Vanishing Act
It’s just not possible. Where did it all go? How could this be?
No, I’m not referring to one of those television ads talking about hair loss. I’m talking about how many small business owners find themselves in situations where they become dangerously short on funds.
It happens a lot more often than you might think. Small business owners face pressures on their pocketbook just like everyone else. Rapidly depleting financial resources can result in disaster for many small businesses in the Philippines, even to the point where they just might they have to close their doors for good. While small businesses can run into financial trouble for a number of reasons, this column will focus on the more stealthy ways one’s resources come under attack. Many small business owners concentrate on the more obvious problems when trying to figure out why their cash position is worsening, like looking out for employee pilferage and ‘leakage’, any misuse of inventory, and searching for mismatches between real costs and actual pricing. But there are a number of more insidious threats that can often be overlooked. Listed below are eight such threats and some suggestions on how to side step these potential financial landmines.
Blindsided by inevitable surprises. Just when you think everything is fine . . . wham! You get blindsided by a surprise of one sort or another. A sick relative needs help with a big medical bill. Your key piece of business equipment suddenly stops working. Your vehicle gets in a wreck. You get the idea. No matter what the circumstance, you’re facing a big problem that requires a large chunk of money. Perhaps it was money you needed for expansion, or was earmarked for travel to a trade show or convention. The fact is you need to divert funds away from your core business activities to deal with such an inevitable surprise. What can you do about this? Surely you can’t anticipate every surprise situation. That is true, but you can take certain precautions to make sure you limit any potential downside. For example, you could make sure all your employees and relatives are on PhilHealth (the national health care plan). Or you could budget at the very beginning to have a back-up piece of equipment that you feel is critical to operations. And you just might want to make sure your insurance coverage is up to date on your vehicles and business premises. In other words, you really ought to plan ahead and make an effort to limit any possible disaster scenarios that could happen.
Not wanting to miss out. Sometimes your business may come across what appears to be a great deal or opportunity, but it is a deal or opportunity that you really didn’t consider or make allowances for in your business plan. Lots of small business owners face this dilemma, and it can be agonizing. Should you purchase that building that is a steal of a deal even though you’re happy with your current location and rental agreement? An equipment supplier is going out of business and having a sale – should you upgrade all of your operations equipment at bargain basement prices? These are tough calls. Sometimes you really need to go out on a limb, but if your cash reserves aren’t that deep, you better think twice and decline. There will always be other opportunities down the road.
Falling for fads. Did you just come back from a trip somewhere new and find yourself brimming with excitement over introducing a new product or service in your own market that was all the rage in the place you just came from? If it was a hit over there, it will surely be a hit here, right? Now before you go overboard, remember that fads come and go. If it will be easy introducing the product or service into you current product mix, maybe it is easy to adopt and test out on a trial basis. But if it is a product or service that will require a re-tooling of your overall business operations, you should probably douse a cold bucket of water on the idea and let it pass. Trying to latch onto the success of a fad is not a good idea. You waste precious resources on something that will fizzle out with time, and the overall experience will distract you from your main business priorities.
Wanting instant gratification. OK, your business is showing a pretty good profit after 6 months of operations, so is now the right time to go on that trip to Italy, or buy that new truck, or purchase the beach house property you’ve been dreaming of? Nope. It’s not a good time. Small businesses generally go through real irregular patches of sales with new highs and new lows (often in successive months) during the first few years of operation. Just because you’ve had good sales early on doesn’t mean you won’t hit a bump in the road. More often than not, you will feel the effects of competitors who will begin to fight to win back the market share you have taken from them. You’ll need to stay sharp and have a good reserve of cash or they just might take back the customers you have just fought to win over. Try to delay your urges for instant gratification and wait a few years before making major purchases. You just may need those extra Pesos to stay in business and keep your cash flow positive.
Relying on Peter to pay Paul. Many small businesses underestimate the amount of cash they will need to keep operating day-to-day in the first few years of business. As a result, many are forced to rely on their early sales to finance operations and get working on secondary orders and subsequent sales. This is natural in the early stages or your business operations, but it becomes a real problem and can be a dangerous strategy if you constantly rely on this method later on. If you don’t find ways to put money away after each sale, you could quickly find yourself with no cash at all in an economic downturn.
Hooked into buy now — pay later schemes. Now, there are times when you should take advantage of buy now — pay later special offers. If you are making an investment in a key piece of equipment and are offered an interest free payback period, then taking advantage of this offer is a shrewd business move. But it is not a wise move if the equipment is not essential, or will serve only as ‘window dressing’ for your small business. Remember, purchasing unnecessary equipment can crimp the cash flow of your business.
Wanting to ’Keep up with the Jones’. One of your competitors is introducing a new product or service and you feel like you should offer it too or be left out. Another competitor has renovated his shop and the new look is drawing in lots of customers — should you follow suit? Resist the urge to follow others! Stick to your business plan! You can always add your new products and services when you are ready. And you too will need to renovate some day in the future, so do it then and not just because your competitor is doing it now. It is easy to think you need to follow the herd. Try to go against the herd when you can, especially if doing so doesn’t seem to cause you any financial pain. You shouldn’t abandon your business plan just because someone else is doing something different. Be a leader, not a follower!
Hoodwinked by inflation. This one is tricky, and really has nothing to do with what you do or don’t do at all! Inflation is something that can cause real problems for everyone in society if it gets out of control. That’s precisely why it is a major concern of the central bank here in the Philippines, and with central banks all over the world. Inflationary conditions have major implications for small business owners because inflation can wipe out the purchasing power of your savings over time. If the returns you are receiving on you savings are not growing at a rate that is faster than inflation, you are actually getting poorer over time! If you anticipate needing to make capital expenditures in the future, make sure your savings are put in an investment vehicle that at least mitigates the effects of inflation. In other words, don’t leave your cash in the safe. Talk to a financial adviser and see how they can help you grow your money over time and outstrip inflation.
This column was a bit longer than most that are written in the Small Business File, but the concepts and mitigating strategies really can make a difference for those trying to understand how you too might protect your business from potential cash shortages in the future.
My wife and I have a general store and after 8 years of (personal) retail experience I can say that I anticiate those very pitfalls. One of the things I have noticed about how Sari-sari stores do business over here is that after setting up the family starts using the store as their personal pantry. It’s way beyond pilfering here and when the time comes to restock the money isn’t there because the sale was never made to begin with. Now they have a choice, fail or take out a 5/6 loan to get the funds to restock. The horrible reality is most sari-sari stores are using profit to service debt and therefore are insolvent to the extreme.
I appreciate your columns and look forward to more. Your advice seems well reasoned and experienced, with a dose of common sense.
Hi BrSpiritus,
The sari-sari store business is about as cut-throat as it gets, with the lowest margins for error of most small businesses. Even when a store does well, it never fails that another similar store opens next door quickly, cutting sales in half almost immediately.
If people use the store to make breakfast, lunch, and dinner as well, then I’m pretty sure the store will forever remain in the red. This just seems to happen more often than not.
On a side note, have you noticed how faithful the money-lenders are at showing up every day on motorbike to collect their payments!
Thanks for sharing your ideas!
Hi Gary,
Thanks for popping in! I’m glad you find my column interesting. I do try and stick to topics I have experience with, and wherever possible I try and add any practical suggestions that have either worked for me or for others here in the Philippines. We also tend to get some informative comments from other small business owners who post here on occasion. I hope you find their contributions useful as well!
Cheers!
I like your columns martin …Phil R.
Hello Phil,
Thanks for your support! I try and focus on issues that will be useful to most small business owners in the Philippines, but I also try to tailor columns so that a lot of information can be useful at the household level as well.
Thanks again!
Hi Martin
That is some good advice for business both here in the states and in the RP. Watching your cash is especially important in the RP were Cash is King. My wife and I have tried a couple small businesses in the RP while living in the US and we found it to be impossible to watch the business close enough while living in the US. We also found out you cannot trust any one, especially relatives.
Hi Larry,
Thanks for your comments! You raise some really important issues. The first one is related to being in contact with your business on a daily basis. I have never met anyone that was successful in business who could get away with not being physically present and on site for at least the first few years of operations. Even now, the most my wife and I have spent away from our business at any one time is 6 weeks. And that length of time only happened after 5 years of operations! Having a small business is like having a baby — you need to be there and take care of it.
The second very important point you raise is on staffing and trust. Every small business really relies a lot on trust, so having the right people in place is crucial. There seems to be two camps when it comes to hiring relatives in the Philippines. One camp says never hire relatives. The other camp says only hire relatives. I have found you need to hire the best people you can. Our employees are a mix of relatives and non-relatives. The key for us has been in placing the right people for the right task, and according to their abilities and loyalties. You only find out with time who needs to be responsible for what.
Thank you for raising some really great points, Larry! Looking forward to hearing more about your experiences with small business in the Philippines.
Cheers!
Hi Martin I fully agree with regards to relatives I myself have come up against this
in past years now I am settled here in RP I have made changes to who and who I dont employ with regards to relatives in my business, and since I have done this it has made a marked difference to my business earnings enjoyed reading your column found it very good.
Hi Andy,
Thanks for sharing your experience. I agree with you and believe it really depends on family dynamics, type of business, capabilities, etc. After a while you get a feel for what people can do. Some can take on more responsibilities, while others hit their own ceiling. Some family members want to do more, while others are happy with what they are doing. The same can be said of outside employees. The key is promoting people for the right reasons in as transparent a fashion as possible. Some may say ‘easier said than done’ given the way some Filipinos expect special treatment based on familial ties. But you’re the boss! The Pesos stops with you. And this is one of the few times it pays to be an ‘outsider’ — you are under less pressure than an inner circle member of the family.
Looking forward to hearing more from you in the future, And. Thanks again!
Martin, I appreciate your column . This is just what I was looking for. I will be sure to check back and see what all else you have written and look forward to your future articles. Do you mind personal emails? I am very sure I will be wanting to ask you questions over time. Most of my questions I will try to keep here as posts. I already have encountered the family pantry thing. I know many Philipinos are very succesful, so it boggels the mind to see that some do not understand the principal of saveing the seed for future merchandise.About the Philipine national health insurance. Do you think it would be cheaper to just go ahead and buy certain family members some insurance as opposed to chokeing up a chunk of change when the inevitable emergency arises? Thanks again!
Hi Tim,
Thanks for your post! Please feel free to look back at previous articles. On the main page of LiP you can click on ‘more articles by Martin’. There are a number of articles on various topics related to small business that you may find interesting. Scroll through to see what you like or find most helpful. Please also read the comments at the bottom of each article. There are many very good comments from different readers who share their experience in small business as well.
Indeed, there are many very successful and financially well-off Filipinos. I usually find the most successful people are those that are able to do the little things right, and on a consistent basis. Things like controlling inventory, keeping and rewarding good staff, always trying to make continual improvements no matter how small they may seem, etc.
PhilHealth is probably one of the best investments you will ever make. It only costs P1200.00 to cover an ENTIRE family for a whole year. The PhilHealth coverage will cover virtually all the costs for people to use a government hospital. If you choose to visit a private hospital, you will need to ‘top up’ any charges above what would be covered in a public hospital. The coverage also covers foreigners, so if you are married make sure your wife signs you up as a dependant spouse of hers.
Thanks again for your posting! Feel free to keep contributing and I hope you continue to enjoy LiP!
Marie and I had a discussion involving hiring family members a few days ago. my position was that they can only be hired if they are qualified and reliable. Her position was that we should always help family first. I explained that we could help no one if we are bankrupt from poor business practices! I have a business here in the US. I would not consider hiring my family members because I know them personally. That would take away the objectivity from people management. I have some family in the Philippines that would be good business associates but I admit that I would agonize over damaging the family structure if the business relationship failed. We did compromise and decided that any endeavor would have complete oversight by us and would not be based on blind trust.
Hi Tom,
I believe your instincts are right. You need to hire the best people you can. It is always better to hire family members IF they can do the job. But hiring them to do a job they cannot do is a recipe for disaster. Having the wrong person do a job can result in financial losses, productivity losses, hard feelings and strained relationships, sets the wrong message to other employees, etc.
I believe you can always find jobs to match family members later on as the small business grows — just make sure the key positions are staffed by people based on merit, not familial ties alone. The key is communicating the policy to EVERYONE. And this should ideally come from the Filipino spouse — especially the procedures for hiring who and why, along with procedures for dismissal. The tone has to be set by the family ‘insider’, not the family ‘outsider’.
Cheers!
I have a friend running a business in Surigao with his wife. They employ about 20 people. Only once did they employ a sister, after 2 years working there she was trusted to go to Mamila to purchase a vehicle for the business. She disappeared with 6 months profits from the business and has never reappeared. Of the other employees, 3 are described as ‘useless’; but although they are not family they are extremely difficult to dismiss due to their family connections standing over the business owners with threats of violence.
Moral of the story seems to be: be extremely carefull who you hire; what basis they are hired on, trial periods etc. Also it seems to be a good idea to meet with the potential employee’s family and make sure they are aware of the conditions of employment as well as supportive of your reasons for such.
Hi Chris,
Yes, hiring decisions are critical to business success or failure. Like you say, the basis people are hired upon needs to be well established and communicated so that everyone really knows what is expected, and under what circumstances employment could be terminated.
I feel bad for your friend in Surigao. Unfortunately, I also believe any major purchase should be made directly by the owner of a business. I can’t imagine ever handing over so much fiscal responsibility to someone — decisions involving a half of a year’s earnings NEEDS to be something only the owner should be responsible for. And how did your firend ever get into a situation where threats of violence were able to creep into the business? I have to believe there must be more to the situation to make it so complicated. Hopefully your friend can find a way to address the many issues he has had with his business to this point.
Hi Tom,
I was going to add more on the ‘insider’ and ‘outsider’ idea, but didn’t want my message to be too long. Maybe I should develop an article on the issue. But in a nutshell, this is what I mean:
You, as an ‘ousider’ to the family dynamics is a good thing. You can establish a set of ground rules for thus business. The system so-to-speak. It is better if the ‘outsider’ does this, because you can inject some objectivity into the situation.
Your spouse, as an ‘insider’ to family dynamics is also a good thing. The spouse’s job is to COMMUNICATE to the family and employees what the rules are that have been made by HER and the ‘OUTSIDER’. The spouse has to be strong enough to be a leader in the business. There is nothing worse than mixed messages, so make sure you and your spouse are on the same page and agree to the system. She can always shift some burden on you and save face, while you can lean on her to institute changes that require family finesse. That way she isn’t blamed or pressured by family members too much. It’s a real balancing act, but strong leadership from both really needs to be set from the outset.
I hope this makes sense. It has worked for a lot of successful entrepreneurial couples here in the Philippines.