Let profits guide us

Let profits guide us

Rakesh Wadhwa
The Himalayan Times , Monday, July 25, 2005

 

I spoke to a gathering of young ladies at the behest of Ms. Ambica Shrestha, the owner of Dwarika Hotel. "Profits", I told the girls, "are your best guide when you are seeking employment, or want to venture out on your own. Follow the money and you will not go wrong." If you have a choice available to you of where you can work, pick the company which makes money. However good a negotiator you may be, you will not get a high salary in a company which has no cash, makes no profit, or carries excessive debt on its balance sheet. The company must have a free cash flow before you can obtain a piece of it for your services.

The number of foreign visitors is down, competition to get them tough, and, therefore, despite the glamour associated with tourism related businesses, avoid jobs in these and seek instead employment in consumer product, tobacco, soft drink, bank, or liquor companies. It would be better for you to forego a job with a debt-ridden hotel and take the one offered by a cash-rich cigarette company. Forget Sherpa hotel, opt for Surya Tobacco.

Profits are a signal, they guide and reward you. You thus have an incentive to find out where the cash is flowing toward in an economy. Profits are an even more important indicator if you plan to set up your own business. If you are an entrepreneur, then you would want to employ your capital to maximize returns. If companies in a particular business area are profitable you may choose to enter that, and eschew the sector where the existing companies are losing money.

What makes sense for you, also makes sense for the country. Talent and capital should go to areas where the rewards are the greatest. Profits tell us where the market values your services the most. If the demand for cement picks up and profits for its manufacturers go up, it sends a signal throughout the economy: move resources to production, trade, and sale of cement, you will be rewarded. Profits constantly make us allocate scarce money and manpower where they can be best used for satisfying the demands of consumers.

This is what increases efficiency of people and capital. Where this process is jammed up by government restrictions, the well being of the people is adversely impacted. Profits are telling us to make cement, however the government refuses to issue a license to do so, the demand remains unsatisfied, and the existing companies rake it in to the detriment of consumers.The resources which cannot be used to manufacture and sell cement are instead allocated to fulfill our less important demands. Capital and talent is diverted to satisfy our not so urgent needs. We lose. Big time. This is what happened during the pre-'91 license raj days in India. Cement was always short and could only be found in the black market, while companies wanting to set up plants could not obtain a license.

Bajaj could not get permission to manufacture more scooters, people waited for ten years to get one or paid in excess of a 100% premium over the officially set price. Waiting lines for phones were even longer; the private sector prohibited from entering the telecom arena. Mercifully all this changed in 1990's, when by one stroke of the pen, licensing was abolished for most industries including cement, scooters and telecom. All these are presently available in plenty in India. This is why it is so important, especially in a poor country like Nepal, to abolish restrictions, controls and approval processes which end up halting the movement of scarce resources to their most desired use. Let profits, not government, guide the economy.