Raj Shankar's Blog, page 28

Finance for Entrepreneurs: Difference between Expense and Investment

After a detailed understanding on the various types of expenses (http://rajshankar.wordpress.com/2014/01/03/finance-for-entrepreneurs-what-are-expenses/ ) that a business incurs, let us try to quickly appreciate the difference between the two terms: expense and investment.

Expense and Investment both incur a cash outflow. Technically an expense is fully charged to the current Profit/Loss Account (or Income Statement), an investment is fully added to the Balance Sheet (http://rajshankar.wordpress.com/2013/11/08/finance-for-entrepreneurs-what-is-a-balance-sheet/ ) and the outflow is charged to the Income Statement in proportion to the utilization of the invested asset. Because of their inherent different, an expense is a drain on the current year’s profit and does not necessarily add to the Assets in the Balance Sheet. The investment in all probability adds first to the Assets of the Balance Sheet and then a small portion of it is brought to the Income statement (http://rajshankar.wordpress.com/2013/11/01/finance-for-entrepreneurs-what-is-a-profit-loss-statement/ ) every year based on the utilization of the Asset or based on its expected useful life. If you did not understand any of the above – ignore and read on. You will understand it after reading the below or when you return to this after a few more lessons (Weekly Lessons on Finance for Entrepreneurs Delivered every Friday on this blog).

While both expense and investment incur a cash outflow, the reason why it is done is quite different. Expense is a term used for purchases where the usefulness of the purchase is utilized by the enterprise in the immediate future. Investment is a term used to refer to outflows incurred wherein the usefulness of the purchase is utilized by the enterprise over a period of time.

Let’s understand using an example: Fuel (either Petrol or Diesel) is generally purchased by an enterprise for running one of its vehicles. They are used to run the vehicle today or this week. The usefulness of the fuel to the business is immediate or in the near term. Thus ‘Fuel’ is classified as ‘expense’. Businesses buy vehicles for the transport of their products or personnel. This vehicle generally has usefulness to the enterprise for a long period of time. Hence the vehicle is bought with the rational that it will be used for say ten years. Hence the cost of the vehicle is not called as expense, but is added to the ‘Assets’ side of the Balance Sheet. But since it has a life of ten years, a tenth of the cost of the vehicle is brought to the annual expenses of the business (that is to its Income Statement) every year. The term used to refer to such expenses which are brought from the assets to the Income sheet is called ‘Depreciation’. We will learn more about ‘Depreciation’ and similar terms later, but for now please focus on learning the difference between an ‘expense’ and an ‘investment’ and how they are charged to the financial statements by accountants.

As an entrepreneur you will also be lured to buy assets when you start making larger profits, but you will have to review and make rational decisions on large value purchases which result in investments. If the usefulness of the asset dies away faster than predicted (which in today’s world seems to be the trend), a large portion of the assets will result in poor business decisions in the future as well. It also reduces the adaptability of the enterprise. Hence as an entrepreneur, attempt to see if you can convert all non-core business investments into expenses – it will serve the best interests of the business in the long term.

Think about it!

Vedantic Wednesday: Being true to oneself

Being true to oneself means being true to one’s closely held beliefs. Putting this to practice has two inherent problems:

Finding your beliefs or values in life
Having the courage to be true to them

While many believe that they know the answer to the first point, in reality it is not so clear. Most of them time people don’t know what they believe in. A simple reflection of this is the fact that for most people values / beliefs keeps changing all the time! This means one has not really gone deep inside oneself and found who they truly are. If values/beliefs change, then how can you be true to something that is constantly changing? Hence it needs to be fixed. This needs to be done as early in life as possible. While philosophy provides enough tools and techniques to make this happen, no one other than the person individually can figure this out for themselves.

Don’t make the mistake of looking for soothsayers or astrologers to figure this out for you. Even the real practitioners of these fields can only provide a broad direction or suggest domains. Neither are self evaluation tests or type casting questionnaires going to help you resolve this challenge – for they are created to filter not point. They can again be used as cues, but definitely not as the solution.

This puts the onus on the individual to find this out for oneself. So make this your first exercise towards becoming peaceful, happy and successful. It is only when you find who you truly are that you can go on and be sincere to that person – that person called you. This is what is called ‘being true to oneself’.

Think about it!

Uniqueness of Idea and Success in Entrepreneurship

Over the years of having taught entrepreneurship to a variety of audiences, one thing that continues to surprise me is the increasing frequency of this question’s occurrence. “Should my idea be unique to be successful?” It seems to me that this ‘myth’ has almost assumed propositions of ‘truth’ that it takes a lot more effort to help aspiring entrepreneurs see through the illusory nature of this untruth. This belief has also resulted in a disproportionate amount of entrepreneurship efforts spent on ideation and creativity. While they are important for the success of a business they are not enough for success of an enterprise.

Looking at the innumerable businesses that succeed and fail, it is becoming fairly clear that the ones which succeed are not necessarily the ones that are unique. In fact it seems that the more common the idea the more the chances of success. And the more unique the idea the more the chances of failure! While it seems quite contrary to popular belief, almost any level (even minimum) of analysis clearly indicates that uniqueness has nothing to do with possibility of success. In fact if there is one thing that it relates to, it is the possibility of failure.

This leads us to the real question that many entrepreneurs want to actually ask – “If I share my idea, won’t people copy it?” While it seems like a worthy risk to worry over, it is a fall out myth of the previous one. During a recent program at Indore, at the end of the three day interaction, one of the aspiring entrepreneurs came out in front of the class and confessed: “Apart from all the other learning during the three day workshop, my biggest take away is that I need not worry any more of any one copying my idea. What I realized is that it will take even me a lot more hard work to turn my own idea into a profitable business. This now gives me enough mind space to actually stop worrying over the loss of my idea and start speaking more widely about it. It also gives me the absorption capacity to seek input on my ideas from as many useful people as I can meet.”

I not only thanked the participant for his honest declaration but also appreciated him for his courage to do so. Was this trait itself not indicative of his entrepreneurial nature? Why should we worry so much over ideas themselves? After all was it not a wise man who quoted, “Success is 1% inspiration and 99% perspiration.”

So the next time you hear entrepreneurs spending their time worrying over the loss of their ideas, think again – is there really a loss over loss of ideas?

Think!!

Entrepreneurship: Tool for socio-economic development?

If you believe in the title of this blog (as most of the policy makers do), then two of the basic questions you should ask yourself as an entrepreneur is:

Is my start-up having a social impact?
Is my start-up having an economic impact?

What do we mean by the above questions? How is this important for an entrepreneur? What benefit will I get as an entrepreneur by answering these questions? All are valid questions and here are some thoughts on why you should answer them!

Whatever be your business, ask if you are solving a social problem or serving a social want? If you are not doing both – be careful, for your start-up might be at the risk of failure. Whether it is Facebook or Google or Apple or Airtel or Infosys or Citibank or Saravana Bhavan – all of them solve either a want or a need. In doing so, they ensure that their enterprises have a future. Hence it is a very important thing for your enterprise to have a value proposition that either solves a need or serves a want.

Whatever be your business, ask if you are creating value for your customers and for yourself? If you want to truly solve a need or serve a want, you need to do it at a price that those who will benefit feel right. If you do this then people will buy what you sell. They will continue to patronize your products or services because it brings meaning to their lives. This answers half the question. The second half of the second question revolves around whether by doing this at a price that appeals to your potential customers, you make money. If you cannot sustainably create this value for your customers, then the solution is temporary. This will kill the enterprise itself. Thus, profits are critical for an enterprise to exist. Revenue and Profits answer the second question.

Thus the two questions that seem like a policy level thoughts are actually a quick check for every entrepreneur to try on themselves. In my opinion these are good questions to validate if the start-up will be widely accepted by the potential customers as well as by the ecosystem.

Use them to bring the much needed focus to your enterprises’ activities as well as to the performance.

Think!

Business Today’s 22nd Anniversary Issue dated 19th January 2014

Due to constant travel and much demand on my time (personal and professional), my reading of magazines has taken a beating in recent times. While I still manage to catch up on a few magazines, it is extremely selective. After a long time I ended up picking a magazine that I read fully (cover to cover).  I also ended up reading it in almost one sitting (I think two in all).

The issue is interesting for the collection of articles by interesting minds. Right from Al Ries and his clarion call for ‘narrowing focus’ (a topic very close to my heart) to Sadhguru Jaggi Vasudev’s interesting statement “I don’t know who Rahul Gandhi is…” the issue contains a good number of articles covering a whole range of domains including but not limited to: urban transportation, Indian toys, Tourism and Kashmir, Inequality and Sufi Music.

You are bound to get a view from top thinkers in their respective fields, interviews with practitioners, evolving trends, facts, figures and sources of information that you may find interesting from your interests. Go ahead and consume this little gem of an issue! Thanks to Business Today to create such a lovely 22nd anniversary issue of their magazine. Congratulations and Hope to see many more lovely issues such as this. Best wishes for the future as well!

For a complete list of articles in the issue and the articles themselves please do look up here: http://businesstoday.intoday.in/issue/334/1/

Vedantic Wednesday: Why we can’t be true?

During the course of facilitating workshops for entrepreneurial leaders I have found companies stop short of delving deep into discovering values! The result is poorly identified shallow values. When values don’t mean so much to us, how can we be true to them? Hence this results in value breaches almost every day. Another big reason why this happens is because we are so worried about immediate responses. To ensure that we gain business in the short term we compromise on our deeply held beliefs. This is critical to reflect on considering the fact that the most important outcome of this is – agitations within the entrepreneur or leadership team.

Think about it!

Why is it so difficult for entrepreneurs to define their beliefs? It is because of a shallow purpose. Many times entrepreneurs are not entrepreneurial. They are not sure of what they want. This leads them to be kicked around like a football by all who pay. This will result in short lived, stunted and unsatisfied lives. Being entrepreneurial means not searching for success, but for living what one truly believes in. This requires every individual to figure out what they truly want to do with their lives. Once you decide and figure out what you want in life, write it down somewhere. Read it every time you feel confused over a decision point. If the opportunity is not in line with what you have always wanted to achieve don’t do it. This makes taking decisions in life easy. More importantly there is now at least a reference point to which you can be true.

What drives your enterprise?

Every entrepreneur starts because of a heartfelt need to solve some problem or overcome some challenge. But over time as the business grows this original intent is lost. This leads to stagnation or sometimes growth that brings profits but not satisfaction. What makes this change happen? Where does this dissatisfaction arise from?

It looks like the answer to that question rests in answering another question: “What’s driving your enterprise?”

If the purpose is strong enough the entrepreneur and the growing entrepreneurial team continue to keep their focus on the purpose and this inspires them to wade through problems and setbacks equally as successes and achievements. But if purpose takes a back seat to allow profits lead the way, then the inspiration is lost unconsciously. This leads to lot of compromises and eventually stagnation of some kind – either at the individual level or at the enterprise level. This has resulted in a lot of promising enterprises wither away far earlier than realizing their true potential.

Whenever you run any entrepreneurial initiative, always keep checking what gives your satisfaction? Always ask yourself the question – “What made you get started?” Ensure the answer is the purpose itself and don’t let a measure come in the way as the driving force. There is nothing wrong with profits, but profits are only a measure of passing performance. Let them not become the driving force behind the actions of the enterprise – they are bound to show some short term gains but reduce the journey itself over time.

So what’s driving your enterprise: purpose or profits?

Think about it!

Small Business and Developmental Investments

Every progressive individual knows the importance of making futuristic investments. But when it comes to business most entrepreneurs rarely invest in themselves and their people as much as they make investments into machinery and technology. The primary reason being the latter is more tangible than the former. But aren’t entrepreneurs the right people to prepare for the future? Is it sensible to run a business with under prepared resources? Why is it so difficult for entrepreneurs to make developmental investments? Why do they find it difficult to make investments into strategy and planning, learning and development, and research and development?

I am not sure if entrepreneurs really spend time strategizing their growth plans regularly. If you are one of those who do sharpen your axe every year (if not more frequently) then as part of the exercise also look at what investments you would love to make this year towards developmental initiatives. The quantum is less significant than the intent. While spending money seems to be the primary stumbling block in making these decisions – ideally they should not be! Why? Because typically in every enterprise there is already a lot of resources deployed but not used! Surprised, here is a quick example: An entrepreneur incubated at any reasonable university campus typically has access to faculty, classes, library, and workshops. Have you attended any of these? Have you nominated any of your people to attend these and bring some value back to your enterprise? Does that require any money at all? In most cases it doesn’t and even if you have to spend some money it is too little to warrant even a discussion – then why is it that entrepreneurs don’t push themselves or their team members towards development? It is primarily because of a lack of understanding, rather than all the reasons being voiced. First get the intent right – then the decisions will be much easier to make. In some cases when the enterprise has grown bigger, one may be required to hire a coach or a mentor for the CEO or the senior management team – even this investment if rightly channeled will lead to improved leadership.

Hence this year please look at what initiatives you and your team will take to develop yourselves into a much stronger team so as to use the engine you have developed and fine tune it into a much more capable vehicle so that you can take it to greater heights. I have met a few forward looking CEOs and they focus on this area as an important aspect of their growth strategy. Their advice is strictly never to measure these investments in the short term. But that does not do away measuring them. They have to be done right so as to derive the relevant benefits.

So what are you investing in this year?

Think about it!

Interesting Links This Week: 12-January-2014

Entrepreneurship is a young subject. It is also interdisciplinary. Hence studying it without another domain makes it less meaningful. But when the subject is researched with other areas such as Strategy, Economics or Psychology, it tends to provide useful progress with our overall understanding. Prof Shing-Yi Wang’s research on how property reforms have impacted entrepreneurship seems to provide us one more variable that contributes to creation of entrepreneurs. It also shows how public policy changes can also lead to boosting entrepreneurship and thereby to more jobs for the economy. The short post itself has a lot to take away, while the paper seems like a goldmine for further research. Read more here – Link: http://knowledge.wharton.upenn.edu/article/jump-home-ownership-boosted-entrepreneurship-china/

 

So many people subscribe to the Harvard Business Review, but few actually end up reading the issues that land on their tables. But this collection of articles from across issues of the HBR provide a selected list of interesting articles with short write-up on how it can help you. These articles cover various aspects of senior management challenge and opportunities. Hence every leader across growth oriented enterprises should consume them. The thoughts could trigger a whole new world of ideas. The articles are also available for download as well. But let that not entice you to download and stock them up! Read them! Read more here – Link: https://enterprisersproject.com/insight-across-boardroom

 

I am yet to read and review the latest book ‘David and Goliath’ from Malcolm Gladwell. It is sitting on my table to be consumed. Gladwell’s story telling prowess within a larger well researched framework makes reading his works a pleasure and insightful. Here is a nice little review of his book along with a short interview of the author. I am sure this will inspire you to read the book too. Read more here – Link: http://www.inc.com/magazine/201312/leigh-buchanan/malcolm-gladwell-book-underdogs.html

Books and Me: Dhandha

Book Title: Dhandha – How Gujaratis do Business

Author: Shobha Bondre (Translated by Shalaka Walimbe)

‘Dhandha’ is another inspiring read for entrepreneurial minds. It is a given that Gujaratis are born business people. Gujaratis are referred to as a benchmark for reference when it comes to business sense. But most of what people speak about Gujarati businessmen (women included) is hearsay. There is very little that is written about of the Gujarati way of doing business, at least in English. Hence a lot of the business students and aspiring entrepreneurs outside of regional literature like Gujarati and Marathi have not had privy to this knowledge. Shobha Bondre’s works in Marathi seemed to have had a wide readership. But the non Marathi speaking population will now have access to her works – thanks to Shalaka Walimbe’s interesting translation.

The book describes the journey of five Gujarati business persons (one woman as well). Each of their stories are truly entrepreneurial. They are typical of how many of the Gujarati business persons have grown and built their own communities. The book is first and foremost, very inspiring. Every story traces the growth of an entrepreneur from rags (almost in some cases) to riches. The stories also highlight the fact that they were ordinary people like all of us. One can easily relate to these people since the stories are so intertwined with their personal lives. This makes the reading very human and realistic. It is not that they have not had problems or that they did not have set backs, but every story is about determination to be in business, to be successful and to be fair to their lives. They have taken tremendous risks as well. The success and the ongoing challenges of some of their lives are useful lessons for teaching entrepreneurship.

Every class that I teach on entrepreneurship rarely goes without a remark about Gujarati business acumen. But instead of accepting their natural inclination towards business and speaking at the macro level, we can now bring at least five real stories to class: Bhimjibhai Patel (Diamonds are forever), Mohanbhai Patel (The Circle of Life), Dalpatbhai Patel (Motelier becomes Mayor), Jaydev Patel (Life of a Salesman) and Hasu & Hersha Shah (Not Only Potels).

The book is an easy read for anyone. One of the highlights of the book is the absence of smart statements and prophetic advices. The suggestions are all about being honest to the profession, thinking long term, working hard, building strong relationships, etc – all of which are so simple, that it may be exciting. But it is this simple advice that has created generation after generation of Gujarati businessmen and women. A lot of learning for entrepreneurs lies subtly embedded in the stories and that is what makes story telling interesting. Lessons can be milked out by the reader based on their level of extraction. Overall a good read which goes beyond inspiration. With a foreword by the chief minister of Gujarat (Narendra Modi) and an introduction by the state’s brand ambassador (Amitabh Bachchan) – the book has received a generous introduction.