Saturday, January 11, 2014

Cost Estimation and Implication on Financial Channel Distribution Business

Today I will discussing about an industry which has grown to Rs 8.5 lac cr based upon the distribution business model over the last decade. Well this same industry was Rs. 1,21,805 lac crores in January 2003.This simply gives a clear indication about the stupendous growth the industry have achieved over the decade.I have been working in this industry more than 10 years and I am fortunate enough to see the business models of the financial distribution business. From 2003 the financial distribution industry moved into a revolutionary growth phase with diverse products. Mutual Fund used to be the prime business for the distribution models. I remember that Mutual Funds, Equity IPO are used to be sold like a hot cake. Days and Nights used to busy with prospecting with clients and deep focus for acquisition of clients. Distribution business models are based in two segments 1) Direct client model and 2) Sub broker/channel business model.  I will be covering the business model cost and also the strategy for growing the business of the sub-broker/channel business model.

The 2nd business model was the most easiest and fruitful business model which is currently being run by the financial distribution business. Direct client models ruled the financial market from 2003 to 2008 and after the abolishment of entry loads concept in mutual funds the business took a hit. But the sub broker or channel business kept on ringing its business growth and this business model is very much cost initiative. The financial distribution cost component comprises mainly of employee cost followed with working capital cost. It does not involve investments in Fixed Assets hence much of the business in the initial days are being started based on low capital requirements. It can also be said that variable component of the cost is more since if the business grows well the organization converts variable cost into fixed cost and vice-versa. Well cost estimation before any business is being started and working capital projection strategies needs to be prudent enough to provide support to the business in the long run. I have seen many companies who have dried out due to initial outlay of huge cost, without making realistic projections about revenue growth.

Standing today at 2014 the business cost of this type of segment is low since one needs to invest more on technology and employees to drive the business growth. One of the major differences between direct business model and sub broker model is that in the former one the employee cost remains high followed with a substantial growth in fixed cost and variable cost in the form of office rent etc.

In sub broker model the clients are majorly mapped or brought into the system by the agent. Hence if you don’t have an office say in Duragpur (West Bengal) or Pune (Maharashtra) but your office is in Kolkata or Mumbai, your sub broker gets business from these places without a penny being spent from your pocket. In other words you don’t have to set up any office and incur fixed or variable cost but still you develop business network and procure business through channel business model.  If I compare this business with CMA practices we will find that we have to open new branch offices to provide services and increase business where as in financial distribution model based upon sub-broker/channel business model leads to a significant business growth without incurring any cost component. Well this was about the business set up model of sub-broker or channel based model now I would bring the growth model of this business segment where judicious cost measurement is required to set up the business.


The success process in this business model is that one needs to get deeply into the cost components of the sub-broker/channel business segment. It can be compared with FMCG industry where the success of the business partner/franchise is being taken care by the company itself. For a sub broker the cost component always remains a high since he has to spend after keeping aside his fixed expenses. Hence the marginal expenditure all ways remains a hindrance for his growth. He has to take calculative steps and often these steps are setbacks for his business. Hence as a manager of a financial distribution business model one should follow the below process to develop and grow his business which would finally lead to the distribution business growth. One of the prime things one should keep in mind that your cost saving is dependent on the growth of the sub-broker business. If he fails to grow then you might have to take the step of setting up a new office in that place to get business.

First calculate all the cost involved in the business of the sub-broker. The below checklist can be handy for an quick reference.       (All  are estimated and subject to change)


After this cost calculation of his business one distributor needs to take other cost segments also so that profitability calculation for his business can be measured and designed.
His personal and family expenses needs to be taken into account so that to make his more viable. This cost component aspect is being taken mainly to keep the business of the sub-broker/channel distributor to alive. Well every one earns for his family hence we need to take all these things into account so that his distribution business turns out to be profitable from all sources.  Hence we find that his total cost yearly stands around Rs.9 lacs. On the overall it can be said that proper estimation of cost (fixed and variable) is required in the financial business segment. Majority of the distribution business segment falls apart due to improper and uncontrolled cost estimations.

 Hence now we need to develop his business plan where he can earn more than Rs 9 lacs so that he can live a reasonable life supported from his distribution business. One of the key aspect of this segment is that we did not take into account other cost like borrowing/loans which he might have taken for setting up his business and also as working capital. When we take into account all these cost factors we would find a substantial growth in the cost components of the sub-broker.

No the distribution company can design the business plan and customer acquisition plan based upon the cost factors and revenue generation target of the sub broker. This type of business planning is required to develop a sub broker based distribution market. Moreover in the above all calculation the profit game is dependent on the type of client is being procured by the sub broker. The distribution company should focus more on client acquisition process for the sub broker. Since this is the key area to kill the entry of any type of distributor from taking away your sub broker. Providing clients to the sub broker leads to a substantial growth of business. 

1 comments:

Rakesh Rathod

FOR 75K HE HAS TO DO 1 LAC P.M AS BROKER WILL TAKE 25%

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