IN BUSINESS TO MAKE MONEY
How To Paisa Vasool
this is for those of us who are not lucky enough to be born in business families
I am by no means am a consummate business person. The only thing i know is, if the unit-economics are not positive from day zero there is no point being in business of making money. Sharing a few thoughts I’ve learned along the way
Coming for a family where most are Lawyers, Doctors, and Engineers — it was not the easiest to learn the nuances of how to manage and circulate money. I was very fortunate to have met and exchanged ideas with many who have been successful in their businesses. Some have sold chunks of their businesses to the Tata group, others have completely sold and started anew, few others have sold and made enough to retire at 40!.
Why discounts are a death spiral!
Take a few minutes to study the table.
It shows a few things that need attention.
- Increasing volumes has a direct increase on your margins, when the costs are retained the same
- Increasing the selling price has a direct increase on your margins, when the costs are retained the same
- Reducing the costs and maintaining the selling price has a direct increase on your margins
- Discounting means you will ONLY be reducing the selling price and maintaining the costs. This will have a direct NEGATIVE impact on your margins. Also means you will have to sell more to make your earlier margins
- THE BEST option is to increase volumes + reduce costs + increase selling price! As you can see a very marginal reduction of cost by 5% and subsequent increase of price and volumes by 5% each increases our margins by a whopping 27%
Lesson Learnt : The last thing that you do is to discount, pay more attention on how to reduce your costs
Calculate your BEP
Break Even Point — very important to know before you sell your product or service.
BEP may be in number or items or Rupees for pricing.
this will also help you calculate your selling price so that your unit economics are positive.
Lesson Learnt: before you make your first sale know and understand where your costs are coming from and then price the product or service. No point going down the discount rabbit hole.
Invest your cash
You are running your business amazingly well and you are generating cash — heaps of it!
What do you do with it?
- leave it in your bank?
- invest in assets?
- increase salaries?
- pay yourself dividends?
- How about invest it into the markets?
why not invest it into a liquid fund that will give you better returns and also lets you access the funds in short notice. When you have 3 months running expenses covered in your liquid fund, why not put the rest into debt funds :-)
Cash is King! — don’t you ever forget that!
If there is no cash in the bank it means nothing — nada, zilch, zero, shoonya. When you make a sale if you don’t get money due to you either in advance or immediately after you perform the service, there is a high possibility of the business running out of cash.
You may have invoiced Rs. 100,000 worth of service or goods. This means that month you have to pay your tax for that sale — meaning you are again paying before you get money from the customer. Now imagine there is a delay of 21 days from the customer to pay. This results in you having to pay salaries from your earlier month’s collections, which is not ideal.
Now further imagine many customers start to delay payments, you will have a long list of debtors in you PL&BS which will also show a huge figure in your Revenue line. But the bank shows zero!!!
This is where you will have to take a OD to take care of your running expenses. Essentially you are paying even more money [ interest on your OD drawn ] because your customer delayed his payment to you!
Lesson Learnt: Take your payment in advance or at the point of sale
Long-term loan for long term requirements / Short-term loan for short term requirements
It is imperative that all of us remember this.
Never get a long term loan to tide over short term requirements and vice-versa.
That’s why managing your cash is very important.
Use Overdraft Facility at your bank to tide over your cash-flow issues for the month. Most banks will charge your for the number of days you drew down the OD.
There are ways to set-up your waterfall mechanism with your banks for OD etc.
Lesson Learnt: don’t you ever take a OD to pay for your purchase of a building or take a 3 year loan to pay for monthly salaries
Do you know your company overhead as a %?
When you are pricing your product or service it is imperative that all costs are included — both direct and indirect.
Direct Costs are those that may be directly ascribed to the product or service. For example — man hours, travel expenses, food expenses incurred during the exercise, etc
Indirect Costs are those that are incurred by the company but have to be distributed to every unit of sale so that you cover those costs. For example — rent, utilities, phone, internet,insurance, bank charges, etc.
You need to find a way to make sure you capture this and then use it in your pricing. Otherwise this portion of it will definitely be coming from your profit margins!!!
What is your WACC? Why should you know this?
Weighted Average Cost of Capital — this is what money costs your company. There is a formula and some number jugglery that is involved here, but you need to know what this number is.
The reason is, this is what you are being charged by the lenders as interest. So your margins HAVE to be greater than your WACC. You understand what happens otherwise — you will loose economic value on every transaction.
Lesson Learnt: one should absolutely know what the company is being charged for the money it is using.
Profit — a number or a percentage?
Obviously we are looking at generating a profit on all transactions, but the question is how much?
If it is a product it is simpler than for a service, in my opinion. In executing a service we need to be cautious of man-hours involved which becomes a variable cost. Which brings us to all costs that are linked to talent — such as food and travel which too can be fixed-variable.
One may construct a simple excel sheet as shown here to capture all the costs involved and then add a margin to it. More advanced tools are available which help entrepreneurs do this too.
Lesson Learnt: know what your costs are at every point of the transaction and have a handle on your profit margins.
Catch-22 : hire or wait for the contract?
This is one big decision that needs to be taken with a gut feel…and with what you know of your own industry and the market situation at that juncture. My guess is not all situations are the same thus one solution will not fit all.
The author is a 2X entrepreneur. Presently is the CEO at Nemmadi.in | we enable better living
