Sunday, October 22, 2006

Vanity & Sanity

"Revenue is vanity. Profits are sanity."

Don't remember where I heard this quote. But, this is something every businessman should keep in mind. I have seen companies making colossal mistakes and repenting it later when they chased revenue to be market leaders but undercut the price so much so that they did become market leaders and in turn incurred huge losses, were sued for liability, lost dear cash and scene was not pleasant. There is a tendency in business world that once you have the customer hooked to something, you can fleece him later. This is typical drug peddler mentality. Give initial doses free, get the person addicted and then make a lot of money out of him or her. But, in legit business world, hardly any product is that addictive. Companies have pulled plug simply on IT products they once thought were indispensable for their operations. When vendors became too greedy or did not provide requisite service, they decided to take temporary pain to live without that than to endure the pain continuously.

I like typical Indian Gujju, Marwadi business mentality. Always focused on profits. Even if it is small. They are OK even if they can break even. They are the ones who understand the time value of money better than ivy-league MBA managers who fail to recognize the most important principle that is money today is worth many more times than the money tomorrow. They make arguments saying that we have to go without cash for years because after X number of years we are going to make a lot of money. Who has seen the future? There can only be predictions about the future. At least until you build a nice war chest of cash, it's utterly foolish to go after market share when the very market share you gain may comeback to haunt you.

Same parameters should be used while we make investment decisions. If a companies revenues are growing and if profits are not growing in tandem. Or worse if the cash flow is negative, such a company is not a good investment. Hi-tech companies can be given little bit of lee way because it takes some time to develop a hi-tech product which can start bringing in some cash. But for other companies with established products if free cash flow is not positive, it's time to reevaluate the company. They did not say cash is king for no reason. Cash is what lets you solve problems. Most of the problems can be expensed away and you need cash for that.


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