  • Structuring employee compensation like ESOPs
  • Better deal structuring in case of M&As

And above all – educating/informing the promoters about all the macro factors that can have a ramification on the business in the near or distant future.

How should they choose the right financial advisor? 

A small business owner always has the necessary plans for the future in place, but it is difficult for them at times to strategically invest in the future when they need to make decisions about every fund allocation in the company along with focusing on sales growth, cost-cutting, personal decisions and many more such things, all on their own. That is why, it is always better for them to seek the help of a financial expert who can suggest strategies to them for the betterment of their business.

Choosing a financial advisor for an MSME should be based on their targeted goal because every business is different and unique in its own way. Apart from opting for a financial advisor who has the right professional qualifications, credentials and experience in handling financial assets, MSMEs should preferably select someone who has some working knowledge about their field of operations and possesses clear and updated information about all the macro factors associated with it. The financial advisor should be more focused on the future growth of the business.

Also Read: India’s startup economy stares at deepening funding winter in 2023

A good financial advisor should be passionate about wealth creation. They should be able to provide the bigger picture for your business in the long run. But ultimately, they should be more focused on protecting your money instead of only making it grow. The core values of both the parties should also be aligned to bring in the best results for the business.

MSMEs face quite a few challenges, one of them being access to capital. How and what kind of assets should they invest in? 

Assets play a very big role in intensifying the overall valuation of a business and in generating the revenue to continue the business. As a small business owner, a founder needs to be always aware of their basic assets and how they can be utilised to their fullest to provide proper returns for their business.

A good business asset is that which acts as a very beneficial resource and has good economic value which will be of benefit in the future. Most Indian MSMEs don’t have access to long term sources of capital like IPOs, QIPs, ECBs, etc., and most of their short-term needs are met by the working capital facilities offered by banks, which is far more expensive than all the other sources. So, it is imperative for them to judiciously choose assets which are mostly liquid and can be converted into cash for their business needs.

Bank deposits, liquid funds, real estate or gold which can be offered as collateral to banks to get quick loans are preferable investment options for MSMEs. Volatile assets like equity or risky ones like offering credit to other companies are best avoided.

More than a quarter of the MSMEs in India lost a market share of over 3 per cent due to the onset of the COVID-19 pandemic. Due to this issue, a government scheme called the ECLGS (Emergency Credit Line Guarantee Scheme) was set-up to support the micro and small businesses in 2020. This governmental support in getting credit by way of the ECLGS schemes is going to come to an end in 2023 and the MSMEs will have to get used to costly credit again. Commodity inflation, wavering demand, supply chain issues, a weakening export demand due to global recession fears and a volatile rupee are the main trends to watch out for in 2023 for the MSMEs.

MSMEs have to incorporate a very high input cost and a very high credit cost in all their business model assumptions.

Also Read: Union Budget 2023-24: Optional tax regime provides relief to low-income bracket: FM

Inflation can be like a double-edged sword for MSMEs. Inflation can bring about consequences which can impact the operations of MSMEs in different ways. It can increase their overall business expenses. As the pricing of raw materials rises, so does the cost of production and other operations. Input costs for MSMEs increase when the demand for their products reduces due to an increase in prices.

Most of the MSMEs don’t have pricing power and inflation is hard to manage for them. Any lag in the passing on of higher costs and renegotiation of contracts would be detrimental for them. Inventory management becomes crucial in times like 2022 when a steep rise and fall in commodity prices was seen.

The hiking of interest rates by RBI to manage inflation will hit MSMEs both in terms of reducing the demand for their products and in increasing their financing costs. Therefore, refinancing of debt during low interest rate periods becomes crucial.

High supply-chain costs and narrow profit-margins can also impact their business growth negatively, leading to difficult times for them.

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