Archive for Books

Cheap in price, high on cost.

At the core of her argument is the idea that the wealth of cheap goods available to us doesn’t make our lives better; instead, it fosters an environment that endangers not just the jobs of American workers but the idea of human labor, period.

It’s impossible to grapple with the global economy without addressing the tricky subject of China, and Shell does so with the right amount of clear-eyed empathy. She notes that China as a nation has grown wealthier while its poor have become poorer. According to figures released by the World Bank, between 2001 and 2003 the income of the poorest 10 percent of China’s 1.3 billion people had fallen by 2.4 percent, to less than $83 per year. In that same period, the country’s economy grew by 10 percent, and its richest people became 16 percent richer”

“IKEA is the third-largest consumer of wood in the world and uses timber that comes mostly from Eastern Europe and the Russian Far East, where, Shell points out, “wages are low, large wooded regions remote, and according to the World Bank, half of all logging is illegal.” IKEA president and CEO Anders Dahlvig asserts that the timber his company uses is harvested legally, and the company does employ forestry experts to monitor the company’s suppliers. But Shell points out that IKEA has only 11 forestry monitors, not nearly enough to keep a watchful eye on all those suppliers worldwide, and five of those specialists are devoted to China and Russia, a vast spread of territory by itself. Dahlvig says that hiring more inspectors would cost too much; he’d have to pass the cost on to the consumer.”

source: Salon book review

I think underline question is : Do we as consumer care why a product is cheap?


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And then what?

Experts, be  they economists, ecologists or  linguists,
have been aptly described as  individuals who know more
and  more  about  less  and  less.  Since the world is too
complex  for our minds  to  remember every detail and to
easily encompass  the whole,  experts employ  filters to set
aside  certain  dimensions  of  reality as trivial or as
something  to  be  dealt  with by another expert. Since
different filters alter the total picture of  reality  in different
ways,  we  need  to  know  the  characteristics of the
intellectual   filters used by experts as well as by ourselves
in  solving  problems.

“Experts, be  they economists, ecologists or  linguists, have been aptly described as  individuals who know more and  more  about  less  and  less.  Since the world is too complex  for our minds  to  remember every detail and to easily encompass  the whole, experts employ  filters to set aside  certain  dimensions  of  reality as trivial or as something  to  be  dealt  with by another expert. Since different filters alter the total picture of  reality  in different ways,  we  need  to  know  the  characteristics of the intellectual   filters used by experts as well as by ourselves in  solving  problems.”

“since we cannot do just one thing we must always ask and answer the question and then what? when we  try  to  ascertain  the  benefits  and costs of proposed courses of action on both the individualas well as social levels. The ecological systems way of thinking  employs  modern  scientific   theories  and knowledge  to  study  a  world  of  interlocking  processes characterized by many reciprocal cause-effect pathways.The ecological systems way of thinking has to become an integral  part of the thinking of the well-educated person if we are to adequately control technology rather than fall victim  to  the  forces  we  generate  and are unable or unwilling to control. Ecological systems thinking provides well-educated persons with the opportunity to act more rationally, because they have learned a more comprehensive and more accurate way of estimating  the probable costs and benefits of their actions.”

Source: Book reveiw: Filters against folly by Garrett Hardin

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Quarterly Report 2009 : Books

As I  mention on my opening post for this year  I have observed a significant shift in my reading preference since  late last year. I am no longer intersted in success stories, incorrect or influenced biograprahies and managment formule books. I am also convinced that most of the author lack ability to present both side of the argument and are more intersted to profess ‘the truth’ then working hard on ‘a truth’  convincingly and comprehensivly. Moreover I realised that rationality, logic, and knowledge alone cannot solve all problems and I must also learn and understand emotional, social side view of problems and individuals.

Consequently I am trying to be even more selective and balanced in my reading. I wil be reading few classics in coming months although Iam finding hard to comprehend authors understanding of matter. I started reading Iliad in the begining of this year but was not able to finish this epicof Greeks.Although laguage is simple I am not able to gain the underline merit of epic.  Similarly I find hard to read novel based on historic context. I started reading Daughetr of Fortune but was not able to finish it too. Same way I started reading Possesion by A.S.Byatt but was very slow in reading through it. Reading good fiction is hard. Dificulty comes in two folds. First they strech your imagination too far and second its very hard to relate with the context and times. Inablity to appreciate good litery work is another issue. Good literature is creative work and I have to develop really good ight-brain skills to make myself absorb finer works of great writers.

By end of this month I will have read :


Very beautiful small book based on thoughts of Krishnamurti , one of the most extraordinary Eastern thought leader. I am able to relate with many of his views specially  on education.  I would like to add this in my under gradute must reading list.


One of those books who can chnage a man . Requires many reading to grasp the essence. Will be reading it again soon. Must read for any undergraduate.

3. Sushi for Beginners: A Novel by Marian Keyes

Its a novel  revolving arund three gals. Not the best of novel I read but not boring also. 

4.Iliad Homer tarnslation by Taylor

Iliad is Mahabarat of Greeks. This war-epic envolves god,heros, and mens. Although laguage is beautiful and it could be one of the greatest  stories  ever told I  find very hard to appreciate the work. Somewhere in the middle  of story lord of immoratls disclosed how the whole war will end and Torjan will lose toDannans and I  lost my patience. Amzing stuf but i need help to absorb it. Do we have lectures on classics in Delhi in any collgee?

4. Crack in forever (recemmended)

Its a painful  love story. I have not read many love stories  so I don’t  have any reference to compare this work.  If you like  ‘Notebook’ ( my fav romantic movie)  then novel  is for you.

5. The Confession of  Economic Hit Man by John Perkins

Awesome.  Most of us think that our lifes and world around us world is runing  on some strong, pure, and rational  principals which are  guided & guarded by well-intended peoples. Moreover many of us hate politics and politicians considering them as reason for al chos we see in our public life. But as current economic criss have proved , reality is quite comples and unclear ven to the msartest of peoples. Politics is one of the most strongest force of our times and many a times its the only force that decide who will enjoy limited resources on planet earth. As long as I remember everyone around me awe and respect USA . For many , the  definition of world power is USA. But I doubt they have ever given thought to the politices and strategies used by USA to become world power.

This book give one explanation for USA’s ability to attact world’s  wealth. Its very disturbing and equally convincing. Even if I consider this as work of fiction  this is the most powerful political novel I have read. Its very well written and shocking. You will never find  history, economics, geography and politics effortlessly mixed in single book.

After reading this you will realise why left is so skeptical about our relationship with USA and may able to apprecaite our politicians  ability to keep right distance from USApolicies. Last but not least it remind us that with so many nation fighting hard to again access to world resources, path to world power is ruthless and full of compromises.

6. The great Gatsby by F.Scoot Fitzgerald

Just like most Indian love stories ( heer-raanjah, Soni-mahiwaal, rishi-farhaad etc etc ) this american love story had tragic ending. Something that never expected when I started reading this. Its a beautiful  story with all the drama, passion, love,  emotional aatyachaar you find in typical KJ movies. But its an american love story so instead of  involve fight with society and family, here its about individual needs, passions and love.I  was able to connect with Gatby and his love for his sweetheart and felt sorry for him in the end.It was reallly tragic to see painful end of hislife and love. I realised why bollywood make happy ending cinema.

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Fortune must reads

The Fortune Must Reads
Booms and Busts

The Great Crash 1929 by John Kenneth Galbraith (1955). This concise, insightful history has never been out of print since it was first published. Why? “Every time it has been about to pass from print,” Galbraith himself wrote in 1997, “another speculative bubble … has stirred interest in the history of this, the great modern case of boom and collapse.”

Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay (1841). This chronicle of Holland’s tulip mania of 1634 and the South Sea Bubble of 1720, among other irrational crazes, is an engaging, perceptive account of humanity’s urge to plunge itself into speculative frenzies. Funny Money by Mark Singer (1985). For sheer entertainment value, Singer’s tale of the fall of the Penn Square Bank in Oklahoma—one of the first of the inside-a-scandal books—has never been topped. The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish ’60s by John Brooks (1973). Brooks, the late New Yorker writer, dissects the 1960s mutual fund boom with a panache that business writing hasn’t seen before or since.

The CorporationBarbarians at the Gate: The Fall of RJR Nabisco by Bryan Burrough and John Helyar (1990). This story of an iconic deal, the $25 billion leveraged buyout of RJR Nabisco (co-written by a FORTUNE senior writer), has all the stuff of great business journalism—skullduggery, cigars, trophy wives, and enough greed to sink Wall Street. Wretched excess has never read so well. Built to Last: successful habits of visionary companies by Jim Collins and Jerry I. Porras (1994). Begin with the simplest of questions: What makes great companies great? Then research the heck out of it. It’s a big, hairy, audacious goal—but then, this book coined the phrase. Chainsaw: The Notorious Career of Al Dunlap in the Era of Profit-at-Any-Price by John Byrne (1999). When Dunlap took his enthusiasm for mass firings from Scott Paper to Sunbeam, he left broken pieces and a stock price in free fall. Byrne takes the reader through the debacle in detail, an account that is spiced with the vinegar of a writer who truly loathes his subject. Who Says Elephants Can’t Dance? by Louis V. Gerstner (2002). Gerstner’s account of how he turned around IBM after taking over as CEO in 1993 contains valuable lessons for those who think “corporate culture” is consultant gobbledygook.

Decision MakingAnnapurna: A Woman’s Place by Arlene Blum (1980). Triumph mixes with disaster in this nail-biting account of the first all-woman attempt on an 8,000-meter peak—an expedition the author led. The Best and the Brightest by David Halberstam (1972). Halberstam’s masterful explanation of how the application of raw candlepower—in this case Robert McNamara’s whiz kids trying to apply what they learned at Ford Motor Co. to the Vietnam war—isn’t always enough.

In the Heart of the Sea: The Tragedy of the Whaleship Essex by Nathaniel Philbrick (2000). Back when the “oil industry” involved harpoons, a Nantucket whaling ship sinks in the Pacific—rammed by a whale that would inspire Melville’s Moby Dick. The harrowing odyssey that follows is a study in bad decision-making. The Killer Angels by Michael Shaara (1974). A Pulitzer-winning historical novel that places you at the Battle of Gettysburg in the shoes of the soldiers themselves—including Robert E. Lee as he contemplates one last, desperate charge. Thirteen Days: A Memoir of the Cuban Missile Crisis by Robert F. Kennedy (1969). R.F.K.’s spellbinding first-person account reads like a Tom Clancy novel and delivers powerful lessons about delegation and plain old good judgment. EconomicsCapitalism, Socialism, and Democracy by Joseph A. Schumpeter (1942). Ignore the title and skip straight to Chapter 7, “The Process of Creative Destruction.” Look around, and you’ll see it happening everywhere.
Everything for Sale: The Virtues and Limits of Markets by Robert Kuttner (1996). Free markets unleash entrepreneurial drive. They also produce the Asian financial crisis. Kuttner gets you thinking about why the invisible hand works and why it sometimes doesn’t. The General Theory of Employment, Interest, and Money, Chapter 12 by John Maynard Keynes (1936). For all his fame as a wordsmith, too much of Keynes’s work is dense and dated. The amazing Chapter 12 is something else: a timeless, witty, crystalline account of why financial markets confound and bewitch us.

Pop Internationalism by Paul Krugman (1996). Most of what’s said about international trade is bunk, the economist argues in a series of contentious and entertaining essays. Targeting the lazy thinking of politicians, journalists, and even fellow economists, Krugman instructs even as he attacks. The Wealth of Nations by Adam Smith (1776). Smith is often caricatured as a laissez-faire zealot. He wasn’t.

The Wealth of Nations is an eloquent argument in favor of liberty, enlightened government, and the intrinsic worth of the individual. No one has ever made a better case for the morality of capitalism. EthicsDen of Thieves by James Stewart (1991). In this morality tale, good (a crew of dogged government lawyers and detectives) triumphs over evil (Michael Milken, Ivan Boesky, Martin Siegel, and Dennis Levine). But evil gives it a rollicking run for its money.

The Informant by Kurt Eichenwald (2000). With its deadpan prose, startling plot, and you-are-there dialogue, Eichenwald’s book about a twisted informant at Archer Daniels Midland ranks with anything by le Carré for sheer suspense.

Leading Quietly: An Unorthodox Guide to Doing the Right Thing by Joseph L. Badaracco (2002). Finally, an ethics book for people who live in the real world. Recommended for people who want to keep their job and “do the right thing.” The Smartest Guys in the Room by Bethany McLean and Peter Elkind (2003). This riveting account of the Enron debacle (by two FORTUNE senior writers) is unsparing in laying the blame at the feet of all the guilty parties. It explains not just how Enron lost its way, but how all of Wall Street did as well.

The Way We Live Now by Anthony Trollope (1875). Trollope’s classic satire about Victorian London, where speculators and trust-fund fops “had but a confused idea of any difference between commerce and fraud,” feels eerily familiar to observers of modern corporate miscreants.


Beijing Jeep: The Short, Unhappy Romance of American Business in China by Jim Mann (1989). The story of how AMC’s 1979 joint venture to produce Jeeps in Beijing ended in tears is perhaps the closest thing to a classic work on doing business in post-Mao China. It’s required reading for anyone venturing to the world’s most populous nation.

Development as Freedom by Amartya Sen (1999). Dictators around the world argue that a strong hand is needed for economic development; freedom can come later. Sen, a 1998 Nobel Prize winner, says they are dead wrong. Freedom is a foundation stone for development—democracies, he points out, don’t have famines.

The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Hernando de Soto (2000). For liberal types who are vaguely uncomfortable with property rights (unless the property is in, say, Aspen), Peruvian economist de Soto explains why they matter.

Nonzero: The Logic of Human Destiny by Robert Wright (2000). A dazzling mix of history, theology, economics, game theory, and evolutionary biology that paints the world’s increasing entwinement as a positive and possibly inevitable development.

The Prize: The Epic Quest for Oil, Money, and Power by Daniel Yergin (1991). Oil is the most important commodity on earth, the fuel of modern civilization. Yergin’s great achievement is to give readers a thorough grounding in why the world—and especially the Middle East—works the way it does, while all along appearing to simply spin an engrossing yarn. Workers: An Archaeology of the Industrial Age by Sebastio Salgado (1993). A Bangladeshi shipbreaker’s raised sledge. A Sicilian fisherman’s anxious gaze. A technician glistening in Kuwaiti oil. This stunning set of images—the work of an economist-turned-photographer—brings us deep into the world economy’s engine room.


The Essays of Warren Buffett: Lessons for Corporate America compiled by Lawrence Cunningham (1997). Buffett never wrote a book. Instead he poured his thinking about investments, managing, and corporate excesses into his annual letters to Berkshire Hathaway shareholders. Cunningham sifted through the 1979-96 bunch to create this best-of-Buffett anthology.

Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life by Nassim Nicholas Taleb (2001). Taleb, a hedge fund manager, is equally disdainful of Wall Streeters and academics who claim to understand markets: They see patterns that don’t really exist. Almost everything, he argues, comes down to Lady Fortuna.

The Intelligent Investor: A Book of Practical Counsel by Benjamin Graham (1949). Warren Buffett has called this classic guide to value investing—recently updated by Money magazine senior writer Jason Zweig—”by far the best book about investing ever written.” What more do you need to know? Moneyball: The Art of Winning an Unfair Game by Michael Lewis (2003). Billy Beane, the Oakland A’s general manager profiled here, isn’t just a smart baseball guy with new ideas. He’s an exemplar of how to succeed by zigging when everyone else is zagging—which of course is also how great investors make money.

LeadershipNever Give In: The Best of Winston Churchill’s Speeches edited by grandson Winston S. Churchill (2003). “Never give in—never, never, never, never, in nothing great or small, large or petty…. Never yield to force; never yield to the apparently overwhelming might of the enemy.” On Leadership by John Gardner (1990). Gardner sees leadership as an ever-evolving learned skill separate from status or power, and he carefully dissects its many elements—without resorting to cute language or strained metaphors.

Parting the Waters: America in the King Years 1954-63 by Taylor Branch (1988). This spellbinding tale of how Martin Luther King Jr. and others built the civil rights movement shows creative, disruptive leadership in action. King and his comrades possessed none of the conventional tools of power but found ways to wield it nonetheless.

Personal History by Katharine Graham (1997). The late Graham grew up shy and insecure and stayed that way till her glamorous husband shot himself. Then she found the strength to take over Washington Post Co., which hit new financial and journalistic highs during her tenure. Her defense of the First Amendment made her a hero; her dinner parties made her a legend.

Titan: The Life of John D. Rockefeller Sr. by Ron Chernow (1998). If 75 books were burning and you could save just one, this might be it: a biography as powerful and detail-minded as its subject. Negotiating and

ManagingA Civil Action by Jonathan Harr (1995). Harr’s story—an attorney fights polluters over carcinogenic toxic waste they left in a town’s groundwater—reads like a thriller. It shows how one dogged individual can take on the formidable resources of two corporate giants.

The Effective Executive by Peter Drucker (1966). Before you can manage anyone else, you’ve got to learn to manage yourself. In this slim volume, Drucker tells you how. Remember Every Name Every Time by Benjamin Levy (2002). Here’s a book that delivers on its promise. Read it, and you’ll never stare blankly at an employee or a client again.

Taken for a Ride: How Daimler-Benz Drove Off with Chrysler by Bill Vlasic and Bradley A. Stertz (2000). A tale of how the merger unfolded—and how Daimler’s Jürgen Schrempp always managed to stay two moves ahead of Chrysler’s Bob Eaton.

Women Don’t Ask: Negotiation and the Gender Divide by Linda Babcock and Sara Laschever (2003). The first book to adequately explain the dramatic differences in how men and women negotiate and why women so often fail to ask for what they want at work (starting with equal pay). Every male manager in America should read it.

Office PoliticsLive From New York: An Uncensored History of Saturday Night Live by Tom Shales and James Andrew Miller (2003). Given the behind-the-scenes sex, drugs, and screaming matches, the most amazing thing about Saturday Night Live is that it ever managed to get on the air, let alone stay there for 30 seasons. Consider this oral history a handbook for managing the highly creative and the borderline deranged.

The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O’Neill by Ron Suskind (2004). No, George W. Bush (“a blind man in a roomful of deaf people”) does not come off well. But whatever your politics, you’ll be fascinated by the dishy descriptions of how Bush, Karl Rove, and Dick Cheney operate around the office.

The Prince by Niccolò Machiavelli (1513). Machiavelli wasn’t as Machiavellian as he is made out to be. Today we’d probably call him “pragmatic.” But his treatise—penned after losing his political job in Florence—was shockingly frank. Power and idealism, he said, don’t really mix.

Something Happened by Joseph Heller (1974). This novel—Heller’s follow-up to Catch-22—portrays one man struggling with the American dream and a Kafkaesque office where perseverance is the key to promotion.

PowerFather Son & Co: My Life at IBM and Beyond by Thomas Watson Jr. and Peter Petre (1990). A son’s-eye view (co-written by a FORTUNE senior editor at large) of how Watson Senior started and ran IBM and how Junior took it over. Told in an intensely personal voice, by turns shrewd, grudging, exasperated, and kind, it is the operatic story of power passing between generations.

The 48 Laws of Power by Robert Keister (1998). The overarching thesis—deceive others lest they deceive you—is appallingly cynical. The wealth of observations (“The longer I keep quiet, the sooner others move their lips”) is eminently useful. Indecent

Exposure: A True Story of Hollywood and Wall Street by David McClintick (1982). McClintick turns the federal case against Columbia Pictures and David Begelman into a drama of power—East Coast moneymen like Herb Allen vs. West Coast production honchos—and lets you watch, in intimate boardroom detail, as they tear at one another’s throats.

Influence: The Psychology of Persuasion by Robert Cialdini (1993). How do you get people to say yes? To answer that question, psychologist Cialdini mines nuggets as diverse as mother turkeys, pickup situations, Hare Krishnas, and the unlikely power of the word “because”—and identifies six principles that entice people to buy your stuff.

The Power Broker: Robert Moses and the Fall of New York by Robert Caro (1974). Moses, the legendary city builder, defied mayors, governors, and even a President, constructing a political machine that lasted for decades. Caro’s classic biography is one of the most exhaustive—and exhausting—studies of American power ever written.

Project ManagementAmerican Steel: Hot metal men and the resurrection of the rust belt by Richard Preston (1991). If Nucor employees can get molten metal flowing in one unbroken strip, they’ll revolutionize the steel industry. If something goes wrong, their new plant can blow up. The author of The Hot Zone makes the tale truly riveting.

The Billion-Dollar Molecule: One Company’s Quest for the Perfect Drug by Barry Werth (1994). No writer has ever gotten as deeply inside a company as Werth got inside biotech Vertex. He offers deep insight into the difficulties of drug discovery, the trials and tribulations of startups, and the conflict between great science and good business. Cadillac Desert: The American West and Its Disappearing Water by Marc Reisner (1990).

The West was not won by gunslingers and whores with hearts of gold. It was won by people who gave it water. This is the best book ever on how politics, business, ambition, and most of the seven deadly sins can work to literally shape the landscape of America.

The Making of the Atomic Bomb by Richard Rhodes (1986). Reaching far beyond Los Alamos and the Manhattan Project, this hefty tome meticulously pieces together one of the most important and terrifying scientific projects in history.

StrategyThe Art of War by Sun Tzu (circa 500 B.C.). What may be the greatest book on war ever written contains such aphorisms as “All warfare is based on deception” and “When the army engages in protracted campaigns, the resources of the state will not suffice.” It’s time-tested poetry for the strategic mind. Black

Hawk Down: A Story of Modern War by Mark Bowden (1999). No one—not the Pentagon, not the spooks, and certainly not the soldiers rappelling from helicopters into the middle of Mogadishu—had any idea of the hell they were getting into. Bowden’s history of the humiliating U.S. incursion into Somalia is an eloquent treatise on how not to plan an operation.

Information Rules: A Strategic Guide to the Network Economy by Carl Shapiro and Hal Varian (1997). If most writing from the dot-com era reads like 17th-century medicine (give the patient mercury?), here’s a book that that holds up. No, the laws of economics haven’t changed. Shapiro and Varian show how they apply to the world of information.

Only the Paranoid Survive by Andrew S. Grove (1996). Think of this as a Special Forces handbook for corporate managers. Grove, a co-founder of Intel and its current chairman, shows you squarely how to thrive in the most feared of business environments: one where competition, technology, or the very rules of engagement have suddenly changed.

The Tipping Point: How Little Things Can Make a Big Difference by Malcolm Gladwell (2000). What do bestselling novels, crime waves, and yawning have in common? They’re all examples of how ideas and group behaviors can “tip” from fad into epidemic. Gladwell’s book is filled with examples of eclectic freethinkers using the phenomenon to their advantage.

Technology and Innovation

The Last Lone Inventor: A Tale of Genius, Deceit, and the Birth of Television by Evan I. Schwartz (2002). This is a cautionary tale of the brilliant visionary (Philo T. Farnsworth) up against Big, Determined Business. You can guess who wins.

New and Improved: The Story of Mass Marketing in America by Richard Tedlow (1990). Who invented the shopping cart? What become of Coke-Ola, Co Kola, and Koke? When did consumers first appear on the American continent? An eminent business historian answers questions you wish you’d thought to ask. They Made America: Two Centuries of Innovation from the Steam Engine to the Search Engine by Harold Evans (2004). Evans takes us from the steam engine to the search engine, profiling 53 of the top innovators in U.S. history. The trait they share isn’t greed or the lust for fame, but the drive to democratize—the often shocking desire to bring to the many products previously enjoyed only by the few.

Sam Walton: Made in America by Sam Walton with John Huey (1992). Most great ideas really aren’t that complicated, and Wal-Mart is a perfect example. To wit: Put discount stores in towns that the other retailers thought were too small to support them. Walton’s words (written with the editorial director of Time Inc., FORTUNE’s parent) still resonate with simple wisdom.

The Victorian Internet: The Remarkable Story of the Telegraph and the 19th Century’s On-line Pioneers by Tom Standage (1998). A new technology will connect everyone! It’s making investors rich! It’s the Internet boom—except Samuel Morse is there!

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Finance for Geeks

Finance for Geeks
Summary: Eric Sink provides a geek-oriented overview of accounting and company funding.

On my weblog I write a series of articles entitled Marketing for Geeks. The concept of these articles is that a lot of technically-oriented people actually do end up involved in marketing decisions. Most software startups are founded by one or more geeks, often without the presence of experienced people in other areas like marketing. For these people, a little marketing knowledge can go a long way.

The series has been quite popular, but marketing is obviously not the only functional area that a geek entrepreneur might need to learn. Several readers have asked me to write a similar geek-oriented overview of accounting and finance. This article will highlight several things that a geek in a small ISV should know.
Before I get started, let me offer a disclaimer or two. I am not a lawyer, nor am I an accountant. I can’t give legal or financial advice to anyone, and nothing in this article should be construed as such. I am simply a geek who has learned just enough about accounting and finance to have an intelligent conversation with the experts who advise SourceGear. I’d suggest any geek entrepreneur should do likewise. Find some financial experts you trust. Learn enough about their field such that you can talk with them. Hopefully this article will help with some terminology and basic concepts.

I’ll begin with a short summary of what accounting is all about. Then I’ll cover the concept of profit margins. Finally, I’ll talk about outside funding sources and the perils of building a company with money from other people.

Three Financial Statements

If you are a geek who helps make strategic decisions for your ISV, then you need to know how to read the three basic financial statements:

Income Statement–A summary of revenue vs. expenses and total profit (or loss) during a specific time period.
Balance Sheet–A snapshot of the company situation at a specific moment in time.

Cash Flow Statement–A summary of receipts and disbursements of actual cash during a specific time period.

All companies report their financials to somebody. Publicly traded companies like Microsoft are required to publish their financial statements to the public. This means that many examples of the three basic financial statements are available easily over the Web. Most Web sites that give stock quotes can also show company financial statements. For example, the latest Microsoft stock quote information can be found at

At the time of writing this article, the Yahoo! Finance Microsoft Corp. (MSFT) Quotes & Info page has a sidebar on the left. At the bottom of that sidebar are three links to the latest Income Statement, Balance Sheet, and Cash Flow for Microsoft. Right now, the latest Balance Sheet says Microsoft has around forty-nine billion dollars in cash (and “near-cash” assets).

Balance Sheet: How much is the company worth?

Every introductory accounting class teaches the basic equation on which all of accounting is based:
Assets = Liabilities + Capital

Assets: An asset is anything of value that the company owns or has in its possession. Cash is the most obvious asset, but receivables, inventories, laptops, chairs, and copyrights are assets as well.

Liabilities: A liability is a debt or other financial obligation.

Capital: Sometimes called “Stockholders Equity”. This is the residual interest in the company’s assets after the creditors are all paid.

The balance sheet is simply the expression of this equation. At the top, it lists all the assets, with a total amount. Below that, it lists the all the liabilities and capital, with a total amount. The two totals are always the same.

The total amount of capital or stockholders equity on the balance sheet is one way to describe how much the company is worth. However, the actual fair market value of the company is often significantly higher or lower than this number. Company valuation is a complex subject that I won’t attempt to cover here. Suffice it to say that the information on the balance sheet is an important part of determining the value of a company, but it is only a small part.

I like to paraphrase the accounting equation like this:
Everything the company has (assets) either belongs to somebody else (liabilities) or to the company’s owners (capital).

The first thing I check when I’m reading a balance sheet is how much cash the company has. This is near the top of the page, sometimes in a subsection called “Current Assets”. As the old cliché goes, “Cash is king”. If nothing else on a balance sheet interests you, it is always critical to know how much cash a company is holding.

Another important thing to remember about a balance sheet is the date at the top. A balance sheet is a snapshot of just one moment in time. For example, it tells you how much cash the company had at that moment. It tells you how much debt the company had, but only at that moment.

The balance sheet says nothing about how much money is being made or lost. It can’t tell us anything about the performance of the company over time, since it merely describes the company’s condition at just one moment in time. To understand what is happening over time, we turn to the income statement.
Income Statement: Is the value of the company going up or down?

The income statement is sometimes called the profit and loss statement. Unlike the balance sheet, this statement describes what happened during a range of time. For example, it might contain a list of all the income and expenses during a given month, or a given year.

The income statement tells us where money is being spent and how much. Just like the balance sheet, this statement is merely the expression of an equation, and a rather obvious one at that:
Income = Revenue – Expenses

The income statement appears to be the easiest of the three basic financial statements. Everybody thinks they understand it. Revenue is shown at the top, following by expenses. Below that is the oft-mentioned “bottom line”, also known as net income or net profit.

But the income statement can be deceiving, since it usually contains a whole bunch of numbers that have nothing to do with cash. It says nothing about how much cash we have in the bank right now. Even worse, the income statement can sometimes obscure important details about cash that management wants to know.

This brings us to the most important thing that all non-accountants should learn about accounting. Money and cash are completely different.

Cash Flow Statement: What’s happening with cash?

The third of the three basic financial statements is the statement of cash flows. This one is critical. It covers a specific time period, and provides answers to important questions like:
How much cash did we receive, and from where?
How much cash did we disburse, and where did it go?
What was the change in our cash balance during the given time period?

This may sound like it is the same as the income statement, but it is are very different, and the distinction is quite important. I am being somewhat facetious when I say, “Money and cash are completely different”. Nonetheless, in one sense it is quite true.

All the numbers on the income statement are in dollars (or whatever applicable currency you use). However, not all of those numbers correspond to actual cash. Just to be clear, note that when we speak of “cash” we are not talking about physical paper currency or coin. In corporate finance, the word “cash” refers to money in the bank that could be spent.

The income statement tells us how we gained or lost anything of value, but those gains or losses may not have cash connected with them right now.

As a silly example, suppose we agreed to sell a license of SourceGear Vault, and as compensation we accepted a cow. (Those kinds of deals happen quite a bit here in the Midwest, you know.) That cow is definitely income. For our financial statements to be correct, we have to assign that cow a dollar value. It must show up on our income statement as revenue. It needs to show up on our balance sheet as a new asset.
But it is not cash. Cash is a very special thing in a company. It is by far the most important asset, since it is the only thing our creditors and employees will accept when it is time for them to be paid. Salaries are paid in cash. Our lease is paid in cash. Our company credit card bill is paid in cash. And all of these expenses and debts have strict deadlines associated with them. No matter how bright our future looks, no matter how much our customers like our products, if we run out of cash, we will go out of business.
These facts are the reason why we commonly say “Cash is king”. Companies monitor cash very closely. If the most critical issue in financial management were cows, then we would have a Cow Flow Statement.
Setting aside my silly example, there is a more important reason why the Income Statement says very little about cash. Most businesses practice a concept called “accrual accounting”. This basically means that income and expenses are recorded when it makes sense to do so, but not necessarily when the corresponding cash moves in or out of the company.

This is best explained by way of example. Suppose that a corporate customer places an order with SourceGear for one copy of our product. Here’s what usually happens:
The customer sends us a purchase order (PO), usually by FAX. The PO describes exactly what they want to order and includes a commitment to pay within 30 days.

We run a credit check on the company to find out if they have a reputation of paying their bills. This isn’t necessary for all companies, but for little known companies like Microsoft with a mere 50 billion dollars in cash, we like to verify payment history before we extend credit.

We ship the customer their product, along with an invoice reminding them that they owe us money. On the day we ship, the sale is recorded as income. The balance sheet for that day contains a new asset called a “receivable”, indicating that somebody owes us money. However, the cash for this purchase won’t be received until 30 days later.

Eventually the company pays our invoice with a check. No income is recorded that day, but we now have more cash and less receivables.

Accrual accounting is the major reason why we need a cash flow statement. Non-cash income and non-cash expenses can give us a false impression of how the company is doing. The cash flow statement filters out all the fuzziness that arises from accrual accounting and agricultural barter, giving management a clear picture of cash.
OK, that’s enough about accounting. I’ve only scratched the surface of this topic. If you remember nothing else, do grab onto the most important concept here:
Cash is king. It is possible to consistently make a profit and still run out of cash.

Profit Margins
It’s 2003. It is no longer appropriate to pigeonhole individuals and make assumptions on the basis of their gender, race, or religion. We are an advanced and civilized society, and we have outgrown that kind of narrow thinking about people.

However, it is still perfectly acceptable to pigeonhole companies according to stereotype and make the corresponding assumptions. In fact, it’s kind of fun.
Personally, I like to broadly categorize companies according to their gross profit margin. This is a really important concept when thinking about any business. Let’s define some terms:
Revenue is what you get when you sell something.

Cost of Goods is the cost of the actual items being sold. This is sometimes called Cost of Revenue.
Gross Profit is revenue minus the cost of the goods.
Gross Profit Margin is a percentage, and is equal to gross profit divided by revenue.
For example, let’s suppose I am buying sweaters for $12 and selling them for $24. My gross profit per shirt is $12, and my gross profit margin is 50%. This is a standard markup level in the apparel industry. The price tag on clothing is usually twice whatever the retailer paid for it.

Note that “gross profit” is quite different from the “net profit” figure that shows up on the bottom line of the income statement. Net profit is what you get when you take gross profit and subtract all the other costs of running the business. Except for the old joke about the guy who loses money on every sale and makes it up on volume, gross profit is always a positive number. On the other hand, net profit is positive only if you do a good job running your company.

Gross profit margins tend to vary widely across industries. The lowest margins are in markets where all the products are commodities. I define a commodity market as one where all the products are basically the same:
The bananas and milk at one grocery store are not much different from the bananas and milk everywhere else.
Despite Amoco’s valiant attempts to convince me otherwise, I’m pretty sure gasoline at Amoco is the same as gasoline anywhere else.
These are commodities. As a consumer, I might accept small price differences, but any time the gap grows too large, I will choose the cheaper item, since the products are the same anyway. In commodity markets, gross profit margins are usually quite small.
Let’s talk about these ideas in the context of a small ISV. Many software products sell for a gross profit that seems ridiculously high. For example, our SourceOffSite product sells for $239 per license, but the actual cost of the CD is just a few dollars. The gross profit margin on this product is somewhere in the ballpark of 97%. Note that our net profit is a lot lower, since we have to pay the programmers who develop the product. Programmer time for a software product is not included in “cost of goods”. If we sell a hundred copies of our product or a million, the cost of developing that product is essentially the same. Software product companies usually operate at a high gross profit margin.
In contrast, custom software development or consulting has a lower margin, because programmer time is included as cost of revenues. For every hour of time we charge, we have to pay an hour’s wage to the developer who performed the work.

Gross profit margins are obviously not established by any authority. They simply tend to settle at the lowest level where people can be successful. Some industries have higher operating costs or higher risks, and these industries tend to operate at higher gross profit margins. For example, the gross margin on sweaters might be 50% while the gross margin on milk is 4%. There are many reasons for this, but one of the important ones is that the clothing retailer has to assume more risk in carrying inventory. Grocers carry inventory too, but they don’t tend to get stuck with lots of excess milk and bananas that won’t sell because they went out of style.

Why Open Source Business Models Are Hard

Like I said above, you can understand a lot about a company if you know roughly what its gross margins are. For example, understanding gross margin is the key to explaining why most open source companies tend to struggle. Fanatics can argue all day about whether or not open source business models work. Clearly they can, as there are several very impressive companies whose products are available as open source.

However, just as I mentioned last month, this is a situation where the typical programmer’s black-and-white thinking doesn’t help us find smart answers. The wrong question is “Do open source business ever work?” The right question is “Does an open source approach makes the business of software easier or harder?”

From a strictly financial perspective, I think open source makes things harder. An open source product is a commodity. Your version of Linux is essentially the same as mine. If you try to charge too much of a premium, I will undercut you on price, and people will start getting Linux from me instead. Open source companies tend to operate at lower gross margins. That doesn’t mean that open source can never work as a business model. However, no matter what anybody says, if two companies have the same risks and operational costs, the low-margin company is a lot harder to manage than the high-margin company.

We’ve covered a bunch of fundamentals, so let’s talk about a topic that is dear to the heart of every entrepreneur: How to get funding.
Actually, scratch that. The topic of “how to get funding” is extremely well discussed in lots of other places. Over and over, I see seminars and workshops being offered to help entrepreneurs find the money they apparently need to start a company. Much more rare is the seminar which helps entrepreneurs figure out if outside funding is appropriate at all.
I realize what I’m about to say is heresy to some, but I think new companies should spend less time figuring out how to get funding and more time deciding if they should get funding. There are other ways to get a company started. Getting money from investors is not always the best approach.
I fully admit that many types of companies simply cannot be built without significant start-up capital. However, there are always pros and cons involved in the decision to have investors (or creditors), and I’m not sure the cons get enough attention.

When building or growing a company, you face two basic choices:

Build the company slowly, and fund its growth using its own revenues.

Get money from other people and try to use it to make the company grow more quickly.
Like I said, there are pros and cons. The “pro” side of funding is obvious. Cash is king.
The “con” side of funding is the fact that the criteria for success are different for companies with outside funding.
A company with no investors or creditors has a simple definition of success. The company can stay in business as long as it is not losing money and never runs out of cash.
For a company with investors, the bar of success is higher and harder to jump over. If the company merely breaks even, making no profit and incurring no losses, there will be no way to repay the investors. This brings me to

Eric’s Law of Company Funding:

For a company that was built with somebody else’s money, operating at break-even is failure.
It doesn’t matter whether your investors loaned you money or used it to buy stock in your company. Cash always comes with strings attached. Debt comes with different strings than equity, but both come with obligations that cannot be ignored. Eventually, your company has to make enough profit to repay your investors or creditors. The more money you took from other people, the more profit you have to make. If your profit margins are low, you’ve got a big problem on your hands.

My favorite example of a funding disaster is Webvan. The basic concept of this dotcom was to be an online grocery store with same-day delivery. Visit Webvan’s Web site to place an order. A few hours later, somebody shows up at your door with milk and bananas. Cool idea.

The problem was not with the idea, but with the implementation. Webvan built an enormous distribution infrastructure. The total amount of outside capital invested in Webvan was in the neighborhood of a billion dollars.
Stop and think about that for a moment. We’re talking about a business that sells food. Food is the ultimate commodity market. There is no industry that has tighter margins than food. It is unlikely that Webvan could have ever repaid a billion dollar investment from the profits on selling food. What were these investors thinking?

As they say, hindsight is 20/20.
Even though the Webvan example is rather large, we can apply its lesson in the small. Before taking investment money, think long and hard about how your investors will get their money back.
I’ll close this edition of the “Business of Software Cliché Festival” with the reminder that there is no free lunch. The cash you get from funding can increase the likelihood of success, but the obligations you get from that funding also increase the likelihood of failure.

The Perils of Getting Advice from Experts

Like I said at the start of this piece, nothing here should be construed as financial advice. Every entrepreneur needs to find a financial expert to give advice, and that person is definitely not me.
But even as I observe that it can be foolish to make major decisions without consulting accountants and attorneys, I must admit that getting advice from these folks can involve a different kind of risk. I will close this article with one final caveat.

There is often a big impedance mismatch between the world of accountants and the world of software. You don’t fully understand their world, and they don’t fully understand yours. Depending on your geographic region, there is a good chance your accountant or attorney is more familiar with traditional industries than with the business of software.

If your legal or financial expert does not have a software background, move carefully. Consider his or her advice and decide whether it makes sense in a small ISV. Explain the special constraints of software businesses and how they differ from selling corn, cars, or carpet. This may slow you down a bit, but there’s no point in paying for advice that isn’t applicable to your situation.

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