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Kumaran Padayachee Of Spartan SME Finance Unpacks When You Should Apply For Funding And What Strategies To Have In Place To Secure It

There’s a big difference between funding that will help you grow your business, and trying to plug a self-inflicted cash flow problem. Kumaran Padayachee unpacks the difference, as well as what funders look for and how businesses can build better cash flow bases.

Nadine Todd

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Vital Stats

  • Player: Kumaran Padayachee
  • Company: Spartan SME Finance
  • What they do: Growth finance, bridging finance and specialised asset finance for the SME sector
  • Visit: spartan.co.za

When do most business owners apply for funding? For some it’s because they suddenly — and urgently — need cash. For others, it’s the culmination of a long-term growth strategy that requires additional working capital to invest in new equipment, people, premises or marketing.

The difference can make or break a business. Do you have a strong base to build from, or are you trying to plug a hole in a leaking ship?

Spartan SME Finance is an alternative funder that focuses on the SME market, ranging from businesses with a turnover of R5 million right through to hundreds of millions. The key to alternative funding solutions though, is that they should be accessed to help you grow.

Spartan CEO, Kumaran Padayachee, unpacks the key elements business owners should have in place to build sustainable businesses with healthy cash flows, and how this will place them on a better footing to secure growth funding as well.

1. Know your numbers

A key success factor in all growth businesses is a focus on internal financial management. “As businesses move from start-up phase into a growth phase, considerations around financial management, forecasting and overall strategic decisions require a higher-level resource than a bookkeeper whose role is to do the books,” says Kumaran. “Someone must be responsible for the business’s financial portfolio, whether that’s a senior financial manager or a financial director.”

Kumaran and his team interview hundreds of business owners each year, and this key area is a clear gap for many businesses. “Entrepreneurs come from many diverse backgrounds. A few have accounting or BCom backgrounds, but most are subject matter experts. They have marketing backgrounds or industry-specific skills. They’ve never studied finance and their decision-making isn’t influenced enough by the numbers.

Related: Spartan Technology Rentals: Kumaran Padayachee

For example, we often analyse a business that has applied for finance and discover that their pricing is incorrect and they are actually undercharging for their product or service. There are clear gaps in their strategy and understanding of product/market fit and a lack of access to market. There are also gaps in how gross profits, margins and pricing formulas work. Put this all together and you have a business that is making less profit than it should, which means less cash is coming into the business, resulting in cash flow problems. Additional financing won’t fix the problem — but financial insights will.”

The lesson is simple: Invest in a financial manager or director sooner rather than later. “Having a financial head offers SMEs two clear advantages. First, their financial housekeeping is in order and up-to-date. You can’t apply for finance if you don’t have up-to-date management accounts and realistic forecasts. We often find business owners applying for funding and they need the cash immediately because they haven’t had a clear view of their financials to see what was coming; the problem is that these businesses tend to have poor management accounts, which delays the process because we can’t get a clear view of the business.

“Second, if the business owners had a tight hold on their financials, they could plan for future requirements, or not need financial assistance in the first place. Finance should be for growth — not to plug cash flow problems.”

2. Focus on a healthy working capital cycle

It’s an all-too-familiar scenario: A manufacturing business needs to purchase raw materials and pay their suppliers within 30 days. Meanwhile, it takes 30 days to manufacture the product, they sell it after a further 60 days, and then another 30 days pass before they are paid. It takes 120 days before the manufacturer sees their cash, and yet they need to be able to fund a production cycle and pay their suppliers.

“The key is to recognise your cash flow cycle and through forecasting be able to manage it,” advises Kumaran. “You can approach your suppliers and negotiate 60-day terms. You can negotiate with your debtors to pay earlier. These are the levers of the working capital cycle that need to be managed to minimise your cash crunch.”

From Kumaran’s perspective, a strategic view of working capital is essential if you want to scale, but there are many basic areas that need to be addressed before a business owner can start focusing on strategy.

“For instance we have businesses with a R30 million turnover that approach us for R5 million in finance. These are not small start-ups. They’re established businesses with decent turnovers. And yet they can’t give us up-to-date management accounts. We need debtors, creditors, management accounts and the last set of financials to evaluate a business and whether it can service the loan. Financials aren’t good enough. We live in a volatile world and a lot changes quickly.

“Management accounts and a debtors report shows us who owes you money, but more importantly, how you manage the people who owe you money. We see this more often than we can count: business owners who are owed a lot, and yet they aren’t collecting their cash.

“A company’s debtors age tells us a lot. We can see how you’re exposed, how many people owe you money, how good or bad you are at managing that, and who your bigger customers are. We can see the balance between your debtors and suppliers. Any accounting system today can capture this information, but is it up-to-date and are you reviewing it? Without these figures at your fingertips, you can’t have a firm grip on the health of your organisation. A healthy working capital cycle is the lifeblood of a business. It doesn’t matter how much money you’re owed if you can’t pay your bills.”

3. Realistic forecasting can make or break you

spartan-sme-finance

When you’re in a scale or growth phase, it’s essential that you lift your head beyond simply the survival of the month or month-end. “Many entrepreneurs get stuck in the trenches, working on the day-to-day challenges and requirements of their businesses without looking ahead.

If you want to grow, you need to be focused on the future: How many people do you need to hire to achieve certain goals; how much funding do you need; where are your growth opportunities? Answering any of these questions requires a forecasting ability that takes into account cash flow, sales forecasts, your pipeline and any opportunities to increase revenue and margins.”

A great example of forecasting is a company that Spartan recently assessed.

“This business is a niche wholesale supplier to the confectionery industry. This sounds like an incredibly narrow offering, and yet they did their research and found a machine that can improve their margins by 75% — after paying for the machine. They needed to finance the machine, and they approached us with full financials, including sales forecasts and the improvements that importing the machine would make on their margins. They had also calculated whether or not they could service the loan.”

4. Be able to service the loan

Your cash flow forecast demonstrates past and future cash flow. It shows how you’re managing the business, how you’re managing cash flow and debtors, and the residual cash that’s available to pay a loan.

“If you’re approaching a funder, make sure you have these figures on hand. If you don’t, the funder needs to figure it out, and more importantly, you might not be able to service the loan. Having the numbers on hand impresses the funder instead — you’ve determined your payability and whether the loan makes sense. You’ve reviewed your options and evaluated the best course of action for your business — these are all clear markers of success.”

Related: How Spartan Has Geared Their Business To Help Fund Yours

According to Kumaran, more often than not, growth requires funding. Businesses that ensure they are in a constant state of readiness, whose financials are always up-to-date and who understand their needs are far more likely to access that funding for the right reasons. More importantly, they’re far more likely to access funding they can afford.

5. Use funding for growth

There is a key to growth funding that can be summarised in a sentence: Will this help me make money? If the answer is yes, you’ve ticked the growth-funding box. If you’re not sure, relook your financials and forecasting. If the answer is no, you’re trying to solve a cash flow problem that will not be fixed by taking on more debt funding.

“As a funder, we care about what entrepreneurs want the money for,” says Kumaran. “We look at business models and strategy. We take a view of the entire picture, which gives us insight into whether the funding will be used in a growth context, or to plug a gap created by a strategy, cash flow, sales, marketing, management or access-to-market problem.

“Why does a business need funding? Is it because they’ve given customers 90 days to pay when the industry norm is 30 days? Is it because they have poor debt collection processes in place? Are they asking for money because their cash flow systems are inefficient? Is a big contract not paying you, and now you need funding to cover a delinquent client?

“On the other hand, is there a legitimate need? One of the key areas we look at is contracts. Project and contract-driven businesses have become the norm in today’s economy. A six-month contract with no prospect of additional work shouldn’t be used as a reason for large capex expenditure. A three-year contract, on the other hand, can be justification for finance to purchase additional machines or to hire more people. You now have three years to build up your pipeline while you service the first contract.

“We also evaluate each business’s strategy. A company that competes with cheaper imports and has no discernible value proposition shouldn’t be securing funding to do more of the same at poor margins, particularly in a highly challenged sector. On the other hand, a company in a commoditised sector that needs funding to pursue a new niche where they can improve margins, play in a space with far fewer (if any) competitors and even start exporting to other markets has a good case for securing funding.

“Can you creatively engineer yourself based on your knowledge, sector expertise and skills base? Or are you trying to bridge a self-inflicted cash flow problem? Too many business owners don’t adequately research their markets. Do you understand the market you’re in? Is your product or service unique? Does it allow you to be insulated against competition and charge a higher premium? Remember, healthy profits equal healthy cash flow, which in turn allows you scope for expanding the business.”

6. Grow slow

Where does growth go wrong? Accessing finance doesn’t automatically ensure success. “Growth is like placing a big bet, and the reality is that in most cases, an incremental bet is better,” says Kumaran. “Are you hiring one staff member every six months or 20 in one go? Will you buy one machine every two years or three in one year?

Related: Business & Leadership Lessons from Kumaran of Spartan

If you’re focused on incremental growth, the chances of falling are lower. We’ve seen business owners go big, and then they lose a key contract. The debt burden of that funding they’ve taken to service that growth buries the business, instead of boosting it. We evaluate every assumption business owners make relating to growth, because that’s the last thing we want to see happen.”

A problem Kumaran often encounters is when entrepreneurs use one positive sign as an affirmation for an entire strategy. “Entrepreneurs may get anxious that if they don’t ‘seize the day’, they’ll miss out on a big opportunity. The result is that they do things too quickly and over-expand.

“Ego also plays a role, particularly when it comes to opening multiple offices. Our advice is to watch yourself and your ego when making these expansion decisions. Get feedback from two or three alternative sources, whether that’s from your board of non-executive directors, mentors or a business group. Ask others for red flags. Review your decisions from every angle.

“Big bets should be slow; they should be the result of considered decisions rather than impulsive ones. You won’t always get everything right. You can plan ahead and still need to plug gaps. But at least start from a solid, sustainable base, with a clear strategy in place.”

7. Know when to fund your growth — and what funding to access

When is the right time to apply for growth funding? For starters, when the growth you’re planning can’t be funded organically, or simply through unlocking more cash within the business.

“Retail businesses and restaurants are a good example of this,” says Kumaran. “A retail business’s growth is often dependant on multiple locations or sites. You reach a point where you’re reasonably confident that your brand and business model works, you’ve piloted your first store for a few years and now you’re ready to expand.

To organically build up the cash to fund a second location will take another five or ten years. If the business has the margins to pay for debt funding over the next five years however, you can have two stores operating at the end of that cycle, with both turning a profit.

“Just consider your burn — there will always be a period where you are not making money from the investment. Is it six months, nine months, 12 months? You need adequate cash flow to support the debt and the burn.

“Go back to your strategy. It’s not just about your market, margins, product, uniqueness and so on. We’ve found that a lot of businesses are poor in their sales and marketing strategies. They want to grow — they have a plan and have pinpointed where to invest — but they can’t fill their sales pipelines. If you aren’t bringing in sales to support your growth investment, you’ll just increase your burn.

“In this economy, rather operate under capacity than over capacity. You’ll never be able to match supply and demand perfectly, no business can. No business can afford redundancies though. When you’re considering your growth options, focus on what you absolutely need to push the needle, and make do with what you can as you build up your pipeline.

“In every case ask the question: Do the costs involved make sense? Will this help drive growth? How? Once you’ve ticked those boxes, consider all your funding options. There are a lot of solutions available to you, from bank funding, which is the cheapest to access but requires a lot of collateral, to private equity funding, which involves giving away equity in the business.

“Alternative funders play in the middle of these two traditional options. Alternative funders tend to be niche and specific, focusing on specific sectors or industries. They carry more risk and don’t require collateral, which is why they’re more expensive than banks, but they bring industry and sector-specific insights as well — and it’s debt funding, which means you aren’t giving away equity in your business.

Their processes tend to be efficient as well, largely due to the niche nature of the funder. When you’re ready to grow, find a funder that matches your needs and understands your business.”

Related: The Ultimate Guide To New Business Funding

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Entrepreneur Profiles

Rich List: 2019 Richest People In The World

They’re worth billions, and their wealth continues to grow each year. Here’s the top 10 richest people globally in 2019.

Catherine Bristow

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jeff-bizos 10. Jeff Bezos

Net Worth: USD 139,5 billion

Jeff Bezos founded e-commerce giant Amazon in a garage in Seattle, USA in 1994. He also purchased The Washington Post for $250 million in 2013.

Bezos believes in always taking a long-term view and living in the present moment.

“I think this is something about which there’s a lot of controversy. A lot of people — and I’m just not one of them — believe that you should live for the now.

I think what you do is think about the great expanse of time ahead of you and try to make sure that you’re planning for that in a way that’s going to leave you ultimately satisfied. This is the way it works for me. There are a lot of paths to satisfaction and you need to find one that works for you.”

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Entrepreneur Profiles

7 Self-Made Teenager Millionaire Entrepreneurs

These teenager entrepreneurs have already made their first million and more. How did they do it and what’s their secret to success?

Catherine Bristow

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1. Evan of YouTube

evan-of-youtube

Evan and his father Jarod started a youtube channel ‘Evantube’ to review kids’ toys. The channel was a resounding success with other kids – so much so that today it boasts just over 6 million subscribers.

Evantube brings in more than USD1.4 million a year from ad revenue generated on the channel.

How did it start? With a father-son fun project making Angry Birds Stop Animation videos, and morphed into doing reviews on toys and video games. But Jarod’s dad is aware of the responsibility of Evan’s sudden fame and hopes to teach Evan about the importance of being a good role model for others.

“Most recently, we had the opportunity to work with the Make-a-Wish Foundation, and were able to fulfill the wish of a young boy whose dream was to meet Evan and make a video with him at Legoland,” explains Jared. “It was a really incredible experience. YouTube has definitely opened many doors, and the kids have gotten to do some pretty amazing things.”

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Entrepreneur Profiles

Expert Advice From Property Point On Taking Your Start-Up To The Next Level

Through Property Point, Shawn Theunissen and Desigan Chetty have worked with more than 170 businesses to help them scale. Here’s what your start-up should be focusing on, based on what they’ve learnt.

Nadine Todd

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Vital Stats

  • Players: Shawn Theunissen and Desigan Chetty
  • Company: Property Point
  • What they do: Property Point is an enterprise development initiative created by Growthpoint Properties, and is dedicated to unlocking opportunities for SMEs operating in South Africa’s property sector.
  • Launched: 2008
  • Visit: propertypoint.org.za

Through Property Point, Shawn Theunissen and his team have spent ten years learning what makes entrepreneurs tick and what small business owners need to implement to become medium and large business owners. In that time, over 170 businesses have moved through the programme.

While Property Point is an enterprise development (ED) initiative, the lessons are universal. If you want to take your start-up to the next level, this is a good place to start.

Risk, reputation and relationships

“We believe that everything in business comes down to the 3Rs: Risk, Reputation and Relationships. If you understand these three factors and how they influence your business and its growth, your chances of success will increase exponentially,” says Shawn Theunissen, Executive Corporate Social Responsibility at Growthpoint Properties and founder of Property Point.

So, how do the 3Rs work, and what should business owners be doing based on them?

Risk: We can all agree that there will always be risks in business. It’s how you approach and mitigate those risks that counts, which means you first need to recognise and accept them.

“We always straddle the line between hardcore business fundamentals and the relational elements and people components of doing business,” says Shawn. “For example, one of the risks that everyone faces in South Africa is that we all make decisions based on unconscious biases. As a business owner, we need to recognise how this affects potential customers, employees, stakeholders and even ourselves as entrepreneurs.”

Reputation: Because Property Point is an ED initiative, its 170 alumni are black business owners, and so this is an area of bias that they focus on, but the rule holds true for all biases. “In the context of South Africa, small black businesses are seen as higher risk. To overcome this, black-owned businesses should focus on the reputational component of their companies. What’s the track record of the business?”

A business owner who approaches deals in this way can focus on building the value proposition of the business, outlining the capacity and capabilities of the business and its core team to deliver how the business is run, and specific service offerings.

“From a business development perspective, if you can provide a good track record, it diminishes the customer’s unconscious bias,” says Shawn. “Now the entrepreneur isn’t just being judged through one lens, but rather based on what they have done and delivered.”

Related: Property Point Creates R1bn In Procurement Opportunities For Small Businesses

Relationship: “We believe that fundamentally people do business with people,” says Shawn. “There needs to be culture match and fluency in terms of relations to make the job easier. As a general rule, the ease of doing business increases if there is a culture match.”

This relates to understanding what your client needs, how they want to do business, their user experience and customer experience. “We like to call it sharpening the pencil,” says Desigan Chetty, Property Point’s Head of Operations.

“In terms of value proposition, does your service offering focus on solving the client’s needs? Is there a culture match between you and your client? And if you realise there isn’t, can you walk away, or do you continue to focus time and energy on the wrong type of service offering to the wrong client? This isn’t learnt over- night. It takes time and small but constant adjustments to the direction you’re taking.”

In fact, Desigan advises walking away from the wrong business so that you can focus on your core competencies. “If you reach a space where you work well with a client and you’ve stuck to your core competencies, business is just going to be easier. It becomes easier for you to deliver. Sometimes entrepreneurs stretch themselves to try to provide a service to a client that’s not serving either of their needs. This strategy will never lead to growth — at least not sustainable growth.”

Instead, Desigan recommends choosing an entry point through a specific offering based on an explicit need. “Too often we see entrepreneurs whose offerings are so broad that they don’t focus,” he says. “Instead, understand what your client’s need is and address that need, even if it means that it’s only one out of your five offerings. Your likelihood of success if you go where the need is, is much higher.

“Once you get in, prove yourself through service delivery. It’s a lot easier to on-sell and cross sell once you have a foot in the door. You’re now building a relationship, learning the internal culture, how things work, what processes are followed and so on — the client’s landscape is easier to navigate. The challenge is to get in. Once you’re in, you can entrench yourself.”

Desigan and Shawn agree that this is one of the reasons why suppliers to large corporates become so entrenched. “Once you’re in, you can capitalise from other needs that may have emanated from your entry point and unlock opportunities,” says Shawn.

Building a sustainable start-up

While all start-ups are different, there are challenges most entrepreneurs share and key areas they should focus on.

Shawn and Desigan share the top five areas you should focus on.

1. Align and partner with the right people

This includes your staff, stakeholders, partners, suppliers and clients. Partnerships are the best thing to take you forward. The key is to collaborate and partner with the right people based on an alignment of objectives and culture. It’s when you don’t tick all the boxes that things don’t work out.

2. Make sure you get the basics right

Never neglect business fundamentals. Do you have the processes and systems in place to scale the business?

3. Understand your value proposition

Are you on a journey with your clients? Is your value proposition aligned to the need you’re trying to solve for your clients? Are you looking ahead of the curve — what’s the problem, what are your clients saying and are you being proactive in leveraging that relationship?

Related: Want To Start A Property Business That Buys Property And Rents It Out?

4. Unpack your value chain

If you want to diversify, understand your value chain. What is it, where are the opportunities both horizontally and vertically within your client base, and what other solutions can you offer based on your areas of expertise?

8. Don’t ignore technology

Be aware of what’s happening in the tech space and where you can use it to enable your business. Tech impacts everything, even more traditional industries. Businesses that embrace technology work smarter, faster and often at a lower cost base.

Ultimately, Desigan and Shawn believe that success often just comes down to attitude. “We have one entrepreneur in our programme who applied twice,” says Shawn. “When he was rejected, he listened to the feedback we gave him and instead of thinking we were wrong, went away, made changes and came back. He was willing to learn and open himself up to different ways of approaching things. That business has grown from R300 000 per annum to R20 million since joining us.

“Too many business owners aren’t willing to evaluate and adjust how they do things. It’s those who want to learn and embrace change and growth that excel.”

Networking, collaborating and mentoring

Property Point holds regular networking sessions called Entrepreneurship To The Point. They are open to the public and have two core aims. First, to provide entrepreneurs access to top speakers and entrepreneurs, and second, to give like-minded business owners an opportunity to network and possibly even collaborate.

“We believe in the power of collaboration and networking,” says Desigan.

“Most of our alumni become mentors themselves to new entrants to the programme. They want to share what they have learnt with other entrepreneurs, but they also know that they can learn from newer and younger entrepreneurs. The business landscape is always changing. Insights can come from anywhere and everywhere.”

The To The Point sessions are designed to help business owners widen their network, whether they are Property Point entrepreneurs or not.

To find out more, visit www.ettp.co.za

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