From my ninth article in the Start-up Logic entrepreneurship series in the Hindu BusinessLine
Every business sets out with a single premise and in the case of successful entrepreneurial firms this usually is a simple premise. If your business promises to deliver ‘hassle free online bill payment’ or to ‘keep all your contact information current automatically’, it keeps everyone in your company focused on what needs to be done. As an entrepreneur, you discover that just as you manage to get your ducks lined up, growth sneaks up on you scattering things once again. Read the rest here.
For a business to be viable, money is important. Most of us understand this intuitively and deal with it constantly in our own personal lives. Yet, as runaway individual credit card debt or a cash squeeze in a large company and the occasional sovereign currency crunch demonstrate, it is not difficult to lose sight of where the money goes. Even as capital and sales revenues supply money for your business, inward and outward cash flow management is critical for survival. If you don’t track and control the cash flow in your business, you may not keep your doors open too long, unless, as in the case of Chrysler, an elected government bails you out. It makes better business strategy to understand and manage your cash flow rather than rely on the government to help you with it.
As an entrepreneur, you likely began with an idea of a product or service. Soon, you are knee-deep in building a team, pulling together the product or service, finding and servicing customers. You may even have written a business plan and try to raise money. In addition, you are still trying to keep the company rolling forward. In a previous article, I asserted that having good people on board is the first step to managing the challenges your business will constantly face. The most life threatening of these will be cash flow management. As with the advice of any personal trainer (eat less, exercise more), cash flow management is easier said (spend less than you have, collect sooner than you need) than done, as many large and even profitable companies have found out.
Profit versus cash
To understand the criticality of cash flow, it is useful to begin with a simple business scenario. Ram Charan, author of What the CEO Wants You to Know, begins his book with the example of a street vendor selling fruits and vegetables in India. He poses the question: “How does he (the street vendor) know if he’s doing well? When he has cash in his pocket at the end of the day.” In the case of a cash-and-carry business such as a street vegetable vendor, profit and cash flow are closely tied. Most companies operate on credit terms, at least with their customers. In the case of start-up firms with no track record of good credit, this can be a bigger challenge with customers wanting 30-, 60- or 90-day credit terms and suppliers wanting advance payments or cash on delivery.
Imagine that on a holiday to Hong Kong you see these adorable ceramic animal sculptures that you know every woman would want for her home. You locate a supplier in China who can supply them for a mere Rs 100 each and you know that you can sell them for at least Rs 150, may be even as high as Rs 200. After all your expenses, you’ll still make nearly Rs 50 profit!
So you beg, cajole and wheedle Rs 4 lakh from your family and get a container load of the ceramic menagerie. Unfortunately, you have to pay your Chinese supplier up-front by wire transfer but the thought of that Rs 50 profit per ceramic animal keeps you rolling. Your largest buyers, unfortunately, also pay you only 120 days after receiving their supply of ceramic animals (what accountants refer to as net 120-day terms).
In other words, you have spent Rs 4 lakh on day one for the first container. The products are selling like hot cakes and you have sold all the ceramic animals you had bought within the first 30 days. Your customers, though, are yet to pay you (for another 90 days). Worse, they want to order even more animals from you. You scrape together another Rs 4 lakh and order that second container, whose contents too fly off the shelves.
Your accountant and books tell you that you are profitable, having bought Rs 8 lakh worth of animals, selling them for nearly twice that and making a net profit of Rs 4 lakh. However, your customers owe you nearly Rs 16 lakh and are not likely to pay you for another 60 days. You still have to continue to pay rent, the phone and electricity companies and salaries for your employees, not to mention returning the money you borrowed from family. Thus, despite being profitable you have run out of cash! And if you want to continue in the business, you need even more money.
So even simple and profitable businesses can get into trouble. Most real businesses rarely have products flying off the shelves, so they have cash tied up in goods bought but not yet sold (inventory); if the goods are perishable (vegetables) or time constrained (fashion) they may totally lose their value, resulting in losses or reduced profits. Most real businesses have to pay banks or lenders interest on the money they borrow; their profit margins are rarely as high as in this illustration. All of which means managing cash even in the simplest and, yes, profitable businesses is critical.
Capital as cash
Capital, and adequate capital at that, is the surest way to ensure that you don’t run out of cash. In the above example, if your customers are likely to pay you only on 120-day terms, that means you need capital for at least four months to be able to buy your goods, pay your routine running expenses and have some room to spare for unforeseen issues such as delayed shipments, broken animals or returned goods. So suddenly, you see that you need nearly half-a-year’s worth of cash outlay as capital — and this is for a simple trading business. As every entrepreneur has found, there are no simple businesses and you always need more money than you think.
The downside to capital, particularly equity capital, as the answer to cash flow is twofold — raising sufficient money may prove non-trivial and result in a dilution of your equity early in the life of your business. Debt and other methods of raising working capital might be more fruitful ways of planning and managing your cash flow. Banks offer various working capital funding mechanisms such as packing credit (a credit limit or a loan against orders you have secured from your customers) and bills discounting (providing you cash against bills you have raised on your customers). For a start-up, banks may require personal guarantees of either the company directors or third-parties before extending working capital facilities. Once you have built a track record and, more importantly, a relationship with your banker, it will be easier to grow and leverage such working capital mechanisms.
Cash flow is in the details
Even when you have raised what you deem is adequate equity and got your local banker to extend you various credit facilities, it is critical to pay attention to cash flow. More importantly, you need to build a culture where your entire organisation is well-educated about cash flow and comprehends the need to manage it. Every time a sales person makes a sale for net 60 days rather than net 120 or a purchase manager buys supplies on net 30- or 60-day terms rather than advance payment, they are managing cash flow.
Most entrepreneurial firms, especially in their early days, understand managing to cash. As they grow, a balance is needed between continuing to manage for cash flow and the need to spend money to sustain growth. There have been instances where companies have paid heavily due to their failure to educate employees adequately. An employee in trying to save Rs 10,000 (to buy a testing tool), delayed the shipment of a product to the customer who was ready to pay Rs 2.5 lakh for it, within 30 days. Of course, there have been times, as in the infamous Chrysler case or, more recently, the US Federal Reserve having to guarantee the bailing out of investment firm Bear Stearns, when the lesson of having to watch your cash regardless of your size is brought home hard.
This article first appeared in the Hindu Business Line in April 2008
In every entrepreneur’s life, there comes a moment when a bulb goes off, “Darn! We are a real business.” You’d think that having embarked with much thought (or for some of us with little thought) on the path of entrepreneurship, learning that you are a real business wouldn’t surprise you. Of course, such a realisation usually occurs when the problems of running a real business put in an appearance.
When you first start your business, it all seems more fun than work — figuring out what you want, whom you are going to make the journey with, whom your customers are and what they want and if you have raised capital, what prospective investors want. Notice, but for the first day, you haven’t had time to think about yourself.
However, soon each new day seems to bring up a number of issues, ranging from life-threatening cash-flow problems to stumbling product development, stuttering sales and marketing and the inability to hire good people fast enough. We will look at each of these issues, and how best to address them over the next few weeks.
Let’s begin with the good news – you are not the first entrepreneur to go through this. The bad news is that this knowledge does not make it any easier to get through this period. As with adolescence that every one of us has had to go through, companies too go through an equivalent phase. Only this seems to appear a lot sooner for entrepreneurial firms and, at times, more than once; as with any hormone-laden teenager this will be a time of monumental emotional ups and downs for your company and you.
The one thing that can help you navigate your way through these emotional rapids is having great people on board with you. I spoke of business being all about people earlier and this is truest in such times of corporate hormonal sloshing. Hiring, retaining and motivating great people is far easier said than done and fixing hiring mistakes always takes far longer than we’d like. The truth is companies that learn how to do this well are the ones that grow and prosper in the end.
Hiring people
Hiring even in the best of circumstances is time-intensive and can be emotionally draining. Nevertheless, it will be hard to over-emphasise the importance of hiring well. Brent Gregory, Fellow at Synopsys, and an ex-colleague said it best, “You can let 10 potential good hires go, but you don’t want to make one bad hire.”
Most of us, especially early in our careers, tend to focus on skills and competence when hiring. In times of great demand, we may end up lowering this talent bar, which is a mistake many an entrepreneur has come to regret. It is vital to first test for cultural fit and team skills – domain skills and competence are critical but insufficient indicators of a good hire. Paul Hawken, founder of Smith & Hawken, goes as far as to say, “Hire the person not the position.”
This may seem radical at best or naïve at the worst, particularly for those of you who are hiring for highly technical positions. All too often, interpersonal and team skills get overlooked when hiring for specialised jobs and the organisation invariably pays a high cost due to the resultant cultural and interpersonal conflicts that arise. This is truer still when hiring for senior or leadership positions.
As an entrepreneur, you should be personally involved in hiring the first 50 or even 100 people, as they will go on to build the DNA of your organisation. It is critical to get a large number of people, including the interviewee’s future peers and direct reports to interview a prospective candidate. Many companies make the error of hiring folks based solely on face-to-face interviews.
Hal Rosenthal, author of The Customer Comes Second believes in “placing candidates in situations beyond the normal scope of their work or in environments away from the work place – sports, driving or informal gatherings.” I have found taking a prospective candidate to the company volleyball game often reveals a lot more than two hours in a conference room. And for every hire, from the mail room boy to an executive director, always ask for and check references. More often than not you’d be glad you did.
People – Letting go
In a previous article, I spoke about how hard it is for most entrepreneurs to let go of a paying customer. The only thing that is harder is admitting that you have made a hiring mistake and letting go of that person in a timely manner. Despite the best hiring practices, you occasionally end up hiring the wrong person. Wrong, because mutual expectations were misunderstood; or the incorrect assumptions made by either party about attitude, competency, culture, the job or working in a team. Usually, the causes of such a mismatch are less important than rectifying the situation, at the earliest. No one enjoys firing or letting go of people – especially in small start-ups where there are few secrets and you get to know a individual at a personal level. This is the very reason for rapid corrective action.
The smaller your company, the greater is the need for zero tolerance of any violation of core values by a team member or worse yet, for being a deadbeat. More than the shock of termination of a poorly hired individual, the cost of delaying decisive action is far higher due to the loss of morale, the damage to your credibility as a leader and the overall emotional toll other employees pay. The upside of definitive action is that it communicates your values and beliefs in a manner no number of posters or lectures can and reinforces the expected behaviour in your organisation.
Growing together
Once you have built a team of fine individuals, hiring them would seem simple compared to keeping them happy and growing them with the business. Studies show that when a person joins a new job, he or she does so with high morale and much motivation to make a difference.
The onus is upon you to ensure that you do not demotivate them or undermine their morale.
The best way to achieve this is to provide clarity of purpose for both the organisation and the individual, provide them the tools and resources to do their jobs and remove the roadblocks or regulations that would hinder or disempower them.
For an entrepreneur who never met a problem that he didn’t love to tackle and solve himself, it takes some practice to let go and allow others to get the job done. This requires trust and confidence in your people, which, if you have done a good job during hiring, should be easy.
It is also important to create a learning environment, so that your team stays fresh, is challenged continuously and, in turn, creates a self-reinforcing milieu of teamwork, sharing and continuous learning.
Finally, ensuring that recognition and appreciation are a way of life in your business, will cement the whole team.
It’s worth keeping in mind Paul Hawken’s words about the people you want on your team, “… it makes no sense whatsoever to hire any but the best people you can possibly find. Your employees shouldn’t admire you. That is kid stuff. You should admire your employees.”
(The writer was founder and CEO of Impulsesoft Pvt Ltd, which grew from a boot-strapped organisation of two people to a global leader in Bluetooth wireless stereo music prior to being acquired by SiRF Technology Inc in 2006. Srikrishna, who has an MS and a PhD from the University of California in Berkeley, has more than 18 years of experience building and marketing semiconductor and software products. He writes for The New Manager on the travails and triumphs of being an entrepreneur. He blogs at http://designofbusiness.blogspot.com)
(This article was published in the Business Line print edition dated March 24, 2008)
“A customer is the most important visitor on our premises. He is not dependent on us. We are dependent on him,” said M.K. Gandhi. As with many of Gandhi’s teachings, it is hard to disagree with him, but harder still to follow his simple advocacy of direct action.
If your business involves direct interaction with the customers who walk in the door, Gandhi’s advice is a great place to start. However, it is just as likely that your business requires your going to the customer (selling credit cards, vacuum cleaners or consulting services), or shipping your product to customers you have never seen (software, books or mobile phones). Occasionally, as in the case of radio, television or newspaper columnists, it may mean “free” broadcast of your product and very little interaction with customers, if at all. In all these instances without a good number of paying customers, you will find it is hard to run a viable business.
The customer, someone who pays for your goods or services, is what defines your business. So how do you find customers — and having found them, how do you keep them coming back? Will there be times when you want to let go of customers — if so, how do you do it?
Finding customers
“Build it and they will come” may work in the movies, but definitely it is unlikely to work for most businesses. Even if you run a retail store, a barber shop or a restaurant in the most popular mall in town, finding a customer – especially the right, paying customer is non-trivial. And is best not left to chance. If you are not a retail store front but rely on direct or indirect sales folk or other marketing channels to reach your product or service to your customers, it is even more critical that you find the right customers and find them fast.
As an entrepreneur you have to recognise that first and foremost, you are a sales person – regardless of your job role or what it says on your business card. You will be selling to partners, employees, financiers, bankers, suppliers and most importantly to customers.
To find customers, particularly appropriate customers, you begin with understanding what it is you have to offer and who will be best served by it. This determines your target customer segment. For instance, “Mothers of young children will benefit from our childcare service” or “Companies with employees in more than one location will benefit from our Web-based HR tool.”
Now, it is relevant to address “How will I recognise this customer?” In other words, qualifying the appropriate customers within that segment. “Working mothers and mothers with more than one child will find our service particularly useful and be willing to pay for it.” “Companies, with more than 40 employees, offices in multiple cities, revenues greater than Rs 10 crore and profitable will be the most likely buyers.”
Once you have answered these two questions, then it is a matter of locating or reaching out to these qualified, target customers. In the example we have spoken of, we could reach the target segment of working mothers through hospitals or nursing homes, through children’s stores, through their workplaces, or even movie theatres that play children’s movies. And all this is without advertising, which I assume as a start-up, you will not be spending money on.
If you are selling to companies, it is important to go where these companies congregate, be it to a trade show or exhibition, industry associations and consortiums and to partner with companies offering allied services, so that their existing customers become your prospects. The most neglected and important way to find new customers is to ask old customers for referrals! Far too many entrepreneurs fail to do this and leave easy money on the table.
Keeping them
If you thought, finding good, paying customers is hard; keeping them can be harder still. The good news is that “It takes less effort to keep an old customer satisfied than to get a new customer interested,” as Michael LeBoeuf, retired professor of management at the University of New Orleans, says. There are three critical steps for keeping customers. Step one is providing them what they want, not just what you have to sell or offer. Step two is asking them for feedback and actually listening to them – not just to what they say and how they say it but most importantly to what they don’t say. No news is not always good news in keeping customers. Finally, step three is demonstrating through your actions that you have listened to them and improved upon your offering or service.
Letting some of them go
The hardest lesson I have found is that sometimes we have to let customers go. It appears to contradict LeBoeuf’s assertion, made in the previous section, that keeping a customer is easier (and hence better) than finding a new one.
If you don’t let go of the ones that are either not profitable, or not paying you on time and distracting your business with the overhead of running after them, you will find yourself in trouble soon. And these are the easy ones!
Even harder to let go are customers who are profitable, but don’t treat your employees well or with whom you have fundamental issues of values mismatch, the ones that supported you in your early days but are now sucking up all the energy of your company with little or nothing to show for it. And it is critical, that as an entrepreneur you spend time each month and each quarter reviewing and culling your customers.
Yes, you had better have other paying, profitable and prosperous customers to be able to do this – and that brings you full circle to finding new customers, keeping and growing them even as you continue to weed and cull those that are holding you back! So get out there and begin selling!
This article first appeared in the Hindu Businessline in March 2008.
Thanks to my grandfather and numerous teachers along the way, reading is one of my greatest pleasures – and even today, while allegedly busy working, I manage to read one maybe two books a week. In my callow youth I felt, that any one who reads either self-help or how-to books must be somehow wanting. Luckily somewhere between ages thirty-two and thirty-five, I seemed to have gained my senses. And here I am today, practically bursting with lessons learnt from my grandfather, mother and father and a slew of mentors, a few I that I have met in person and a whole lot I have only encountered through their writings.
Running an entrepreneurial, cash-strapped, people-intensive, technology business is the surest way I know of having utter decimation of any semblance of ego – yet surviving the pounding each day and actually thriving and growing is probably the biggest boost to one’s ego as well – do it long enough and a true state of non-duality can be reached. I am not there yet – but along the way have learned a few things and reckoned its my turn to share with the world. With that in mind, I began writing a series of short articles, that are now getting published in the Hindu Business Line on alternate Mondays. Today the third in the series has appeared.
Business is about people When most people talk about starting a business, they are thinking about commerce — buying and selling. At first glance, business appears to be about that. The street hawker who sells vegetables off his cart or the corner boot polish is indeed doing just that. Even in the case of these single-person businesses, people, usually in the form of customers (and occasionally as investors or moneylenders), are critical to their survival.
However, any business that does anything more complex very rapidly becomes all about people. Particularly for entrepreneurial ventures, it may seem that it is only about people. Make no mistake, capital, cash flow, products, marketing and sales are all important; yet these play the same role for other businesses including your competitors. Your people are what will separate your business from the pack. Full article here.
Over the last several years, I have written about startups, entrepreneurship and business in general in the Hindu BizLine and Wall St. Journal. I have compiled these for easy access in the column below.
For a business to be viable, money is important. Most of us understand this intuitively and deal with it constantly in our own personal lives. Yet, as runaway individual credit card debt or a cash squeeze in a large company and the occasional sovereign currency crunch demonstrate, it is not difficult to lose sight of where the money goes. Even as capital and sales revenues supply money for your business, inward and outward cash flow management is critical for survival. If you don’t track and control the cash flow in your business, you may not keep your doors open too long, unless, as in the case of Chrysler, an elected government bails you out. It makes better business strategy to understand and manage your cash flow rather than rely on the government to help you with it.
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