Probable Entrepreneur:
Let us take a typical Software Engineer working in an IT firm who has a lot of experience. Let us assume that his take home salary is INR 85,000 / month. Say he wishes to quit the job and start his own company. Let us also think he would be interested in an “Aggregator” kind of a service, of course, which would be “App” based. However, in actual cases, these assumptions would differ.
Hurdle 1: Working Capital:
Before I go ahead explaining why not. I’d like to talk a bit about Working Capital. One of the important concepts what we can ‘implement’ from Corporate Finance to our lives is ‘Working Capital Management’. The Wikipedia definition is as follows: “Working capital (abbreviated WC) is a financial metric which represents operating liquidity available”. Working capital management in a company helps you to link between payments to Vendors & receive revenues from Customers or Clients. There can be 2 kinds of problems if not managed well. One if Current Liabilities are more than Current Assets. The other if Long term/Capital Investments eat up Working Capital.
Veterans say that it takes about 5 years for a business to flourish. Till that time, the cash needs to be pumped in at regular intervals. Funding could be helpful only for a few and to a certain extent. For the rest of the Entrepreneurs, they would have to sacrifice their own money for their business. In effect, they would be taking out their personal money (Personal Working Capital) and spend it towards their business (Capex or Opex). If personal working capital is compromised, there will be a significant degradation in the standard of living of that person.
Calculations:
So the IT Engineer who left the job should get his share of profit equivalent amount. The calculations are as follows:
Earlier take home salary = 85,000 INR
Yearly take home salary = 1,020,000 INR
Expected share of PAT pa = 1,020,000 INR
For 2 Partners, Company PAT = 2,040,000 INR
At 20% PAT, Revenues required = 10,200,000 INR
So the company has to make sales of almost 1Cr a year so that the hero of our story, i.e. the Software Engineer, can maintain his lifestyle. Now, how can a company grow from 0 to 1 Cr turnover quickly? And how many months or years can the Entrepreneur would have to wait to get back to his former lifestyle?
Hurdle 2: Net worth
Alright, this one is for kicks. The highly experienced Software Engineer whom we were talking about, was earning a take home of about 10 lacs pa. Here is a net worth analysis:
Take home Salary = 1,020,000 INR
CTC Salary = 1,500,000 INR
Applying effective Corp tax rate 33% and expected returns,
His net-worth is = 1,500,000 / (1 - 33% ) / 15%
= 15,000,000 INR
Which means that his net worth is 1.5Cr when he is viewed as a ‘Company’. So the company he has started should go to a net worth value of 1.5 Cr quickly.
Hurdle 3: Maslow Hierarchy of Needs:
As a human being emancipates from childhood to old age, the individual transcends across various stages. So, if an Engineer who is about to step into the “Love/ Belonging needs” stage takes up Entrepreneurship, there is a chance that he might go down a step lower or higher. In figurative terms, an Entrepreneur should be willing repeat a journey across a stage. The effort to transgress up across stages would take years. This would consume one valuable & exhaustible resource that we have i.e 'youth'. Having a Rolls Royce is fantabulous, but can you wait till 55 and slog till then?
Hurdle 4: Supply & Demand relationship
It is estimated that the Kohinoor Diamond is valued at approx $10billion. So, if you own one, you’d be $10B richer. What if you had two of them? Would you be $20B richer? Micro Economics opines that you’d be almost the same. Because each of the diamond’s value would come down from $10B to $5B. This is a metaphor to explain the fate of a working business idea if it no longer becomes exclusive.
AntiClimax:
At an outset, I don’t wish to discourage any person from becoming an Entrepreneur. But what is important is to understand that there is a lot of science behind the continued success of a company. To gauge this, I’d advise budding Entrepreneurs to understand and complete in detail, a Business Model Canvas of Alexander Osterwalder fame. This science, when we don’t understand, but still manage to do, could be termed as art. This art what we can’t comprehend could be called magic!
The key take away is you should be willing to endure hardships for a consideration amount of time. An exciting idea or a passion for technology won't suffice. And then you could do 'magic'!
The author's earlier post "From a blue collared workman to a student at a premier b school" is here.
About the Author:
MBA from XLRI & now works as Director Business Excellence at Sutherland Global Services. He also volunteers as Country Advisory Board Member at ISCEA India SCNext and is an associate member at ASQ. He is a certified Six Sigma Black belt and with 11 ¾ years of experience in Business Excellence, Manufacturing & Supply chain; handling pivotal role in order to enhance productivity, by integrating Lean, 6 sigma, Robotic Process Automation methodologies & bring in real QnI to the company bottom line. Prabhakar MN Linkedin
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