Profit focus

Profit is critical for long term sustenance of any business. Shareholders / Owners are happy to invest in businesses that produce sustainable profits. While planning for any business this objective must be kept in mind. Often, management gets carried away with other objectives without worrying about profits - for e.g. they focus on brand image, market share, top line growth, book size etc. at the cost of profits.

While drawing up the business plan, a key question to be dealt with is on what is the break even period and when will the business deliver sustainable profits to deliver returns to the shareholders. Everyone understands that a business becomes profitable only after a critical book size is reached. However, one should have clarity on what is the level of operations which is necessary to deliver profits.

This profit focus leads the management to focus on all elements which drive profits which are outlined below:
(a) Volume of business
(b) Pricing
(c) Cost of funds
(d) Fee income opportunities
(e) Sourcing cost
(f) Cost of operations and technology
(g) Manpower costs
(h) Losses on account of defaults, frauds etc.

Each of the above are dynamic and linked to market forces. For instance, pricing has to be competitive and attractive to ensure high volumes and high quality portfolio. Pricing also decides how much penetration of market and therefore can be achieved. When each item listed above is seen individually and collectively, the business can become an efficient player. And at every stage of the business growth these have to be carefully monitored and analysed.

Too often, there is a temptation to drop prices below competition to make our product look attractive. There is also a temptation to pay the distribution channel handsomely to attract volumes. A long term player will not succumb to such temptations. Only short term mindset will encourage compromising on quality standards and building book only based on price advantage.

Productivity is a key measure which can be used to evaluate performance of employees, channel, branches etc. It is a useful tool to compare performance between various units and even across organisations if suitable information is available. This can be used to pay more attention to laggards and to improve their output. I remember an instance when I found one branch consistently under-performing and on visiting that branch to identify problems, I came across many obvious issues. I found the manager in charge was distracted with personal issues. Also, as opportunities for funding new assets were limited in that location, we began funding used assets and also focused on transferring loans from other banks to our bank and thus improved productivity significantly.

It is important also to monitor profitability by branch, by individual product etc. Many times organisations get confused due to a large number of products and branches and are unable to ascertain which ones are contributing to the overall profitability and which ones are a drag. it could also be due to poor systems or methods of allocations / apportioning of revenues. Sometimes, managers with vested interests also mix up costs / revenues deliberately so as to continue doing unprofitable businesses and have large empires.

Quality of portfolio is also a very important aspect which has a direct bearing on profitability. In the quest for building a large book, one should not loose focus on underwriting or credit buying. Profits come only when the customer is repaying regularly. Some organisations play on the borderline cases where the likelihood of defaults is high. The rationale for doing this is to collect higher amounts as penalty and default interest. However, this should be done very selectively and only after being sure that the collections costs are not higher than the incremental income. In any case, one should restrict the portfolio of such sub-prime cases to a manageable percentage of the overall book.

This blog would be incomplete if I do not mention the importance of cost consciousness. Every organisation should be wary of incurring costs. Every cost proposed to be incurred is to be evaluated in terms of benefits it will deliver. A tight process of budgeting should be followed with a close and periodical review of costs. Inter branch / unit comparison of costs should be done. Delegation of authority should clearly identify who is empowered to incur costs and to what extent.


I would love to hear your views on this blog. Please feel free to leave a comment on the blog or send me a mail at vish.sesh@gmail.com and I will quickly respond.

Solid Foundation

Any organisation to have a lasting impact must be built on a solid foundation and enough attention needs to be paid to get a solid foundation. It is always better to go slow at the foundation laying stage rather than succumb to pressures and try to show numbers. This is very much akin to building a multi storied tower where the initial period seems agonisingly slow. Much time and effort is spent on creating a rock solid foundation. Once this is done well, the rest of the construction is a much easier affair.

When we talk about foundation, we cover a variety of things as outlined below. Each of these will be dealt with in detail in later blogs. The typical areas to be created as part of the foundation include:

(a) An efficient operations platform to deal with recording transactions diligently and servicing customers
(b) A strong technology platform to ensure seamless flow of data with minimum human intervention and with strong checks and balances
(c) A robust credit policy, under-writing and risk management systems
(d) A focused collections and recovery system and process to deal with defaults
(e) A good fraud management process
(f) A good accounting and MIS to be able to ascertain profitability by unit / product
(g) A well thought out marketing and distribution plan
(h) A good organisation structure to ensure effective supervision and coordination between units
(i) Internal audit to ensure approved policies and processes are adhered
(j) Clearly laid out authorisation / delegation policies

It is only when all of these are working smoothly and effectively that one should attempt to scale up the business. Any attempt to do so prematurely with a plan to fix other areas along with growth will lead to huge issues. Each of the above are like the pillars of the business and weakness in any pillar will lead to the structure becoming weak and collapse.

For an organisation to be a long term player, the thoughts must be like that of a marathon runner and not like that of a sprinter. A marathon runner appears to be relatively slow to start with and may seem to be not making much effort. However, for the long run that is before him, it is better to conserve energy and run with a rhythm.

I would love to hear your views on this blog. Please feel free to leave a comment on the blog or send me a mail at vish.sesh@gmail.com and I will quickly respond.

Recruit right

It is common knowledge that recruiting and retaining the right kind of people is key to any successful business model. Yet, we find that most organisations ignore this cardinal rule in actual practice. Either because of the incompetence of the people responsible for recruitment or due to poor people management practices or other reasons, organisations find themselves short of talent leading to inefficiencies over a period of time.

This blog specifically deals only with the recruitment process and other issues like retention, motivation, talent management etc. will be dealt with in later blogs. Selection processes are to be tuned to attract the right kind of profiles to the organisation. Cultural fit is critical and it is better to spend a little extra time to ensure the right candidate is selected.

Qualification and experience are important but not the only factors. Right attitude is also to be ascertained. I list below some of the key traits to be sought for from each candidate with minor tweaking based on role and level of the position.

(a) Energy and enthusiasm
(b) Positive mindset
(c) Solutions and service focus
(d) Initiative
(e) Communication and articulation skills
(f) Team spirit and networking
(g) Target and result orientation
(h) Ambition combined with maturity
(i) Relationship skills

It is not easy to identify all these traits easily merely on the basis of an interview process. One should therefore make extensive use of psychometric tests, detailed background checks etc. to know more about the candidate. Some people are especially skilled in spotting talent and they should involved in the recruitment process. It is better to take due care and diligence at the initial stage itself so as to avoid problems later.

The right kind of mix and balance is necessary in every organisation. It is not correct to take too many people of a particular type. It takes all kinds of skill sets to lead to efficiency. Too many risk takers or too few are both undesirable. Likewise, too many leaders / thinkers or too few, too many doers or too few etc. are all recipes for disaster. Diversity of people and thought should be encouraged.

It is critical to closely observe the candidate and take frequent feedback from people working around to know how the fitment is working. Within the first few weeks, one can ascertain whether the recruitment was a success or not and take suitable actions.

I would love to hear your views on this blog. Please feel free to leave a comment on the blog or send me a mail at vish.sesh@gmail.com and I will quickly respond.