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Be rational about revenue when starting a new business

13 Jun, 2016, 07.30AM IST

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My driver on a recent longish Uber ride was a 25-year old management graduate from one
of the well-known Bschools. Lets call him Alex.

He had been driving for Uber for the last six months after he quit his job with a multinational

firm that recruited him from the campus. He needed that time to make his business plan, do
some market research and work on a few tie-ups. If everything goes well, Alex will launch
his business with an initial capital of Rs 1 lakh and total work experience of four years.

I asked Alex why he quit the job. He told me that his firm was crowded with senior managers
whose hands were too full to mentor a young recruit like Alex. He explained that their plans

were grand, but no one had the time to work out the details, and assign tasks to the younger
members of the team. So the frustrated management trainees spent a lot of time being

treated like research assistants, who did ad-hoc tasks. The induction programme was too

Most young entrepreneurs stumble when they realise money

does not come in as smoothly or in the order mentioned in their

business plans.

brief and too rushed. Alex simply did not feel that he belonged.

Alex wanted to set up a men's formal wear store. He told me that most men did not care much about choice when it came to clothes.

However, each of them needed a few plain white shirts and dark trousers on a regular basis, anyway. But they needed advice on what kind
of cut suited them and help to marginally modify pre-stitched garments. Alex would employ men's tailors who were out of business. He

would get them to replicate shirts and trousers of good brands, at lower prices, and make it easy for men to choose and modify. The store
would be in a lower cost suburb, where men could walk in and make decisions easily.

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Be rational about revenue when starting a new business - The Economic Times

2 of 3

http://economictimes.indiatimes.com/small-biz/startups/be-rational-about-revenue-when-startin...

There is a new breed of young people who are keen to set up businesses that solve small problems in a sensible way. They are willing to

take the risk of not earning a steady income, but are enthused by the prospect of doing better as they learn how to conduct their business.
Alex asked me what a finance person like me would advise him. Here is the gist of what I told him. First, initial capital is a precious

commodity. It is tempting to view a business as the place you work out of with all the embellishments that make it a place of pride to go to.
There are multiple things that seek the attention of the limited amount of capital. The ground rule is that it has to last until the sales

revenue comes in. A business cannot begin to roll without sales, and the focus of the entrepreneur has to only be on the revenue when he
begins. Alex should find out who will buy his first 100 shirts, and how soon. Only expenses that lead to these sales are worth incurring to
begin with.

Second, working capital is a killer. There will be workmen who have to be paid; raw materials to be bought; electricity and phone bills to

pay and rent for the store. These expenses will kick in before the first sale can happen. Alex will have to seek credit from his suppliers and
workmen. It will be a while for the cycle of cash inflow and outflow to become well balanced. A part of the initial capital has to go towards
working capital, and how long it would last dictates how soon sales have to happen.

Third, the crux of the business plan is about how the costs and revenue will be sequenced. If Alex was going to buy material, employ

tailors, rent space and put the shirts out there, he would have incurred the costs upfront, with the revenue being at the mercy of customers
who walk in and buy. A painful trickle of sales will not be enough to cover the costs.

Every business plan makes assumptions about revenue and the confidence to begin a business is based on profits after all costs. But in

reality, the costs will kick in from day zero, or earlier if one includes market research and other set-up costs. The revenue will come much
later. Even as the business idea is being subjected to reality checks of the market, the costs would add up quietly.
I asked Alex to come up with a list of business activities he would do without incurring any cost. He knew there was nothing except

ideation and planning in that box. I asked him to visualise for me his first day as entrepreneur. He told me about his clean, neat and stylish
shop, and the busy tailors. He told me about him smartly dressed and welcoming his clients. I stopped him there. What would he do to get
them in through his door?
Alex was quick to go back to his business school days. He spoke about discounts and their effect on customers. He spoke about creating

a buzz that got people to come in and make a purchase. He spoke about referrals. Soon he was holding forth on customer psychology and
how asking a few well-connected friends to come by would help. As he spoke he saw that he was romanticising the revenue, while the

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Be rational about revenue when starting a new business - The Economic Times

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http://economictimes.indiatimes.com/small-biz/startups/be-rational-about-revenue-when-startin...

costs were real. That in a nutshell is the "finance" problem of a new business. Cash does not come in a neat flow and in a sequence that is
assumed in the business plan.

Alex then wondered if he should not have a showroom, but just a workshop and generate sales online. He then asked if he should procure
orders online based on designs and then hand them out to tailors who will stitch the shirts in their own shops. He wondered if he could
make it a virtual business and run it from his desktop, connecting various elements of ordering and delivery. The conversation now was
only focussed on getting the buyers in.

I asked Alex if he rejected a job on the campus because it involved selling. He sheepishly admitted to it and told me it was different when

he did it for himself. I suppressed my smile. There were countless examples I could provide of businesses that went astray trying to secure
and stabilise their revenue. And about innovation and customer-focus getting sacrificed at the altar of revenue pressures. But we had
reached the end of the journey, and I got off after wishing him the very best.

( By Uma Shashikant, Chairperson, Centre for Investment Education and Learning )

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