In a section on ‘company assets,’ in ‘The Buck Stops Here’ (Penguin), the author Ashutosh Garg rues that both as a professional manager and as an entrepreneur he has seen company assets generally being misused.
In his view, a simple antidote to the widespread malaise of misuse of company-owned vehicles is to build the cost of vehicle or the perquisite into the total package of employees rather than provide them with an office car or two-wheeler. Having implemented such a policy in his own company, Garg reports that the effects are visible, thus: “Our office driveway is full of clean, shining and well-maintained staff-owned vehicles, in contrast to dirty run-down and battered company-owned delivery vans.”
Own your notebook
The author mentions further examples of misuse, such as store air-conditioners damaged within a few months of installation, computer keyboards with tea or coffee spilt on them, laptops damaged beyond repair within a few weeks of purchase, a new mobile handset with a damaged screen, and broken chairs. “In some cases, I have asked my colleagues if they replaced the compressor of the air conditioner in their homes within six months, or if their home computer has any dust, leave alone tea, on it.”
Observes Garg that for some strange reason, employees show no respect for their company’s assets, but if these assets are owned by them or if they have an option to purchase the same asset at its depreciated price after a few years, the asset’s lifespan increases and the maintenance quality improves automatically.
He reports about the results of the ‘own your notebook computer’ initiative in his company whereby the office subsidises by fifty per cent, every three years, the purchase of notebook computers by employees.
“Suddenly, I see employees cleaning their notebooks very carefully,” notes Garg. “We don’t have any more broken screens, damaged computer hinges, noisy fans, burnt motherboards, lost chargers, and batteries that need replacement within six months.” Employees now have ‘more skin in the asset’ and hence the maintenance and longevity of assets are better, he reasons.
Company vehicles
On the company vehicles, the caution in the book is that these can turn into expensive propositions, with fuel consumption pattern and maintenance going haywire. “If a delivery scooter was expected to give at least 40 km per litre, we started getting bills showing 40 km for every 5 litres. We discovered that new tyres would wear out within three months and each time a driver would be questioned, he would look at us most innocently and say, ‘I have no idea how this has happened.’”
Garg’s decision, in his company, was to sell the vans and scooters and outsource the vans from a local contractor to make deliveries of goods from the warehouse to the stores. “Though the initial cost was higher, we started to see significant savings because we had no recurring costs; also, we did not have to deal with errant drivers anymore,” he recounts.
Cost control
An instructive takeaway in the book is that cost control has to start at the very top. Urges Garg that an organisation cannot have one set of rules for its promoter, another set for its senior management and yet another for other staff.
In this context, he reminisces his meeting with T. T. Lim, former president of Wal-Mart China and a very successful businessman in China. “When TT came to meet me at the Grand Hyatt, Shanghai, he asked me a question: ‘Who is paying for the hotel room?’ I replied that I was. He responded with a smile and said, ‘Looks like you have a lot of money to burn especially when it is your own.’”
Learning from TT where he normally stayed in after starting off on his own, Garg moved to a hotel called Home Inns at $25 a night. This hotel is part of a chain owned by a local businessman, who within ten years, had built over 100 hotels across the country, and he got a valuation of over $2 billion when listing on NASDAQ, informs Garg.
“This hotel provides very ‘basic’ rooms with a clean bed, a clean attached toilet, colour television, hot and cold water dispenser for tea and coffee, free Internet and free breakfast – all for $25. This is all that a business traveller needs when he returns at the end of a long, hard day.”
Need for debt
The chapter devoted to ‘the financial side of business’ opens by acknowledging that the single most important challenge faced by any entrepreneur is getting adequate money to sustain a project. “A start-up entrepreneur should try and keep sufficient funds to meet at least twelve months of projected ‘burn,’” advises Garg. He reminds that without providing for sufficient funds, the stress on the entrepreneur is very intense and meeting planned business outflows becomes a huge challenge.
While it is safe to build any business with one’s own funds, debt becomes a necessity when the entrepreneur’s dreams are bigger than savings. Yet, raising debt can be daunting, writes Garg. For instance, as he despairs, filling out the loan application in the format required by the bank can be a huge challenge for a new businessman! “I had to seek help from a consultant who was recommended to me by a banker to get the format right.”
Collateral challenges
A tough hurdle is the demand for ‘collateral,’ narrates the author. He frets that all the talk of ‘intellectual capital’ and ‘good promoters’ mean very little to a banker whose simple credo is, ‘It does not matter what your education is, what your professional track record is, or how strong your project is. Get an immovable asset as collateral, give your unlimited and unconditional personal guarantee, and take the loan.’
The harrowing experience of raising money from the bank – after offering house as the collateral and giving personal guarantee – makes the author wonder if our banking system is at all designed to support entrepreneurs or is simply designed to give money to well-established and profitable companies.
“And then when we did raise large sums of private equity (PE), the same bank insisted that we place these liquid funds with them at low interest rates, and they kept reminding me of our long mutual business association as well as my ‘moral’ obligation to the bank that had supported me in my time of need.”
Instead, after receiving the PE funds, the author decided to pay off all the debts and release his house from the bank’s grip. His counsel to wannabe entrepreneurs is that personal house should never be put in jeopardy, no matter how strong the business model or how confident the promoter may be about the enterprise.
Private equity stage
On the oft-faced dilemma of promoter-stake dilution in the wake of PE funds, Garg opines that once a company is established, the promoters’ priority has to change completely. From guarding and enhancing one’s own wealth, the priority of the promoter has to shift towards ensuring the growth of the company which now has many more stakeholders, including employees, creditors, vendors, governments, and most importantly, customers, he explains.
“At an appropriate stage in the life of a business, it is necessary to raise private equity for the company in order to ensure that the growth of the company does not suffer at all… The old adage is that it is better to have 25 per cent of 1000 than to have 100 per cent of 100. Only when a company grows will its value grow, and with it, the value of its shareholders’ wealth.”
Recommended read for those embarking on the arduous entrepreneurial journey.
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