managing a business to make money – my experience talk at iisc – 17 th sept 2008

Managing a business to make money – my experience

Talk at IISc – 17th Sept 2008

“When I was young I used to think that money was the most important thing in life. Now that I am old, I know it is.”Oscar Wilde

Flow of the presentation

• What is a business and why should a business make money?

• Capital in a business – it’s nature and role• The “economic performance” of a business –

challenges in achieving it• Increasing chances of “start-up” success – my

experience

What is a business and why should a business make money?

What is a business and why should a business make money?Capital in a business – it’s nature and roleThe “economic performance” of a business – challenges in achieving itIncreasing chances of “start-up” success – my experience

What is business?

• “giving someone what they need (or want) at more value than what it cost you”

• Sounds so simple – so what’s the catch?– You are not so sure what someone needs– Someone is not so sure what she or he wants– You cannot give it to them at more value than what it

cost you – what we will talk today– Usually it’s all of the above


Sounds so simple – so what’s the catch?

You are not so sure what someone needs

Someone is not so sure what she or he wants


Sounds so simple – so what’s the catch? - II

You cannot give it to them at more value than what it cost you – this is what we will talk more today

• Usually it’s all of the above in different measures


Why does a business need to make money?

• If you don’t then you cannot fulfill “giving someone what they need” on a going basis, and no one’s happy (your customers, employees, suppliers, shareholders, bankers, the Govt. and yourself)

• If you do then you can “give someone what they need at higher value to them” … and do more of that to more people and everyone’s happy


So how does the virtuous circle happen?

• Value to the customer (measured as Sales or Revenues) – value to you (measured as Costs) = Profits

• Profits invested back into the business leads to:– More of profitable customers – Improved value of the product or service– Generally lower cost (economies of scale, scope, learning curve

effects)• Profits not invested back into the business, but distributed

leads to:– More money in the hands of shareholders leading to – More spending / investing leading to more consumption or

more production• Profits given as taxes improves our Govt’s functioning


Capital in a business – it’s nature and role


How do you “…provide more value than it cost you”?

Revenue > Cost; so simple that there have to be many catches!


The catch / es

• You almost always incur cost ahead of revenues– Why?– Any examples where the reverse happens?

• Often times the cost that you incur would need several years of revenue to recover– Any examples?

• Costs are almost certain, revenues are uncertain• Costs have a tendency to accelerate faster than revenues and often

overtake– "Anyone who lives within their means suffers from a lack of

imagination." Oscar Wilde – “To make a million start with two million”

• Then there is competition that wants your business (or atleast your returns)– “Each person in a parade decides he can stand better if he can stand on his

toes”

So what does it all imply?Capital in a business – it’s nature and role

You need money to start a business

• This seed money is called Capital• Your business should then generate sufficient money

(called profits – or returns) for that capital• Your job should be to manage the business to

generate such returns• The cycle then continues for growing a business


About the seed money called “Capital”

• Usually you will not have all of it and so will borrow this capital from someone else

• Capital always comes in 2 forms:– A promise to return the money borrowed along with its costs, is called

debt– A promise to share the left over capital after debt, if any, is called

equity– Any form of Capital is debt and equity mixed in certain doses

• So what is sweat equity, intellectual capital and other “non-monetary” capital?

• The business and the capital required are structured into a legal entity – a proprietorship, partnership, company etc each entity bound by the

law in the way capital is used and your profits or income are shared by the Govt


The nature of Debt and Equity

• Debt is usually given after extreme assurance it will be returned– “A lender is someone who gives you an umbrella when it’s sunny

and will ask it back when it rains”– The greater the assurance the lower the cost of debt– Examples that highlight the above?

• Equity capital essentially means sharing a fraction of the business (henceforth called company) with “shareholders”– “A shareholder is someone who will help buy you an umbrella

but share it with you forever”– In effect shareholders are your ultimate bosses– Sharing the company is done by way of issue of “shares” against

the money


Reality of getting Debt and Equity in India for start-ups

• Practically speaking Debt unless from friends and relatives is very difficult to get for bootstrapped.

• Typically one would need security / cover for issue of debt for loans from institutional bodies

• Equity is easier to get but you have to share a good part of the company– Usually again from friends / relatives but at some scale would need

institutional bodies• In any case you have the obligation to return and deliver returns on this

Capital– The quality of a business is generally measured by Returns on Equity Capital.– Even if you deliver good profits / profit growth, it will not suffice unless such

profits lead to “good” returns on equity capital– Examples – retail business, hi-tech business, IT services business

• So comes the next question: How do you make your company deliver these returns?


The “economic performance” of a business – challenges in achieving it


How to deliver good returns on capital?

• Theoretical response:– Ensure that you manage revenue and cost in such a

way that the profits earned is higher than expected returns on capital

• Practical experience:– It is so much easier said than done


Business realities however complicate delivering good returns• Revenue related realities

– A business, especially a new business is fully loaded with risks, i.e. a “chance that an unwanted event threatens business”• “If things can go wrong they will”• Examples?

– Risks are generally higher on the revenue side:• How do you estimate revenue for your business idea?• “Astrology has finally met its match in Business forecasting”• Examples?

– Generally revenue related risks are less in your control• Intercept experience of competition and IE 6• Examples?

– Unlike “unwanted events” , “fortunate events” i.e. events that aid the business will likely not happen with the same probability for new businesses. If it does just seize it with open arms

• While you know there are risks you still have to place your bets


Business realities however complicate delivering good returns, Part 2• Cost related realities

– You need to incur costs “ahead” of revenues• A good part of capital is deployed and running cost incurred before even a single paisa is

earned– You also need to incur costs to “get” the revenues

• If you don’t get revenues you tend to spend more to get them, and can go out of business– Diffsoft example– Examples?

– Costs, like slow poison keep expanding even when you don’t do anything!• Cost is like entropy in the second law of thermodynamics• A new business will suddenly realize that costs have bloated and overtaken revenues

– Controlling costs is very difficult but never hurts– Costs are however generally more certain then revenues

• You can never be certain about that though• Examples?

• The big challenge lies in deciding where to spend and where to hold back


Increasing chances of “start-up” success – my experience


So how do we increase chances of new business success?

• Necessary and sufficient condition:– Have lots of luck – true but inactionable!

• Necessary conditions• Pre business

– Identify a business opportunity that has a large number of potential customers• Estimate demand all the while and keep refining• Your business should deliver returns even with a 5% market share

after 3 years– Keep thinking about how is your offering different and why

should the customer find “unique value”• Concept of a Moat

– Expand your thinking of competition• Examples



• Post business launch ( 1 – 2 years)– Be very open to how reality is changing your

assumptions• Both for the better and for the worse

– You can minimize risks and learn by “proofing the concept” with as little cash as possible• Examples

– Manage your cash flows to conserve and build as much as possible



• Keep an eagle eye on finance while running your business– Manage for cash till you have a steady of at least 3 – 6 months

of working capital covered– Keep your cash flows under control

• Never have more than 60 days of receivables• Try and get as much credit as possible from suppliers• Work every cost down by atleast the rate of inflation

– Have sufficient margins (about 50% atleast) over and above your costs to cover risks / profits.

– Be open to changing your business based on what you experience• Most businesses turn out different from what they set out to be

– Know and pay your taxes


What are the skills I had to learn and unlearn

• Skills to learn– Accounting• Accounting is the language of business• Understanding accounting and accounting standards

helps understand business economics better– Soft skills• Teamwork, building trust and developing

trustworthiness, an attitude to listen

• Skills to unlearn– Moving from a yes / no way to a probabilistic outlook


Thank you

For any inputs you think I can help contact me at [email protected]

managing a business to make money – my experience talk at iisc – 17 th sept 2008

Documents

business need

business challenges

business leads

role slide

experience slide

revenues value

oscar wilde slide

higher value