Month: November 2010

This week’s links:

• Mary Meeker’s 10 questions that every Internet entrepreneur should answer
• The entrepreneur’s greatest enemy: by Matt McCall. “Anxiety and fear are the greatest enemies of the entrepreneur.”
• strategy+business: 50 classic management articles from 15 years
• TB in India: from New Yorker. “Is it possible to save the millions of people who die from TB?”
• India’s 2G Spectrum Scam: All the links in one place, via Medianama.
• An empress of India in new clothes: by John MacLithon. “The tragedy of India is that it was colonised for too long. And unlike China, it always looks to the West for a solution to its problems. Sonia Gandhi, whatever her qualities, is just an incarnation of that hangover, an empress of India in new clothes.”

Another key aspect of the business that needs close monitoring is cashflow. Revenues may be increasing, but if cash is not coming in on time, one can face a problem in paying vendors and employee salaries. For this, it is important to have rolling weekly estimates that look a month ahead on both expected payments and collections.

For collections, it is important to also monitor aging. Anything beyond 90 days past payment due date is likely to face a challenge in being collected. As such, even though there is revenue on the books, one may face the prospect of write-offs at a later date and cashflow concerns in the short-term.

I shared some of these ideas over the past few days because these are tips I have found useful and, in some cases, have learnt them  the hard way. I hope you also found them useful.

What I have done is create a set of spreadsheets wherein I track numbers every week and every month. In addition, it has data for many of the key items for 12 months, allowing historical comparison, especially for margins.

As a business grows, the hope has to be that the margins improve. For that, it is important to track which key costs are within one’s control, and how they change with growing revenue. Some costs are fixed – like salary, rent, electricity. These should be reasonably flat month-on-month (or at least very predictable). Based on these numbers and an estimate of the gross margin, one can also arrive at a figure which reflects the breakeven revenue for a business.

Based on topline (revenue) growth, it now becomes possible to estimate when a business is likely to become profitable, and therefore how much cash will be needed till then.

For every business, it is important to define key parameters on revenues and costs and these need to be monitored monthly.

Besides looking at profitability for the month, it is also important to look at trends – especially in terms of percentages over the past few months. For example, look at both the gross margin and net margin percentages, and not just the absolute numbers. The goal needs to be to ensure that these percentages also increase, along with the absolute numbers. If in a month, there has been a dip in the percentage, it needs to be investigated closely – because it may lead to a deeper problem with some aspect of the business.

Any business where the gross margin is 50% or less needs to be monitored daily. Let me explain.

Gross margin is the revenue minus the cost of goods sold. If it costs Rs 3 to buy a widget, and the selling price is Rs 5, then the gross margin is  Rs 2, or 40% (2/5). Such businesses need to be monitored daily for variations in either the input costs or selling prices. Errors in purchase or sale can have a disproportionate impact on profitability.

An idea I have implemented recently in NetCore for some of the business lines is the concept of Projected Score and Required Run Rate. It borrows from the cricket ODI and T-20 matches. An example will help explain.

Let’s say in the first 10 days of the month, we have generated Rs 15L in revenue. Then, the Projected Score for the month is Rs 45L. Now, if the target for the month was 60L, then the Required Run Rate to achieve that is (60-15)/20 days left = Rs 2.25L, vs a Current Run Rate of 15L/10 = 1.5L.

These numbers monitored daily give more predictability to what one can achieve in the month, and also shows the gap between target and current run rate. Based on that, one also can get an idea of the push required to achieve the target.

From a post written two years ago:

A crucible experience is something which transforms us, and shakes and shapes our lives.

[Many companies go through] through their own crucible moments. They face challenges of various kinds — revenue generation, business model validation, competition, need for additional capital. In fact, some face multiple of these challenges simultaneously. For some, there is a clock ticking away as cash runs out and there is a race to prevent closure. That is always the risk in being an entrepreneur (or investor) and doing things which are different and haven’t been done before. The probability of success is a magnitude lower than what most entrepreneurs believe. For these fledgling companies, this is a moment of truth — a crucible moment. It is a make-or-break period — and one which is easier to describe than to live through.

This week’s links:

• The Data Analytics Boom: from Forbes. “As interesting as the range of its application are the many converging reasons for the rise of interest in analytics.”
• Economist special report on Smart Systems: “The real and the digital worlds are converging, bringing much greater efficiency and lots of new opportunities.”
• India Rising: from Foreign Policy. “From the economy to Afghanistan to grand strategy, six looks at an emerging superpower.”
• Rise of Tomorrow’s Middle Class: by Sanjeev Sanyal, about the new Middle India. “We need to change the way we think of slums and small towns – this is where the new middle class is being created.”
• The Crossroads Nation: by David Brooks, about the USA in the future. “[The US].. is well situated to be the center of global networks and to nurture the right kinds of networks.”

Votebanks are exactly the reason why people in Urban India need to come together in an association like the United Voters of India. Unless we self-organise and force each of the political parties to realise that  the swing vote (and hence their victory or defeat) lies in our hands, Urban Middle India is going to suffer. Some of us may strike it lucky and build a cocoon of wealth to isolate ourselves. But for the majority, things are not going to improve.

When real estate prices become so high that it becomes well near impossible to buy a flat at reasonable prices, when water and electricity are not available 24×7, when the air we breathe is not clear and pure, when the roads we drive are potholed or constantly under repair, when the trains are packed beyond limits, when airport runways are shutdown during the day, when money earned by us is lavished on keeping people poor across the country – when all of this does not motivate us to act, then either we have really an incredible ability to withstand self-inflicted pain, or we are incredibly stupid.

It is time, and it is up to us now. There will be no second chances. If we don’t care about making our own lives better, at least we can do this for our own children. They have done nothing to deserve the future we are thrusting on them.

India needs massive investments in its infrastructure. We need billions of dollars for high-speed rail networks, for solar power research and development, for quality universal primary education, for dozens of new cities, for building our urban metros (without needing to wait for CWG-like events), high-speed ubiquitous broadband networks, and more. We need this to happen in a transparent manner that is free of corruption so we get the most for what we spend.

But there isn’t even a debate going on about this in the country. One Coal India issue galvanizes the stock market and everyone is on Cloud Nine. But that does not reflect the reality that we have dysfunctional governments with corrupt ministers and flawed policies that waste public money.

Until we have a leader with vision, we will continue to be distracted by “There are two Hindustans” and how urgently they need to be united. The truth is that dividing India into two factions with conflicting interests suits those in power quite well. They want to keep it that way so they get to play vote-bank politics and retain the power to rob the public.

Continued tomorrow.