Attention to Detail

A good leader will call you by your name. A great one will remember the name of your spouse. A good leader will ask if you are busy when calling after office hours, a great leader will apologise. A good leader will focus on growth while a great one will focus on value.

If you ask Google to define value, it tells us "something that is important or beneficial, the usefulness of something." In business value is only created when ALL the stake holders are well rewarded. There are promoters or owners, investors, shareholders, employees, government (taxes) and then vendors or service providers. The word "stake holders" constitutes all of them.

And personally what I have learnt is that value can only be created and multiplied by focusing on the details. There is a lot of value to be discovered and unlocked in every aspect of the business to finally give multi-fold returns to the stake holders.

Any profitable business has three report cards using which we can judge its health. The P&L, the balance sheet and the cash flow statement. What I have learnt is that you neither have to look too hard nor dig too deep to be able to find value that someone else has missed.

The single biggest cost item in the P&L is the cost of materials or COGS or landed costs. If you are like the ant, an employee doing her small part in the larger organisation, there is still an opportunity for you to add value - 50 times that what you cost. You just have to be diligent like the ant and keep at it. Suppose button in a shirt costs ?1.25 per button, with each shirt having 14 buttons (lapel, collar, cuffs and the extras), and you make 1 Mio shirts a year (say you are M&S) - the cost of your buttons for those many shirts is ?17.5 Mio. Now a person working in sourcing needs to just save ?0.10 per button to be able to save the company ?1.4 Mio per year. Most employees do not make the effort and try. It is not about the amount but about the percentage impact you could have created. Imagine if you were to save 8% across all the material that went in to the shirt, your shirt would cost lesser by 8% and this would straight away add to your bottom line. That is adding value!

Just like the "Impossible Cube" by MC Escher, which is a 2-D object drawn in an irrational way to appear 3-D, there are lost of charges under the finance cost header which can create an illusion that all is well and in control. Here is an example of attention to detail. A channel financing company, as per agreement must discount invoices and pay you within 7 days. The daily rate of interest being charged if 0.05% (18% annualised). If it sends you a credit receipt after banking hours, it has essentially "eaten" up 1 whole days of interest or 0.05%. On the whole most of us think this number to be negligible, but if 80% of your sales is running through this channel and you are a ?1000 Cr company, then you have just lost ?40 lacs over the whole year! And that is money simply down the drain due to someone else outsmarting you.

Employees appear as a line item in most companies but only the great ones are able to make them partners. How do we make all the employees partners? Simple - an ESOP plan, a profit share or an opportunity to invest in their company. The Western world did a great job of this and we had three highly celebrated poster boys in the Indian E-Commerce space - Mukesh, Binny and Sachin Bansal. Besides these three, there were so many others who became wealthy due to their part ownership (ESOP) in the company. And now across industries we have examples of employees truly getting rewarded (D'Mart's CEO is India's richest CEO). A good leader will question, "How much raise should I give this year?" where as a great leader will ask, "How much can you add value and how will I share that value with you?". If you change THAT line item from "Indirect Salaries" to the CF Statement and call it "Cash flow towards investing activities", then it shows your true intent.

The P&L also has sundry expenses which are cleverly clubbed under SG&A. There is so much value to be unlocked there. You can have everything from rental expense, stationery, employee engagement, canteen charges, courier charges, security, internet, telephone expense etc, that it is very easy to ignore the whole damn cost item. Just like the shirt buttons, if you are able to save even 5% across each line item, it will save you a good 10s of lacs. All that someone needs to do is like the spider, slowly but surely believe, that in the end, she will have a beautiful home to live in.

In the balance sheet, the biggest threat to any company is the working capital cycle. How fast do you sell and recover and how late can you pay your vendors? And of course, how much unsold inventory are you carrying? If the P&L might be the heart of the company, the balance sheet is the central nervous system. You will be paralysed without a balance sheet. The greatest companies either receive cash on the spot or in advance and pay much later to the vendors - essentially a negative working capital cycle. And on a yearly basis as a religious exercise the company must extend their credit period to their vendors and reduce their credit period to their customers. Even if you are able to do this by 2 day a year on either side, soon in 3 years you have shortened your working capital cycle by 12 days. Most vendors and customers will not mind this small change. Sanjeev Mehta of HUL, when he first joined the company was able to get this done and over the years not only grew the company from ?3000 Cr to ?30000 Cr but also did all of it without asking the board for any money, but generating tons of free cash in the process. Secret sauce - saw the details and extended his payable days.

Very few leaders understand the power of inventory turns (COGS/Average inventory). Imagine company A having 10% profit margin on its products but turning the inventory 4 times a year. Starting at 100, Turn 1 = 110, Turn 2 = 121 and in the end the return is 46%. Now company B is having a 30% margin but is able to turn inventory only once. The return is only 30%. Inventory = Cash. It is better to sell the goods than to wait for a better time. This aspect of the balance sheet will unlock far greater value in terms of cash than any other. A great leader will only focus on inventory turns while a good one focuses on profit margin %. And the most under rated benefit of focusing on inventory is that you will align your systems to make/buy and then sell only what gave you the fastest turns. Your system will be cleansed.

There are several such examples of each and every line item across those three report cards, but the only thing required to add ANY value is the attention to detail and the relentless pursuit. For anyone who has seen the "Pursuit of Happyness" will remember the way Will Smith pursued his dream without missing any detail. Eventually his efforts over the years were compounded to make his dream a reality. The pandemic opened my eyes as I was taught by the MD and promoter of StoveKraft to lift every corner of every expense and see where we could get even a tiny fraction more. Of course, the team walked the journey as true partners and together we compounded all the tiny fractions we found and added immense value to all the stake holders. So for all of those who are connected to StoveKraft, a sincere THANK YOU and for those who are not, go uncover more value for yourself and your company.

I will leave you with the power of compounding - If you fold an A4 sized paper 50 times, the height of the paper will be almost 12 Mio KMS (2 raised to the power 50). So do not underestimate your contribution. Every penny counts.