Understanding Economics of Business – a guide for start-ups

    We are  noticing  a spurt in the  rise of  entrepreneurs in our country.  It is a  healthy and a welcome trend.  Entrepreneurs    generate opportunities  for employment, produce  goods and services for the economy ,promote new business ideas  and  take  responsibilities to be the torch bearers for next generation of  budding Business  Men.

Initial  years  of  an Entrepreneur is dotted with Investments,  use of new technologies to support  his/her  business ideas  and promoting their brands. However, during their journey of new enterprise , they most often  experience hurdles which  causes  stress on the cash flows and begging for increased borrowings. Most often  such hurdles  are a  product of negative incomes ,improper production planning and  product pricing.

I take this opportunity to share my experiences  of providing total solutions through  Business  re-engineering  of various activities that Influence a business. Many a times we hear that there is a serious financial problem in an enterprise and additional dose of capital, mostly in  the form of  debt, was induced to solve the problems. Finance can never and will ever  be  a panacea for Business problems. Indeed, inducing debt can further aggravate  cash flow problems ,. Let me explain with an example. ABC Pvt ltd is a manufacturing company engaged in manufacturing of automobile components to Large OEM’s. ABC pvt ltd has obtained adequate working capital and term loan  for machineries from financial institutions.  After a year or two they start to experience negative incomes, (loss).Can this problem be solved by fresh capital ? Definitely not. Until health of the business unit is not restored.

Health of an individual  is a  direct functions of all organs in his body working together and in a best condition. Likewise, health of an enterprise is a function of various activities of business to work in tandem  to their best abilities for a given objective . Hence a function of the business or few functions of the business cannot be responsible for proper health of an enterprise. Every enterprise or business unit must understand all the activities which are needed to a run a business. In my opinion all activities such as purchase, Inventory , production, HR, finance, marketing, pricing and statutory compliance are important activities that govern the business, Each of these activities bear a cost and only when we understand in totality the cost structures , we can then appreciate Business.  I term this process as  Understanding Economics of Business.

    Economics of business deals with decisions involving economic parameters which influence your business . My next blog will explain the Economic Concepts of Business with Examples and Case Studies .  

Advertisements

It’s not What to Lend But Where To Lend.

India has just celebrated  its  seventieth  Independence day a few months ago.  We are a proud nation with a hope and promise to carry forward the largest democracy with the youngest demographic dividend. A positive thought for the Banking system to capitalize and to deliver innovative financial  products along with best practices  for the modern markets.

About fifteen years ago Dr.Manmohan Singh paved way for reforms which transformed the financial landscape and integrated our economy with global markets. Since 1991 our  financial system  has developed vibrant markets and innovative products. Banking industry has created ecology for private banks, introduction of E-Banking and retail banking. Steady growth in Gross domestic produce has created demand for Investments, which has  led to increase in credit utilisation from banks.

Bankers have followed traditional practices in lending credit , i.e. against collaterals,  fine tuned financial statements and projections. Even though Economic parameters are studied and analysed their weight age are relatively less emphasized. Competitiveness amongst banks in credit lending has instilled myopic view of the market conditions and depended heavily on the collateral and audited financial statements.  Such practices in credit lending  has detrimental effects on the quality of the advances made during bouts of recession, depressions and in short economic cycles, rather than  large ones as in the past.

I would to like highlight a point based on the current practices of the bankers on credit lending. A manufacturer approaches the bank for term loan towards purchase of machinery and  bankers obliges with acceptance and offers  to lend for the machinery provided additional collateral is offered along with machinery.  As explained above less emphasis on market conditions has limited the bankers in most cases  in not offering solutions for market conditions in place of machinery finance. Finally, it is not what you lend for  but where to  lend.

In modern market conditions traditional practices of lending has dented the creditability of the bankers.   Time is ripe for the Bankers of tomorrow to adopt fresh strategies in credit lending by emphasising on economics of markets in addition to statutory requirements.