Saturday, 11 January 2014

How to Practice Cost Control in Start-Ups

It is very easy to spend money and commit additional costs for a startup. On the other hand it is very difficult to cut back these costs.

One cost that I found running out of control was that of paper used in printers and photocopiers. I realized that we were using using several reams of paper every day and this had started to become a very expensive proposition for the company.

Employees would print anything they wanted on one of several printers spread throughout the office floor and I would often find hundreds of sheets of waste paper lying next to the printer in the morning. Someone would had given a print command and then not bothered to pick up the printout. All these printouts were single side printing on each sheet of paper leading to a doubling of the costs, more so when the paper was wasted in unnecessary printouts.

I found the same practice at the photocopying machine where a lot of documents would be sent for copying and then extra copies would be left lying around the photocopier. I also found employees misusing the photocopier by copying personal books which ran into several hundred pages.

Other than the cost of the paper and the wastage of the paper being environmentally unacceptable, this was also a serious data security lapse both near the printers as well as at the photocopier.

We implemented the following steps immediately to bring our costs under control

·     We earmarked each printer to a group of departments to identify who was wasting paper. Each computer print option was configured to select only the nominated printer and all other options were removed.

·       We configured a default option on every computer to print on both sides of the paper. Now an individual had to select “single side print” if he wanted to send an official letter.

·        We started using refilled printer cartridges for all printers.

·      We used the existing “code” feature in the photocopier and assigned a code to each department. Each department had to enter this code before they could operate the machine and records were available for a scrutiny if necessary.

These were simple but very effective steps to reduce the cost of paper. We saved a lot of money by reducing the wasted paper and we brought in much greater accountability. We took these steps using features that were available in all the software and while achieving cost cuts, we were being environmentally friendly as well.

Another area of paper wastage was at the stores. As a retail company, we would print our customer bills on three inch strips of paper. I found that our standard customer bill was about 15 inches long. A lot of paper was being wasted simply because we were leaving too much space between every line of each bill. These empty spaces were left partly to make the bill “look nicer” and partly because no one had bothered to think of the cost. I did a quick calculation and found that we were using over 5000 kilometers of paper rolls in one year.

We re-engineered the bill, cut out all the blank lines and the unnecessary lined and reduced the length of each bill to 6 inches from the earlier 15 inches (without removing any data that was required to be printed on the bill). We saved over 3000 miles of paper rolls every year.

Cost control in a startup is critical for its success. A culture of cost control, if implemented properly from the beginning will go a long way in building efficiencies in most companies.

The author is the Chairman of Guardian Pharmacies and the author of the bestselling books, The Corner Office and The Buck Stops Here. Twitter: @gargashutosh

Wednesday, 1 January 2014

Looking To Raise PE Funding? Here’s What You Need To Know

Once the entrepreneur has exhausted his funding sources he needs to turn towards raising equity from private equity players. It is important to select a good private equity partner since this investor will stay with you all through thick and thin till he is able to find an exit.

As a promoter one’s passion is to build a strong brand and a resilient company that will survive over the years. On the other hand a private equity player is in the business of making money and therefore, very rightly their interest is only on how soon they can get their desired return and exit from the company.

The best way to approach private equity players is by appointing a good Investment banking company which specializes in raising money for the industry you are in. the Investment Banking Company will work with you to prepare an Information Memorandum and introduce you to potential investors.

Even if there is a considerable pressure on funds, the promoter needs to ask the private equity player important questions such as how long is the life of the fund, what their exit time horizon is and most importantly what will they bring to the company other than money. It is better to ask such questions before the funding than to find out later after the investment has been made.

Unless one’s private equity partner shares your dream, there will be contrarian positions between the two partners at most board meetings which will prove dysfunctional for the business of the company. It is also important for both partners to agree on the time horizon for the exit of the private equity investor. I have seen a lot of companies being pushed into going for an Initial Public Offering very early in their lives even though the promoter felt that the timing was early.

The discussions with the potential investor will revolve around valuation of the company, the amount of the investment and the percentage of dilution. Terms such as pre-money and post-money valuation must be understood by the promoter.

Once there is agreement on the terms of the investment with the private equity player, it is critical to get this incorporated into a term sheet. For most promoters, it is recommended that they get a good lawyer who can help the promoter to understand the legalese in the hundreds of pages of agreements. The promoter must understand the key provisions in great detail. It is also essential to read the agreements carefully with specific reference to the rights and responsibilities of a promoter.

Watch out very carefully for the IRR percentages that are being built into the Default Clause and Liquidity Preference Clause of the agreement that you will sign. Sometimes innocuous numbers that initially seem to be very reasonable can come back to bite you after a few years when you suddenly realize that a large chunk of your own equity has been diluted because of the IRR guarantee that you have signed in the investment agreement.

Set up monthly review mechanisms with the investor and make sure that you record the minutes of the meetings very carefully. Copies of minutes should be sent to the investor to guard against a future denial of what was discussed in the meetings in the event your business runs into a problem.

As an investor in your company, the private equity investor is as responsible as the promoter to work towards the growth of the company. I have seen several instances of companies which are under performing where the private equity investor has attempted to step in and then made a complete mess of an already challenging situation.

Raise private equity but with caution and with your eyes open.

The author is the Chairman of Guardian Pharmacies and the author of the bestselling books, The Corner Office and The Buck Stops Here. Twitter: @gargashutosh