One of the advantages of running a small business in the Philippines is that once profitable, you can count on an income stream in the local currency: Pesos. This is a definite advantage, because ideally it should mean you rely less and less on outside sources of funds. As a foreign small business owner, the more Pesos you earn, the less likely you are to tap into your savings or outside investments which are likely to be in a different currency like dollars, euros, pounds, yen, etc.
Having a local income stream is important for two very practical reasons. The first, and most obvious, is being able to lower your overall transaction costs when meeting your cash requirements in the Philippines. If you rely on the ATM to access funds from abroad, chances are you are paying some form of service charge each and every time you withdraw money from the ATM. You may even be double-charged when both the local bank here in the Philippines and the outside bank you are accessing funds from each charge you for the transaction. If you have an income stream in Pesos, you may not have to withdraw funds as often, or even at all, meaning either fewer service fees or transaction costs and maybe none at all! This allows more of your savings to work for you and not the financial institutions.
The second reason why it is important to have an income stream in Pesos is for risk diversification purposes. In the past year, as the Pesos rallied and the US dollar weakened, many expats and others who rely on outside sources of funds saw their purchasing power fall as the Peso went from around 56 to 1USD all the way down to 40 to 1USD. Those who had budgeted living on a thousand dollars a month in remittances saw their usual monthly budget fall from P56,000 a month down to P40,000 per month. That is a huge fall, and meant a great deal of sacrifice and lifestyle changes for a good many people. On top of that, inflation was on the rise during the past year; meaning goods in the Philippines were increasing in price while the purchasing power of people relying on remittances was falling. A classic double-whammy! Those who have a small business earning a Peso income stream were much less affected by such gyrations in the value of the currency. For one, small business owners could adjust their budget easier because they knew how much they were earning in Pesos and did not have to worry about the impact a falling dollar would have on their budget. For another, they could also look at adjusting their own prices and pass on some of the cost increases wherever possible, provided such moves did not negatively impact their overall sales and profitability.
Having a Peso income stream is also important if you are worried about long-term uncertainty in relation to your savings. If you have a Peso income stream, you can rely less on your savings or nest egg that is likely to be tied up in a more stable or ‘hard’ foreign currency. Earning in Pesos can result in the ultimate protection of your savings — meeting your monthly needs entirely in Pesos, saving a portion of your business income in Pesos, and retaining your entire nest egg in a hard currency that can be invested prudently to allow for capital appreciation or if more conservative, for capital preservation.
Bottom line: Having the Peso income stream helps you when the dollar is weak, and can allow you to also retaining you nest egg which helps you when the dollar is strong. A true double-bonus!
So, how can you maximize this situation if your small business is providing you with positive cash flow? Keep separate currency accounts! Try to see if you can live on your earnings in Pesos. Invest your foreign currency savings in conservative investments that grow slowly but safely, and should you need to tap into them on occasion, try to only withdraw interest earnings and leave the principal untouched. If you are able to cover your living expenses and save Pesos, look at ways to grow your Pesos quickly. Many banks offer very attractive interest rates on Philippine Peso time deposits. One strategy may be to try to maximize such opportunities by allowing deposits to grow all the way up to P250,000 — the maximum insured by the Philippine Deposit Insurance Corporation. After 250K, one could then either open a new account at another bank and do the same, or perhaps look at converting excess savings above 250K back into a hard currency with the aim being to grow any foreign currency nest egg even further.
I hope this column gets small business owners and future entrepreneurs in the Philippines to start thinking about the benefits of even a small Peso-denominated income stream. As you can see, a Peso income stream can provide upside possibilities while at the same time limit downside currency-related risks. Good luck, and hopefully, happy saving!
Martin is an expat businessman based in Butuan City. Martin writes about business related topics here on LiP for those who want to engage in business here in the Philippines.