Money in Business

Continuing from the business series, this post is my notes on money matters in business.

It is easy to get confused about finance or accounting. Many people gets scared when they hear about it. Balance sheet, ROCE, ROI, IRR, NPV, DCF, WACC, CAGR, etc. etc. But when it comes to money in business, there is one principle that takes precedence above the rest.

1. The principle is this: You must collect your money.

Many businesses go bust because they fail to collect their debts. This is a major chronic situation, especially so in desperation to get sales. The best type of businesses are those that collect cash upfront before delivery of goods or services. Heck, the best are those who collect upfront before production starts.

In the course of business, it is easy to forget this principle because the sales numbers are so tempting. And the apparent “friendliness” of your customers makes you believe that they will pay you on the dot. Most of the time, they don’t.

It has to be clear in your mind this thought: bad debts are worse than no sales.

Imagine that you earn 10% profits on your sales. If you fail to collect on just one job, you will have to do 10 more jobs of equal size and margin just to cover the debt that you failed to collect. This is a disaster!

2. The next principle is that you must pay your staff and suppliers on time. And if you have salespersons that earns commissions, you must also pay them on the dot.

Paying people on time establishes trust. Paying salespersons’ commission on time establishes motivation. And these are the people that supports the business, your suppliers and staff. Understand that without their support, for example, if suppliers stop delivering to you on time because you do not pay on time, or they do not deliver high quality raw materials to you, your end products will also reflect such inferior quality. Also, if you do not pay your staff on time, they will sooner or later look for other jobs and those who remain either is your secret admirer hoping one day to be able to marry you or those who cannot find a job elsewhere, which means you are keeping people that nobody else wants.

3. The third principle on money in business is to think of Inventory (stocks) as the devil that needs to be cast away. Inventory eats you dry. You should target zero inventory. Having inventory as “assets” is an accounting laughingstock because inventory is cost.

The problem with inventory is that you expect you can realize them in the future, turning them into cash. The sad truth is that a lot of inventory goes to scrap, and the cash spent to stock them also goes down the drain. This is not a smart thing to do.

Actually, all the above is what we call working capital management, or the cash cycle. It is how fast you get back the cash that you invested into the business and turn a profit. The shorter the time, the better off you are.

For example, imagine if you are selling handphones. The best scenario is your customers pay you upfront the full price of the handphone and then you use that money to buy the handphone from your supplier and then pass the handphone to your customer, keeping the profits in your pocket.

The worst scenario is you stock up one thousand phones hoping that you will sell all of them.

Collecting all the cash upfront is usually not possible nor realistic but you must at least get a deposit. This is a must.

There may be customers that you need to give some credit but still, you need to get some deposits or downpayment. The reason is very simple. If they are genuine customers, why is it that they cannot pay something upfront, as earnest money? And having a deposit will reduce the chances of them canceling the order after you have bought the raw materials/stocks.

If there is one person that is your friend in your finance department, that person is the credit control manager. Have him or her report to you directly. Have standard operating procedures and credit risk management policies in place. Make them inviolable. Stick to your guns, always remembering that one bad debt will take many good sales to recover, so don’t be greedy.

Bad things happen to greedy people.

Principles of Business

As I am trying to write and distill what I learnt so far in business, I have come up with the following principles of business. They are actually pretty common sense but many people do get lost along the way and I thought I will post it here to remind myself. Each principle can easily be expandable and elaborated on but for my current convenience, I will just simply state it first.

1. To be in business, you need to sell things that people want to buy.

2. To make things that people want to buy, your products must be superior to your competitors’.

3. To create people’s desire to buy your superior products, you must first make people aware that your products exist.

4. When the people are aware of the existence of your products, you must make it convenient for them to purchase it.

So as you can see, the principles are pretty common sense and general but each can be further elaborated on. First you need to know what people want to buy. There are a million things that people wants to buy, so how do you decide what to sell? The guiding light will be to sell what you are good at, extraordinarily good at. Not just that you are good, but you are at least the best amongst your family, friends and acquaintances. So what is it? If you cannot figure this out at this point in time, do not proceed.

Next, how to make your products superior to your competitors. The first thing to know here is who are your competitors. Your competitors need not be those who sell the exact same products or service that you sell. Your competitors also consist of people offering alternative solution. For example, the competitor of a burger seller are not just other burger sellers but also the noodle store, the rice stall etc. because they offer the same solution to the problem. For example, in entertainment, the competitor of the TV box are not just merely those other TV channels but also the mobile phone, the iPad, the Mac or PC, etc. So after you figured out what you are really good at, then figure out who will be your competitors if you go into business and how can you be better than them. Even if you cook the best pasta amongst your family, friends and acquaintances, that doesn’t mean your pasta is better than the one across the street if you decide to start a pasta shop.

And then you need to spend a lot of time innovating. Your pasta may be the best now but they may no longer be so 6 months down the road. Look ahead of the curve. Improve your products. Innovate like mad, whether products or processes. Always strive to be better and better, just like a 100m sprinter always working so hard to clock a better time. Listen to customers. Observe behaviors and trends. Make innovation a process so that you can remain the best all the time.

Now, you are really good at something, and you know your pasta is the best in the neighborhood because you have tasted every single pasta shop, you still sell zero if no one knows you exists, that your pasta is the best in town. This is where marketing comes in. You need to shout, make every single person know that you exists and you have the best stuff in town. Do not be shy. Shout. Bang your pots and pans. Make yourself well known. Give no apologies for being the loudest to tell everyone you are the best there is.

And after everyone knows you exists and have the best pasta in town, they must be able to buy it, godamit. What is the use of a line of a hundred people if you can only cook one bowl of pasta every 30 minutes. Or that your stall is so inaccessible, going there is a major chore and hazard. In industry, for example, this is operations and customer service. You must always be contactable, accessible. You must always show your face and make it easy for people to do business with you. You must always be able to offer solution faster than anybody else in business. You must be there.

Push your products. Tell them why your products are so good. Show them that they will never get fired choosing you. Prove to them that you will always be there all the time, anytime. Keep in touch. Send cards. Do whatever it takes so that you will be there when they need you and you can neatly offer a superior solution to their problems, on budget, on time.

And of course, underlying it all, you need to have a great team but that is another major subject which I have touched on in my previous post.

So let’s think about every step in our daily business. Where are you at?