Alok Mittal, the former India head of venture capital firm Canaan Partners, now spearheads Indifi Technologies, a Gurgaon based platform for small businesses to gain greater access to debt financing. Recently, Indifi partnered with Travel Boutique Online (TBO) to provide working capital finance to travel agents who book tickets through the portal. Here, Mittal talks about how hotel companies can manage their working capital requirements using a judicious mix of channels By Steena Joy
Cash gets trapped in working capital, restricting a company’s ability to grow. So instead of being able to invest in growth, companies have had to invest in working capital. Your comments.
Working capital is an essential ingredient for growth. Most SME promoters invest their own equity to start a business, and that takes them to a basic stage of viability. Many of these promoters then find themselves strapped for incremental working capital to grow the business. Platforms like Indifi serve to provide such working capital and assist in growth of SMEs.
Do you agree with the mantra that good working capital levels come at the cost of EBITDA?
That is not necessarily true. Good working capital management should boost the EBITDA levels of the company. First, efficient use of working capital should power the growth of the company, thereby causing an absolute increase in the amount of profits the company can make. Second, certainly at the operating profit level, the cost of working capital does not show up – in that sense EBITDA represents the pure operating performance of the business. The impact of working capital financing may be visible in the net profit numbers – however, appropriate use of working capital where the returns from the business far exceed the cost of working capital, should lead to an increase in net profits as well.
How can hotel companies achieve good working capital management?
Hotel businesses are going through a fundamental shift in their channels of doing business. Apart from the conventional sources of business from corporates and retail customers, some routed through agents, the avenues to generate business have multiplied. From increasing presence of online travel agencies, to the hotel’s own proprietary channels like their website and mobile apps, the change in channel mix translates into change in working capital management. Hotel owners must respond to this change through a judicious selection of the mix and corresponding working capital demands. Further, as information asymmetry in the hotel business reduces on account of consumer reviews and other such mechanisms, hotels must focus on upgrading their amenities, in order to stay competitive and increase their occupancy rates. Given that most of the costs in a hotel are fixed costs, increase in occupancy rates can have a disproportionate increase in profitability.
Considering the recent growth in food retail startups, what is your advice to them for maintaining a good working capital balance?
Food retail businesses must largely be able to manage their working capital at a negative level in steady state. This means that while customers pay in cash, there is possibility of getting credit from suppliers. Hence working capital investments might not be the biggest challenge in businesses like restaurants. On the other hand, opportunities to expand the business brings in financing challenges for such businesses. Platforms like Indifi support restaurants in enabling this growth.
How can the government/ banks/ NBFIs help the hospitality and tourism sectors service their working capital requirements?
While there have been several schemes of the government to assist financing in small businesses, the transmission of those policies has been relatively limited. This is largely on account of the challenges in accessing and assessing small businesses from a credit standpoint. Platforms like Indifi are focused to building channels and data around small businesses – such infrastructure can help banks and NBFCs address the opportunity in MSME working capital financing.