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 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 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

Are you really an entrepreneur?

Emma got up to go to her boring, monotonous job and as usual was tired of waking up early every day. The same routine was getting too much and one day she decided that I will leave the job and follow my dream of becoming an entrepreneur.

THEN THE SEARCH FOR PASSION BEGAN!! AND THEN THE PROBLEM STARTED!

Welcome to a world where every other person with a decent financial background and no appetite for a steady income finds solace and escape from a regular job by becoming an entrepreneur, rather a wantrepreneur because they want to become an entrepreneur, but are they really the one?

Am I an expert on entrepreneurship? The answer to this is “No One Is”. Just because one becomes a successful entrepreneur doesn’t mean they know everything about it. But there are few questions that one needs to ask themselves when they decide to become an 'Emma'.

Are you confusing hobby with passion?

Let’s work on basics! Hobby is something you like doing, while passion is something you want to work for continuously. So, search for your passion and see if you can make a revenue generating business out of it.

Do you think your business can generate positive cash flows in future?

Let's answer some fundamental questions before you start finding an answer to this one. In simpler terms do some number crunching and answer questions like,

How much money can you invest in your business?

What’s your risk appetite?

Can your business sustain itself after a period, or will it require more investment in the future?

How will you acquire customer and what is the expected volume?

Finally, based on your response to these questions, answer the question we started with!

Can the business generate positive cash flows in future?

These are just questions you need to answer before you even start working on the implementation part, and still there would be a hundred questions you will be answering and problems you will be solving during your turbulent yet experiential journey.

Word of advice! work hard on your business plan, always practice financial discipline, and know when to stop. If you do this, then even if you fail, you will still have enough zeal to start again and not get dejected.

Be sure of one thing, you will learn a lot more compared to what you learned in your B-schools.

 

Do it for the right reasons!

 Manan