Rakesh's Printing Machine: Risk Without a Survey
Rakesh Kumar, 24, earns ₹21,000 a month as a shift supervisor at a printing press in Patna. His father runs a small stationery and photocopy shop in the same lane. Rakesh has saved ₹1.2 lakh, and a cousin has offered ₹4 lakh, interest-free, on condition that he receives 40% of the profits. Rakesh wants to resign and install a digital colour printing machine costing ₹5.8 lakh to print wedding cards, invitation folders and small banners. He has already paid ₹20,000 as an advance to a dealer. He has not surveyed the local printers, does not know the going rate per thousand cards, and has not calculated paper, ink or electricity costs. His father insists that the shop's twenty-year-old goodwill will bring customers. His employer has offered him a permanent post with a ₹3,000 raise if he stays. Rakesh plans to resign next week and start printing within fifteen days.
1. Place Rakesh at a specific stage of the entrepreneurial process and name the stages he is about to skip. What is the single most likely consequence of skipping them?
Read the worked answer
The entrepreneurial process is usually described in stages: (1) idea generation, (2) identification and assessment of the opportunity, (3) feasibility study and business plan, (4) arranging resources - men, money, material, machine and market, (5) launching the enterprise, (6) managing and growing it, and (7) harvest or exit.
Rakesh is at stage 4. He has an idea (digital colour printing), he has premises, and he is about to arrange money and resign. But he has not done stage 2 or stage 3: he has not surveyed local printers, not estimated demand, not fixed a price, and not prepared a cost-and-revenue plan.
Consequence: he will discover his costs and his price only after the machine is installed and the loan is taken. The machine carries a fixed instalment and fixed depreciation whether or not it prints a single card, so a demand error becomes a cash loss in month one. The likely outcome is that he competes on price in an already crowded wedding-card market, cannot cover both the cousin's 40% share and the instalments, and loses his savings and his salaried job together. The ₹20,000 advance is a sunk cost and must not be allowed to push him further.
2. The cousin's ₹4 lakh is called interest-free but carries 40% of profits. Show with numbers why Rakesh should treat this as the costliest money in the deal.
Read the worked answer
A 40% share of profits in return for ₹4 lakh is not a loan - it is equity wearing the clothes of debt, because the cousin takes the upside while his ₹4 lakh is not at risk in the same way a lender's money is.
Numbers: if the unit earns ₹40,000 profit a month, the cousin takes ₹16,000 a month = ₹1.92 lakh a year on ₹4 lakh advanced. That is an effective 48% annual return. A bank term loan of ₹4 lakh at 12% over five years costs about ₹8,900 a month, roughly ₹1.07 lakh a year including principal, and its claim ends when the loan ends. The cousin's 40% never ends.
Rakesh keeps 100% of the risk and 60% of the reward, and a partner who contributes only money will also expect a say in decisions. He should either borrow at a stated rate with a written repayment schedule, or bring the cousin in as a formal partner with a partnership deed, capital account and registered profit-sharing ratio. Mixing the two - a 'loan' with a profit share - is the arrangement most likely to end in a family dispute.
3. Rakesh argues he is an entrepreneur because he is risking his savings. His father says he is just a shopkeeper with a machine. Decide between the two views, using innovation, risk-bearing and opportunity.
Read the worked answer
Risk-bearing is one test of entrepreneurship, but it is not the only one. An entrepreneur spots an opportunity, assembles resources, organises production and bears the uncertainty of the result; innovation - doing something new, or doing something better - is what separates an entrepreneur from a mere owner of capital.
On this test Rakesh is at present neither a manager nor a full entrepreneur. He is not a manager, because he is not organising on someone else's behalf for a salary. But his father's description is closer to the truth than his own. He is buying a standard machine to offer the same wedding cards as every other printer in the lane, with no new product, no new market and no cost advantage. That is a quasi-entrepreneur or copy-cat imitator: capital is risked, but nothing is innovated.
He could still become an entrepreneur by converting the shop's goodwill into a real advantage - same-day delivery, online ordering, contracts with schools and coaching institutes, or a design service. That means finding an unmet need rather than adding one more machine to an existing market.