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KR editions 85 to 88

KR-85 (Management refresher I)

Ever wondered how a company is run? Or why does a corporation need to issue stocks? Or why it needs to worry about stockholders as much as (or even more than) it worries about employees?
Well, we'll take a look at some of these aspects....a little management refresher for a change!

  • It would be apt to use an example rather than dishing out theories. So let's assume we have a college whizkid who decides to set up his own business. 
  • Having just graduated he obviously would like to start small. Let's say he is a highly talented web-designer. 
  • There are 2 options before him: either start on his own or start by getting some more people along with him (if he had some whizkids friends who shared similar ideas). Let's first assume that he starts solo. 
  • The only investment he needs is buying a PC (if he doesn't have one) and managing a few other miscellaneous expenses like internet charges, stationery etc. He approaches small customers and starts making a little money. 
  • After a year of this he realizes that there's more money to be made in this market. But for that he'll need to hire at least one more person. And he'll also need money to buy a new PC. 
  • If he has saved a some money he may be able to afford all this using his savings. Or he may be able to get assistance from a bank (a bank loan). 
  • At this point our whizkid is running a sole proprietorship (i.e. he is the only one in charge of the company; he takes all the decisions and he has to shell out money for investments; and he can keep all the profits).

Food for thought: What do you think are the drawbacks of running a business this way?
That's all for this edition,

KR-86 (Management refresher II)

Continuing with our story of the whizkid.....

  • Our whizkid started off as a solo company. He could have started off in a different manner as well. 
  • Let's assume that our whizkid had friends (say four friends) who were like-minded. In that case, all 5 of them could have started what is called a partnership (rather than a solo proprietorship). 
  • In a partnership, all of them would have pitched in money (and effort) for the business and all of them would have equal rights in the business. 
  • No single person can take major decisions (it would require support of the other 4 partners as well - or at least support of 2 partners for a majority). 
  • In this case whatever profit (profit = all the revenues generated - expense for running the business) is made would be equally divided among the 5 partners. Say they made $100 profit in the first year, then each partner can take $20 at the end of the year. 
  • A partnership is similar to sole proprietorship in a few ways. Just like a solo business, a partnership is tightly held by only a few indiduals. Neither the public nor do outside firms have any say on the business. 
  • Some differences between a solo business and partnership are: more money will be available in a partnership than in a solo business (5 people can contribute more than one). Also the absence of one individual won't hamper the partnership (whereas in a solo business everything depends on one individual).

Food for thought: Can you guess what are the drawbacks of both sole proprietorship and partnerships?
Well, that's all for this edition.....

KR-87 (Management refresher III)

And we again come back to the question: what's the drawback of a partnership or sole proprietorship?

  • In these 2 cases we say that our whizkid has unlimited/unrestricted liability. 
  • What's liability? Liable means accountable/responsible. 
  • In a sole proprietorship our whizkid is accountable entirely for the business. Any profit he gets to keep to himself fully and any loss he alone has to bear it. 
  • If our whizkid borrows a loan from a bank or moneylender and is unable to repay it then he is held liable by the money-lender. Even personal assets can be taken over by the money lender. This is unlimited liability. If the business goes bankrupt the person is held responsible and has to somehow repay back the loaned money (even if it means using up all his personal assets). 
  • A partnership is slightly better off since there are more people involved. If our whizkid's partnership business has to repay $1000, all the partners will shell out equal amounts of money (5 partners means $200 each - assuming each of them has $200. If one of them can't contribute even a dollar then the other 4 have to pay $250 each). 
  • If the partnership business goes bankrupt and they have to pay back $1 million and if one partner is entirely bankrupt (can't repay even a dollar), then the other partners have to somehow repay the $1 million. Thus even in a partnership there is unlimited liability.
  • This is just one of the drawbacks of partnerships and sole proprietorships. Can you think of some other drawbacks?

That's all for this week; have a great weekend,

KR-88 (Management refresher IV)

Continuing with the story of our whizkid.....

  • If our whizkid has established himself well in the business and is really serious about becoming a major market player then he would consider turning his establishment into a corporation. We'll take a look at some of the reasons as we continue our story. 
  • A corporation is usually a publicly held company (unlike partnerships which are privately-held where only a few people are vested with all the powers; these people take all the decisions and the profits). 
  • We did see some drawbacks of partnerships and solo companies. Another major drawback is the difficulty in raising/ collecting money. Money is needed to expand the business and bank loans might not be sufficient. 
  • Our whizkid knows that there's more market to be tapped and so he wants to expand (let's say he started the company as a solo proprietorship). But to expand and reach out, he needs a lot of new things (infrastructure): a new office (can't keep running his business from home), some more employees, more PCs, software, furniture etc. And to acquire all of this he needs money. One option is to approach the bank and get a loan (of course for that he'll have to provide security etc). But there is a limit to the amount of money you can loan from a bank. And again you won't be able to use the same security to obtain multiple loans from different banks. So, is there some other way to raise money? 
  • Our whizkid thinks of an alternative. If many outsiders (individuals or other companies or financial institutions) contribute a little money, then the total money collected will be huge (for example if 10,000 people contribute Rs 1000 then the total money raised would be Rs. 1,00,00,000 or Rs. 1 crore!). 
  • But no one would ever give money for free (except for charity). So in return for the money contributed our whizkid would need to give back something to the contributors (something which makes the contributors feel that they will get back more than the Rs. 1000 they invested).

So, what can our whizkid offer?
That's all for this edition.....(and we'll get back into the technical KRs after a few more editions);

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