Tips, Gratuities and Service Charges

A little something extra. For the effort. I’m talking about tips and tipping. Not all small businesses have any forms of gratuity associated with good service, but many do. Food businesses. Bars and clubs. Tour guides. In a nutshell, gratuities of some form or another play a part in the compensation of employees in many of these types of businesses. If your business does involve gratuities, should there be an established policy in place when it comes to tips and other forms of gratuity? I do not believe there are right nor wrong answers because every situation will probably call for its own solution, but perhaps a little discussion on the issue will be of benefit to some readers of The Small Business File.

There are many different approaches that could be taken by small business owners when it comes to how tipping should be handled. For the sake of simplicity, let’s break things down into two camps. Those that have a policy, and those that don’t. In cases where tips are an infrequent part of the compensation of an employee, there probably isn’t much of a need for a policy on tips and gratuity. If one customer in a couple hundred is simply overjoyed with his/her service received and offers a small tip out of appreciation, then there’s hardly any need for a company policy. But if tips are frequently given, perhaps it is a good idea to come up with an agreed upon framework among staff on how tips should be handled.

Most of the time tips received can be viewed in one of two ways: (1) an individual tip for a particular person’s extraordinary efforts; and, (2) a tip that could be given for a great team effort. Having a policy in place in relation to who receives what portion of a tip or gratuity should be something talked about and agreed upon in most small business settings. In many parts of the western world, servers in bars and restaurants expect to keep their tips to themselves. Sometimes there are unwritten rules like sharing a portion of your tips with the kitchen staff or those who bus the tables. In the Philippines, this form of tip-sharing may also be present in many bars/restaurants, but many other restaurants owners I talk to (both foreign and local) instead opt for the pooling of tips and sharing among all hired staff. In many ways, this latter approach to sharing tips and gratuities is probably more in line with Filipino cultural values, so this could be why this type of ‘policy’, whether written or unwritten, is more common here than in other parts of the world.

There are also a growing number of establishments in the Philippines that include a mandatory service charge to the gross sales tally of each bill. Many restaurants that engage in this practice seem to have adopted a service charge in the 10 to 15 percent range. Again, this practice is relatively new, but from what I have discovered in talking to a number of staff in such establishments, the reasons for introducing the additional charge have nothing to do with tax collectors trying to stamp out the under-reporting of tips (a main reason for such forms of legislation in many Western jurisdictions). Instead, it seems many restaurants are adding a service charge for the sake of having a service charge! In some cases, the service charge does go to the hired staff. But there are cases where owners are simply pocketing all or the lions share of proceeds gained through this added charge.

Clearly there are issues to consider when contemplating how tips, gratuities and service charges should be handled within a small business where such additional forms of compensation may be a regular occurrence. Some owners might prefer that individual staff keep their tips to help encourage outstanding service. Other owners might instead prefer to see tips pooled so as to keep all staff members equally happy and productive. And other owners who implement service charges may want to be clear with their staff and their customers why and to whom any proceeds go. There doesn’t seem to be any cut-and-dry answer on how to address this issue, but some consideration and proper communication would probably go a long way in helping alleviate any misunderstandings and possible grievances from staff and customers alike.

How about you? If you have a small business, or have experience working in this type of business environment, please feel free to leave a comment and  share your philosophy on how and why you handle tips and gratuities a certain way.

F&B Insider: Shrinkage

F&B Insider is a special column that appears on occasion in the Small Business File. Each week the Small Business File addresses some interesting topic related to entrepreneurship or small business management in the Philippines. F&B Insider columns focus on issues of particular interest to those small business operators in the food and beverage and hospitality industries in the Philippines.

One of my favorite Seinfeld episodes was the one where George and Jerry try and explain ’shrinkage’ to Elaine. In case you need to refresh your memory, search Seinfeld and Shrinkage in YouTube, and you should get directed to one of the many clips related to this episode.

In the F&B industry, shrinkage means something totally different from what George and Gerry have in mind. And it doesn’t have anything to do with laundry either, as Elaine might have offered. Instead, shrinkage has to do with loss of product that occurs due to a variety of reasons.

The most common forms of shrinkage are related to losses of product in the beverage department of a business. Shrinkage can occur because of employee theft, inaccurate pouring, customer returns, poor handling resulting in spillage, or the accidental breaking of bottles. The best way to reduce as much shrinkage as possible are to limit opportunities for any theft, and properly train your bar staff. You’d be surprised at how few managers take the time to train their bar staff in exactly how they should pour drinks, maintain an uncluttered work station, and how to keep bottles and other stocks safely out of the main traffic areas of a restaurant or bar.

How can one limit pilferage? The easiest way is through proper supervision. It is much easier for an employee to steal when supervision is lax. I can’t tell you how many foreign business owners complain they are being robbed blind, and yet fail to see that when they are present, nothing seems to go missing. If you have been made to believe you can open a small bar or restaurant and then hand over management to somebody else so you can spend your days at the beach or lazing about, then I’m afraid you and your bar or restaurant will likely be going your separate ways in a rather short period of time. You really need to be physically present much of the time.

The other way to limit pilferage is to split the two ends of every sales transaction. What I mean by this is have servers be responsible for serving, and a cashier responsible for verifying orders and concluding any sales with the customer. If a server is responsible for both, it is easy for them to be tempted into serving the customer and accepting payment, but with the proceeds going directly into their pocket and no sale being recorded whatsoever. This tactic by unscrupulous staff members can devastate a bar or restaurant. Limit pilferage by being present as much as possible and try and split up the sales transaction by making sure there are separate servers and cashiers with different responsibilities.

Training staff properly is also an important step in reducing shrinkage. If a staff member is not told to pour exactly 1 ounce, and how much that is, it can be easy for a novice server to over-pour a drink. Your staff needs to be taught that every drop counts. This is especially true when you serve premium brands. Over-pouring house brands will sting the pocketbook a little. Over-pouring a premium brand can be extremely costly to the business. Train your staff to pour or serve the exact amounts.

Training should also include having a system for dealing with busy periods in a shift so as to avoid making the wrong order for a customer. Make sure there is a system for staff to know which order to work on and in what order. There is nothing more frustrating for an employee than to be given a bunch of orders at once. In many cases, somebody will end up with the wrong order. Wrong orders get returned, and this costs the business money. Furthermore, properly storing inventory saves money too. Keep bottles away from high traffic areas where they can get inadvertently bumped-into and broken. A little bit of good old fashioned organizing can save you losses of product.

Two final points. First, try and get into the habit of doing frequent inventory checks. The more frequently you check your inventory, the more likely it will be that staff will be concerned with properly pouring or serving the correct portions, and also feel less temptation when it comes to pilfering a free drink for their friends or fail to ring up every order made by a customer. Once you know how much inventory should be present and how much sales should have reduced the inventory, you get a pretty clear picture of just how much shrinkage you have in your operation. Frequent inventory checks also help you keep on top of your inventory — you are more likely to have a better handle on ordering stocks if you make regular inventory checks.

Lastly, remember that providing complimentary drinks or meals is something that needs to be monitored very closely. Every time you hand out something ‘compliments of the house’, you are giving away money, and this can be very dangerous to businesses that operate on very tight margins. If you do feel compelled to provide complimentary meals or beverages, make sure such freebies are accounted for. Actually note the loss in your sales journal, so you can see how they affect your daily take. When you institute this policy you will see exactly how much complimentary meals or beverages are costing you.

Good luck in finding ways to eliminate shrinkage in your F&B business. Until next time, Bon Appétit!

More and more expats and OFW’s are getting involved in small businesses that fall under the food & beverage industry umbrella. F&B Insider articles will focus on some of the key issues that can help small business owners gain an edge over other establishments in this very competitive industry.

Learning Curves

I just wrapped up teaching a class on Managerial Economics for MBA students this semester at Father Saturnino Urios University. One of the topics we covered was the use of learning curves in business. In a nutshell, learning curves are used by managers to help understand how organizations become more productive over time as people get better at doing their jobs. The basic premise is that as people get better at their jobs with time, they become more productive and the organization reaps the benefits when errors are reduced or corrected. The idea is simple. But to reap the benefits, people must learn to reduce their errors and make the necessary corrections.

What do learning curves have to do with this week’s Small Business File? Well, everything! Because this week I’d like to discuss how people, especially foreign small business owners, must make an effort to learn to get better at reducing their own errors in the Philippine context. Failing to learn from your errors in the Philippines will result is more failures in business, and in life in general. There is a real danger in relying on Western conventions when undertaking business in the Philippines. Why danger? Because the Philippines does not have the same business traditions, foundations and characteristics of other countries.

Too many foreign small business owners try to bring what they perceive are better business practices with them to the Philippines and expect those practices to result in success. Rarely does this happen. Now I’m not saying it is impossible to introduce small changes and create incremental improvements. But I am saying it is vitally important to remember: “When in the Philippines, do as the Filipinos do!”

After one has lived here long enough, many often learn that there are generally very valid reasons why things are done the way they are in the Philippines. What may appear to be strange, inefficient, or unproductive is often not the case. Laws, regulations, norms, checks and balances, employee and management training, wages — all of these factors and many more combine to form what have become generally accepted business practices in the Philippines.

Successful foreign small business owners work within the Philippine framework. Unsuccessful small business owners rage against the system and get absolutely nowhere. Complaining and making derogatory accusations towards Philippine business practices only alienates these small business owners to others, both foreign and Filipino. Instead of swimming upstream and crusading against Philippine norms, one should embrace the Philippine business culture for what it is and learn from it! This brings us back to learning curves.

The best way to make improvements in productivity for your small business is to learn from your mistakes and take corrective actions. It’s time to stop believing western methods are ‘correct’, when in fact they may not have increased your business volume, or worse, alienated many customers. If your suppliers are having trouble meeting your orders, find out why. Don’t simply jump to the conclusion that Filipino suppliers don’t know what they are doing and care less about your business. Many small business owners burn bridges this way. They don’t realize that stocks may not have arrived with the supplier yet — shipping companies face ship break downs or weather delays which cause shipments to miss by weeks sometimes.

I remember ordering supplies from Manila about three years ago and faced such a problem — there were typhoons in Luzon, and after the weather cleared up the ship to northern Mindanao was dry docked for a week for repairs. I received my order almost 3 weeks late. But that’s hardly the fault of the supplier I ordered from. I followed up with my supplier and the shipping company and learned about the cause of the delays. Both delays are a part of doing business in the Philippines.

Another foreign small business owner faced the same problem, but instead of investigating what the problem was, he simply called up his supplier, ranted about how backward the Philippines was and threatened to never do business with the supplier again. Bad move. The supplier simply decided not to do business with him again. Of course the foreign small business owner couldn’t find another supplier and his business failed soon after. I’m sure he continues to believe the Philippines ‘just doesn’t get it’. I am pretty sure it is he who just doesn’t get it. Typhoons do disrupt transport. Ships do break down. There aren’t many other alternatives when you think about it. Claiming this would never happen in a ‘western’ economy is ridiculous. Just ask anyone trying to get something delivered in one of the gulf-coast states after a hurricane has made landfall.

The lesson here is to respect Philippine business norms — build in appropriate times for delays; make sure you have an inventory system that can handle delays; be on good terms with suppliers so they can help you find alternate ways of solving your problem. You’d be surprised how easy it is to get help by simply asking for it nicely! Filipinos are used to the idiosyncrasies of doing business in the Philippines. Why not ask them to help you navigate through it? Seems to make a lot more sense than running down the business culture and wishing things worked ‘like they do in the west’ or wherever else.

Learn from your mistakes and take corrective action. Learn how to do things in the local context. Sure, introduce outside methods if they make a difference in day-to-day operations, but don’t be fooled into thinking such methods will always work. Sometimes they won’t. Don’t keep trying to force the issue. Learn that some methods and practices just won’t work. Learn from the experience and try to find out how you should be doing things to be more successful. Make the correction and be better off for it. If you’re interested in increasing productivity, adapt to local norms. You just may learn that doing so not only makes sense but improves your bottom line.

F&B Insider: Leasing Space

F&B Insider is a special column that appears on occasion in the Small Business File. Each week the Small Business File addresses some interesting topic related to entrepreneurship or small business management in the Philippines. F&B Insider columns focus on issues of particular interest to those small business operators in the food and beverage and hospitality industries in the Philippines.

Not many restaurateurs or bar owners start out with their own building in a prime location. In almost all cases, finding an appropriate commercial space to lease is the norm.

When thinking about where to lease a commercial space for your restaurant or bar, you really must follow the timeless adage: location, location, location! But what does that exactly mean for a F&B operation?

Ideally the location should be in an area where there is a high concentration of potential customers during the day and the night. This doesn’t mean your business will be open from breakfast to late evening, but it is nice knowing you have the opportunity to do so in such a high traffic location. You have flexibility to expand your hours if that is the case. The drawback is that rents are usually much higher in such prime locations.

The other option is to locate in a less prime location. This is not exactly a bad idea. In locating in not so prime locations, you get the opportunity to take advantage of lower rents and may face little or no competition in the immediate area. You may not have the visibility you would like when starting up, so sometimes this strategy works best for established businesses who can pretty much move wherever they want, knowing their customers will follow them.

Once you find the right location, you will have to talk to the owner or manager of the space to see if they will accept your offer to open a business in their space. Be prepared to be told ‘no’ if you plan on doing cooking of any nature. Many commercial building owners do not allow food-related businesses to open in their buildings, as there are increased possibilities of fires and/or pest-related problems. This is an extremely frustrating part of the search for an appropriate commercial space, but it is a very real problem.

When you find a space that does allow cooking, then the real negotiations regarding the lease can begin. In general, there are at least twenty important items to consider when contemplating signing a lease for your restaurant or bar. Three of the most common and important considerations are: (1) term of the lease and any renewal options; (2) base rent and security deposits; and (3) provisions for renovation and/or alteration of the space.

The first consideration is very important. There is no point opting to lease a space for the duration of say a year if you intend on spending a considerable amount of money renovating the space to meet the ambiance desired for your restaurant or bar. You really need to seek out landlords who will grant you at least a 3-year lease on the space. Furthermore, you should try and see if you can add in a clause allowing you the option to renew the lease for another 3-years once the initial lease is up.

The second consideration is linked to the first. You will need to negotiate the base rent for the space. Most commercial building owners want a regular monthly rental payment. These are the best kinds of landlords. Try and stay away from any landlord who asks for a base rent and a percentage of sales. You will find it very hard to make any money with leases that take base rent and a percentage of sales. It is not worth the trouble.

In addition to the base rent, landlords will want a security deposit that includes an advance rent portion and a damage deposit portion. There are many landlords who require a 6 month advance rental and a 3 month damage deposit. Try and stay away from such locations as much as possible – I’m pretty sure everyone could find a better use of capital than to tie it up in deposits. Good landlords will want to help you be successful so they get paid regularly. If you find a landlord who asks for 1 month of advance rent and 1 month of damage deposit, consider this a very favorable situation for your fledgling enterprise.

The third consideration concerns what renovations and space alterations will be permitted by the landlord. If you have serious re-design ambitions, you will need to make sure the landlord approves of any changes to his or her building or structure. Don’t be vague at this point. You don’t want to find out half-way through construction that the building owner will not permit you to make certain changes or add certain features to his or her building. If you stick to a basic design, you will encounter few objections.

Good luck in finding the space and lease that is most appropriate for your F&B business. Until next time, Bon Appétit!

More and more expats and OFW’s are getting involved in small businesses that fall under the food & beverage industry umbrella. F&B Insider articles will focus on some of the key issues that can help small business owners gain an edge over other establishments in this very competitive industry.

Best Addresses

Sometimes I take the little things for granted. Like all of you, I’m a busy person. Most of the time I assume that readers who come here to the Small Business File already have a fair bit of knowledge about small business. That’s simply not the case. I know there are people who are just starting out. I remember when I was first getting involved in entrepreneurial activities, and I’m happy to admit, I too was very ‘green’. So this week I’m going to offer my views and reviews of three websites I think offer excellent information to people who have recently been bitten by the ‘entrepreneurship’ bug. I’ll revisit this topic at different times in the future, so I’ll only start with a handful of sites today.

I personally find the three sites below are extremely useful. I can recommend them simply because they are comprehensive, and, in the case of the third site, laden with the correct information many small business owners need to not only understand, but to fully comply with the laws and regulations associated with undertaking a business venture in the Philippines. Moreover, these three sites offer both breadth and depth. What I mean by this is that most topics on small business in the Philippines that you could possibly think of are in fact covered, and normally in rich detail. In many instances there are links to related topics or articles that provide guests with more than a cursory understanding of the most pertinent issues associated with whatever happens to be the topic of interest.

The first site I would like to review and recommend is the website for Entrepreneur Magazine (Philippines). The website is no substitute for the actual print issue, but it is still an excellent resource, especially for OFW’s and people living abroad and thinking about opening a small business in the Philippines at some point in the future. This website contains many articles and links of use to entrepreneurs in the Philippines. There are sections on finance, technology, human resources, etc. Of course there is also information on current and upcoming issues of Entrepreneur Magazine (Philippines). The ‘workbook’ section of the site is especially good for those hoping to expand their list of small business ideas.

The second site I would like to review and recommend is the website for EntrePinoys. This particular website is one of the best internet ‘hubs’ devoted to small business investment and livelihood opportunities in the Philippines. The amount of excellent information on this site is very impressive. Guests can search for topics or can browse according to a number of categories that includes food related businesses, agricultural businesses, and a wide variety of other small business opportunities. There are even ‘How To” videos that guests can watch so as to learn different tips and techniques used in a wide variety of small business pursuits.

The third site I would like to recommend is the website for the Department of Trade and Industry in the Philippines. Every small business owner will have to register with the DTI before they begin operations, so I highly recommend visiting the DTI website so that you can get comfortable with the different rules and regulations required in establishing a small business in the Philippines. But the DTI website offers even more than the usual pages associated with rules and regulations. There is also a whole lot of additional information of use. There is information on upcoming trade fairs. There is information on upcoming trainings. And there is a very interesting section on the OTOP Program (One Town, One Product). If you want to learn what different towns in the Philippines are best known for in terms of local products or services offered, the OTOP site can help!

I hope you all decide to bookmark these sites and visit them regularly. If you’re like me, you’ll constantly be amazed at how much terrific information is available on these sites.

I would be interested to know what sites many of you small business owners find especially useful, so please feel free to submit comments on the websites you find are most useful for entrepreneurs and small business owners in the Philippines.

They Did It: RK Franchise Consultancy

‘They Did It’ is a special column that appears on occasion in the Small Business File. Each week the Small Business File addresses some interesting topic related to entrepreneurship or small business management in the Philippines. ‘They Did It’ columns showcase businesses developed by foreigners and OFW’s. The goal is to provide insights into how different entrepreneurs have found success here in the Philippines, and provide encouragement to others by demonstrating that running a small business in the Philippines is not only possible, but can be rewarding as well!

This week ‘They Did It’ examines the efforts of an Austrian entrepreneur, who has established a franchise consultancy firm here in the Philippines. RK Franchise Consultancy opened its doors in 1995, and is without a doubt one of the top franchise consultancy companies in the Philippines. Since opening, RK Franchise Consultancy has assisted over 350 Filipino companies in developing their franchise systems. The types of companies that RK Franchise Consultancy has assisted includes everything from food and beverage companies, to personal care companies, to computer businesses, clothing and retail businesses, and even gas stations and pharmacies.

Name: Rudolf Kotik

From: Austria

Residence: Cubao, Quezon City

Business Name: RK Franchise Consultancy

Business Description: RK Franchise Consultancy is a full-service franchise consultancy company in the Philippines. The company is based in Metro Manila, and has an office in Cebu City that handles services for the Visayas and Mindanao. RK Franchise Consultancy assists existing companies by developing franchise systems for them. Furthermore, RK Franchise Consultancy also helps individuals wanting to open a franchise by matching them with an appropriate company that offers franchises based on the individual’s various criteria and interests. For those businesses wanting to offer franchises to help grow their business, RK Franchise Consultancy offers a comprehensive package including: structuring the franchise; developing the franchise contract and related agreements; developing an operations manual and a franchiser’s manual; developing materials related to the business as well as training programs; developing guidelines for store uniformity and set-up; website development.

Q: Can you give our readers here at LiP’s Small Business File some background history about how and why you started up your consultancy business in the Philippines?

A: Before coming to the Philippines I had extensive experience in the European franchising industry. I realized that much of this experience could be used in the Philippine context, so that is why I decided to try and see how I could use my experiences and adapt them to the Philippine market. The decision to engage in this type of business has been very good to me, as I have been a franchise consultant in the Philippines for more than fifteen years now.

Q: What aspects of running this type of business do you like the best? Least?

A: What I like most about being a franchise consultant is meeting so many different people and the variety of businesses that are interested in developing franchise systems to grow their sales and develop their business in new markets. The least interesting aspect also happens to be a very important aspect, and that is going through and proof-reading the various franchising manuals my staff help develop with our clients. Most of these manuals run into the hundreds of pages, but they are critical components of every franchise system and must be developed with great care and attention.

Q: What are your keys to success?

A: I believe the keys to business success are in being very focused and very professional. We are 100% client oriented and strive to offer the best service possible. As a company, we try to be both flexible and innovative when it comes to offering tailored services to meet our client’s needs. This is a major key to our success and helps us stay one step ahead of a number of competing consultancy companies.

Q: What are the biggest challenges in running this type of business?

A: To be honest, there are very few major challenges in helping our clients develop a franchise system that meets their business needs and goals. I see it more as a pleasure than a challenge when it comes to developing a franchise system for any one of the companies we work with. We enjoy what we do at RK Franchise Consultancy!

Q: What are your future plans for the business?

A: Franchising in the Philippines is still growing by leaps and bounds. In many ways the market for franchise development in this country has enormous potential and there is a tremendous amount of room for continued growth. The prospects are great for RK Franchise Consultancy and for a number of the other leading franchise development companies in the Philippines.

I would like to thank Rudolf for providing us with some insights into what it is like to run a successful consultancy business here in the Philippines. Clearly it is possible to harness previous life and professional experience and use these experiences to develop a niche consultancy business in the Philippines. There are many different possibilities and potentially lucrative niches waiting to be filled. If you are an expert in a particular field and have a passion to help others achieve their own personal or organizational goals, you too may be able to open your own successful consultancy service in the Philippines.