All businesses need not be profitable
Does every business have to be profitable? To the common man, yes!
Not true, not true, not true at all!
Many people do businesses to:
– keep themselves busy
– to show to the world that they are doing a big business
– hoping to make money 10 years, 20 years or 30 years later!
-for their own ego – and the price is paid for by the shareholders.
Let us take the case of ‘keeping themselves busy’. In this category are a bunch of retail grocery stores. Most of them will earn much, much more by selling their shops and investing the monies well. However just because they have no hobbies, and have no clue about how to manage their time (but for the shop), they continue to go to the shop. What I mean is – If you are the owner of a shop with a market value of say Rs. 1 crore, and are aged say 55 – you should earn at least Rs. 15 lakhs a year – right? Well I know of shop keepers with a Rs. 2 crore shop and earning Rs. 5-6 lakhs…but WILL KILL ME, if I suggest a sale of the shop….’What will I do all day’ is a good rebuff. Not arguing against it, just enumerating as the first … This category includes those companies which had a great past, but the owner of the business has no clue what to do now, in the changed circumstances. Like shops losing to E commerce websites..but refusing to close down. Like Udipi losing out to pizza joints with home delivery – and deep pockets to kill the competition!!
The second is worse. They are actually wasting good money after bad. They have a big set up, an office, daily visits to the office, AND ARE ACTUALLY LOSING money. One such category I know are some wholesale traders – they ‘invest’ say Rs. 5 crores in stocks…and at the end of the year they earn about Rs. 50-60 lakhs. Again not having a hobby (which means they need to go to an office till they CANNOT go) is a must. I know of a 70 year old who goes regularly…and frankly is destroying wealth. What do you tell him? Nothing.
There are some businesses which justify to their stakeholders business models based on hope. Or optimism. Hoping to make money after 7, 10 or 20 years. This is really funny simply because they way people buy things or services is changing fast. Very few people are capable of or willing to make long term commitment. So to think that businesses must build brands, build a ‘loyal’ customer base…sometimes need to be checked again and again.
The worst are those businesses that are run for the ego of the owner. There is no way on earth that a ‘gas’ or ‘petrol’ agency from a PSU (Fortune 500 Companies!) will ever make money. It is also very difficult to make money from an auto agency of a small car company. However it gives a lot of ‘social’ standing. So people with a lot of money (and own old real estate) need to be roped in.
Of course the absolute worst are subsidiaries of big large companies which may not earn money. The distance between the shareholder of the parent company and the company making losses is so huge that NOBODy really pays attention to what is happening. Shareholder activism, mutual funds becoming active in such companies, or threats of asset stripping are all necessary to help the shareholder. Not seen it in corporate India for a very long time.
Sad, is it not?
Corporate Egoism and Egotism are far more difficult to spot compared to Alcoholism.
Muthu
Yesterday and today’s piece are brilliant. I met a gentlemen some time ago, employing lot of people, having huge receivables, constant problem in finding labour, piling up inventories, taking huge risks in terms of going for big loans every 5 years as the work is capital intensive…… with all these, the return on his capital for the last 10 years is around 6% to 7%. He doesn’t see any scope for improved returns in the future as well. Asked as to why he wants to take this much stress and strain for such a low return, when even a FD post tax would provide him the same minus all the above pains and stress; the answer was that the social and community recognition of being an industrialist.
If someone like what they do, with their own money; then return need not be the only criterion. Otherwise it is an expensive way of impressing the society and keeping oneself occupied.
I was under the impression petrol bunk owners make good money. Why it is not a lucrative business?
Sachin
me too think petrol owners earn decent money. isn’t it almost PSU monopoly business ?
krish
Very nice article. More such articles on businesses are welcome. However in this article, one key important point is ignored i.e. funding for the business. I know at least 10 people who had a capital of 20% and borrowed 80% to set up the business. These ratios may fluctuate in each case and borrowed capital seen as must to set up the establishment.
Then the risks would kick-in. Regulatory approvals, customer foot falls, supply chain, monthly payments, tax & duties, managing employees, marketing and so on.
Every stage there are hurdles and very often on the verge of catastroph. The businesses have other threats like Bandhs, floods, power cuts, construction and fire accidents.
My heart goes out to entreprenuers who risks everything in life (money, time, family life) to provide employment to people, to pay taxes & duties to government, funding to political & cultural events and overall enormously to the economy.
PS: I am a failed entreprenuer
subra
petrol bunk, gas agencies, car agencies (not very popular cars especially), …are all good ‘show off’ or ego enhancing and net worth reducing businesses…
shinu
Subra sir
Wonderful article. A follow up post expected anytime on “What is the right profits, sustainable profits, ethical profits”, in the new world of scams, “social audit”, “media audit”, court rulings…. 🙂
Have a nice day.
Sachin
My friend bought a petrol pump station for his son about 5 years back, for Rs. 60 lakh (No loan). His son earns about 1.25 lakh per month (last year figures – don’t know about today).
I do not understand maths of the returns, but I think this is a decent income.
suhas
@ krish
I refuse to belive you are failed entrprenuer…
Your are SUCESS IN PROGRESS entreprenuer
Edison found 999 ways of not making a bulb before he found 1000th working way
pravin
what about businesses which have 6-7% margins? big hardware companies,many utility companies? why do they even exist.not to mention airlines.
pravin
@sachin.. 25% returns? thats outstanding.he should put in more money if the business can scale up
Pramod
@Pravin, that’s possible. Petrol selling price is Rs. 70 on average. Now a little tweaking in the vending machine and you can dispense 970 ml per litre. Although that’s unethical but many pump owners do that. Customer’s dont even notice such things and It can’t be proved even in measurement test as 30 ml in a litre can be attributed to errors.
Now do the maths. At a sale of 1000 Lites per day, this is 63000 per month, out of thin air. With more innovations like mixing only 2% of cheaper liquids can fetch you another 50K.
I know that’s illegal but this is how shrewd pump owners operate. I have heard this tactics from the horse’s mouth. Same is the norm when you buy steel bars or cement for your house. You are always sold 3%-5% less in wt. Hard to notice for customer but big profits for seller.
BTW. Ever measured the soap bar. The wt. mentioned is 120gm (when fiiled) this means that the HUL filled 120gm of soap in pack in the factory, when soap is wet but overtime water dries and it is only 100 to 110 gm when bought. So in pure daylight big companies are robbing us for 5% and the small traders are learning fast.
subra
sorry I should have said legitimate business. Secondly 1.25L pm on 60L. Pravin jumping to calculate returns is amazing.
Gross profit or net profit
Salary for the owner provided or no?
taxation considered or no?
apart from Rs. 60L – what about cost of land
A zillion questions have to be answered. No a petrol pump is not a LEGITIMATELY DONE PROFITABLE BUSINESS. Period. Any doubt, read it again.
Geo
We run a petrol bunk, invested amount 3 years back at 50 lakhs. Earning a mininmum of 2 lacs a month ever since save a few months.
Decent returns I guess. After taking away money for personal expenses, I have covered the cost of setting up the whole thing within 2 years.
Vithal N Satwik
One best example is a very popular businessman, who has interests in Lquior, Horse Racing, Fashion, Avition, IPL. All his businesses are in loss. But still the gentle man refuses to accept it and still takes lot of loans.
Dominic
I am referring to the original article. Why don’t you think that these people are stuck with their investments and not able to come out of it? They are aware of their low returns and but what to do?
In my case, I invested in a mutual fund for the past two years in SIP and last August (2011) I reviewed and wanted to get rid of it. I stopped SIP and during Nov-Dec the return was (minus) -25% with additional exit load. Now in (Feb’12) the return is -8% and little less exit load. My objective is to exit without any loss. Same case with my ULIP and endowment policies. To reduce loss you have keep going forward.
I understand those businessmen that you are talking about. They could be in the similar situation with much bigger investments.
Praveen
I feel an business can’t be run if that doesn’t give popular returns in short term. Suppose all the sugar mills are in severe losses from past two years. So now the owner can’t go off selling these mills and invest in an another business for short term.
Krishna
Hi,
How about setting up gas agencies. Those require much lower capital and under govt schemes, lands on lease etc cant this be turned into a profitable venture.. . Again i am not a mathematician or a financial wizard. Can you help break this particular business down, links Bplans anything :).
Dk
This is senseless article with no knowledge and survey . petrol pump owners make good profit and talking about wholesale traders the motto in their business is ” less price more coustomer and more coustomer means more profit” but only buissness minded pepole can think like that so sorry for those who like this article .