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Ravi Kiran
I help ambitious businesses in Middle India scale. Rapidly and properly.

When Cash may not be King

How money sitting outside the books poses a threat to growth
Sometime in the first quarter of 2010, the Mint staff writer Deepti Chaudhary wrote a telling piece describing how small town businesses are finding it difficult to attract VC money. It felt odd and somehow, ‘unfair’, that VCs would ignore a geography that I felt was going to be a key driver of the next chapter of India’s growth story. [That article formed part of the basis for my friends and me to launch our advisory for businesses in Middle India, but that is not the point of this post].

Over the last few months, having met several VCs in big cities and businesses in Middle India, I am beginning to understand one of the reasons VCs are shy of putting money in those businesses.

It’s what you may call the ‘parallel balance sheet’, the business equivalent of the parallel economy. Now, not reporting part of your business income may not be a sole privilege of businesses in Middle India. Perhaps it’s equally prevalent in big cities and in all kinds of businesses in India. But I am pained by the inefficiency this money creates for a company looking for rapid growth.

MORALITY ISN’T JUST PHILOSOPHY One dimension of this issue is the morality of informal business dealings creating and often using unreported income and how much strain it may be putting on our country’s financial planner’s calculations. And indeed morality and ethics is an issue in business, it’s not something we can avoid any longer, not while our collective consciousness is being attempted to be woken up from slumber against graft in public life. It is true that for many businessmen, it has been a fact of life to run a parallel account consisting of cash. “It’s the way of business, sir, we can’t change it,” admitted a young first generation businessman to me in a recent trip. In fact, another gentleman told me of an accounting software available in the market that can help you manage balance sheet A versus balance sheet B. Apparently, in some of these you can programme a key on the keyboard to delete all the Type B data on a single keystroke, when the taxman comes calling.

The poignant part is many businesses may not even be aware that they are doing something wrong by maintaining two sets of books. “How else do I manage [read, grease palms] those in power to control my approvals?”, asked another entrepreneur, “they aren’t going to  accept a cheque!”. On a dias in front of nearly 300 people in an event I attended recently, a successful businessman spoke of the existence of a ‘rate card’ of bribe in the local civic body and how he was asked to pay five lakh rupees [USD 10,000] if he needed some land surveyors to do their work fast. [‘working fast’, we all know, actually means ‘doing your work and not delaying it without reason’]. A realty company owner told me, “Often customers want to give me part cheque and part cash and ask for the agreement value to be lower, so that they can save stamp duty. What am I supposed to do? I can decline the proposal, but who knows whether I will have a business tomorrow if I keep doing it?” The more I talk to people, the  more interesting are the justifications I hear, making it sound as if having cash sitting outside books for miscellaneous purposes like these is one of the most practical things to do, and is often a compulsion.

CASH MAY KILL GROWTH The second dimension of the issue is that of efficiency of money. When 40%-50% of your income is sitting outside your books, it also reduces your ability to borrow formal money by that extent. And for growth oriented businesses with turnover of no more than Rs 20 -30 Cr, it would appear that a large part of the income is indeed sitting outside books, carefully managed by the ‘well-meaning’ chartered accountant, a man usually the business owner depends completely upon.

This approach may appear smart and practical, but in my belief, it also keeps companies crawl in their growth trajectory. Think about it, one reason software services companies may appear to have grown really rapidly, is because often their clients are sitting in the USA or Europe and they certainly aren’t paying cash.

It’s possible that different professionals may have different views, but I have managed companies long enough to have developed a conviction that the cleaner a book you keep, in general, the stronger a reputation and company you will end up building. Too clever book keeping can sometimes land companies in trouble.

We live in a world where ‘financial prudence’, ‘corporate governance’ and ‘disclosure’ are more than mere management jargons. Companies are built and destroyed based as much on how much money they make, as how they make it.  Enron, WorldCom, Satyam and many other enterprises are bright examples of corporate greed, misconduct and abuse of accounting rules. Many growing enterprises may feel that they are too small to be caught and they can get away. But it’s not about whether you can get away; it’s about whether you want to do something that forces you to try to get away.

More importantly, to fuel growth, you are going to need someone else’s money sooner or later – banks, private equity firms, and even public. Why would someone want to give you money if they believe that you are managing parallel and ‘creative’ balance sheets?

They say being cash rich is a good thing for your business. I agree. But if that cash is sitting outside books, you are actually starving your business of essential growth nutrients.

It’s worth a thought.

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On the contrary, I found that in tier II & III cities no business can happen without paying in cash. Recently tried buying house in my native but could not since no body wants payment through cheque which is not avoidable if taking home loan from bank. I am not sure when I will be able to do since the cash payment forms 70% of the payment. Where the cheque payment is possible property is too far away and does not meet my requirement.
Agree with the observation. It is not just small business owners and traders but even many small to medium size listed companies work around the system. I like the content under "MORALITY ISN’T JUST PHILOSOPHY" // This parallel economy, as i like to think this is..is the result of the system we have. If ppl see ways to exploit the system to there benefit...well like it or not ppl will exploit, having said that, nobody wants to be unethical. Probably in a "राज्य" "जेसा राजा वेसी जनता" !!
Gaaahh! Comment box is not WYSIWYG formatted. My prevs comment came out as a wall of text.
Made very powerful reading nevertheless Suhail. Thank you for leaving your comment. Cheers.
Well said and agreed, but these micro-cap type businesses aren't bothered so much about reputation, because their vendor-customers also tend to be of similar nature; and if you throw around heavy words like 'corp-governance' etc in their general vicnity, one runs the risk of being laughed out. It's too fancy-schmancy for them :-) I think there's one more reason why so many small-biz are happy swimming in their small-biz mediocrity. And that is 'Mgmt bandwidth'. In most of these biz's there's no professional mgmt structure. The owner is the whole and sole person who 'looks after things' so to say. He may have a jack-of-all-trades right-hand man to share some burden. But essentially the entire circus is a one-man show. In such a scenario, there is no pull from owners to bring in professionals to scale up. This is more pronounced in the steel/construction industry where I ply my trade. In my job, I get an opportunity to deal with both big professional mgmts and small-time traders. And this feature stands out in stark contrast to me. You can observe it in the fact how 'busy' they are constantly on phone with their workers always 'firefighting issues'. Ofcourse there are a few exceptions and it's a charm to work with them. But they are clearly in minority. Recently, I pitched our s/w prod to a Delhi steel rebar plant for X INR. The guy countered with X-30% "all-cash, abhi ke abhi le jaa, maamla khatam kar". He even offered me help to route this money back to my mothership Europe HQ bank account :-) I said sorry, we don't transact like that. He then pretended to get pissed off, that he said, well then I'll handle with labourers whatever yr software offers. I said fine and parted ways amicably. At this point, he's clearly sold on my product and he clearly knows he'll recoup ROI on s/w investment within 2-3 months of steel-savings in his plant. Yet, he foregoes that. Testing if I blink! Because well, "software ka itna charge kyun! we get entire MS-office from our computer guy for free" - his exact words. And when I walk away, his ego doesn't allow him to revert to me within weeks. Anyways, six months later and after losing more than my offer X amount in plant inefficiencies he comes back to me and closes my sale on X+15% price on our terms (which were not onerous to begin with) :-) Alas, such is the manner in which umpteen of businesses operate. Penny wise, pound foolish! The only thing that can save us from these cycles is our willingness to walk away from such customers.
subbarao thammana
An eye opener.
 
 
Ravi Kiran
As a child, I used to wonder where mosquitoes in winter hide, why fish keep swimming, how birds learn to fly and other such 'un-natural' occurrences. After a career in marketing & communications for over 20 years, building and running businesses of excellent size and in many a geography, hiring and training dozens of successful managers, I continue to be aggressively curious about beings and things.

Today, as a founding partner in Friends of Ambition, a growth advisory company three friends of mine and I started recently specifically with the aim of assisting and guiding ambitious businesses in India’s mid-sized towns [we call them Middle India] in chasing their dreams, I am curious about 1st and 2nd generation business owners in that geography. As I often find myself in cities and towns I might have only heard of just a few months ago, meet business owners there and hear their stories, dreams and challenges, I feel a sense of elation and sadness, sometimes simultaneously.

This blog is a chronicle of my experiences in Middle India - mostly gleaned from real life encounters with business owners, their influencers and well wishers.

Scaling a business is something I have been fortunate to learn firsthand, as I helped build and ran several businesses for Starcom MediaVest Group, a part of Paris based Publicis Groupe, as its CEO- South East and South Asia.
 
 
 
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March 13, 2012 18:15 pm by Bhushan
On the contrary, I found that in tier II & III cities no business can happen without paying in cash. Recently tried buying house in my native but could not since no body wants payment through cheque which is not avoidable if taking home loan from bank. I am not sure when I will be able to do since t...
March 09, 2012 18:12 pm by Bhuvan
Agree with the observation. It is not just small business owners and traders but even many small to medium size listed companies work around the system. I like the content under "MORALITY ISN’T JUST PHILOSOPHY" // This parallel economy, as i like to think this is..is the result of the system we ha...
Ravi Kiran
Ravi Kiran
March 06, 2012 16:01 pm by Ravi Kiran
Made very powerful reading nevertheless Suhail. Thank you for leaving your comment. Cheers.
March 06, 2012 14:13 pm by Suhail
Gaaahh! Comment box is not WYSIWYG formatted. My prevs comment came out as a wall of text.
March 06, 2012 11:32 am by Suhail
Well said and agreed, but these micro-cap type businesses aren't bothered so much about reputation, because their vendor-customers also tend to be of similar nature; and if you throw around heavy words like 'corp-governance' etc in their general vicnity, one runs the risk of being laughed out. It's ...