Cash Flow is King
The Agri-output supply chains edition.
It was my hard learned lesson as an entrepreneur. You could be profitable on paper but if there is no cash in the bank to keep things flowing, it all comes to a grinding halt. This is a common occurrence we observe far too often with businesses. Mr Kishore Biyani of Big Bazar fame is an another entrepreneur who lost his company due to crunch in capital in recent times.
Cashflow becomes a challenge for businesses when they set out to do things that are different, tangential or novel with respect to the flow of the ”Cashflow river” in the industry. We at Subjimandi.app were trying to build a new river all together where the trade that happens between the Farmers and Consumers happens on graded produce.
Staying with the theme of getting inspired from Venkatesh Rao’s (@vgr) blogposts on Ribbonfarm. This time we pick an article titled “Ancient Rivers of Money”. Ever since I read it, I wanted to write its relevance in Agri-output marketplaces. All quotes in the belong to the same post.
Agri-Output Marketplaces
Agri-Output marketplaces are supply chains of moving harvested produce from production region to the end customers. I wrote about the problem space in this segment back in issue #8. It is also termed as a legacy industry. They are typically the ones that don’t modernise quickly. The reason behind this could be alluded to ”age of cashflows”, Venkatesh says it best as he starts his article.
Inertia in business comes from predictable cash flows. That’s not a particularly original thought, but you get to new insights once you start thinking about the age of a cash flow.
In agri- output marketplaces there is money to be made for everyone involved. The people acting as traders(middle men) in agri-output supply chains would not survive for so long without profits. Yet, this supply chain is always declared inefficient by startups and novices due to high number of middle men involved in the supply chain. How do we address this dichotomy?
Steps : Process Flow
The farmer sells to a local trader, who sells to a bigger trader before it moves to the consumption region and a similar set of people are involved on this side as well before it reaches the end consumer. A version of this is referred in the illustration.
Production regions are termed where a produce is grown and harvested whereas a consumption region is where it is sold to the end the consumer.
The dominant mode of trade for agri-output supply chains is through the numerous physical marketplaces called Agriculture Produce Market Committees (commonly known as Mandi) set up by Indian Government starting from independence. We are seeing one such mandi for onion produce.
Traders are agents who are licensed to deal in these physical marketplaces. They act either on behalf of the seller or buyer and enable transactions to take place. For this, they take commission on the value of the produce.
Traditional River : Cashflows in Produce Markets
Cashflows generating in the current agri-output market could be referred as a river flowing amongst the numerous stakeholders involved at both the production and consumption regions.
We think of cash-flow as a very present-moment kind of idea. It is money going in and out right now. But actually, major cash flow patterns are the oldest part of any business. It is the very stability of the cash flow that allows a business to form around it. In fact, most cash flows are older than the businesses that grow around them. They emerge from older cash flows. When you buy a sandwich at Subway, the few dollars that change hands are part of a very ancient river of money indeed. Through countless small and large course changes, the same river of money that once allowed some ancient Egyptian to buy some bread from his neighbour now allows you to buy a sandwich.
The focus is on cashflow because it is the most basic form of judging the health of an industry. If the industry is booming, the river will have strong currents. And in produce marketplaces, the river of cashflow is perennial(abundant throughout the year).
Cash flows are also among the most basic financial ideas. Only businesses make profits, but governments and non-profits form around cash flows too.
With the river metaphor we are assessing the flow of cashflow in two dimensions. One being the space aspect and other being the time. The longer a stream of the river flows the harder it is to change the way it flows.
These ancient rivers carve out both a spatial and temporal landscape. Spatially, the flow metaphor suggests old, dried-up river beds, gorges and ravines, flood plains, ox-bow lakes, watersheds, and of course, the rivers themselves. This plays well with the idea of “segment.”
But markets also have a temporal dimension, based on which river of money you are talking about, and how long ago it last changed course.
Generalizing, you can even think of an average “age” of the market as a whole. An interesting question to ask is whether early adopters as a group should be considered as living in a future market, or whether the mainstream should be thought of as living in the past. I prefer the latter model.
Many startups in the agri-output space would relate with the sentiment that the stakeholders involved in the trade are bereft of any motivation to change. We hold people at fault when it is the cashflow that plays the kingmaker. Don’t blame people, blame cashflow.
Mandi System
Traders sitting in the Mandi’s are residents of well settled riverbank communities . They lack any incentive to change the way trade takes place.
Organizations are like riverbank communities. They are as old as the last significant course change or waterfront battle. The stability of the river, not the attitudes of people, is what makes old organizations seem set in their ways. Perhaps people resist new ideas not because they have specific personalities, but because they have settled on the banks of a river of money of a certain age. Or perhaps there is self-selection. Possibly the hidebound kinds go settle on the banks of the most ancient rivers.
When the entire market is unstructured, uncertain and unplanned. The only way to thrive is to adopt practices which enable you to be part of the existing cashflow. For every stakeholder, be it farmers, traders or retailers, they are still reliant on dominant Mandi system.
The Mandi system of physical marketplaces was developed and mandated through regulation to be the only legitimate place of agri-trade. This enabled them to become well settled communities on the riverbanks of agri-output supply chain.
Thus, allowing them to the source of truth for price discovery of produce. They also play crucial role in determining the overall supply and demand of produce through the trade taking place within their boundary walls. If ever there is an oversupply of produce at a Mandi, then the price crashes. On the contrary, if there are few more buyers than the usual, the price escalates. This fluctuations are touted often as the dynamism of the produce markets.
Either side the price moves, traders makes money because they trade everyday. Some days they make more money than the other days. The sheer volume of trade alone suffices them to not think of change in any aspect.
If you could make ₹2 for every ₹100 transaction by being part of the Mandi system. If you could do 50 such transaction in a short span of time, every day. Why will trader change this sort of behaviour when the river of cashflow is flowing the same way ?
Startups Journey: Starting stage to settling down.
Some startups are about finding and colonizing the banks of minor unknown tributaries of old rivers. Others are about creating new rivers. Still others are about building canals between vigorous new rivers and somnolent old ones. And of course, there are those that are about displacing incumbents from prime waterfront locations.
In agri-output market, many startups originate with the notion of changing the course of the river by building communities revolving around the farmers and end consumers. Within few years of attempting to do so and unable to make much headway. They find themselves in a situation where their cash is drying up. They retreat and settle on the banks of traditional cashflow river.
For example, a startup trying to build localised agri-output supply chain where it controlled every thing from post-harvest to end distribution. It rented everything from warehouses to vehicles and invested heavily in expertise via technology and people. In short, the startup attempted to build an organisation around a tributary that was untapped.
Settling Down
When Startups pivot back to the main river, they end up being part of the existing trade. Once they transact and generate enough cashflows by being part of the community. They start to spot the gaps. A renewed belief crops up to replace the existing establishments from the prime location on the river banks. In this case, the Mandi system.
By engaging in the same sort of trade but doing at lower margins and better efficiencies due to help of tech and smarter human capital. This is the equilibrium most startups in agri-output marketplaces reach as they scale and grow.
This trend can be termed as bringing efficiency in agri-output supply chain through increasing the throughput of transactions between each stakeholders. The organisation that can push the highest volume of such transactions stands a change to occupy the coveted location on the riverbank.
The eventual success whether they could replace and succeed is a story that is yet to conclude. Ears and eyes wide open witnessing this attempt unfold.
I hope this analogy and map provide you with sufficient context to map out the current trends at play in agri-output marketplaces. I will let Vgr sum it up why this mental model helps.
The nice thing about thinking this way is that the market is now a system of cash flows that exists independently of the specific set of businesses serving it in a given era. You can map the system and look for an unoccupied waterfront spot.
My shtick since the beginning was to talk about marketplaces in agri-output supply chains through a lens of mutual benefit over fairness. This map of plotting existing Mandi system and new startups along the cashflow river helps in determining the eventual progress and next goals.
I will talk about the perils of fair marketplaces and how they have held back any progress in agri-output marketplace in subsequent post.
Signing off till next time,
Vivek V.S , finding tributaries.