Reducing the Business Risk

I see a lot of SME’s maturing early during their business life cycle¹. During these times many mention that they are unable to expand their operations or require time and money to diversify. I believe The Ansoff Matrix² is effective in providing guidance towards what needs to be done to bring growth to the business during such times. Just to summarize, Ansoff Matrix assists in planning and evaluation of growth initiatives and provide a risk assessment while undertaking the growth strategies as mentioned below:

1.       Increasing the sales of existing products in existing markets – Market Penetration

2.       Focus on selling existing product in new markets – Market Development

3.       Focus on introducing new products in existing markets – Product Development

4.       Enter new markets with altogether new products - Diversification

But the problem is that all these initiatives take a lot of time and effort, and working on them when your business has already matured increases the risk. Innovation and R&D are long-term initiatives which need to be invested in early in the life cycle. Developing new products is challenging and time consuming, and the risk of customers responding negatively to it is also quite high. Overall, working on these strategies at the last moment seems like a knee-jerk reaction to the prevailing market conditions. One must really delve into the problem to accept any one of these strategies and it requires time. The risk increases tremendously based on how late the action is taken during the life cycle. So, the question arises is WHAT TO DO?

I say keep a control over fund allocation and start working on one or more of these strategies while you are in the growth phase, to reduce risk to business when you reach maturity. Get to the depth of exploring existing markets and simultaneously spend moderately on developing new markets as well. Diversify the risk first. Later, even if few markets do not perform well, it probably will not affect your top-line too much. For testing new products while growing, you may choose smaller existing markets where a negative response would not affect your brand and revenue stream. This way you can take the feedback from these markets and improve the product before launching in your performing markets, or in some cases you might even take the decision of shelving the product and allocating the funds elsewhere. Basically, you will have quite sometime to try and test every initiative during growth phase and this will lead to development of a formidable strategy for the maturity phase of the business.

As the saying goes “Do not dig a well only after the house catches fire”. Also, in some businesses the decline comes faster after maturity. Such businesses by the time they think about diversifying or getting into new markets are already loosing existing markets. Before you know it, you just can’t do anything to save the business and eventually it leads to a wrap-up.

So don’t make such mistakes and take risk before it gets too late to do anything.

 

Think Ahead,

 

M

Is the current business environment conducive for SME’s?

For some time now I have been following global economies where recession is slowly creeping in, and I ask myself why are these largely successful economies failing now? Is it because of the pandemic, or have they suddenly started making bad decisions. Well, in my opinion, the pandemic just amplified already existing problems in the economic ecosystem. The largely non-diversified procurement and complete dependence on a few sources for energy, food etc. has also been a major contributor to the current market problems. What I want to focus on is why such stable economies have suddenly become sensitive to market volatilities. The answer to this probably lies in the foundation of the economy, the lack of swift decision-making, or one can say resistance to adapt quickly to new challenges, and forgetting the basics that ultimately create a robust economy. I will elaborate on my thoughts on this in a separate blog soon enough.

What the pandemic brought out in open was the lack of risk assessment, and support to small businesses. Government’s not securing the business environment for its SME’s and making drastic changes to their ecosystem led to hassles for business operations if not a complete systemic crash. SME’s might not generate that much revenue for the government compared to the large industries, but they do what large corporates are unable to, and that is provide employment to people. In India, SME’s generate approximately 20% of total industrial revenue, but give employment to more than 70% of the workforce. A healthy industrial environment for SME’s brings down unemployment, controls inflation, and generates revenue for the government.

Under prevailing market conditions, governments can take measures like reducing the cost of raw material imported in the country and providing temporary duty / import tax break. Another thing that governments of a few countries especially in the west can assist with is creating access to labour by making short-term changes to their immigration policy. Also an important thing that is required is access to new markets and cheap logistics.

If governments start working on the these points along with the SME's I am sure that they will soon witness market stability and greater economic momentum. Its not just a new policy that is required, constant communication needs to be done with the businesses on ground in order to understand the current challenges and what needs to be done urgently. I always believe that a constant two-way communication between the government and businesses lead to development of a healthy business environment. Also SME’s should understand that they need to become less dependent on governments for help and need to strategize to spread operations and generate more income . New thinking needs to be adopted by SME’s where they realise that governments will assist and incentivise with zeal when they themselves are earning and expanding. Its also a responsibility of SME’s to steadily increase their revenue so that tax revenue of the governments from these industries also goes up. SME’s should always strive to evolve from being local businesses, to becoming global suppliers, and provide impetus to their respective governments to think for their welfare and draft policies which strengthens the business ecosystem.

 

Think holistically,

 

Manan

Is Being Cash Rich Always Good News?

 Many times, heads of small companies are boasting about being cash rich, having zero debt, and enough money to take care of the working capital requirements and more. But is it always a happy news being cash rich? Though big companies like Google and Apple are also cash rich, but they use a lot of their cash for research and reinvestment in business expansion. When it comes to small and medium scale companies, I have seen a lot of these especially after the pandemic, having a lot of cash in accounts and still running the business and paying for their operating expenses. In my opinion, the reasons could be much more concerning than otherwise visible. Let me make some points for several companies that had maybe 5% of their revenue as cash reserve to them having a lot more cash reserve now:

1. The business is not growing due to existing external conditions leading to low payables and better cash building up.
2. The raw material purchased by the companies during pandemic is not fully utilised because there are low sales, leading to less purchases. 
3. Few companies that did massive layoffs during pandemic have not fully rehired keeping their employee expenses low. 
4. Finally, the company has no growth strategy and is not reinvesting enough.

The first three reasons could be temporary and might fade once the market conditions change, but the fourth reason is a serious concern. Why I want to concentrate on this reason is because it leads to stagnation of business and eventually the company lies just like a wounded lion waiting for the hyenas to come and do the deed.

Such businesses might give an all-goody picture to the world mentioning the steady sales, controlled operating expenses and no need to raise debt, but reality is far from what is depicted. Few ways of realising the problem with such companies is to observe the following: 

1. The amount and nature of capital expenses. 
2. Whether the revenue is stagnant or shrinking. 
3. The nature of expenses. 
4. The growth in the volume of goods sold along with the growth in revenue. 

The fourth point is mentioned because a lot of businesses raised the prices of their goods in lieu of everyone doing the same once the markets opened post pandemic. A few companies might show a marginal growth in revenue, but their volumes of goods sold might have actually decreased.

If a business does not have a growth strategy and is not reinvesting enough to fulfil its goals, then eventually such businesses will either have a stagnated trajectory or wrap up once a competitor makes a move against them. The point to remember is that businesses without a vision and a strategy especially in such volatile market conditions eventually move towards their slow demise.

 

Not all grass is green 

Manan

Is the race too fast for Innovation?

 Are we going too fast? When was the last time an innovative product took market by surprise? Is your company innovating? Is the world innovating fast enough?

These are few questions I ask myself when I read news every day and see nothing but venture capital backed tech companies selling some service which at the end of the day might be disrupting market, but not creating any value for its investors. Bleeding accounts pleading investors to hold on for long-term returns has become a norm today. Eventually investors are looking for a bigger fool who would pay them back for their mistake. But what about product? When was the last time we saw an innovative product that totally changed the market? For me it was maybe a microwave, mobile phone, or an air fryer (Don’t know about innovation, but I just love it!). Weren’t these products launched more than two decades ago? and developed may be three to four decades back. What about the last ten years? Is it because innovation has stopped happening, or because innovative products don’t find investors to support them. I guess I have put forward too many questions to answer.

As far as my understanding goes, I think that its not that simple to answer these questions. In my opinion innovation takes time and patience, and frankly in today’s world that’s one thing that people and conglomerates don’t have. Where companies are under constant pressure to come out with a new phone every year since smart phone came to market, the product as such has improved, but not innovated. Almost a century ago, the story tellers would imagine that in 2020 there would be flying cars, vehicle running on water, food growing instantly, everyone travelling to space, and people living an artificially prolonged life. I guess the only innovation that has taken place is in the movies and not in the real life. We are still totally dependent on fossil fuel and the cars don’t even fly. Further, the stagnation in innovation is leading to an over usage and over dependence on already scarce resources. A few years ago I read an article mentioning that lithium reserves would last almost two centuries. Well, recent studies suggest that we might start facing shortage as soon as 2025.

My two cents on this! innovation is not something that happens in a day. It takes time, probably more than the world right now is willing to give, and it requires constant investment in R&D without thinking too much about returns. It also requires patiently creating markets for innovative products and not just killing products because they don’t seem to generate profit. Its believing in ideas and waiting for everyone else to believe in them, even though it takes time. In my opinion the investors across the world need to converge their funds to support innovation and help innovative products survive in the market. If this does not happen, then we probably won’t see cars running on water, even though the first car running on hydrogen was made as early as in 1960’s. 

Don’t let new ideas and product just succumb to the economics of business so soon. Be patient with them and let them breathe in the market. May be with further improvements and investments the cost would come down and the economics would work out. To quote an example, the mobile phones haven’t become cheaper with time, but still people pay for them because they can no longer live without them. There is no bigger proof to prove my point, “Innovation takes time in creating dependence”.

My concluding words are for the companies who make billions of dollars, but as soon as stagnation and recession hit them, the first solution they find is to reduce the R&D cost.

“COMPANIES CANNOT FIGHT THE COST OF STAGNATION BY INVESTING LESS IN INNOVATION”

 

Keep creating

Manan  

Is the loan for business expansion becoming your working capital?

 Yes, I know this can sound a bit confusing to some, but sorry I cannot help it, this is too important of a strategic slip that small businesses make. I guess this all starts from not having something very basic that even a home-run business should have, and that is a Vision and Mission. So just to provide you a gist of this, Mission is answering “Why are we running this business”, and Vision is finding an answer to “Where do we see ourselves in maybe 10 years”.

Often, I have seen businesses starting their operations and then taking loans for business expansion, but eventually using them to fulfil their short-term working capital requirements like maybe paying vendors to keep getting supplies, paying salaries, and taking care of other operational expenses with the same money. Few months down the line, these companies realise that the debt fund raised to expand business has neither created any new asset, nor developed any new business opportunity. In a sense this money has not been able to increase or generate new cash inflow and the business is left with a loan (short-term or long-term) to be repaid along with a hefty interest.

Such mistakes should particularly be avoided during the initial stages of business since they have a potential to put it in a never-ending debt spiral. In this the business is continuously borrowing money to pay off previous debt and is not left with any money for taking care of its working capital needs, or to further invest in expanding operations. One way of beating this is maintaining a healthy debt-to-equity ratio which is the key to controlling dependency on debt especially in the early stages of business where cash inflow can be limited, and operational expenses are on a higher side.

Below are a few key things I did, or rather disciplines I suggest one follows to avoid such mess in the early stages of business:

• Always be strict with the credit period given to the clients for payments. Remember the more days they take in making the payments, you lose on cash needed to drive your operations. 

• Try and ask for advance payments even if it means giving some affordable discounts to the client.

• Maintain a touch base with clients so that they remember you for their requirements, and also so that they don’t forget to pay their dues. 

• Keep your suppliers happy by paying on time. This is especially important in the early years since the suppliers are reluctant to open credit line to new and small businesses. Remember, in business – trust is everything.

• Save money and then strategically invest in expanding business. Even if the expansion is being financed by debt, be sure that your working capital needs are taken care of. Always raise the amount of debt that you are confident the business will be able to pay off.

• Finally, having a strategy for your business goes a long way in ensuring financial discipline. Keep your business strategy aligned with your financial requirements so that there is no overindulgence with debt and a monetary discipline is followed.

I guess this sums up my key concern with most of the small and young businesses, and I hope this helps in forming a good strategy for operating in markets and expanding your business operations. Always remember,

 

Discipline is everything!

 Manan

Something a Small Company Needs to Develop

Small companies most of the times are focusing on sales, marketing, promotion, product development, service, and of course profits. But why is that these companies forget to focus on the most essential ingredient for a growing company – TEAM HR.

When it comes to human resource, the idea almost always takes a backseat for small companies. I have experienced that most factory-based companies don’t even have a proper human resource professional (leave alone a department). The job responsibility is either being monitored by a clerk or maybe straight by the top executives of the company. Why such a laxity exists while choosing the people who are going to get the right ones for your company?

In my experience the statement below summarises the prevailing thought.

“Investing in a human resource department is a waste of money. Why pay 2-3 people extra salaries when I can get the work done myself. Afterall our predecessors have been doing the same for past so many decades. So why to subscribe to these “PRIVILEDGED” services now!!”

These words haven’t changed for so many years and one can hear similar echoes in a lot of companies. It leads to non-cultivation of culture, ideas, strategy, and so many essentials for overall growth of a company. The overall functioning of such small companies eventually is dependent on one or two individuals who are managing everything and riding on know-all bandwagon.

I would end my thoughts on this subject with these words:

“One needs to hire the right people, who can search for the right people for your company”.

 

Accept Change!

 Manan

Small Business!! The something of everything.

 It’s my first blog and the idea is to keep it very simple so that everyone from all age group and educational background can understand the unique ecosystem and challenges of running a business. I must confess I started writing a blog with too much information and too many jargons, but then I thought “who’s going to read this?”. The answer was simple, “the people who already know about it”. They are probably the only ones who would understand what I have written. That realisation made me choose between writing a Wikipedia page and a blog read by many. So, I chose the latter and believe me it’s a bigger challenge to write something that requires so much numeric or rule driven information in such simple words that everyone reading it would understand. So, here onwards I will try to write as simplistically as possible. 

I always like comparing a business to a car, it has an engine, the core that keeps running it; a steering that gives it a direction to move in; seats for employees to sit and work on; a speedometer to record how fast you are going; a windshield to look forward clearly, and a rear-view mirror to see your past experiences and mistakes.

Last but not the least, there is a driver that is driving and controlling the car, AND THAT’S YOU.

It is very easy to go wrong with a car while you drive it, one wrong turn and you are either lost or down the road. So why is it so important that we have good comfortable cars, with speed yet stability, which consume less fuel and run for long. Well, because then your car will become bigger, you will add more seats, more technology, and finally pay more taxes, and that is what keeps the nation and the governments happy.

The micro, small and medium enterprise (known as MSME’s) that contribute 30% to our nations GDP, employ millions of people in every corner of our nation, bring in huge amount of foreign exchange, and lastly pay large amount of taxes. Now I am not going to give any statistical information over here, because that is something you can very conveniently google. But yes, MSME’s are part of everyone’s life, some work for them, some run them, and some benefit from them. But all-in-all they play an important role in everyone’s life and most of all contribute a lot to the nation’s growth. The micro and small enterprise employ almost 95% of working population and generate a large part of national revenue. At the same time medium enterprise are responsible for almost 40% exports and have potential to become large enterprise, that generate huge revenues and pay loads of taxes (and that is why they are governments blue eyed boys).

Well, I am not trying to say that states and governments prefer larger companies compared to smaller ones, AM I? But when it comes to policies, ease of doing business, ease of setting up a business, and easy flow of money, then I think large enterprise are at an advantage. Primarily because they have resources, and they are big earth movers. But what about the small cars, the micro and small businesses that a woman starts online, or a man starts in a warehouse, that don’t have big offices but still employ a group of people and have been running their home for years if not decades. I think you get my point; I am talking about everyone who once started a business from their savings and reached somewhere. Yes, they might not be paying exorbitant taxes, but they do one thing that most large businesses don’t do, that is give employment opportunities to people in villages, towns, cities. Employment to people who might not be so qualified or well-spoken that they get employment in big conglomerates, and yes these are sustainable employments.

I have an observation, whether the country is developing or developed, the unemployment rate increases because small businesses are failing. Be it United States of America or India. 

I have some questions in my mind regarding the whole small business environment in our country.

Is the government doing enough for them? 

Are these businesses doing enough for themselves? 

Is there a low interest credit line available to these businesses? 

Has the cost of operating gone so high that its almost unsustainable? 

Are there enough equity infusion options available? (By this I don’t mean going to big venture capitalist or running to audition for Shark Tank. What I mean is that is there a regulatory infrastructure or access to equity funding through financial institutions or simply put through “Banks”).

In present times, are small home-run businesses compelled to invest a lot in social media marketing?

Has cost for hiring business services gone up?

These and many more questions are there which I will be discussing and putting forth my views on in upcoming blogs. But there are things that I am sure about when I think about small businesses. These businesses are majorly responsible for employment opportunities, movement of goods, consumption, augmentation, building and development of socio-economic infrastructure, less consolidation of wealth in few hands, and finally they help bring people above poverty line. That’s why these small businesses are something of everyone’s life, and we need to move towards creating a survivable environment for them so that the middle class of our nation can thrive.

Hope my first blog sets a tone for what’s about to come. Your views and suggestions are always welcome.

Keep innovating! 

Manan