The Essence of Competition


Competition, the rivalry among businesses for consumers’ dollars, is a vital element in free enterprise. Competition fosters efficiency and low prices by forcing producers to offer the best products at the most reasonable price; those who fail to do so are not able to stay in business. Thus, competition should improve the quality of the goods and services available.

Within a free enterprise system, there are four types of competitive environments:

  1. Pure competition exists when there are many businesses selling one standardized product. No one business sells enough of the product to influence the product’s price. And, because there is no difference in the products, prices are determined solely by the forces of supply and demand.
  2. Monopolistic competition exists when there are fewer businesses than in a pure-competition environment and the differences among the goods they sell is small. The products differ slightly in packaging, warranty, name, and other characteristics, but all satisfy the same consumer need. Businesses have some power over the price they change in monopolistic competition because they can make consumers aware of product differences through advertising. Consumers value some features more than others and are often willing to pay higher prices for a product with the features they want.
  3. Oligopoly exists when there are very few businesses selling a product. individual businesses have control over their products’ price because each business implies a large portion of  the products sold in the marketplace. Nonetheless, the prices charged by different firms stay fairly close because a price cut or increase by one company will trigger a similar response from another company. Oligopoly exists when it is expensive for new firms to enter the marketplace.
  4. Monopoly exists when there is one business providing a product in a given market. Utility companies are monopolies. The government permits such monopolies because the cost of creating the good or supplying the service is so great that new producers cannot compete for sales. Government-granted monopolies are subject to government-regulated prices.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, and my Lectures.

Advertisements

Accrual Accounting and Cashflow


Before the end of World War 1 most managers kept track of cash out and cash in. many senior citizen owner-managers still do today. There is an inherent problem in keeping the records that way, however, if the business offers and receives much credit. Doing business on credit displaces the time of the exchange of cash from the exchange of goods and services. Sometimes very little cash comes in during a particular month and very much cash comes in during other months. The same is true of cash out.

Keeping in track of what you pay or get paid for credit transactions causes the monthly reports describing the operations to fluctuate from month to month even though the goods and services flowing in and out of the business may be very much the same. About 1920 the accounting profession began placing emphasis on the accrual method of accounting to overcome this difficulty.

The accrual method portrays the smoothed-out profit as if all the transactions had been for cash and as if the business had purchased only exactly what was needed to make the sale. It is not an accurate portrayal of everything going on in the business, but it is a good approximation of the net effect of those things that affect profit. The problem is that so much emphasis has been placed on the accrual method income statement and balance sheet that the importance of cash has been regulated to virtual obscurity.

Even this result is satisfactory when the reports are describing large businesses with access to external financing through the stock market, commercial paper, and bank loans at the prime interest rate. But companies that do not have access to these external sources of financing have a different problem. For them, the flow of cash through the business means life or death, whether the accrual based profit is great or terrible. When new or small businesses need cash they must turn to the bank, the banker will look to the personal savings and assets of the owner-manager for collateral.

Accountants have not forgotten nor overlooked the importance of cash. They recognize the need for cash in sufficient quantity to keep the business operating. For their purposes, however, they often infer the cash available to the business from the income statements and describe future cash availability with the balance sheets. They, and others, frequently describe it as: cash flow equals net profit after taxes plus depreciation and other noncash expenses, such as amortization.

This statement is incorrect except under some very stringent preconditions that rarely exist in practice for a small business. This statement is an approximation that is valid for large and stable businesses in which changes from year to year are small and the statements from which the cash flow is inferred are annual reports. For a small and new business looking at monthly financial reports this approximation is inadequate. In a small, growing business the net cash flow to the firm’s bank account does not equal the net profit plus depreciation. Profit is not cash nor is it cash flow.

Although this pronouncement may be unconventional, entrepreneurs are realistic. Successful entrepreneurs ask how it really works and then get on with building their business. In the conventional approach the analysts, having inferred cash flow from profit, depreciation, and amortization, stop there, allowing their readers to assume that the resulting cash is in the bank wiating to be spent.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

Pertinent topics for training


I suggest three new topics for your training programs, vis-à-vis, Leadership, Creativity and Innovation in Decsion-making, and Future Trends. They are important for Change.

 

Development of leadership skills can enable target audience to challenge the process, inspire a shared vision, enable others to act, model the way and walk the way. This can be achieved by developing skills for regulating the information flow, direction setting, motivation and decision-making.

 

Development of creative thinking skills will enable managers to initiate a creative process focusing on the mechanisms and phases involved if they partake in a creative act. Such skills will allow them to look at problems as opportunities and not as threats.

 

Last but not the least, knowledge about future will allow managers to know about the environment in certain area in the forseeable future. This will help them in planning and public policy.

 

Without developing leadership skills, and enlightening the trainees about using mind tools for creative decesion-making and the ability to read future, no change can be possible. Those civilizations, societies and organizations,and even individuals face extinction if they fail to cope up with change, innovation and transition with time. This is the law of nature.

 

Include new topics—Leadership, Creativity and Innovation, and Future Trends—in all your training programs.

 

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight