Frugality - Essential Founder Quality

If you are not frugal, don’t bother starting a company [founder qualities]

by Chandoo on September 26, 2012 · 10 comments

in Books & Resources for Startups, Money Matters

I like to read (auto) biographies of successful people. I think it is an excellent way to learn & be inspired. And I notice something common in many business persons who made it big  – Sam Walton, Warren Buffet and many more.

They lead a frugal, simple & happy life.

If you are the kind of person who takes inspiration from books, I suggest reading Made in America by Sam Walton. Sam Walton founded Wal-Mart, the largest retail organization in world and went on to became richest in America. But do you know how they lived? A simple, happy and meaningful life with out luxuries or lavish expenditures. I bought the book in 2nd hand market few weeks ago and have been reading it few chapters every day since. Lovely read.

In fact, one of my favorite books Millionaire next door is full of such examples of small business owners, successful professionals who live a simple & happy life.

Why frugality is important for successful business?

The basic equation of business is,

Profit = Revenues – Expenses.

It does not take a genius to figure out that if your business makes $100 in sales, then you got to spend less than that to turn a profit.

How do you spend less than what you earn? By being frugal of course. It is a surprise that most startups focus obsessively on acquiring funding (ie increasing expenses thru more interest, dividends etc.) than finding ways to cut expenses.

Not only being frugal helps you turn profitable quickly, but once you run a profitable business, you can easily get funding or investors.

By being frugal, you will be able to pass on the benefit to your customers, thus making your products valuable.

And by being frugal, you consume less, thus making earth a happy place.

How to be frugal

Observe frugality in all aspects

The first principle of frugality is you cannot be lavish in your personal life and frugal in business. It does not work like that. You have to believe it, observe it in all aspects of your life.

Hire people with frugal mindset

It is not enough if the founders practice thrift. If you hire people who are used to living lavish life, then you are back to square one. Make sure you hire people who are simple, who consume less and live happy life. It might take a while to know all these aspects when you are hiring someone, but you should invest time to know your team.

Keep things simple

You will end up spending a lot of money if you have a complex process behind everything in your business. By keeping things simple, you can cut expenses drastically and make more profits. Few examples of keeping things simple:

  • Give power to your employees and trust them. Let them make decisions to keep customers happy.
  • Trust your customers. When they ask for a refund or have a service request, just do it rather than subjecting them to extra verification steps.
  • Say sorry when you mess up. And learn from your mistakes. It is much simpler than finding someone to blame or defending your position.

Think of money as means, not goal

When you consider money as a tool to achieve something else, you will respect it more.Frugality does not mean amassing wealth or being cheap. It means being extremely wise with money and using it with utmost care. The moment someone thinks of money as end result, they are lost. For a smart business person, money means:

  • Ability to create products that their customers love
  • Ability to reward their employees & partners for all hard work
  • Ability to buy time (thru outsourcing, hiring etc.) for self
  • Ability to contribute to society (a la Bill Gates, Buffet)
  • Ability to say no to poor decisions & in-correct practices

De-link Happiness from Money

Most people when asked Why they spend so much, they simply say “to be happy of course”. Contrary to what we think, our happiness is not linked to how much we spend or what we buy.

While we can all agree that a starving person need to buy a meal to be happy, we can safely say that marginal returns of additional spending always diminish.

So how to de-link happiness from money?

Simple, develop a strong understanding of yourself and what makes you laugh, cry, content & sleep tight. Most often these things are not linked to how much money we spend.

For example, my happiness stems from,

  • Laughing many times everyday
  • Spending time (a lot of it) with my wife, kids
  • Talking & sharing opinions with my friends & relatives
  • Learning new things
  • Sharing new ideas & techniques with world (thru my blog, classes etc.)
  • Providing excellent value for money to my customers and hearing from them how they became awesome using what we sell.
  • Performing random acts of kindness
  • Doing occasional DIY fixing or creating something
  • Working out
  • Reading books, widening my mental vocabulary
  • Challenging my self with a difficult problem and solving it convincingly
  • Surprising near and dear ones
  • Taking a nap
  • Having a freshly brewed coffee or tea with my wife
  • Cooking (a variety of pizzas and pastas)
  • Eating ice cream
  • Visiting new places & exploring

As you can see a majority of what gives me happiness has no linkage to money

Are you & your company frugal?

Go ahead and share with me how you run your family & business? Are you able to turn profit every month? If not, time for you to rejig the expenses and discard the items that are pulling you down.

I wish you a frugal, simple & happy life.

{ 10 comments… read them below or add one }

Krishna September 26, 2012 at 6:11 am

Nice article and I agree mostly with you. However even for expenses I see two parts: variable and fixed.

If you live in a metro and want to buy a house / flat – you are talking about a few crores. That is not being lavish it is just the fixed min cost of owning property.

So, I see lavishness as more relating to variable expenses (some fixed expenses can be lavish as well – eg: mercedes benz) but how do you distinguish these?

Therefore the real question I have for you is how do you define 'frugal'?

Reply

Chandoo September 26, 2012 at 3:26 pm

While the words "frugal", "smart spending" can be subjective, here is small checklist I use:

– Is the spending related to well being of family members or people I care about?
– Is the money spent for getting an asset (for example getting house, creating a new product, redesigning a website, implementing a process. NOTE: an asset is something that can give you dividends and returns. Hence something like car is not an asset)
– Is the money for learning something new
– Is the spending too trivial (usually less than 1% of your monthly income or 0.1% or less of your net worth)? Again, too many trivial purchases can add up, but once in a while it is ok.
– Is the money buying you time (for example hiring an additional employee can give me time to spend time with my family, learn new things)

If the answer is YES, I usually spend.

Reply

Manish January 17, 2014 at 5:59 am

Well Said Chandoo!! Loved the article as i have similar views about lifestyle.
Too much consumption often takes a toll on health and well being in General.

Reply

Kalyan Chakravarthi September 26, 2012 at 1:40 pm

Hi Chandoo, kudos to you for making it real simple to understand. Its not that I didn't knew this basic funda of leading a happy life. But sometimes in life, the things we already know need a simple gesture or a moment to transform into a life altering discipline. Reading this blog post seems to be that moment for me. I am just starting out with my effort to become successful and lead a simple and a happy life. Thanks

Reply

Chandoo September 26, 2012 at 3:27 pm

Thanks Kalyan. I am glad you like this and want to make a positive change to your life. All the very best 🙂

Reply

robert march October 3, 2012 at 12:39 pm

Just two points,
Warren Buffet never started a company (BH was already established when he took over and converted it )
Larry Elision from Oracle loves to spend money.

Reply

Roshan P Vani October 16, 2012 at 7:38 am

It amazes me how many people are living off credit in this world. Love the "De-link" happiness from money. Many people seem to focus on living rich vs just having a rich happy life. Another great article.

Reply

Ameya Karambelkar November 8, 2012 at 1:34 pm

Hi Chandoo,

Excellent article. You have explained it in such a simple language. This will surely help aspiring entrepreneurs.

Thanks,
Ameya

Reply

Bobby January 17, 2013 at 6:55 am

Being frugal is sensitive to the type of business, right?

My 2 cents, you might not agree now…. 😉

Here is what you wrote:

"It is a surprise that most startups focus obsessively on acquiring funding (ie increasing expenses thru more interest, dividends etc.) than finding ways to cut expenses."

Isn't that the way to go – very s*xy! Please excuse my language readers.
Once i asked a girl friend of mine, what made you fall in love with your husband and marry him against the wishes of your parents? She replied, he was studying engg in Bhopal(India) then (1993) and i engg in Guwahati(India). We met only few times but spoke over phone. That made him board a train (without reservation as he couldn't afford reservation) and go to Guwahati (during that time, was like other corner of the world) to propose me for marriage. I didn't know who else would have made that kind of effort to get me.

Coming back to the dull business world talk ;), the whole thing you said Chandoo, applies to American business context and it makes sense right, to be obsessed about acquiring funding, because the concept of entrepreneurship in USA or western world is finding a big idea, or gap in existing product(s) where a whole new product(s) could fit in and quickly grab that opportunity.

I believe, the same does not hold good for Indian business context though. My intention for writing below is not to offend any reader but simply provoke thinking in people.

My view is, there is a downside of continuously thinking of cutting expenses. Where else the downside shows up more than in Indian business scenario's, wherein there is hardly any concept like entrepreneurship and hardly any person as entrepreneur. All India has is businessman (not entrepreneur). Everything in Indian business is structured around cutting cost and therefore involvement of CA, CWA professionals or a mindset like them. The under graduate and graduate level education strategy is to create that mindset. That is the reason they give out post graduate diploma in management even in best educational institutions like the IIMs but not MBA.

What it does is, makes an entrepreneur cost cutting focused than strategy focused and once that happens the company can never grow big like a Microsoft, Boeing, or Apple.

Beyond all this, i like your excellent work on excel!

Best wishes

Reply

Abhilash VK March 9, 2013 at 9:08 am

Chandoo,

This article is very good. All the above points are known however very few people follow. I am sorry to say that i know but i was not following. I used to spend a lot than the one who earns more than me but now, i will definitely like to say is i changed. Your words are on my wall.

Thanks a lot for sharing excel knowledge along with personality development skills.
Best Wishes

Reply

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