August 5, 2010

Milking the cow

When you analyze the balance sheets of some financially troubled companies and the accumulated wealth of the shareholders, you would see that they have placed the profits of their company in other investments like real estate. The company is in debt. The shareholders, believing that the other investments would bring in higher profits than the business of their company, have invested in these other lines by drawing out the profits of their company or making their company a shareholder in these new investments. When their company needed working capital, credits were utilized and so their costs have increased. If this scenario comes up during years of economic crisis and moreover if the investment was made in real estate, then the contemplated income levels cannot be realized.

Each company is like a living mechanism. Maybe we could compare it to a cow. If you spend the money for fodder on something else, then you leave the cow starving. If the cow is starving, then you cannot receive milk from the cow. The cow loses weight. In the end you might even have to cut the cow.

When shareholders of a company with such a shaky financial picture approach us for finding someone to feed the cow instead of having to cut the cow, we usually see that irrespective of any further feeding it is not possible to keep the cow living. When we ask the shareholders why they have waited so long to take some measures, the answers we receive are generally examples from the list of what shouldn’t be done in a good business management practice.

If you have established a business and you wish to grow it, then your first priority is to satisfy its needs. If you feel that there are other business lines, which are more lucrative, then you should immediately try to find your way of exiting your existing business.

It is also true for all business lines:  The value of a healthy cow is far higher than the value of a dead cow.

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