The Capitalist Circus

I remember going to circus when I was a kid. After a show, I was returning home along with my Dad. Asked him “wish there are more than two jokers in a circus…infact all players should be jokers ring acrobats etc…only jokers”….Dad remarked “if there are only jokers, it wont be called a Circus. We need all the characters to make circus more interesting”. Dad may have been right. But I still felt having full of jokers would only make circus more interesting. I did not realise that to enjoy such a circus, the viewers also have to be jokers.

The problem is that I refuse to become a joker myself. The circus I am talking about is the preparation of a capital budgeting proposal to be presented to the board of directors on the need to build a new freezing tunnel in the factory. Two of the Cartel Members (Finance and Production) and the VP parked themselves in the office in advance of three days. I was also embroiled into the proceedings when I was asked to project sales for next 5 years. wow…I am yet to make a decent sales myself in these 6 months and I am asked to predict sales for 5 years. what an honour! The sales projection for 5 years was needed as the Finance Manager wanted to work out pay-back period.

I just ran my imagination wild…and projected a volume of 800 tonnes in the current year and 4000 tonnes in the fifth year. Finance Manager made me sit with him and went through the costing for each product. As expected, he further increased the sales price by another two rupees in view of the investment in Freezing Tunnels. A whopping 5 crores (Rs 50 Millions) is being planned to be invested! I did not understand why the benefits of having a new and improved freezing tunnels are not being discounted to the current pricing structure to help us tap increased sales, but only costs being added to the price. The poor sales manager (that is myself!) has to bring Rs 2 per kilo more to the already over-costed product prices. hmm…things are going to be tough for me! I could not laugh like a joker.

I learned that it was the production manager’s “technical expertise” which helped arrive the magical figure of 50 Million Rupees as capital investment for this project. Apparently, two quotations were secured from two contractors based in the town where the factory is situated.

The production manager spent a good amount of time with me. He sought out ideas from me on modern freezing tunnels that are coming. He also sought my assistance to speak to some contacts from the Industry and to exchange notes on the project. These reputed consultants or project contractors are from Pune and Mumbai. Those guys discussed modern innovations such as maintenance-less compressors, tri-mix flooring needed for the freezing tunnels, plastic racking systems instead of steel, panelling instead of cement building etc., They also advised that these measures would bring down the project costs substantially. I also introduced the production manager to a friend of mine, working in another company. The company which this friend of mine is working is also building a freezing chambers in their factory. We asked that friend about the project details and about the outlay for the project. He replied – 10 Million. This confirmed my view that our project cost is over-estimated. The Production Manager said that he will consult these guys again once the project is approved by the board.

We three (myself, Finance Manager and Production Manager) were sitting with CEO. I raised the question of outlay – “don’t you think 50 millions is too high investment for a 1000 tonnes Freezing Tunnel?” CEO asked me in an irritating voice – “when did you become a technical staff? Do you think the Production Manager is insane?”. Production Manager was grinning. Finance Manager was expressionless. I did not know what to say. Then I said -” I am not. But I talk from the experience of working in other places”. CEO did not pay cognisance to what I said. He started discussing some unrelated subject with the Finance Manager.

It appeared that the project did not go through in the board meeting. CEO mentioned to me the next day that other directors are sore about this quarter’s performance. This made me presume that the project proposal did not find the board’s approval. After a couple of hours, I heard from H (CEO’s secretary) that the CEO and the tea-drinking Director are sitting in Chairman’s chamber. I also heard that the Chairman could not attend the previous day’s board meeting as he had returned from a far-east country only the previous night.

After a day, we all received a circular from CEO’s office that the Freezing Tunnel project is cleared by the Chairman. To my surprise, I noticed that the storage capacity had been reduced from proposed 1000 tonnes to only 500 tonnes. I looked at the financial outlay. It remained unchanged at Rs 50 Millions. The logical explanation to this change was escaping me.

I was discussing with a friendly colleague about all these. This person works in Corporate Finance dept of the Group. He is responsible for raising finance for capital investment of any of the group companies. He was not surprised about 5o millions. He said – “they have become sensible and have made plans which do not need a lot of outlay. Three years back they planned for an expansion at Rs 350 Millions…whose capacity is utilised at present just 15%.”

A lesson in Capital Budgetting indeed!

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