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Managing a business to make money – my experience Talk at IISc – 17 th Sept 2008.

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Presentation on theme: "Managing a business to make money – my experience Talk at IISc – 17 th Sept 2008."— Presentation transcript:

1 Managing a business to make money – my experience Talk at IISc – 17 th Sept 2008

2 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

3 Flow of the presentation What is a business and why should a business make money? Capital in a business – its nature and role The economic performance of a business – challenges in achieving it Increasing chances of start-up success – my experience

4 What is a business and why should a business make money? Capital in a business – its nature and role The economic performance of a business – challenges in achieving it Increasing chances of start-up success – my experience

5 What is business? giving someone what they need (or want) at more value than what it cost you Sounds so simple – so whats 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 its all of the above What is a business and why should a business make money?

6 Sounds so simple – so whats the catch? You are not so sure what someone needs Someone is not so sure what she or he wants What is a business and why should a business make money?

7 Sounds so simple – so whats 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 its all of the above in different measures What is a business and why should a business make money?

8 Why does a business need to make money? If you dont then you cannot fulfill giving someone what they need on a going basis, and no ones 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 everyones happy What is a business and why should a business make money?

9 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 Govts functioning What is a business and why should a business make money?

10 Capital in a business – its nature and role What is a business and why should a business make money? Capital in a business – its nature and role The economic performance of a business – challenges in achieving it Increasing chances of start-up success – my experience

11 How do you …provide more value than it cost you? Revenue > Cost; so simple that there have to be many catches! Capital in a business – its nature and role

12 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 – its nature and role

13 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 Capital in a business – its nature and role

14 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 Capital in a business – its nature and role

15 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 its 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 Capital in a business – its nature and role

16 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? Capital in a business – its nature and role

17 The economic performance of a business – challenges in achieving it What is a business and why should a business make money? Capital in a business – its nature and role The economic performance of a business – challenges in achieving it Increasing chances of start-up success – my experience

18 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 The economic performance of a business – challenges in achieving it

19 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 The economic performance of a business – challenges in achieving it

20 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 dont 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 dont 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 The economic performance of a business – challenges in achieving it

21 Increasing chances of start-up success – my experience What is a business and why should a business make money? Capital in a business – its nature and role The economic performance of a business – challenges in achieving it Increasing chances of start-up success – my experience

22 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 Increasing chances of start-up success – my experience

23 So how do we increase chances of new business success? 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 Increasing chances of start-up success – my experience

24 So how do we increase chances of new business success? 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 Increasing chances of start-up success – my experience

25 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 Increasing chances of start-up success – my experience

26 Thank you For any inputs you think I can help contact me at


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