Here is the link of the article: https://www.capitalmind.in/2020/02/opm-other-peoples-money/
Generally, a company is funded by either debt or equity. However, both debt and equity come with an cost. We need to pay an interest on debt and need to generate extra returns to pay to the equity shareholders. However, there is a source of fund called the OPM (Other People’s Money) which is available free of cost to a company.
The concept of OPM can be explained with the following examples:
Say, an apartment is rented out and the tenant pays a security deposit of Rs 1 lakh, when he vacates another tenant moves in and pays a security deposit which is then used to pay the first tenant. This goes on and on and thus, the security deposit paid by the first tenant is yours as long as you keep renting your apartment. This is known as Other People’s Money.
In the business context, your customers and suppliers are those other people.
Case of Eicher Motors
Eicher Motors manufactures Royal Enfield brand of motor bikes and Eicher brand of trucks and buses. They have over 90% of market share in the mid-weight motor bike segment. From 2011 to 2019, the sale of motor bikes increased from 74000 units to 8 lakh units. In the same period, two wheeler sales increased from 1.2 crores to 2.1 crores per year. There are long waiting lines for its bikes and consumers pay Eicher in advance.
Eicher pays its suppliers 95 days after the purchase on an average. It’s like keeping the suppliers money interest free for 95 days.
Eicher gets to keep both the customers and the supplier’s money. This leads to a negative working capital.
The OPM generated between 2011 and 2019 was enough to fund almost a quarter of the additional property, plant and equipment that Eicher spent in that time. If Eicher had borrowed this much amount than the interest cost would have been high which concludes that OPM helps to save interest expenses too.
Case of Info-Edge
Info-edge operates popular websites like naukri.com, jeevansaathi.com, 99acres.com and has investments in several other companies, most in Zomato. Info-edge acts as a bridge between recruiters and job seekers, who pay the company in advance for its services. Info-edge gets paid more 120 days in advance for its services
However, it doesn’t need any land or machinery to grow. Thus, it has an OPM i.e. 3 times its investments in PPE.
OPM is important to shareholders because:
- OPM is free of cost and thus helps the company avoid interest expenses leading to greater profits.
- Presence of OPM in itself signifies the company specialty. However, that specialty must not be short lived.
The Fundamental Mindset 