Ram charan,who has been named as “The most influential consultant alive” by Fortune magazine believes that the basics of doing business are not complicated at all and are just common sense. He says :
Business acumen is not an arcane or complicated skill.Every successful business person has business acumen,including unschooled vendors who sell their wares in third world open air markets.
If you think about those business fundamentals in their simplest terms,the way a street vendor selling fuit and vegetables might think about them,I believe that the concepts are easy enough for anyone interested in business to understand.
He adds :
Revenue is the amount of money that comes into a company from the sale of its products or services.For a street vendor it is the money he collects for selling his fruits and vegetables.
Profit is the money left after deducting the cost of those goods.
Profit margin, is the money you get to keep as a percentage of total revenues.
Sales – $150
Cost – $135
Profit – $15
Margin – 10 % ( $150-$135 = $15 , $15/$150 = 10 %)
Any business is started with an intention to make money which can be expressed as the Profit Margin Target.
The street vendor makes many decisions during the day to achieve his profit margin goal,beginning early in the morning when he decides how much fruit to buy and what to pay for it.This is his sourcing strategy.
Should he buy one variety or several ?This is the “Product Mix”.
He sets up his cart and decides how to price the fruit as it will affect his margin.This is his Pricing Strategy.
I will chip in:
The way he arranges them on the cart is his Visual Merchandising Planogram.
Back to Shri Ram Charan
During the day he takes some tough trade off decisions about what price cuts he should make to unload his inventory so he ends the day with enough cash to buy merchandise tomorrow.These are Mark downs.
He learns to make these decisions through trial and error therefore the clearer his view of his customers,the better his decisions will be.We call it Consumer behaviour.
Just as street vendors need cash,so do companies.A dwindling flow of cash from operations can get them into trouble even if the financial statements show a handsome profit.
The next fundamental that concerns your business is Velocity,what some people call asset turns.
Assets often include buildings,equipment,computers,receivables and inventory.
Velocity is how much annual revenue the company generates for each $ it has invested in assets.
Annual sales – $ 1 billion ,Assets – $ 100 milion, Therefore Velocity – 10
For a retailer If :
Revenue $700 million, Average Inventory – $100 million, Velocity is – 7
Velocity 7 is quite good in retailing.
Margin and velocity can be combined into one measure that most investors use to assess a business,its called Return on Investment(ROI).
ROI – Margin X Velocity.
Retailing ( we are talking about a street vendor selling F & V) is a low margin,high velocity business.a retailer may have a 3 % margin but a velocity of 7 will yield a respectable return of 21 %.If you put the same money in bank the max that you can get is 9 %.
That’s why you are doing the business.
Lets look at growth.A growth that sacrifices margin for revenue is not desirable.A real growth is the one in which the revenue as well as the margins grow.
Finally we will talk about the most important entity – the customers.A growing market share shows that customers are choosing your product over your competitors in increasing numbers every day.
So if you are growing your share of the market, in a market, that is by itself growing then it is a great position to be in.If cellphone market is growing by 30 % and your share has doubled from 10 % to 20 % from last year it is exciting and you are doing something right for your customers.
But if your market share is growing in a market that is on a free fall For example CD’s then it simply means that your competition has moved to greener pastures and you are left to tow away the burden.
Bear in mind that business acumen is not a matter of being able to calculate numbers to the 9th decimal place but about being customer centric, focussed and intelligent.
Further I want you to consider this :
Trial and error are called insights from Consumer behaviour in a board meeting and mapping the pschycographic mindscape of purchase decisions executed in a competitive environment by measuring the dynamics of inter relationship between product and price by consultants from Bogus Consulting Group.
All three basically mean that you have messed up with your customers last year and are going to grapple with it in the coming year too.
PBA -Paralysis by analysis is a favorite game played by bored corporate citizens.If you have 2 two rupee coins and you keep counting them till the clock strikes 6 PM and they will still add up to 4 rupees only.You can make them 5 rupees by doing something about it – I will suggest that you go to the nearest signal and beg for it if there is no other strategic or tactical move that you can plan within the limited time constraints.
Will leave you with a powerful thought by Ralph Waldon Emerson :
Common sense is genius in a work man’s clothing.