Most of us are now convinced that the “Cornona Virus” will be with us for at least 1 year or more. If that is the scenario then what can we do to keep our ship afloat? Most of the entrepreneurs I came across recommended to adapt the “go lite” policy. But what is the meaning of “Go lite” and how an organization can be Lite? To understand the whole concept of “Go lite” we have to look at the example of a ship. Lite is a concept of relativity. Let me try to explain this concept. A ship can be as much heavy as we want, the only thing that the engineers has to ensure is that laden weight of the ship should not be more than that of upward buoyant force.
For businesses the upward buoyant force (FA) is the Total Revenue of the organization and Weight of the laden ship (FP) is the cost part. A laden weight of the ship consists of unladen Weight of the ship (say, FS) in addition to that there are other components like load of the materials, weight of the crew, weight of the consumables, weight of the additional fixatures and other items.
To stay afloat FA should be greater than or equal to FP.
Let’s understand numerically.
FP = FS + FLD + FT + FC + λ (unknown costs)
FS is the cost of the business,
FLD Admin cost
FT Team cost
FC Capex Cost
λ Variance cost
For IT and ITES sector FT & FS shall merge.
First of all let’s talk about the business cost, to achieve the “go lite” situation the Business revenue FA should be more than or equal to the sum of the all the Business cost FP. Hence product Pricing/ Offers/ Discount should be vet properly. Otherwise whatever we may do our ship will sink.
Secondly the Capex Cost, in a stressed situation when FA is uncertain, we should not increase our Fc in terms of capital expenditure. If situation requires, we can increase the cost in opex and can add the same in the prices to balance the situation.
Third is Admin Cost, an organization has to be very careful while making the provisions for the Admin cost. This is the most fragile part as most of the companies spend 3-7 % of their revenue in this cost.
Fourth is Team cost, it is the foremost important part of an organization. I strongly believe that an organization should have two categories of employees, one (A) - Must To Have and other (B) – Like To Have. Team (A) are those who drive the business and are having high integrity towards the Organization. Team (B) are those whom we might require in case of uncertain conditions. An Organization should have a list of people in these 2 categories and points should be assigned to each person based on the attributes like Integrity, trustworthiness, Understanding of Business, Communication, Attitude etc. To downsize the team, we should start from team “B” with the lowest score.
λ Variance cost: It is the cost which any organization can easily avoid. These could be the unnecessary beer party, unnecessary gifts or unnecessary adv... normally organizations spend 1-3 % of their revenue in this. If we shift this cost to investment λI, an organization can have a corpus amount which can be utilized in future to deal with such crisis.
Let’s take an example of an Organization having average monthly Revenue equal to 10 million. 1% of 10 million is equal to 1 lac. 1 lac investment per month means 12 lacs per annum. If investment is made for 3 years it would be around 36 lacs (I am not considering the interest company could earn from the investment). That means a company can have 36% of its revenue to support the business fluctuations / uncertainties. With interest @ 15% per annum this could be around 45 lacs.....
On contrary when we talk about cost cutting, most of the time we fire our team member without even doing proper due diligence. The time has come when each one of us should do brainstorming to find a proper finance model for our organization to make it “LITE”.
There are a few other attributes which are crucial for an organization’s success:
- Be transparent to your employees, they also understand the crisis.
- Build an organization with strong values, it will pay in the long run.
- Prefer freshers as they are raw talent and can be shaped as per Biz requirements.
- Give preference to Integrity over Knowledge.
- Entrepreneur should have the ability to see beyond the visible range.
TITANIC sunk because the sailors failed to notice the CEBERG & not because of the Ship Build Quality.