I see that businesses go through three stages. Each has a different kind of mindset when it comes to capital and cash, and how they operate, and what the core objective is.

You can reduce the amount of cash needed to run a business by renting and outsourcing things. That takes care of a lot of human costs and long-term asset upfront payments.

Like instead of having to buy some machinery, you can just rent some cleaning company, or instead of creating paint yourself, you can get it made by some manufacturer.

You can also improve your working capital cycle by tweaking your operations.

These are the two levers that you have to control the amount of cash you would need: the long-term things and the working capital requirement.

So the first stage of business is when we are trying to rent and outsource as much as possible and just establish our operations. The philosophy here is to just get things set up in such a way that we are minimizing the amount of cash needed upfront because we don’t know if this thing will work and we don’t want to engage too much cash in this and also be able to try out other ideas. So we outsource things and that might just let us check if this thing actually works, even if it is denting the margins a bit.

When you have concluded from the first stage that, this is something that you would want to dig more into, then you can think about optimizing your working capital requirements by tweaking your operations – the way you do business, your credit terms, the lead times and things like that, also how you manage your inventory and supply chain. The objective here is to reduce the working capital needs and improve cash flow. We are essentially iterating our workflows here. There is a lot of testing and experiments involved. And we are trying to minimize inefficiencies and minimize the amount of liquidity needed to keep this engine oiled.

Next would be to shift from rents and outsourcing to CAPEX and keeping your work on working capital optimization via operations also a thing in the background. We are basically at this stage where we know that, this is the thing we want to get into and we have found a modus operandi that is worth doubling down on. And thus we are trying to improve the margin by cutting out the middlemen and increasing our CAPEX so that we are capable of doing those things ourselves. This is a highly advanced stage in business where we are sure that this is something that has scope in the future and we want to expand in it and want to pump in more cash into the business in exchange for better margins. And that is a sign that we have high confidence in this business and we have done our fair share of experiments to think OK, this is the thing that deserves our cash.

So the three stages are: rent and outsource plus operations. Then rent and outsource plus working capital optimization via operations. Then CAPEX plus working capital optimization via operations.

Basically, at the start, we’re stingy with cash, then we’re trying to improve the cash generating ability and health of the business, and then we are pumping in our cash.

(Most of this was Speech to text so there might be some artifacts)