MANAGING FINANCE IN AN SME
Babu Shankar - Fosroc
By Tom Leander

If there was noise on the street, neighbors knew it was one of the Shankar brothers. One hundred kilometers from Bangalore, the township of Hindupur in Karnataka proved to be a good place to grow up.

All six of the boys eventually got university degrees and went into business. One became an auditor for the government, another a banker, another a computer analyst, another a manager in their father's tungsten trading business, and another an electrician.

Number four, Babu, had a talent for accounting and took a stab at a small company called Fosroc Chemicals (India), where, it turns out, he drew upon each and every talent that propelled his brothers, and some of his own. What attracted him to a small company was the multiplicity of responsibility. He put the shared family knowledge to good use.

The category of managing finance in a small- to medium-sized company is unique to our Best Practices awards around the world. The demands of the job require that a CFO be many things at once. In Europe and the US winning CFOs often benefit from the services of sophisticated bankers and consultants. But to an Asian SME, such services are unavailable.

The CFO becomes a kind of Svengali keeping 30 doves in the air at once: building a management information system from scratch, squeezing cash from lurching operations, setting up a basic incentive compensation system, overseeing marketing - in short everything, including, like Shankar's electrician brother, possibly rolling up his sleeves and fixing the wiring.

Shankar started at Fosroc as an internal auditor in 1984, when the company had a mere turnover of 4 million rupees (US$90,000) per year. But the company was growing quickly, and by 1989 he transferred to Dubai, where the company had opened another operation. He worked as second in finance there until 1999, when the CFO of the Indian unit based in Bangalore left suddenly. Shankar was offered the job and went back to find the company's cash position in peril..

Chemical Reaction

The source of the company's trouble was a miscalculation of the market's business cycle. Fosroc develops chemicals for construction that allow building materials to last longer, but that aren't required by law to use.

In other words, property companies can build more cheaply and less safely, but just as legally without them. "Our growth," says Shankar, "depends on how we educate the builders and the public about the value of the chemicals," which, he adds, are commonly used throughout the world.

That education process broke down when hard times hit. Demand for the higher cost, higher quality chemicals faded with Asia's economic collapse. It hit Fosroc hard, despite encouragement by the World Bank to use the chemicals in its funded projects. Not anticipating the downturn, Fosroc's planning committee had approved the building of two new factories and drawn down a 70 million rupees (US$1.7 million) loan.

By 1998, with pinched cashflow due to its stagnating business, Fosroc was continually drawing down overdrafts to pay the loan back. Overdrafts grew as high as 40 million rupees (US$941,000). By January 1999, when Shankar accepted the job as CFO and transferred from his post in Dubai, the company was in danger of defaulting with its creditors and banks.

"I had never faced anything like this before," recalls Shankar, "but I had enough experience to know that the problem had to be solved in two stages: first with the banks, then internally, as a matter of discipline within the company."

The first portion of the challenge was straightforward, if not necessarily easy. Shankar had to prove to his bankers that he could provide a reliable schedule of repayment through forecasting cashflow for the next year. He managed this by pulling a tighter grip on days outstanding of working capital.

The move that allowed this tighter grip proved canny. He made availability of intra-company funds contingent on managers' ability to collect payments from customers. If the managers didn't meet their targets, they couldn't fund their new projects. On the banking side, he was able to capitalize on the keenly competitive nature of the banking industry in India to set up a new loan facility with another financial institution. "We had to put ourselves in a position that banks would compete for our business," he recalls.

The improvement on receivables and the threat of his taking business to another bank improved Shankar's hand when he went in to negotiate new terms on the big term loan with his primary bank. He reduced the interest rate to 13 percent from 17 percent. The savings in interest amounted to 2 million rupees (US$45,000) for 2000. Last year, in response to the global decline in interest rates, Shankar reduced the rates again to 11 percent.

He even used Fosroc's new clout to save on overdrafts, which amount to 16 percent per annum on the daily balance. He converted a fixed amount of the overdraft into short-term loans, again at a rate of 11 percent. This arrangement aided repayment of the big loan. In December 2001, the entire term loan was repaid.

He says his comfort level with bankers stemmed from living in a family that took naturally to finance. He drew on other family gifts as well. Conversations with his computer analyst brother helped him see the gains that could be garnered by restructuring Fosroc India's management information system. He redrafted the way that Fosroc's eight factories around the subcontinent report figures that eventually are used to drive budgets.

The yearly budget, says Shankar, had been created using a top-down approach, with the finance department requesting information from busy subordinates. Shankar adopted a package that forced managers to plug in information on the shop-floor level. The information could then be automatically consolidated on a week-by-week basis.

The process yielded targets that have proved be far more accurate. The information has further been used to identify the most reliable customers and where marketing might be redirected to concentrate on the most profitable segments of the business. He also revamped the internal audit system in 2000, seeking advice from his brother, the auditor for the Indian government, and his own experience as an auditor. Shankar sent auditors to check the books in all areas, including purchase, sales processing, inventory and maintenance - a departure from before.

The hands-on approach resulted in some managers seeking out alternate, lower-cost suppliers and, in some cases, eradicating excess payments to suppliers that had gone unnoticed. Because he came from a family that understood the supplier side of the sourcing business - his brother ran the family's tungsten operation - he saw where savings could be garnered down the supply chain. Shankar weighed in as a purchasing manager and reduced the prices of the raw materials that Fosroc uses in its products. Thanks to him, Fosroc has planted the company's pinions for a period of accelerated growth. Shankar predicts annual sales will move to 1 billion rupees (US$21 million) at end 2002 from 400 million rupees (US$8.5 million) at end 2001.

Shankar is now able to mull over what should come next. "Now that our loans are paid we will be able to fund an acquisition," says Shankar. Chances are, when he finally does nab a new company, he may find one of his brothers already there, ready to talk over the task at hand.