Business come in varying sizes. Visualizing this range is helpful in appreciating what is a good business. As visualizations go the colourful world of birds is a good place to start; for birds like business have more in common than their first letter-B. The size of birds range from bee hummingbird weighing 1.6 grams to ostrich the largest that weighs around 160 Kgs, a variation of 100,000 times.
Even this wide range pales into insignificance as we enter the world of business. Measured on any front- number of employees, customers served or the revenue earned, they range from the solo entities of single owner-single employee or single customer or business with miniscule revenues to Walmart, the world’s largest business. In their 2014 Annual Report, Walmart revealan employee base of 2.2 million employees, equal to the population of Namibia, serving each week 245 million customers, equal to the population of Indonesia, the fourth largest country by population and sales of $466 billion, equal to Argentina’s GDP.Compared to birds that range in size to magnitude of 100,000, businesses like Walmart show that the range in business is much higher.
As the fable of the peacock and crane show, there is no one parameter to define the most attractive bird. Multi-coloured peacock grabs the attention over single colour crane, only for the crane to soar into the sky, leaving the peacock fluttering on the ground as it attempts to fly. Unlike birds, despite their wider range, defining a good business is not tough and can be reduced to three simple factors. Each one of the three factors must be present in a good business, for without it, like the peacock the business will only flutter in the air for a short time before they come crashing down.
Businesses need to be liquid, which is an accounting jargon for saying that they must have enough cash to pay their day to day expenses. It does not matter if the cash is their own or it is borrowed. Without cash, like Kingfisher—not the bird but the short-lived airline, they will go belly-up.
While liquidity is an essential criteria for survival, solvency is not. There are many businesses that have more liabilities than assets, which technically make them insolvent. Despite this,like the mythological phoenix bird that rises from ashes, fresh liquidity infused into the business help the technically insolvent businesses survive.
Profitability is the only enduring solution for an insolvent business to become solvent, or for that matter even for a solvent business to remain solvent. Profitability for business is not unlike flying for birds. The flight can be at great height like the Ruppell’sgriffon vulture which is seen even at 37,000 feet above sea level, where they fly for six to seven hours a day or it can be for long duration like the Flying Alpine that non-stop fly for 200 days, eating and drinking in flight. In businesses too, profitability can be at very high levels for short durations, often seen in new tech companies or it can be for long periods that is seen in the less volatile core industries.
Though profitability goes hand in hand with liquidity and solvency, it need not always be the case. Like migratory birds that move from one geography to another in anticipation of weather changes, businesses too seek to move from one industry to another to keep their basic parameters—liquidity, solvency and profitability healthy. Given this overall business scenario, where does compliance fit in?
Liquidity, solvency and profitability are self-controllable parameters only when a business stays within the realm of law. Transgression of law, irrespective of whether it is real or suspected, can take that control outside and place the business at the mercy of regulators and law enforcers. Examples of Sahara group and their frozen liquidity, Union Carbide and insolvency are too stark to need a more graphic illustration.
Given this, what should be the approach of a business to keep their destiny in their own hands? Should they comply with the letter of law or go the whole hog and comply with the spirit of law.
Next week, this blog will focus on the 360⁰ view of compliance.