Doing Business without Loans - Tiny Philip.ppt
- 1. 1 How to Run a Successful Business Without Loans By Tiny Philip Scaling Up Your Business – The Sharia Way 8th April 2017
- 2. 2 Why this Presentation? Entrepreneurs are encouraged to take loans Most successful businesses take loans Most un-successful businesses take loans Loans increase the probability of failure Can we run a successful business without loans?
- 3. 3 Assumptions Example of a mfg + distr business Seasonality, Infrastructure, Taxes etc ignored Very simplified approximate figures Show the principle of the concept
- 4. 4 Conventional High Investment model Market credit – upto 2 months Final customer mostly pays ready cash FG & WIP – upto 3 months Most factories have excess capacity Actual production time is a few hours/days RM – upto 3 months Most suppliers have excess capacity Actual production time is a few hours/days Most suppliers are located in the same country
- 5. 5 Need for Loans Rs 60 crores annual turnover Net Profit Margin of 7.5% ie Rs 4.5 Cr/year Investment required to run this business Market Credit of 2 months – Rs 10 crores (approx) FG & WIP stock of 2 months – Rs 10 crores (approx) RM stock of 2 months – Rs 10 crores (approx) Total Investment Needed – Rs 30 crores (approx) Return on Investment = Rs 4.5 Cr / Rs 30 Cr = 15% per year Bank Loan interest ~ 12-14% per year
- 7. 7 Why Market Credit? Final customer pays ready cash We dump too much stock on Retailers Supply infrequently Push sales at month end to achieve targets Believe that maximum stock should be kept at the retailers to avoid lost sales We view goods transferred on credit to retailers as sales; in reality it is a stock transfer as we have not been paid Retailers end up holding upto 3 months stock of mostly slow moving items and ask us for credit to manage their cash flow
- 8. 8 Giving Market Credit is a very unhealthy way of doing business We lose sales (up to 30%) as we don’t supply to customers when payments are overdue Upto 70% of our sales force’s time is spent on collection Since we dump stock on customers, our sales force tends to focus on larger customers who bargain hard on prices (volume discounts, schemes, offers) resulting in lower margins
- 9. 9 We don’t need to give Market Credit Make a compelling market offer and ask for ready cash from your customer Focus on small customers and provide regular weekly service (FMCG) Focus on small customer and provide regular weekly cut piece supply (Footwear) Focus on end customer and provide customised single piece home delivery (Doors)
- 10. 10 FG & WIP Stock
- 11. 11 Why hold high FG & WIP Stock? Most factories have excess capacity Actual production time is a few hours/days We believe in keeping our workers and machines busy all the time We avoid set ups and insist on large Production Batch Sizes which are not in sync with sales We produce to stock when sales are insufficient Since our Production pattern in not in line with sales, we always find that we are short of fast moving products and then feel the need to hold high finished goods stock to prevent lost sales
- 12. 12 Holding high FG & WIP stock is a very unhealthy way of doing business High WIP stock results in long lead time for production which leads to poor service levels High FG & WIP stock leads to high obsolescence and carrying costs High FG stock causes us to offer promotions/schemes to liquidate slow moving stock leading to lower margins High FG & WIP stock causes us to limit the variety of products we offer leading to lost sales Higher FG & WIP stock allows “NEAR TO EXPIRY” products to reach customers
- 13. 13 We don’t need to hold high FG & WIP stock Accept that only the BOTTLENECK areas should run at 100% capacity; all other areas should run at LESS than 100% capacity “Make to Order” rather than “Make to Stock” or “Make to Forecast” Do not insist on large Production batch sizes; be willing to change over according to the sale pattern; focus on reducing setup time rather than setups Do not insist on 100% capacity utilisation by “Making to Stock”; solve the real problem in sales
- 15. 15 Why hold high Raw Material Stock? Most suppliers have excess capacity Actual production time is a few hours/days Most suppliers are located in the same country Focus on reducing price leads to bulk purchase Transport costs are normally borne by suppliers, causing them to use the least cost option which is normally the slowest leading to long lead times and HIGHER RM stock Suppliers are unreliable as we do not build long term relationships
- 16. 16 Holding high RM stock is a very unhealthy way of doing business High RM stock leads to high obsolescence and carrying costs Since we hold too much RM stock, our lead time to phase out old products and introduce new products is very long High RM stock causes us to limit the variety of products we offer leading to lost sales Higher RM stock causes many “NEAR TO EXPIRY” items to be used in production leading to unhappy customers In spite of holding high RM stock, we run out of RM stock from time to time as suppliers are unreliable leading to lost sales
- 17. 17 We don’t need to hold high RM stock Focus on price, lead time, minimum order quantity, order frequency and defect percentage when negotiating with suppliers Increase frequency of ordering from suppliers to the maximum possible (daily) Reduce the transportation lead time to the minimum possible (1 day) Reduce the production lead time at the suppliers end to the minimum possible (1 day) Build a long term relationship with suppliers thereby improving reliability of supply
- 18. 18 You can make your business attractive enough to invest in Current business practices require an investment of Rs 30 crores (approx) to successfully run a Rs 60 crores business By changing your business practices, you can substantially reduce your investment Market Credit of 0 months – Rs 0 crores (approx) FG & WIP stock of 0.5 months – Rs 2.5 crores (approx) RM stock of 1 month – Rs 5 crores (approx) Total Investment Needed – Rs 7.5 crores (approx) This will give you a very high and sustainable ROI ~ Rs 60 cr x 7.5% / Rs 5 cr = Rs 4.5 cr / Rs 7.5 cr = 60% per year, which is very attractive for investment, so why take BANK LOANS ?
- 19. Summary Reduce the investment required in your business by thinking out of the box Increase the ROI of your business so that investing your own money becomes attractive 19
- 20. 20 Thank You!