Sunday, November 23, 2014

When everyone in a company is an employee and nobody is the owner

In my opinion, it is important that at least several folks in the leadership of a company be the "owners" of the company. If this isn't the case, and if everyone in a company is an employee and no one is an owner, then there is little incentive left in the leadership to take the company forward. In fact, the senior executives - who are all paid a fixed salary, right up to the CEO - could actually start to leech the company for private gains.

This is probably what happens in government-owned companies such as ONGC or SAIL in India. Everyone is an employee, and the Indian government is the owner, so the executives are almost free to be as corrupt and inefficient as possible. This can explain, to some extent, the gap between the performance of private and government-owned companies.

Saturday, November 22, 2014

Credit period given to a buyer is distinct from the safety of your payment - this must be remembered always

Sometimes a business can confuse the duration of credit period given to a buyer with the safety of the payment. While it cannot be denied that a longer credit period [say six months] introduces the risk of unforeseen events taking place which could put the safety of the payment in jeopardy [compared to, say, a credit period of two weeks, in which you don't expect anything unforeseen to take place], still, these two things are distinct and should be treated that way. It's possible that your payment isn't safe with a buyer even if the credit period is only two days. It's also possible that a different buyer is so strong that your payment is safe even if the period is six months. Of course, a longer credit period means that you build the cost of capital appropriately into the price.