The Reluctant Entrepreneur: The cookie Jar

Congratulations to Business Goa for completing a milestone 5^th year. Every year adds to the wealth of experience and strengthens the magazine for another year ahead. All the very best to Team BG. Even as this is written “SHAKTI” enters its 20^th year.

A cookie jar is more western in usage. It usually denotes an easily accessible jar in the kitchen which anyone can put their hands in and get a cookie (reward). In our companies we usually make policies and systems which unknowingly create cookie jars. Related or unrelated stake holders, find them and help themselves. When it is discovered, it leaves a bad taste as it implies the Company was short changed.

When sitting late into the night in Shanghai and catching up with a junior from the Asian Institute of Management, he told me a story. He was a senior expat manager at an FMCG company. They had faced a peculiar problem, sales to a nearby district (X) were almost zero. While sales to another district (Y) a few 100 kms away were flourishing. Yet, when the marketing team visited the district X, the market was flooded with the product. Surprised and perplexed, they did a quick survey and found out that they were being supplied by the Company distributor itself. The catch was in the freight factor. Freight to the X was far less than freight to Y. So the salesmen decided to book all orders on District Y, claim higher freight, but ship to product to X. The difference was split between the transporter, distributor and salesmen.

Closer home, we noticed that it was difficult to get our workers to agree to an hour of OT, however if we asked for 4 hours there was less resistance. This was becoming cumbersome. After a little study the reasons became apparent. We used to offer an incentive with 4 hrs, a food allowance and somewhere along the line an additional transport allowance got added. This was in addition to the statutory double salary for OT. All this was not available for 1-3 hours. So our workers adapted to the situation and either did 4 hrs OT or nothing. We had made the rules, the employees were only tweaking them to their advantage. It took us some effort to correct the situation.

Another common use of this cookie jar phenomena is leave, not much can be done to stop employees from clubbing sick or casual leave with a long stretch of public holidays and making it even longer for themselves at the cost of productivity and customer service.

The above clearly demonstrates that management policy defines and guides behaviour. This can be positive or negative from the Companies point of view. Another word which describes the cookie jar syndrome is “loop holes”. People are always looking for loop holes to exploit and get a better deal for themselves Not wrong in itself but when the other persons perspective is taken, it is wrong. Take any situation mentioned above or look at some of your own and you will notice it is not fair to all.

One way of avoiding such situations to to think thru your decision making process to include checking if COOKIE JAR situations are possible. This is easier said than done as decisions are taken on the run. The other way is networking, where you meet other owners & managers and discuss situations and avoid the same in your organisation. If, despite all your precautions, you do end up with a cookie jar situation, be sure to take immediate corrective action. All the best.

The Reluctant Entrepreneur: Predicting Storms

If everything is coming your way, it is said you are in the wrong lane. Usually in business and every entrepreneur worth his salt will testify that there is never a dull moment. I am reminded of the movie JAWS and its sequel. Just when you think it is safe to go into the waters, JAWS 2 comes along.

The usual suspects are a cash crunch, a customer complaint or even an unexpected demand from a statutory agency. We have had our share of these “big waves” over the years. Each wave taught us a lesson and strengthened the Company. History does repeat itself. One thing is clear, had we being paying attention to the environment, had we been reading between the lines we could have seen it coming. Unfortunately we get so bogged down by day to day fire fighting that we fail to look up and survey the horizon.

We had to face a bouncer even before we started production. The factory was ready, the machinery was in place but there was no power. It took three month and some follow up to get the power department to stretch their line 200 odd meters. The next next memorable bouncer came after five years. I returned from the US to find the factory shut as we produced to order and there were no orders. Our main competitors had slashed prices 33% and the trade expected us to follow suit.

Today, once again we are staring at a “power” wave. We had imported a CNC machine which requires good quality power to run. A private power supplier had just started operations. Despite the rate being higher by 25% we opted for it. Subsequently, out of sheer laziness we continued using private power despite a consumer unfriendly attitude and rising cost (approx 4 X higher than Government power). Lazy because we should have actually been working on looking at alternative ways to use the cheaper government power.

All of a sudden the private power supplier decided to stop or curtail production of power. This move has left not just us but a large number of companies in a lurch. Had each of these companies been aware and paying attention to the situation, none would have been caught unprepared. This is where the theory at B school comes to mind, scan the horizon for possible pitfalls, changes in policy etc. Had we paid attention to the “Power Purchase Agreement” between the supplier and the Government of Goa, we would have known or seen this coming years ago. The Government is committed to buy this expensive power because of the agreement, once the agreement ends no Government would ever be able to justify buying at that exorbitant rate, since the Government was buying approx 50% of the power the company survived. With the agreement ending on 14^th August 2014, it would have been pretty clear the supplier would wish to shut down once his 50% customer exited. As a consolation, a few of us had got together to a few days before the supplier decided to unilaterally stop the plant citing technical reasons.

Now, we have to work overtime, organise funds to be able to handle cheaper government in lieu of high cost quality power. It is now a pressure situation where our customers are effected because our production is effected. If only we had kept a better watch on the horizon.... we would have seen this storm coming and taken action earlier.

Moral of the story: scan the horizon, keep your eyes open and ears tuned to sights and sounds beyond your Company.

The Reluctant Entreuprener: ROC

Those familiar with the latest fast food addition in Margao (Goa) would mistake ROC for “Royal Only Chicken”. A nice place to go to but keeping the thrust of my column in mind, it refers to Registrar Of Companies. The ROC, is more relevant today with the enactment of the Companies Act 2013.

Way back when we first started, we opted for a “Pvt Ltd” form of Company for two reasons, one: to ensure that later the name would not change and two: it allows for capital formation. The first reason is important because one can start a partnership with just about any name. Subsequently if you go to register with the ROC, the first thing you need to do is get your name approved. At that time if you find the name you were using not available it can be quiet a loss.

In the early days, I started to two Companies, today I will think twice, I would rather set up a division under the first rather than incorporate a new one. While we went fast forward running one Company the other fell on the back burner. We had a table space, registered office in Panaji and the owner closed it. One fine morning we got a court notice. We had not filed our returns. Now, believe me you do not want to be going to court for not filing returns, it is a criminal case and personal presence is required. At that time the fine was 500/- but my other shareholder who was abroad had a warrant issued against him for not being present. Today, the rules do permit late filing, one has not to go to court and the fines have increased and some offenses coupled with imprisonment of directors. So pay close attention to the annual return.

Actually, an entrepreneur would be well advised to get the services of a Company Secretary from day one. The law allows smaller companies to self manage. What actually happens is that when you have to get certified by a CS, your paper work is non existent or in a total mess. At, Zarhak because of my previous experience, we had minute books, statutory registers, etc. and with an early run in with ROC, filing returns was always a priority.

The other issue which we had a hard time was closing our Company. Initially, we tried amalgamation, that proved too be too costly, so we filed nil returns as it was a cheaper option. Basically, amalgamation is a court procedure so it is time consuming and the most expensive part is the lawyers fees which both companies have to pay. We were fortunate as the ROC announced an easy exit scheme. Under that we were able to close easily. Now, the same provisions are applicable so closing is easier. If you intend to close, liquidate your assets, ensure all employees dues settled especially statutory like PF etc., buy back your shares and ensure no creditors are on the books.

Today, unlike then every Director has to have a DIN (Director Identification No), if you are a defaulter in any way your DIN is blocked and you cannot transact. Surely not a good situation. The fines and jail terms are much stiffer under the new Act. Most of us are only hearing about the CSR mandate that the Act has now made mandatory for certain type of Companies. It would be wise to get your Companies Act (pun intended) together and pay attention to the ROC's requirements sooner than later.

Suggested reading: The Companies Act 2013

The Reluctant Entreuprener: Paying Commercial Taxes

A happy new year to the readers and given the situation, a safe one as well. The Christmas season is also a business opportunity. Alert, commercial taxes department decided to ensure that this festive season no one evaded taxes. So, they literally got up early, went to the interstate bus stop and caught a hapless passenger with a suitcase full of Christmas decorations. He had no bill and the INSPECTOR who had only the State’s interest at heart wanted to collect the tax. We must all give this brave and committed officer a standing ovation. He actually sacrificed his sleep and added a few rupees to the States empty coffers. Meanwhile thousands of rupees slipped in on trucks and even the roof of the bus.

We have been selling SHAKTI tanks in this State for close to two decades. When we started we had a level playing field. We were exempt from paying sales tax for some years, and the competition did not pay tax i.e. available without bill. Now, these tanks come into Goa not in a suitcase but by the truckload. I know, I caught one and handed it over to the Department. Unfortunately the officer concerned was not as energetic as the bus stop inspector and the consignment was released, to be sold without tax.

When India, joined the VAT regime, we lost our level playing field. Now we pay the tax and our competition continues to sell without bill. At that time Mr. A.T. Kamat, Commissioner of Sales Tax asked industrialists to make a sacrifice for the Nation and not oppose the loss of the sales tax exemption. My question then is relevant today; when will the Commercial Tax department start batting for the State/Nation and begin doing their job and get every item to be sold on an invoice with the taxes paid so every establishment has a level playing field?

I once gave another Commissioner Mr. Pai Bir,"intel". He was told that a truck load of tanks was headed to Goa and from the brand, I also told him it would go to South Goa. Two hours later he called me, very upset. He was waiting for the truck at the Margao end of Zuari Bridge with his team and no truck was visible. One can only laugh because everyone but this department knows that trucks cannot cross the Zuari bridge due to laod restrictions.

When you start your business you will calculate the price that should be feasible in the market. Now, on finding that adding the tax and doing business legitimately puts your company at a disadvantage, many smaller players opt to follow the same path i.e. sales without bill. Even if caught, and the chances of that happening are slim, one can assume an escape with a payment below the table. With such a low down side on one hand and on the other hand a loss of market share if sold with tax, what would you choose? This is exactly what the bus passenger did – he bought without a bill, and would also sell without the bill.

The other major hassle of registering with the Commercial Tax dept. is the paper work. You have to file returns, you have to go for assessments, you have to follow up for C forms etc., and chair bound officials keep calling you to remind you of the due date to deposit the VAT collected. If you are unregistered, then no one knows you exist and therefore there is no paperwork. Some businesses opt for dual model, show some sales officially and rest in is cash. A la, best of both worlds.

Despite the many pluses of avoiding VAT, I would suggest that each new start up and possibly even those currently avoiding any kind of taxes, pay them in the interest of your own growth and peace of mind. For your customer it is “proof of purchase” and access to after sales service. It is a bit harder but surely more profitable in the long run. As technology advances, the playing field will become level, be there to take advantage. For the customer this "proof of purchase" is very important in case he wishes to enforce his rights as a customer in case of a defective product. The customer should consider paying VAT as an insurance against a defective product.

In the meantime, petition your local industry Trade body to force the department to make the playing field level. Happy selling.

The Reluctant Entrepreneur : The Launch

I recently attended the launch of a social entrepreneurship initiative “ “, for of and by women of Fatorda. The brand was aptly chosen HOME WORK. One can easily write it of as a political initiative but that would be missing the wood for the proverbial trees.

Lets get the political issues out of the way so we can focus on the business of doing business. The launch was at the hands of the Governor of Goa, not someone who will come for every product launch, but given the fact that it was a community initiative and effects the lives of so many under privileged women, it is normal. The concept was thought of by the wife of a politician, and concerned only the local MLA's constituency. Once, we get into the business part it will be clear that there was depth and thought was applied in this project, also it was not a spur of the moment decision, it had evolved.

For any entrepreneur, the starting point is an idea which generates income. The idea here is to organise normally stay at home women to do some activity which will generate income, this inturn will help raise the standard of the women's family. What struck me instantly at the launch was the brand name HOME WORK. This was a huge change from the previous display at exhibitions of the group I had seen. Then I used to think, without a brand how will they be recognised?

This is a point lots of entrepreneur miss, branding. We know of 100's of people who make cakes, chocolates and food at home, how many brand it.? If it is not branded how will any one recognise it, how will any one recommend it, how will you know in Mapusa, that this is the same sweet brought in Margoa which tasted nice? Branding. Branding Branding.

The down side of branding is a customer knows what to avoid. How will you ensure that the customer has a positive experience when he tries the product most of the time. Product testing. And this launch showed that prior to the launch a lot of effort had gone into product testing. The unbranded displays at exhibitions would have also helped fine tune the product mix, but more important was the inclusion of the experts testimony when referring to the “SOAP” that was one of the products launched. Not every product can get away being tested by the customer “a la Tata”. This process will be on going simply because customers taste choices are on going.

The tag line which speaks for the brand was there and put so well, “MADE FROM THE HEART. MADE AT HOME”. In these days where everyone is looking for an elevator pitch, this could not be better.

To sell any product one needs to decide a “price” point and again they impressed. The usual thinking is if a product is made by struggling women then it has to be cheap. It was neither cheap nor expensive, it was priced right. Someone had done homework for sure, pun intended. Importantly the price point was chosen at the start, there is no way a product launched at the bottom can move up later or vice versa, if it is attempted it will fail. Remember the CIELO car, they dropped the price drastically and what happened, the car faded into oblivion.

Finally, they expressed their goal, it was not just a constituency, this model can be quickly deployed across Goa, India or the planet by people. UNNATI for people and planet. They have their work cut out to reach their stated goal. They know where they are headed and they are on the way. A lijjat papad or Fab india in the making?

One down side or an area where they can consider a rework is the website. A google search for UNNATI showed 2 lacs results, not the best way to start searching for this specific site and its people ideas and products. The actual website is a more complex “unnatipeopleplanet.com”. This can be worked on, even a search on “homework” will lead you nowhere. In these days where life is online, a company especially a startup misses a lot when they get lost in cyberspace.

While wishing the ladies behind Unnati the very best, after all well begun is half done. The launch was was a learning experience for startups. It is a great idea and surely it will teach us more in the future.

The Reluctant Entrepreneur: Private or Public Bank

“If a banker gives you a loan and it goes bad he will stand to lose his pension. If he does not give a loan he can become the Chairman” This was my concept of the banking sector, especially related to the MSME sector. This concept emerged out of my experiences in trying to get a loan for the new unit we were planning to set up.

Generally you need an introduction and that defines your choice. Rarely will an entrepreneur have the liberty to make a choice based on the banks fundamentals. We had our fair share of applying in vain and wasting time. The process is “manager” dependent and therein lies the rub. They can generate 101 legitimate excuses, the one that comes home to roost is they are over exposed to a particular sector. If that was the case how come individual banks had such huge exposures to the barge and truck business?

We decided to approached a top nationalised bank without any reference. The Manager here was keen to do business but he needed collateral security in the form of FD’s. Our plea that such a request is absurd because who would keep FD’s and borrows at double the cost against them. Even if an entrepreneur was naive enough to do so, if something went wrong, the bank would encash the FD’s right. So what is the bank doing lending at such a high rate when they have no risk.

The Chairman was visiting Goa and he made a statement that there is money but there are no takers. The editorials went to town stating that even if there is money one has to have guts to borrow and do business and Goans lack what it takes. Our objection to such a statement in the media, shook the top brass of SBI and a meeting was fixed. The outcome, there is no such need to give FD’s as security to borrow. So why did the manager make the demand, simple, he wanted to be chairman one day.

We spent 15 years banking with them. Once in, it was a different ball game especially if the company performs. We learned one big lesson, without the support of your banker the Company cannot grow. Therefore honesty and openness must be the bedrock of this relationship. After all if the Manager is going to support you he must know the correct picture. We also learned to structure the balance sheets so that the correct picture is presented. Eg: interest on loans from promoters should not be put under short term loans, but correctly under long term sources, but more because the ratios get affected and bankers go by ratios.

When we went in for an expansion we fell for the lesser interest sales pitch of top private bank and are we regretting this decision. In the five years we are associated with them, it is clear that at the level where bank and customer interact there is no expertise, simply postmen in ties. The money saved by the lower interest rate already snatched away under the guise of charges. The personal touch is absent as everything is system and controlled by an anonymous central operations team, somewhere. Cutting edge technology surely does not make up for a face to face discussion to sought the issue.

We have now embarked on a mission to switch back to a public sector bank, with our track record of no default over 20 years one would assume the banks would be lining up to get our custom, that is far from the truth, for MSME companies there are takeover norms. Kingfisher type companies will get cores despite defaults but for an MSME it is an uphill task. The lesson here is get into a good public sector bank at the start, and stick with them. They do take time to get comfortable with your business but once they do, both your company and the bank will benefit.

The Reluctant Entrepreneur: Greatness, Save or Sell

Rajesh, like every employee of Zarhak multitasks. While driving me to the airport he brought to my notice that while we had semi finished material on our shop a truck bound for FORD had left with a lot of space, why could we not have filled in more?

His question reflected my faith in goan employees, they come with a thinking cap, and that makes a huge difference between then and employees from other states. The crux of the question he was asking is it it good enough to manufacture and be happy? Or is there more to it?

We have always pushed productivity and savings as a way of life at Zarhak. This was achieved by using the principles behind Kaizen, Just InTime (JIT) and Total Productive Maintenance (TPM). Kaizen ensured that every employee thought of saving in small ways, putting off a light here or putting masking tape on a tear to prevent raw material wastage. Just In Time ensure we produce only to order so that there was no dead inventory sitting on the shop floor. With TPM we pushed machine utilisation from a Company perspective, it was not just about machine maintenance, it involved purchase and sales too. Together these concepts drove our quality initiative which was reflected by our quality concerns on one hand and kept our costs down on the other.

In order to decentralise and avoid confusion, we have fixed prices and standard policies. So if a customer approached us with a big order for tanks from Bangalore, we gave him a price which worked our more expensive because of the additional freight. Invariably we lost such business.

Two, years ago we were exposed to another management concept, Theory Of Constraints (TOC)” expounded by the late management guru, Eliyahu Goldratt. A trained practitioner, had returned to Goa and hence the expertise was available locally. It made a difference as even if a company was interested the costs of hiring non Goa based consultants was exorbitant. To my mind TOC simply put stated that cutting cost would increase your profits, but if you increased your top line, your profits would increase dramatically. A combination of cost cutting measures on one hand and techniques to increase sales on the other would effect the bottom line in dramatic proportion.

We did make take steps to increase sales, and we did not lose orders from Bangalore because we adjusted our selling price to compensate the customer for the additional transport. It made sense, the positive contribution added to the bottom line and we has used existing resources. On the other hand, allowing the vehicle to leave with space when we had semi finished products on the shop floor was violation of the concept. Had the supervisors been fully tuned to the situation they would have reallocated resources to finish the parts and get them on the truck, thereby increasing the sales.

Now they would be left as inventory till the next consignment was dispatched and always open to a schedule change. The thinking should be sales in the key, just producing or manufacturing is not enough. A sale is not closed till the correct part is delivered in time at the minimum and earlier if possible.

One cannot expect to SAVE a company to greatness, one must sell your way to greatness. Whoever said these words knew exactly what he was talking about.

Suggested reading: The Goal by Eliyahu Goldratt