Raj Shankar's Blog, page 34

Finance for Entrepreneurs: What is a Balance Sheet?

A Balance Sheet is a statement prepared to identify the current state of an enterprise. It is a cumulative reflection of all the actions entered into by the enterprise since birth. Hence by design, a balance sheet can be prepared for a business at any point in time. In contrast to an Income Statement, a Balance Sheet is read left to right. It has two columns – ‘what the company owns’ and ‘what the company owes’. The total on each side must always match with the other and accountants go a really long way (at times getting lost too) in ensuring this.

The side of the balance sheet containing what a company owns is called ‘assets’. It contains typically real stuff like ‘cash’ but it also contains some not so real stuff like ‘debtors’. By real I mean that which the company really has, while unreal is stuff that is legally yours, but has still not reached you and whose chances of reaching you are not 100%. We will go into further details later as we go back to these statements and study them deeper. Another term that I used for the first time is ‘debtors’ which means – money for products / services that you have already delivered / rendered, but you are yet to receive. Since it is legally your money, it is considered an asset.

The other side of the balance sheet that contains what a company owes is called ‘liabilities’. Liabilities contain items that a company needs to pay back. They contain payments outstanding to suppliers (who have supplied raw materials) and also borrowed money that needs to be repaid (loans taken from banks, financial institutions, etc). One interesting item which appears under liabilities is ‘shareholders money’! It’s not surprising that every entrepreneur questions why this is a liability. This arises because of the fundamental flaw of the entrepreneur in not separating themselves from the enterprise. This is perhaps the first instance where this thought occurs to the entrepreneur. Is that why so many entrepreneurs refrain from learning to read balance sheets? J The reason why this appears as a liability is because; it is money that the company owes to its owners. The company is different from its owners! Yes, it is. It should be if you want to allow the business to grow.

A Balance Sheet is a statement that is referred to a lot by both bankers as well as by investors. The reason is it shows the strength of a company to withstand shocks and tribulations when turbulence rocks the enterprise. Considering the way things are in the economy across the globe, the importance of looking at the balance sheet cannot be ignored. While an early stage enterprise is not the one that needs to worry too much about creating a good looking balance sheet, there is immense use even for an entrepreneur to know if they are growing a healthy enterprise. It is something like constantly watching the impact of your eating and exercising habits; invariably you will be able to predict how healthy you will be in the future.

Ideas Evaporate!

It doesn’t even need sunlight to for it to happen! It disappears just like how a drop of water disappears when it falls on a hot plate. Many times I wonder if there is an inherent connection between the rate at which ideas appear and disappear.

The truth about losing ideas has been reiterated too many times by artists, researchers, entrepreneurs and by everyone for whom ideas formed value. In today’s knowledge driven economy ideas are almost the new form of currency. Just because ideas have become valuable has not changed its inherent property. They still appear and disappear in our minds at a fast pace. Those who have managed to learn the skill of capturing these ideas before they disappear are the ones who have the potential to become successful.

In a recent panel discussion that I moderated I heard this thought of learning to capture ideas being shared as a tip by a young and successful entrepreneur. He reiterated the importance of learning this skill while sharing couple of instances from his own success story and how he learned it the hard way.

After so many reminders, let us not wait to miss good ideas to learn this skill!

Vedantic Wednesday: Seeking attention in life, at what cost?

In today’s world we see a lot of people putting down others to feel big. During one of the recent felicitation functions of associates, I found a person trying hard to gain attention and he achieved it only by putting down a few people. This made me remember how we fight to gain attention at any cost. We don’t realize even upon seeing it number of times that we are not going to be remembered here for what we have achieved! Surprised? Ask yourself who are the people you remember from about five centuries back? Probably no one!!

Still we all fight to gain attention! To gain this attention we also go a very long way in finding something that is simply interesting, even if it means we are making another person / institution uncomfortable (if not embarrassed). This experience of listening to a young middle aged man lose control over his speech on stage reminded me the importance of living life in absolute. It seems like we cannot live life if there are no people around! I am not even for a minute suggesting that we should learn to live alone – but on the contrary I am exploring the possibility of finding something in life that we can simply do, irrespective of acknowledgement. Sounds difficult, but most of the people who seemed to have lived a full life, seemed to have lived simply for the sake of some action – not even for any results, let alone, acknowledgment.

Why are we seeking attention in life? And at what cost are we seeking it?

Think about it!

Opportunity Driven Ideation

Without a trigger there can be no ideas! If thoughts do not arise without an input, then a lot of the ideas that we generate are dependent on the quality of triggers we use. Many times the triggers are random, but the very successful entrepreneurs ensure they gain access to higher quality triggers all the time. Since this has been used effectively by almost every artist remembered in history, I wondered if it can be used in entrepreneurship. Instead of simply coming up with ideas randomly, can entrepreneurs be driven to ideate around specific opportunities?

As an entrepreneur a lot depends on what you keep as your sources of opportunities. How do you figure which opportunity to ideate on? Do you even have an activity called opportunity identification in practice? Most often not! If you jump to start the business on the earliest idea that hits you, it is quite certain that you will be lost too soon in the entrepreneurial journey!

Hence the first skill to pick up as an entrepreneur is to source opportunities. Ideation or the application of creativity should be used only on a valuable opportunity. When ideation is centered around quality opportunities, they act as triggers to provide the much needed direction to our ideation efforts. Without such a central focus point guiding our ideation efforts, it is highly possible that we go around picking every interesting idea we come across. If we do this we will end up in one of the two situations discussed in yesterday’s blog: http://rajshankar.wordpress.com/2013/11/04/random-ideation-reduces-entrepreneurial-ability/

We don’t want t fall prey to this illusion that we are moving ahead with pure ideation. We want to be rooted in an opportunity that is valuable and that which can be exploited using our strengths and resources.

So, the next time you engage yourself in ideation, ask what’s the opportunity that’s driving this creative effort – you will save yourself and your firm.

Think about it!

Random Ideation reduces entrepreneurial ability

How do you ideate? An interesting question, I always pose to entrepreneurs who I keep meeting almost every day. What do you think could be possible answers? I am always surprised at the response – that it is based on random experiences or objects! There are two patterns that seem to emerge from this activity:

One keeps ideating endlessly without any focus: In the first case I find people falling prey to what I call the ‘Chronic Ideation Disorder’ (CID) Syndrome. People seem to be excited over everything that crosses them; they ideate and then lose those ideas too soon. The reason for this quick loss of ideas is because they move on to the next trigger, the next bunch of ideas, and there is nothing that does not bring ideas in their mind. Such people value creativity over everything else. They pride themselves of being child-like in their attitude. While it is no doubt a very tough thing to maintain, what they miss is that it does not look very good to remain a child all the time! Think about it! We want to use the child-like abilities in limited ways so as to be able to apply them when needed, without actually being a child all the time!
One gets on to the first idea that strikes and then loses focus: The second variety is those who come up with the first interesting idea and then start working. The first hurdle they see and they give up. These are the guys who constantly take up fresh projects and keep dropping them too often. They keep moving across projects and think of their adaptability to experiment as strength. But what they don’t realize is that they lose their entrepreneurial ability every time they attempt something shallow and keep giving up. There is huge difference between an Einstein failing ten thousand times on the same experiment and some of our young minds failing one time on ten thousand experiments.

Any ideation of this nature is bound to create more confusion than lead to any form of clarity. In fact it can even lead you to feel a false sense of success and advancement. But sooner or later, one is bound to lose the spirit as they are not building on the effort. This can be very de-motivating in the longer term. So a budding entrepreneur or an educator mentoring young entrepreneurs should learn to nip these random ideation efforts early.

Think about it!

Interesting Links This Week: 03-November-2013

The title brought me here to this TEDx Talk, but the topics got me to listen to it fully. If you are a teacher of any kind or you are one who is involved with the education system overall, you will find some interesting ideas in this short (less than 8 minute) video. Listen more here – Link: http://www.good.is/posts/you-can-t-be-mindful-if-your-mind-is-full

Any help to network better is useful for emerging entrepreneurs. Here comes another 8 of them from a popular author Dorie Clark. Some of the advice in here is very relevant considering the fact that early stage entrepreneurs have limited time and limited money. Read more here – Link: http://www.huffingtonpost.com/dorie-clark/eight-ways-to-generate-ne_1_b_4079730.html

It is always inspiring to read about ‘Showing Up’, because if we don’t where is the game in the first place? It is in this context that when I enjoyed reading Whitney Johnson’s blog post on HBR titled “Always, always, always show up” Oh! What a title? It gives me the needed push to get out of my seat and doing something that I was giving myself excuses against. Read more here – Link: http://blogs.hbr.org/2013/10/always-always-always-show-up/

Books and Me: Stephen Hawking: My Brief History, A Memoir

Book Title: Stephen Hawking: My Brief History, A Memoir

Author: Stephen Hawking

A short but scintillating memoir! I must confess that a lot of the book is written for a physicist by a celebrated one from their fraternity. He has made the book pretty much a quick two hour run through for even a moderately paced reader. If you are the quick reading type, you will finish it in less time than that.

Highly recommended for a person who is involved in Physics, Cosmology, Astronomy, etc and for all others read the book more for the story. You can easily skip / scan large portions of the book even if you don’t understand them and may be finish faster too. But here are few things that I took away even though I didn’t understand much of the physics related portions:

The book is brutally honest
Prioritization: Facing the possibility of an early Death and that too when you are 21 years old is not something that many want to even hear about. But the author’s life changed on this discovery. It is yet another inspiring tale of one who faced death in the face and lived a full life. Should we not learn from others experiences? A lesson that the author clearly wants the reader to take away.
Meaningful Life: The thirst to do something meaningful with life, especially knowing that you are going to live for a limited time is an important learning. A meaningful life is not created if we don’t figure out what will give us meaning in our lives – a very personal thing. The author’s story tells us how he wanted to take on the big questions that would contribute something to the field, a clear lesson to figure the big challenge that you want to handle in life, which will eventually give life some meaning.
Focus: The author’s ability to focus on theoretical physics and make an effort to remain in the area even when lots of options were available for experimental physics is, one huge learning for all of us. In the author’s case he also made the choice considering his inherent strengths and weakness. This awareness of your SWOT makes gaining focus; easier said than done!
Narrowing the opportunity window: This is something that I have been talking about to almost everyone I meet, especially in entrepreneurship and small business. The author’s identification of the area of work, by identifying the space of physics that was available to make a significant contribution; which did not have too much work done, provided him the chance to meet fresh findings and contribute to the development of the subject. Finding your area of work is an important task which one must not cut short to start the journey.

While everyone is bound to find inspiring lessons from the little book, two groups are sure to find great value:

(a)    The Physicists – The memoir of one of the most celebrated scientists in their field sharing how he went about finding his area of work, how he connected with the right people and how he kept his focus on his goal, is truly inspirational material.

(b)   The Differently-abled – While the author does make a case for everyone with a limitation to overcome it, I believe no one must think they have less or more abilities. Everyone is born with some clear strength. Why see them through a lens of the societal-average / others? This story is a clear example that if a human being intentions, he / she can achieve any goal and overcome any handicap, irrespective of depth of the challenge.

Overall a short but truly inspiring, highly recommended book for all who feel they are not adequately endowed for a meaningful life.

Finance for Entrepreneurs: What is a Profit / Loss Statement?

A ‘Profit / Loss Statement’ details the performance of a company. Performance is the result of an activity which takes time. Any activity by definition has a start, a process and an end. Because of its very nature, every time we want to understand the performance of a process we need to define a period during which we are attempting to study it. Hence the basis for drawing or creating a ‘Profit / Loss Statement’ is to define a period (a clear start and end point).

The usual period during which this statement is prepared is 01st April to 31st March every year. This is called a ‘financial year’. In fact an income statement can be prepared for any period of time. Ideally entrepreneurs must prepare (request their accountants to prepare) income statements every month and keep a tab on the performance. How does one read the income statement to make sense of the performance of a company?

Take any income statement and it is normally read top-down. It has revenues at the top, followed by expenses and ends with profit / loss. All sources of incomes earned during the period are added to calculate revenue for the company. The sum total of all revenues earned during the period under consideration is called ‘Income’ or ‘Revenue’ or ‘Top Line’. To generate the revenue for the period, all expenses incurred are identified and come in the expenses portion of the income statement. Once the expenses are deducted from the revenue, what remains is called surplus / deficit. If it is surplus, it is termed ‘profit’ and if it is a deficit, it is termed ‘loss’. This is the first level of understanding an income statement. Once we cover understanding of the basic structure of the three financial statements, we will come back to understanding more detailed variations of the statements that are made by various organizations.

How you fail matters?

Entrepreneurship is all about experiments! And experiments by their inherent nature should have failure as a possible outcome. No one disagrees! But there was something amusing that came to my mind as I was listening to various views on entrepreneurship being shared by educators and mentors on entrepreneurship.

While all of them spoke of the importance of ‘failure’ in starting up and constantly experimenting without losing the spirit and the attitude; something about how these young minds view experiments and how they fail struck me hard! An experiment in this context is an attempt to crack a problem / challenge that has intrigued the entrepreneur.

Is there a difference between failing a thousand experiments on a single opportunity and one failed experiment each on a thousand different challenges? Edison is often quoted for this. But Edison’s quote with respect to failure is often around a thousand failed experiments around one opportunity – isn’t it?

Can our entrepreneurs learn from this? Doesn’t it make a world of difference if we have our entrepreneurs work over and over on an interesting problem rather than keep moving from one small problem to another? Wouldn’t it make sense if we have entrepreneurs working deliberately on cracking big challenges? Doesn’t innovation happen when we stay with a problem for a long time and keep improving on our earlier experiments?

I think how and on what, a failure happens matters – and this deserves more thought!

Even failure has some reputation to protect – isn’t it? Think!

Vedantic Wednesday: “Who will cry when you cry?” – Part 2

Last week we started discussing the question – ‘who will cry if we cry?’ (http://rajshankar.wordpress.com/2013/10/23/vedantic-wednesday-who-will-cry-when-you-cry-part-1/) which in my opinion is a question that has a lot at stake, especially in a turbulence filled world. As India turns into one of the youngest nations in the world, we do not want to court economic development at the cost of a sick society.

While on one side we are touting the much spoken of ‘youth’ as our biggest asset, on the other side we are also seeing a lot of this group falling prey to ‘lifestyle sicknesses’ way early in their lives. On a recent visit to a local drug store I was startled to hear the vendor tell one of the customers that he had run out of anti-depressants. He was also saying that the demand was too high and most nearby stores had run out of stock too. They are all awaiting replenishment of stocks the next day.

What started off as vocational problems such as back pain, joint pain, obesity, diabetes, blood pressure, etc is now seeing more cases of emotional sicknesses such as depression, schizophrenia, etc.,. Where are we headed? Why is all this happening? With so much real time access to people via mobiles phones, tablets with 3G/4G access – why is it that people are feeling lonely? Is access to real-time communication a problem? Or is it the reason why most of us have neither the time nor the attention to empathize and help one another? A root-cause analysis on the issue is a must for the well being of our entire society.

A few decades ago joint families used to be a common sight in India. Hence there were always people available for support. The family requirements were always managed by a senior member and the overall peace and happiness of the family was protected. It provided the necessary emotional support system that young people required as they stepped out into the world. Wise counsel for advice, a shoulder to cry on and people to help you get out of situations were available at beck-and-call.

But with the onset of nuclear families and alarming number of single parent run households, it is certain that most young minds are leading shallow (socially) lives. Due to this their emotional states are also brittle. No wonder that one of the big trends observed by the healthcare industry is the rise in emotional sicknesses. It also seems that these diseases tend to increase proportionally with economic development! If this continues, we may actually be a rich, but sick nation which is young as well. Not a great combination to look forward to! It is then in the hands of every one of us to ‘think’ what and how we want to lead our lives. It is then in our own best interests to study how to live life. It is in our overall interests that we learn how to form social connections with human beings in the real world (beyond the virtual world).

Think!