Prudence and a tight control over the available funds is of utmost importance for any business
Words by: Jayadev Menon Photographs from: pexels
In the mid – 80s a young man from a well-to- do family in Trivandrum, fresh out of college, asked his parents for capital to start a travel agency. Even those days Kerala was a popular travel destination for tourists from the West and there was the regular outbound travel to the Persian Gulf region. His business had more than a 50-50 chance to succeed.
He used the funds to rent a large space for his office and to get the space decorated – there was wood panelling in the Customer Reception Area and an expensive Executive Table and Chair in his cabin. His intention was to impress people who visited his office.
Using his father’s contacts he was able get the business rolling. The young man’s selling skills and pleasing manners helped him win more deals. His travel venture was off to a good start.
When funds started flowing in one of the first things he did was to purchase an expensive car. Heeding to a friend’s advice he also invested funds into starting a branch office in a satellite town which had a significant number of families with members working in the Persian Gulf.
Most of the revenue generated in the early days was spent on interior decoration and the rest was used to live out his dream – his car had a top-of- the-range audio system and he loved throwing lavish parties for his friends and airline officials.
Cataclysmic Failure
The airlines companies often give travel agencies a reasonable period of time to settle invoices raised for the tickets issued by them. Expectedly, the fledgling agency started missing the due dates and the young man had to use his PR skills to get the airline officials to extend the deadline. But soon as that option expired he started borrowing funds from money – lenders at exorbitant interest rates. His parents had, on the other hand, pulled the plug on him.
The decline was rapid. With lenders and airline officials baying for his blood the young man had to make a hurried exit from town like a common thief. He had left behind a huge pile of debt that caused immense disgrace for his own family members.
The entire saga was played out in just 18 months.
It all happened for just one reason – poor fund management.
The lesson? Build a wall, one brick at a time.
While the young man spiralled to his own doom another travel agency (which to this day remains one of the industry leaders) was being run by a more scrupulous entrepreneur from a small office space in a not-so- swank part of town- his office wasn’t so impressively decorated but it was always busy. Instead of opening branch offices in satellite towns he developed a network of commissioned agents who were well connected with the families who had members working in the Persian Gulf. This entrepreneur didn’t spend money on office space, interior decoration or staff. He was building the business on rock – solid principles of prudence, frugality and careful planning. Later on, he did move to an impressive office and even created a network of branches, not just across the state, but the country itself. But, he did that only when the revenue had grown sufficiently and he had the capital to fuel such expansion.
Right on the money
It is easy to get carried away when money starts rolling in and embark on a major spending spree. Such behaviour indicates lack of planning, error in judgement, poor understanding of business processes and bad decision – making.
Survey after survey has listed insufficient capital, uncontrolled expenses and poor cash-flow management among the top reasons for the failure of Small Businesses.
Here are a few questions:
- What is the payback period for each investment made?
- Where will the fund come from and where will it go?
- How much cash is needed to keep the business going and to take it to the next level?
- What expenses are essential and which ones can be avoided?
- What is the cost of borrowed funds and how will it be serviced?
- What is the cost of infrastructure, staff and inventory?
- What is the financial impact of delay in recovering receivables?
- Do we need to hire staff? Is outsourcing the better option?
- Do all processes need to be managed in-house? Will an external agency do it cheaper?
- Are we measuring the ROI of all marketing expenses?
As the business grows there will be a need to bring in Financial Experts to help in Financial Planning and to structure funds, but smaller businesses can do it to a good extent by being sensible and savvy. The idea is to keep a close watch on what one is doing with the available funds. It is important not to get carried away and stay grounded.
The literal translation of a Malayalam proverb goes thus – Sit down before you stretch your legs. The message – Be sensible and don’t live beyond your means. Cut your coat according to your cloth is the English equivalent.
It is said that the third richest man in the world, Warren Buffett, doesn’t have a computer or a calculator in his office and he lives frugally, but he sure does know how to invest money and make it grow beyond most businessmen’s wildest imagination. If you wish to have a bank balance as large as Buffett’s learn to run your business on the principles he used to build his empire.
FUND is fundamental to the survival and sustainability of your business!
Words by: Jayadev Menon Photographs from: pexels