22 September 2016
During the course of our careers, we’ve come across a range of mathematical expressions. One equation in particular has resonated with me. I call it the ‘entrepreneur’s equation’ – simple yet powerful in its application. So what is the equation?
Y – C = S = I
These elements are represented in economics, where:
Y = income/funds
C = consumption/expenditure
S = savings
I = investment/capital
We should revisit the fundamentals from time to time, and be open to start the learning process again. There is a close relationship between income(Y), expenditure(C), savings(S) and investment(I). The fundamental understanding of how to manipulate these four elements in investing and in sustaining your business is imperative.
Why is it important?
As entrepreneurs, we have to learn to invest(I). In order to have the capability to invest, we need to reduce consumption(C) on unproductive expenditure, reduce luxuries or even change our perceptions of life. Most of us have assumptions and fixations about success. Perhaps we think that we can be successful because we want to be successful. However, the desire to be successful is not enough. We can be successful when we are working and behaving as people who want to be successful. Part of that behaviour involves allocating funds(Y) for productive use which may involve a shift in mind-set. Imagine using funds to buy a Ferrari(C) instead of allocating it to fund a milk processing plant on a farm(I) as per the business plan. Well, sooner or later, the chickens come home to roost.
It seems we have to go through some pain of some kind to have money available(S) to invest. We need to evaluate options available for investment. The fundamental understanding is that if we don’t continue investing(I), we are impairing our capability to earn income(Y) and impairing our capability to grow. An interesting point about this expression is its connection to strategy, capital and people.
Beyond the Maths
If you are an entrepreneur, there is a risk of staying in certain businesses for too long alone. Working with partners might be required in order to raise capital(I) and share the risk. It’s not just about the quantum of capital, but also sharing experiences and best practices. The skill sets required in running a successful business are different. It’s not correct to think that they can be held by one individual. At some point, we may have to trust other people and work with partners in order to grow.
Another fundamental understanding is that investing in people(I) has the potential to generate income(Y). The ability to attract and retain talent is essential to any business. We should not under-estimate the value of recruiting and working with people who are strategically aligned, who are a good cultural fit and share core values. In our experience, attitude can be the most important factor. Hire for attitude and train for aptitude. So how can entrepreneurs and Executives gain a ‘vantage point’ to increase business value?
Our approach to increasing business value goes beyond just the P/E ratio to encompass all elements related to strategy, capital and people in order to provide a more holistic insight into a business. Our proven tools and techniques can help Executives make strategic decisions.
We wish you every success in your business.