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Alok's Posts / Essentials / Startup

Building a Business? Decide between the Balance Sheet way or the Profit & Loss way!

By Alok Rodinhood Kejriwal on 39 Comments / 10514 views

I’ve been involved in building, running, starting and closing all kinds of businesses for the past 25 years.

It’s clear to me that in this age and time, when Entrepreneurs have many options and routes to take, they must be clear on 2 fundamental issues that I have always encountered.

These are presented below:


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The link to the same PPT on Slideshare below:

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39 Comments

  1. Great, 18 slides and 30 mins in absorbing the framework well spent:)

    Thanks for sharing with the junta!

  2. Dear Alok Sir,

            I am currently working on https://buyhatke.com which is a unique combination of meta search (B/S business) https://compare.buyhatke.com and penny auction (P/L business)  I would like to know the concept of Investor valuation model which I should pitch to an investor as it entails both things in it. You have described in the slide about goodwill shares to be given to investors and no permanent equity. I have for the first time forayed into entrepreneurship and do not have much experience about investors . but certainly know that they can be the make / break person in a venture’s success. So can you help me in getting some information about the valuation models for such businesses. Eagerly awaiting reply, 

  3. Promising ( to be P and L) B/S business get acquired by cash generating P and L business – youtube and google, hotmail and Microsoft.

    to be doom B/S business get acquired by another B/S business – Letsbuy and Flipkart

  4. Amazing clarity Alok needed for any Entrepreneur who is about to start his own business or have already started the business. I think this thought process will help both the start up and its investor to find an answer to the friction they may be having because of the lack of decision (Such as whether the business is Balance Sheet or Profit & Loss) Many Entrepreneurs succumb to the easy capital provided by some eager investors who wanted to drive the business P & L way without understanding that the business in question is actually of Balance Sheet type and it will yield only when the value would be created. A great learning for me as usual and I hope it will prove to be a great learning for all the start ups and investors who fund those start ups 

  5. Awesome…Just another absolutely awesome article……

  6. Am not sure you can demarcate start ups as just these two kinds of businesses. A runaway success ecommerce site like threadless or spreadshirt did focus on making money from day one. 

    I would think that one needs to be prudent at all times with funds whatever type of business one builds. 

  7. Wow! Fabulously well communicated. Alok, please do write often more via slides – makes it easy even for lazy-to-read-online people like me!!!

  8. Very useful, Alok. Many thanks!

  9. Great Presentation! I am going to refer to it time and again. 🙂
    Thanks, for sharing.

    Prasant

  10. Dear Alok,

    I’m a post doc doing cancer research and an aspiring entrepreneur. This is the best  illustration I have read about balance sheet and profit and loss type of business. Thank you very much for educating a research oriented entrepreneur like me.

    Thanks

    Saravana Murthy

  11. Good !!! One of the best article from you. This one has the potential of future division of business.

    What you think about mixing both ??

    You can complain of focus. But not every entrepreneur in the world is lucky enough to  get a VC to fund him.

    That doesnt mean he has leave his dreams in trash..So you need to make your bread and same time presume your technology dreams. In such situations I think a mix of both is suitable.

    Great slides..Love it.

  12. Great article. Very insightful.

  13. Thanks Alok.  As usual you bring a dose of much needed sanity in understanding how business actually works.

  14. Nice way of connecting Youtube business in B/S vs P/L model. 

    What type of business is Education business – B/S or P/L ?

  15. Great Article Alok. Is there some way the points can be kept handy, like a bible! (may be).

  16. So, i guess it all boils down to COST of CAPITAL.

    No business [ here i mean a real business that lasts more than a decade ], can be built without sustainable long term assets to facilitate PNL. It never was a viable way, and i guess, it never will be. if you see any business that is milking cash today, it has to have a great asset base, again in any avatar in its present or previous lives. So if a few flicks who call themselves entrepreneurs, have honed their skills at a large enterprise and then make a PNL business, do carry assets paid by someone else. Again to the point of any large company of today, i mean TCS, Infosys, Wipro, Cognizant, etc. became big PNL business only because of the assets built by them for years, including technical and marketing skills. Any other economic activity like steel making, automobiles, dressing people, vanity, entertainment, ANY, if it has to be a business needs a strong balance sheet to be built.

    So for all entrepreneurs reading this, please focus on a balance sheet with assets, as alok says, it takes 10 years to make it big, and i guess about 4-5 years, to just make the assets you need. People may not see the value of the assets you have built, but focus on doing that. They will eventually see it. Do not listen to people who want you to explain how will you make money in 10 mins. Very few people understand it that fast.

    And asset building cannot happen with today’s abundant capital. Only because it is not cheap. 5x and 10x VC formulas are for entreprenuers to pay for the venture capitalists mistakes. Even after a 1:40 funding:receiving business plan ratio their error rate is often more than 60%. In most cases, with that kind of success rate, you are considered a failure.

    The Indian ecosystem for early stage capital is not yet mature for today’s markets, especially the internet market. Great companies have always been built in this nation and under every economic condition. This aberration will pass too. eComm cos have shown, that a quick and large PNL business is only about finding the larger fool.

    Great Investors have a great track record to back companies that will make a lot of value. They do not have a 1:10 [ or 1:5 or even 1:3 ] success ratio. For every company they back, it creates value, not just for themselves but the ecosystem at large.

    So there are two ways then, one find lower cost of capital or substitute a higher cost of capital by finding a better team including the investor. The second is the best way to make the odds in your favour because finding lower cost of capital in highly inflationary times is not going to be possible even with great efforts.

    Hence understand what is the value you are creating and focus on making a strong Balance Sheet to make a strong PNL.

  17. Dear Alok, 

    Its very interesting slideshow. Thanks for sharing this wonderful knowledge source.

    Keep it up!!

    Regards, Brijesh K

  18. Hi Ankur, 

    Education seems like a purely P/L business model.

  19. I have a question Alok…wont Salaries come in the B/S slide also? As salaries are still need to be paid regardless of when the actual sales say for example in the form of products gets started?

    Salaries don’t necessarily generate immediate revenues..in-fact majority(in volumes) are purely from an asset/capacity building point of view..which IT firms like TCS, Infosys do consistently.

  20. i dont’t think u know accounts.

    salaries are P&L items.

    If u build a P&L business then its an expense.

    If u build a BS business then its in ‘accrued losses’ on the asset side.

  21. liked it! 🙂

  22. Accounting conventions and practices in the tech startup arena never cease to amuse me. Are you talking about taking your customer base and website onto your balance sheet? You outdo Satyam.

    People in the tech arena believe that their products are too sophisticated, too valuable to be represented by earthly accounting conventions. For them, assets are all those things they don’t own and can’t see. Imagine McDonalds or WalMart taking their customers onto their Balance Sheet. Absurd, hah? Even though McD and WalMart customers are more brand loyal than e-com customers? Still, no?

    A balance sheet way is when you’re in for a quick buck and are counting on a big fish to take over the reins from you. 

  23. Firstly, my apologies. I hadn’t gone through the slides before commenting. So silly of me. I had formed an opinion on the two models based on the ongoing comments. BS way, as depicted in the slides, covers a wider area than I had initially thought.

    I thought that with BS-model Alok was talking about un-tested businesses, like Instagram and Groupon, that have no profits but promise investors the sky based on transient assets like customers and popularity. Having gone through the slides, the distinction between the two models turned out to be different.

    Treating customers as an actual asset is unheard of, outside the tech-scene. In the tech-scene, anything is possible; Groupon, rumors say, is doing something similar with its accounts. I heard that some e-com firms are treating product discounts as deferred expenditure. That is absolutely incorrect.

    From a layman’s perspective, there is no intangible asset that can be called an actual asset from accounting point of view. So yes, your balance sheet will have very few assets. But, cheer up as it will give you a very high Return on Investment; if you’re not in the red, that is.

  24. 🙂

  25. 🙂 🙂 

  26. well, what can i say? thanks for being so supportive!

  27. Dear Alok

    Great insight and also a cute way of letting people know about the actual difference with a youtube example

    Thanks

    Sai

  28. Thanks Alok for sharing this. Its a good eye-opener for aspiring entrepreneurs.

  29. rodinhood baba, y dont u start working on something like golden handbook for global Entrepreneur. this is a religious material for every startup business man.. 🙂

  30. Learnt a Lot from this Slide/s 🙂

  31. Thanks for sharing this slides.

  32. another fan in making Alok! feel ignorant to not have come across your work earlier! kudos!! amazing work on the ppt too!

  33. really helpful ….! 

  34. And the legendary Abhay Havaldar replied with his legendary wisdom via just the subject line of an e-mail

  35. Hi Alok,

    My question is how do you approach a VC, where do you find it and how does it work. What kind of business is a VC interested in. If you have a product to offer, can you approach a VC to built it a better way and convert it into a IP so that you can look at generating more revenue.

    Since I believe even P/L approach need good investment to generate revenue since there is investment like operating expenses, salaries, technology etc.

    Regards,
    Amit 

  36. Neil, I have build the business in last 5 years but now I feel that we need some funding to grow it in terms of infrastructure, technology, man power etc. 

    So what is the solution for business like us.

  37. Awesome to read this Alok. Thanks for sharing all these great insights.

    Wondering why I did not find this platform earlier? Have a lot to catch up 🙂

  38. I keep on coming back to your slides to refresh my basics!! 

    Though I live in Jaipur among Marwaris and learnt n learning a lot form my Marwari friends, still your never fail to inspire me.

    Awesome Awesome Awesome!!!

  39. A very quick fix way of deciding between the two. Very insightful. Thanks.

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