The Tao of Measuring SME Success
What do SMEs need to measure if they are to be successful in accessing finance?
Like all business loan providers, Foundation East, the responsible finance provider for the East of England, sees measurement as a crucial part of both the lending and borrowing sides of business loans activity. Unlike other business loan providers that are not part of the responsible finance sector however, we do not use credit scoring to automate decisions about who we do and don’t support.
By the time many businesses get to Foundation East, they’ve often exhausted other routes to access finance, and learnt a few lessons upon the way. By the time they leave us, thanks to our ongoing mentoring support alongside the finance we provide, they’re on a much more positive growth trajectory.
In this blog, non-executive director, David Martin, explains how Foundation East takes a different approach from mainstream finance to measuring the potential success of loan applicants, and what loan applicants should be measuring if they want to continue to access finance …
How does Foundation East measure a loan applicant’s chances of success?
Our industry body, Responsible Finance, has shown that over three quarters of businesses we lend to have previously been turned down by a “high street bank”. Sometimes, such rejections are simply because the bank does not, at that time, wish to lend to the sector in which the client operates. Often though, the business plan submitted fails one or more of the measurement tests built into the algorithms used by such lenders to automate the loan review process.
Foundation East is different. While we recognise the importance of measurable financial indicators in a business plan, unlike other financial providers, we use the experience of our staff and directors to assess both the relevance, and performance of the client’s KPIs, using the SMART (is the business plan specific, measurable, attainable, relevant and timely?) approach as well as heuristic techniques.
What do entrepreneurs looking to access business finance need to measure if they are to succeed in accessing finance?
Businesses seeking additional finance have a difficult job as there are many different sources of potential funds, each with their specialist providers, distinct rules/constraints and implications of cost and liability. Clients develop expertise in borrowing the more they apply for business finance, but rarely start out with the knowledge they need to make an informed decision. It’s not surprising really. Business advisers, even financial advisers, find it hard to keep up with the continuing development of the alternative sources of finance, particularly in the lending marketplace.
However, to be sure that any increased borrowing is a sound idea, and to provide a lender with some confidence about the level of risk inherent in the financial restructuring of the applicant’s business, key performance indicators (KPIs) have a crucial role.
This is why the SMART acronym referred to earlier includes ‘M’ for ‘measurement’. There is no virtue in incorporating a key success parameter in the management of the business if the success or otherwise of the venture to be funded may not be measured by that parameter. This requires a firm bond between the aims of the business/project and the management information made available for the measurement of KPIs.
It's not just Foundation East that looks for evidence that your business plan has identified SMART KPIs, it’s all lending institutions, so, whoever you are approaching for support, make sure you’ve not only identified what you’re measuring and why, but also that you have evidence in place of how you are going to monitor your KPIs.
Unlike many lending institutions, Foundation East’s loan assessment panel (made up of board members and volunteers from local businesses), will advise you if they feel you’ve not quite thought it through, and reconsider your loan if you follow their expert advice. Thinking it through first though, will save you considerable time – as well as being good for your blood pressure!
Here’s an example of the type of attention to detail to measuring KPIs you need to aspire towards:
A social enterprise has built a strong business, supplying specialist foods to customers from all around the UK, employing a workforce that includes a particularly high proportion of people drawn from the long term unemployed. The leaders plan to expand the operation by adding an export activity, starting with an approach to the Netherlands, Belgium and France. To exploit this opportunity, they seek to borrow funds for a marketing campaign in those three countries.
It is quickly recognised that an important performance indicator for the project is the number of enquiries received from each of the target nations. Another is the conversion rate for such enquiries. It is also apparent that the existing enquiry monitoring software (a spreadsheet) has no location code that allows for export enquiry identification.
The business plan is amended to ensure measures are put in place to facilitate monitoring all the KPIs in the business plan.
Measurement requires data.
The science of metrology has branches that consider fields such as mass, length, temperature and so on. Like the physical parameters referred to, the measurements of various business-related KPIs are rarely completely independent. Increase the temperature of something, for example, and its dimensions will invariably change. Similarly, business KPIs need to be considered together.
This is why Foundation East will consider all the parameters being measured. We do this, not only when deciding who to loan to, but also when supporting those we do loan to throughout the period of their loan. Monitoring our clients’ success at achieving their KPIs during the life of the loan reduces the risk of default. It also teaches them good habits moving forwards.
How to help us to help even more local businesses (and help yourself to tax relief too)
To help Foundation East with our increasingly essential work on addressing financial exclusion in the East of England, you or your business can invest funds with us, using a little-known tax relief mechanism call Community Interest Tax Relief (CITR). All of the money you invest in us using CITR is lent on to micro, small and social enterprises located in the East of England. This includes businesses like: Bedfordshire birthing pool delivery service, Barefoot Birth Pools; Cambridgeshire award winning chocolate-making social enterprise Harry Specters; Essex eco-brand Cabello Hair & Beauty; Hertfordshire young entrepreneurs Fabio’s Gelato; Lincolnshire award winning community gym, Boston Body Hub; Norfolk-based renewable energy solution provider, Miller Installations; Northamptonshire’s Cookies Bakers & Confectioners and Suffolk Future50 company Your Telemarketing.
For every £1 we use to support businesses like these we create £15 worth of social and economic value. Read our social impact report to find out more.
By purchasing CITR shares in Foundation East, you also benefit from a substantial tax relief, worth 25% of the funds invested over a five-year period, a benefit unique to our Responsible Finance industry.