Volume VIII Part 1 July 10, 2014 25 Business Advisor

Seven pillars

Swami, amatya, janpada, durg, kosha, dand, mitra iti

prakritya. Thus reads verse 1, in chapter 1 of book 6 of

Arthashastra, which forms the basis of ‗Chanakya‘s 7

Secrets of Leadership‘ by Radhakrishnan Pillai, and D.

Sivanandhan (Jaico). The verse, in translation, says, ―The

king, the minister, the country, the fortified city, the

treasury, the army, and the ally are the constituent

elements of the state.‖ A happy kingdom consists of an

ideal king (swami) as a leader, guided by able ministers

(amatya), who takes care of the citizens (janpada),

providing them good infrastructure and facilities (durg), making sure the

treasury (kosha) of the state and the people is always full, which is

protected by an able army (dand), and helped by good allies (mitra), the

authors explain, of Chanakya‘s saptangah. This model, they find, gives us a

big picture of leadership. ―In a company, a person working in the IT

department will focus on issues connected to his area of work. The accounts

department only looks at financial numbers. The marketing and sales team

will focus only on customers and clients. The production department is

concerned about the number of units manufactured. This is looking at the

company in parts. A chairman or CEO will need to understand all these

departments separately and in a unified manner.‖

The chapter on ‗Swami‘, the leader, lists the requirements, viz. intelligent

and dynamic, associates with elders, truthful in speech, does not break

promises, grateful, desirous of training, and easily approachable.

Intelligence and dynamism are two sides of the same coin, the authors

state. ―If a leader has understood the key problem through study, research,

discussion and analysis, and reached a solution for the problem, that is

only the starting point. The next step is to implement his findings…

Therefore, the second aspect is being dynamic.‖

In the ‗Amatya‘ chapter, the authors describe the equivalent of mantri in the

corporate context – the managers, VPs for the CEO, and CEO for the

chairman. A section on ‗Management‘ introduces us to verse 42 in chapter

15 of book 1 of Arthashastra, that the means of starting undertakings, the

excellence of men and material, (suitable) apportionment of place and time,

provision against failure (and) accomplishment of work – this is deliberation

(management) in its five aspects. ―Rulership can be successfully carried out

(only) with the help of associates. One wheel alone does not turn. Therefore,

he (the ruler) should appoint ministers and listen to their opinion,‖ advises

Volume VIII Part 1 July 10, 2014 26 Business Advisor

another verse in Arthashastra. Why is it important to listen to the managers‘

opinion? Because they are not machines, clarifies the book. ―They too are

continuously thinking and applying their minds to the job. They may have

insights that they want to share with you. They have a hold over ground

realities; they are the eyes and ears of your organisation. But all this

experience is useless if you do not ‗listen‘ to their opinion.‖ Book 6, chapter

1, verses 4-6 outline the qualities required of amatya, thus: Desire to learn,

power of retention, thorough understanding, intentness on truth, ability to

lead an army, and sweetness of speech.

The janpada are the citizens of the country, one learns from the third

chapter. ―In the context of the corporate world, janpada refers to customers

or clients… For a leader, it is important to be in touch with the customers

on a regular basis. If you can think like the customer, you will be a good

market leader in your business. Even in governance, the challenge is to

understand how citizens think.‖ The fourth secret is ‗Durg‘. To those in

business, what is durg, or fort? The head office of a business, from where

the CEO or chairman operates, can be called its control tower, the authors

liken. If the business is in the manufacturing segment, the factory,

including the plant, machinery, and other equipment, becomes part of the

infrastructure, they add. ―Expand the concept of the durg in the case of a

modern nation. Good roads, flyovers, bridges, houses are all important for

nation building… As a leader, it is important to ensure world-class

infrastructure for your organisation. Move with the times and get the best

that is available.‖

In the chapter on ‗Kosha,‘ the authors note that there is a misconception

that India and Indians do not understand much about money, economics

and the practical ways of life; and that, since Indians are spiritual, they

think more about life after death, heaven, moksha, etc., than about wealth

and material possessions. ―For thousands of years, we were the wealthiest

nation and had even evolved a theory of economics which the Western world

has not even understood. The Arthashastra is proof of this. It is a book on

wealth and its management.‖

Interpreting ‗Dand‘ as the team, for today‘s managers, the authors remind

that teamwork begins with the leader. ―A good leader is someone who gets

work done from people who may not even think they were capable of doing

it. Thus, the leader should have the subtle vision to understand a person

better than the person understands himself.‖ And, the final chapter, on

‗Mitra,‘ underlines that a king is good or bad as his advisors.

Ancient guidance retold for contemporary age.

Volume VIII Part 1 July 10, 2014 27 Business Advisor

Assets, liabilities

Balance sheet is a summary of the financial position of a

company at a particular point of time, defines ‗How to

Read a Balance Sheet,‘ by N. Ramachandran, and Ram

Kumar Kakani (McGraw-Hill). This position is conveyed by

listing all the things of value (assets) owned by the

company, on one side, and the payables owed (liabilities)

by the company, on the other, they add, in the book, which

is part of Finance Made Easy Series. Balance sheet gives a

snapshot of the organisation, for the moment, and the

balance sheet position of the company changes with every transaction,

clarifies a ‗Finnova and Bholuram‘ chat box. A few pages later, you will find

Bholuram wondering if the balance sheets of two different entities change

simultaneously due to a transaction…

All the elements in the balance sheet should be measurable in clear-cut

monetary terms, the authors explain. ―Their value should be ascertained

and only then should they be included in a balance sheet. This is precisely

the reason why something like the value of human resources a company

possesses is not shown in a standard balance sheet. Similarly, this is also

the reason most companies are not able to state their brand value in a

standard balance sheet, i.e. there is no standard and widely accepted way of

measuring these items.‖

Bholuram is not comfortable with the idea that net worth or the owners‘

fund is shown under liabilities. Finnova points out that, when seen from the

perspective of a company, both the amounts, viz. the one shared with the

owners (shareholders), and one that is owed to other (external) parties, are

liabilities. ―A company is standalone, its shareholders have to maintain their

own balance sheets, their investment into the company‘s shares is

considered as part of the liability by the company, as it has to pay them

back in future. Hence, both are classified as liabilities in a balance sheet.

However, in common parlance and for practical purposes, liabilities have

come to mean only the part which is owed to the other external parties.‖

In the authors‘ view, the most important equation in the world of finance is

that of the balance sheet, thus: Assets = Liabilities + Net worth (owners‘

equity). This equation, they note, is the one from which balance sheet

derives its name. ―The two sides of a balance sheet, i.e. the assets and

liabilities, as a thumb rule always balance out. This is perfectly logical too. A

company basically purchases assets by using the funds that it generates

through the liabilities. So, the sides have to balance out.‖

Volume VIII Part 1 July 10, 2014 28 Business Advisor

A chapter on the importance of balance sheet reminds us that this

statement, usually prepared at the close of an accounting period such as

month-end, quarter-end, or year-end, is a decision-making tool, and one of

the best indicators of the financial position of a company. ―A company‘s

future and value is decided by its flexibility to take loans. It is the balance

sheet that can tell you if a company has enough money to continue to fund

its own growth or whether it is going to have to take on debt, issue debt or

needs infusion of more owner(s) equity in order to keep on continuing.

Furthermore, it provides information to various stakeholders about the

company.‖

Analysing the balance sheet of a company for one particular period of time

may not give you a clear picture of the financial health of the company, the

authors observe. ―Ideally, one would prefer to have data for more than one

period of time to get a reasonably clear picture of the company. This is the

reason why you generally see balance sheets of two consecutive years being

presented simultaneously. It provides us with a picture of the financial

position of the company over the years.‖

Of value is the chapter titled, ‗What to see in a balance sheet?‘ First,

evaluate the capital structure of the enterprise. Capital structure, as the

book defines, is the way a business entity finances its assets, i.e. the

proportions of equity, long-term debt or short-term liabilities; it answers the

question, ‗What are the funding sources (and their relative blend) for the

things a business entity owns?‘ and gives us an idea of the financial

flexibility and liquidity of the organisation. It also provides a basis for

computing rates of return, on total assets, operating assets, and

shareholders‘ funds involved in the business.

For example, ―If a company is increasing its long-term liabilities

considerably without increasing its shareholders funds, then it can indicate

that the company is taking more risks… Moreover, increase in debt implies

higher interest costs for the company, which can lead to unprofitable

operations.‖

Another tip for balance sheet analysis is about how a consistent increase in

trade receivables (debtors) amount and their relative proportions in the

balance sheet is not a good sign. ―It can possibly indicate that the company

might have a few major customers who are not paying or are dictating terms

to the company… It might signal that the company is making its credit

policy more lenient in order to sustain in a competitive market by allowing

debtors more time to pay back the money they owe to the firm.‖

Ready instructions to students of financial statements.