Notes from My First Lesson on Finance- part one

As an entrepreneur,one often finds him/herself getting their hands dirty with the nuances of finance. Ask any entrepreneur and s/he would tell you how important (and boring)it is to  know the basics of finance. That is precisely one of the reasons behind TiE Mumbai hosting a session on ‘Managing your financial issues’ as a part of the ‘ TiE Institute Knowledge series’.

Fortunately M. Hariharan,Director Savoir Faire (an entrepreneur since the last eighteen years) was probably as skilled in participant expectation management as he is in Total Cost Management. His constant dosage of funny anecdotes and analogies not only kept me wide awake through this 4.5 hrs session but also encouraged me to take notes.
I’m posting these notes for the benefit of entrepreneurs. Hope it helps 🙂

  1. What is the GOAL for running a business?
    One cannot have multiple goals for an organisation. It has to be unique. The multiple goals like profit creation, customer satisfaction, social responsibility etc. are interim goals that are necessary conditions but not sufficient condition to run an organisation sufficiently.
    The necessary and sufficient condition for any commercial organisation is that to make Money
    !
    Profit belongs to the investor.
    The firm cannot  make money while ignoring the necessary conditions; the firm cannot ignore making money while pursuing the necessary conditions.
  2. For every action there is a Financial Reaction
    1. Profit is an absolute term.
    2. ROI (return on investment) is a relative term that decides Profit.
    3. Healthy Cashflow is a must for survival.

Normally people get drunk on profit even though they are not cost efficient. People talk about cost only in downturns  its like talking of common cold only  during Monsoon.

3. Drivers of the bottom line:

  1. Revenue:
    Wealth is only created by Sales/earning revenue – not by cutting cost.
  2. Cost:
    Normally people get drunk on profit even though they are not cost efficient. People talk about cost only in downturns  its like talking of common cold only  during Monsoon.
  3. Investment:
    The money blocked in business is investment. It brings down profitability – affects cash flow and ROI negatively.

4.  The four Ms of business:

  1. Men
  2. Machine
  3. Methods- the most critical parameter affecting the bottom line.
  4. Material (finished goods)

5. The four ‘R’s that an investor should look at:

  1. Return
  2. Risk
  3. Raise
  4. Realization

6. Other Important Points

  1. You are creating wealth when you make profits more than the expected rate of returns i.e.  existing in the current market.
  2. We cannot compromise on strategy at the cost of survival and vice versa.
  3. Brand is a set of promises that I’ve been fulfilling for long or have promised to full fill in the future.

What’s in Store: Notes from My First Lesson on Finance- part two

  • Basics of the Balance Sheet
  • Fundamentals of the Profit and Loss account
  • The Cash flow statement
  • Validating your assumptions
  • The Seven financial reactions to any decision you would take.

Image Credit: Wikipedia