Is the current business environment conducive for SME’s?

For some time now I have been following global economies where recession is slowly creeping in, and I ask myself why are these largely successful economies failing now? Is it because of the pandemic, or have they suddenly started making bad decisions. Well, in my opinion, the pandemic just amplified already existing problems in the economic ecosystem. The largely non-diversified procurement and complete dependence on a few sources for energy, food etc. has also been a major contributor to the current market problems. What I want to focus on is why such stable economies have suddenly become sensitive to market volatilities. The answer to this probably lies in the foundation of the economy, the lack of swift decision-making, or one can say resistance to adapt quickly to new challenges, and forgetting the basics that ultimately create a robust economy. I will elaborate on my thoughts on this in a separate blog soon enough.

What the pandemic brought out in open was the lack of risk assessment, and support to small businesses. Government’s not securing the business environment for its SME’s and making drastic changes to their ecosystem led to hassles for business operations if not a complete systemic crash. SME’s might not generate that much revenue for the government compared to the large industries, but they do what large corporates are unable to, and that is provide employment to people. In India, SME’s generate approximately 20% of total industrial revenue, but give employment to more than 70% of the workforce. A healthy industrial environment for SME’s brings down unemployment, controls inflation, and generates revenue for the government.

Under prevailing market conditions, governments can take measures like reducing the cost of raw material imported in the country and providing temporary duty / import tax break. Another thing that governments of a few countries especially in the west can assist with is creating access to labour by making short-term changes to their immigration policy. Also an important thing that is required is access to new markets and cheap logistics.

If governments start working on the these points along with the SME's I am sure that they will soon witness market stability and greater economic momentum. Its not just a new policy that is required, constant communication needs to be done with the businesses on ground in order to understand the current challenges and what needs to be done urgently. I always believe that a constant two-way communication between the government and businesses lead to development of a healthy business environment. Also SME’s should understand that they need to become less dependent on governments for help and need to strategize to spread operations and generate more income . New thinking needs to be adopted by SME’s where they realise that governments will assist and incentivise with zeal when they themselves are earning and expanding. Its also a responsibility of SME’s to steadily increase their revenue so that tax revenue of the governments from these industries also goes up. SME’s should always strive to evolve from being local businesses, to becoming global suppliers, and provide impetus to their respective governments to think for their welfare and draft policies which strengthens the business ecosystem.

 

Think holistically,

 

Manan

Is Being Cash Rich Always Good News?

 Many times, heads of small companies are boasting about being cash rich, having zero debt, and enough money to take care of the working capital requirements and more. But is it always a happy news being cash rich? Though big companies like Google and Apple are also cash rich, but they use a lot of their cash for research and reinvestment in business expansion. When it comes to small and medium scale companies, I have seen a lot of these especially after the pandemic, having a lot of cash in accounts and still running the business and paying for their operating expenses. In my opinion, the reasons could be much more concerning than otherwise visible. Let me make some points for several companies that had maybe 5% of their revenue as cash reserve to them having a lot more cash reserve now:

1. The business is not growing due to existing external conditions leading to low payables and better cash building up.
2. The raw material purchased by the companies during pandemic is not fully utilised because there are low sales, leading to less purchases. 
3. Few companies that did massive layoffs during pandemic have not fully rehired keeping their employee expenses low. 
4. Finally, the company has no growth strategy and is not reinvesting enough.

The first three reasons could be temporary and might fade once the market conditions change, but the fourth reason is a serious concern. Why I want to concentrate on this reason is because it leads to stagnation of business and eventually the company lies just like a wounded lion waiting for the hyenas to come and do the deed.

Such businesses might give an all-goody picture to the world mentioning the steady sales, controlled operating expenses and no need to raise debt, but reality is far from what is depicted. Few ways of realising the problem with such companies is to observe the following: 

1. The amount and nature of capital expenses. 
2. Whether the revenue is stagnant or shrinking. 
3. The nature of expenses. 
4. The growth in the volume of goods sold along with the growth in revenue. 

The fourth point is mentioned because a lot of businesses raised the prices of their goods in lieu of everyone doing the same once the markets opened post pandemic. A few companies might show a marginal growth in revenue, but their volumes of goods sold might have actually decreased.

If a business does not have a growth strategy and is not reinvesting enough to fulfil its goals, then eventually such businesses will either have a stagnated trajectory or wrap up once a competitor makes a move against them. The point to remember is that businesses without a vision and a strategy especially in such volatile market conditions eventually move towards their slow demise.

 

Not all grass is green 

Manan

Is the race too fast for Innovation?

 Are we going too fast? When was the last time an innovative product took market by surprise? Is your company innovating? Is the world innovating fast enough?

These are few questions I ask myself when I read news every day and see nothing but venture capital backed tech companies selling some service which at the end of the day might be disrupting market, but not creating any value for its investors. Bleeding accounts pleading investors to hold on for long-term returns has become a norm today. Eventually investors are looking for a bigger fool who would pay them back for their mistake. But what about product? When was the last time we saw an innovative product that totally changed the market? For me it was maybe a microwave, mobile phone, or an air fryer (Don’t know about innovation, but I just love it!). Weren’t these products launched more than two decades ago? and developed may be three to four decades back. What about the last ten years? Is it because innovation has stopped happening, or because innovative products don’t find investors to support them. I guess I have put forward too many questions to answer.

As far as my understanding goes, I think that its not that simple to answer these questions. In my opinion innovation takes time and patience, and frankly in today’s world that’s one thing that people and conglomerates don’t have. Where companies are under constant pressure to come out with a new phone every year since smart phone came to market, the product as such has improved, but not innovated. Almost a century ago, the story tellers would imagine that in 2020 there would be flying cars, vehicle running on water, food growing instantly, everyone travelling to space, and people living an artificially prolonged life. I guess the only innovation that has taken place is in the movies and not in the real life. We are still totally dependent on fossil fuel and the cars don’t even fly. Further, the stagnation in innovation is leading to an over usage and over dependence on already scarce resources. A few years ago I read an article mentioning that lithium reserves would last almost two centuries. Well, recent studies suggest that we might start facing shortage as soon as 2025.

My two cents on this! innovation is not something that happens in a day. It takes time, probably more than the world right now is willing to give, and it requires constant investment in R&D without thinking too much about returns. It also requires patiently creating markets for innovative products and not just killing products because they don’t seem to generate profit. Its believing in ideas and waiting for everyone else to believe in them, even though it takes time. In my opinion the investors across the world need to converge their funds to support innovation and help innovative products survive in the market. If this does not happen, then we probably won’t see cars running on water, even though the first car running on hydrogen was made as early as in 1960’s. 

Don’t let new ideas and product just succumb to the economics of business so soon. Be patient with them and let them breathe in the market. May be with further improvements and investments the cost would come down and the economics would work out. To quote an example, the mobile phones haven’t become cheaper with time, but still people pay for them because they can no longer live without them. There is no bigger proof to prove my point, “Innovation takes time in creating dependence”.

My concluding words are for the companies who make billions of dollars, but as soon as stagnation and recession hit them, the first solution they find is to reduce the R&D cost.

“COMPANIES CANNOT FIGHT THE COST OF STAGNATION BY INVESTING LESS IN INNOVATION”

 

Keep creating

Manan