Sunday, March 15, 2009

Basic Small Business Management: Why Some Businesses Fail?

It always pays to read good business books. Why? Well, you’ll learn a lot. If you’ve been thinking of starting a business, or if you have been running your own enterprise for more than a decade, it never is a waste of time to read because in the process, you are able to update yourself to whatever changes or trends that are going on in your industry.

Let me highlight something on this particular post – what makes a business successful? Is it pure luck? By the way, is there such a thing as “luck” or is it just being the right person in the right place at the right time with the right goods or services to sell to the right people (which can happen if you’re observant of the industry changes and trends and has a keen eye for new opportunties)? How about destiny? Say, you were born into Filipino-Chinese parents, are you destined to get rich and become the next whatever tycoon?

So why do so many businesses fail? According to Clifford Baumback’s book on Basic Small Business Management, it is commonly due to POOR MANAGEMENT. “It is poor management…that is at the root of most of the operating problems of small business,” Baumback said. And poor management is evidenced by conditions such as:

1. Inventory Imbalance. According to Baumback: “Many business failures are the result of poor judgment in buying.” If you’re into retailing, maintaining balance in your inventory is crucial. Furthermore, he said, “An inventory may be out of balance in either direction; that is, it may be too large or too small. If it too large relative to the demand for it, the cost of carrying an inventory will be higher than it need be. On the other hand, if the inventory is too small relative to the demand for it (that is, if inventory turnover is too fast) stockouts will occur.”

2. Overextension of Credit. “Business is dependent on a constant rotation or turnover of capital. Some small businesses get into hot water because they extended unwarranted credit in their eagerness to make sales.”

3. Excessive Overhead and Operating Costs. Chinkee Tan said in his interview on Go Negosyo that the secret to most business successes is keeping low overhead costs. According to Baumback, “Some small businesses tie up too much money in fixed assets, while others lack adequate expense controls, and operational expenses become top-heavy.”

4. Cash Flow Difficulties. Baumback said, “In cases where a firm’s need for cash is greater than its cash inflow, the firm is not able to pay its bills when they become due and therefore is technically insolvent.” I guess, in most cases, it’s true after all – that you (constantly) need money to make money.

5. Competitive Weakness. According to Baumback, competitive weakness happens when (1) the firm is unable to overcome the lower costs of its more efficient competitors, (2) poor location, (3) business operators fail to understand the changing world about them.”

Wednesday, March 11, 2009

Managing Asia: Christine Tan's Interview with John Lim Gokongwei, Jr.

Hello everyone. Have you ever watched Managing Asia on ANC? I’m not sure if it’s still being aired, but I haven’t seen an episode lately. Anyway, I’ve been browsing the Web here and there (no I’m not wasting my time; I’m researching :-)) when I came across CNBC’s website. I didn’t know (just until the other day) that they have quite a collection of podcasts that you can freely download to your computer or mobile phone, iPhone or iPod, smartphone, etc.

I scrolled up and down and found this very short (yet interesting) interview with John Gokongwei. Here it is:

(START)
Welcome to Managing Asia, I’m Christine Tan. To mark the program’s 10th anniversary, this week, we put the spotlight in one of Asia’s visionaries, an entrepreneur with a classic rags-to-riches story. He has built an empire in the Philippines – with business in everything, from food, air travel to property development. He is Filipino tycoon John Gokongwei.

CHRISTINE TAN: “A true entrepreneur can find opportunities anywhere,” words of John Gokongwei – Filipino tycoon and one of the richest people in South East Asia. Known for his sharp intuition and business savvy, Gokongwei has done exactly that. He has found success by seizing opportunities even in his semi-retirement days in the past decade.

JOHN GOKONGWEI: I see an opportunity and go in. If that is an opportunist then I am an opportunist. But before we go into anything, we really make a study of what…that’s why we have been…90% successful in all our ventures.

CHRISTINE TAN: With his tough as nails reputation, the taipan has built up JG Summit into one of the largest conglomerates in the Philippines, leading in the food, airline and property sectors.

JOHN GOKONGWEI: When you go into business, then you are successful, you’ll learn. And you get…you feel..you know…you can compete against anybody, that’s why I, my personal feeling is, I live from competition, otherwise you will (weather?) away.

CHRISTINE TAN: Gokongwei who turned 80 last year, was born onto wealth, but he lost everything when his father died and his mother moved to China during World War II. At the young age of 15, he had to fend for himself.

JOHN GOKONGWEI: The only thing open for me was either I become a peddler, work for somebody else, or…so I decided to get a bicycle and become a peddler. And it was a very exhilarating experience. I’ll never forget it. In fact, I would look back as one of my, best time of my life.

CHRISTINE TAN: What early lessons did you learn from your childhood struggles and hardships?

JOHN GOKONGWEI: Most important thing is to have people trust you, work hard, try to get as much education as you can, but there were no schools open then. And (austerity?) to a certain degree. And the other virtues, let’s say, Confucius, I think I believe in that, in fact I practice that up to this day.

CHRISTINE TAN: Gokongwei made his first million when he was 30, running a cornstarch factory. But he struck a bigger goldmine producing snack foods. In the 1990s, JG Summit diversified into other businesses, including telecoms, petrochemicals, aviation and banking services – a timely move which analysts say helped the company weather through one of Asia’s most challenging periods – the 97 crisis.

JOHN GOKONGWEI: Like our food business, in a recession, I have noticed the last 40 years, it’s never really been affected. Airplanes, very bad. Because peoplehave no money to travel…but they eat, they have to eat. So it depends on what business…but one is important, you must have reserves. You must have reserves. In a crisis, you don’t declare default. Because if you…are…declared…in default, you are in big trouble.

CHRISTINE TAN: Since then, Gokongwei has aggressively expanded the company’s footprints abroad. So where does the visionary get his ideas from?

JOHN GOKONGWEI: I travel a lot. I read a lot. Ask me…about…very big entrepreneurs or business people in the West or Japan, or even Asia. What they do. I spend 2-3 hours reading every night.

CHRISTINE TAN: How do spot business opportunities just by reading?

JOHN GOKONGWEI: No. you read then you know what’s going on. Then you travel around, see, like C2, that’s already a very…the exceptionally successful. We launched it 2 years ago. I know about the thing by travelling in China. I see…Chinese…drink…tea for free…you know, status symbol. Everybody has that. So, I had a meeting among our people, we decided to go into it, so we’re doing a very big way. And the success…was also in a very big way. The…we were…astounded by the results.

CHRISTINE TAN: Do all your business ideas come into fruition?

JOHN GOKONGWEI: Not all. Not all. There are some that are not very successful. We had an ice cream project that we had for 20 years. We decided to close it. Anything that doesn’t give us the return, we just close it.

CHRISTINE TAN: Your move into aviation and telecommunications really surprised everyone. How did you calculate the risk when it comes to entering new businesses?

JOHN GOKONGWEI: First of all, I have 4 rules. First, we make a study whether we can do it. Secondly, do you have the capital or deep pockets needed? Third, do you have the people and can you compete? The fourth is, can you sleep at night? I guess I can have all 3, sleeping at night maybe I’m having a little difficulty, but I actually, during the daytime, naps, so I recover. Sometimes at night, you know, when you’re entrepreneur, you’re not 9-to-5, you always think of the problem, you know. But I usually don’t, I just go to sleep, I love to sleep, it’s one of my “virtues” I think, I love to sleep.

CHRISTINE TAN: So nothing keeps you up at night at all?

JOHN GOKONGWEI: Not nothing. Some do.

CHRISTINE TAN: Like what?

JOHN GOKONGWEI: Surprises, maybe.

CHRISTINE TAN: Surprises or crises?

JOHN GOKONGWEI: Or crises, either one, you know.

CHRISTINE TAN: Looking at your empire, the Gokongwei empire, spanning across 8 core business, do you ever get worried that the company gets too big, too clumsy and too slow, slow-footed?

JOHN GOKONGWEI: We’re in 8 areas, and we feel we’re not going to go beyond that, we’re doing very well in the last 5 years. It’s been increasing. I have put in place a very good, we have a foundation that owns 30% of the company now I gave half of my shares to the foundation. My son is running it as president. My brother is chairman. And the 2 of them combined, what, 50 years of experience in the company, so if I’m not around, they can run it as well, maybe even better, who knows. And we have a complete line up f very good professionals though. We had a, McKenzie did a thorough job of analyzing our company, about 8 years ago, and they recommended that, some steps which we are taking, and which we feel is, with some revisions, very useful for us, and this has made us a more efficient company, and more willing to take risks that are more understandable risk. So I think in the end we are in the right place and our, looking at competition, I think we’ll do well.

CHRISTINE TAN: Where do you see the company in the next 10 years?

JOHN GOKONGWEI: I don’t think I’ll be around, but, it’ll be in good hands. Top, still, will be run by members of the family, the lower, the presidents and below will be run by professionals. And we’ll be very competitive, I’ve seen around the kind of competition and, we’ll survive.

(END)

I guess Mr. Gokongwei was quite nervous during the whole interview. If you want to listen to the podcast yourself, go to Managing Asia Podcast.

Monday, March 9, 2009

Business Money Management: Bam Aquino’s Interview with Eduard Francisco

As promised over a month ago, here’s Bam Aquino’s interview with Mr. Eduard Francisco of FINEX. It’s a bit incomplete. I missed the first few parts of the interview. My apologies, to my dear readers.

(START)
BAM AQUINO: Cashflow, that is something that an entrepreneur, I see probably, don't know that it's an important thing but it's not the one focused on in the book; it's not the one focused on in school. Tell us what's the importance of cashflow in the business.

EDWARD FRANCISCO: You're right. People think about profit. Sometimes that's a misnomer because the reality is...In fact, I guess, in the financial crisis, investors are not looking at profitability anymore of a company; they are looking at the ability to generate cash.

MONEY MANAGEMENT: In a crisis, investors are not looking at the profitability of a company but its ability to generate cash.

Because there are a lot, I guess, in the accounting side, non-cash items or things below the bottom line that are really important in terms of cash collections. Like even managing working capital, you like to manage that well.

BAM AQUINO: How are you able to convert all of these big concepts, financial concepts to, you know, the small business that you’ve run, for example, I mean for entrepreneurs it’s different when you read it in a book or pick it up in class versus actually applying it in your actual business?

EDUARD FANCISCO: You’re right because of course we go to school, we read books, but then at the end of the day it’s basics lang eh. In fact this year, we should all be going back to basics. It can be as simple as making sure that you manage your receivables, you always follow-up when something is supposed to be paid, you just make sure that you balance your cash at the end of each day sa kahera, even if it’s non-collecting na cash, and try to make sure that you pay your suppliers on time; you make that all you inventory nakabilang para at least, when you reconcile everything it’s there. It’s doesn’t have to be something fancy but as long as you know where things are, that should help you in today’s times.

MONEY MANAGEMENT: Back to basics: Make sure that you manage your receivables; balance your books; pay your suppliers on time; update your inventory.

BAM AQUINO: Is it true Ed that a lot of things fold-up because of poor cashflow management more than a poor business plan, for example?

EDUARD FRANCISCO: Yes. Because there are a lot of companies that do not push through, not because for lack of planning, but, in fact, I think, the problem sometimes is that they grow too fast. And when you grow too fast, it’s a good problem to have but if you don’t have enough cash, kung maiksi ang pisi mo, mauubusan ka. So you have to manage the cashflow.

MONEY MANAGEMENT: Many businesses fold due to poor cashflow management. Always have a financial back-up.

BAM AQUINO: And usually when cash is a problem, would, should you go to a bank or should you borrow? What should be the system there?

EDUARD FRANCISCO: Ok. That’s a good question. Ideally we should always have back-up financing. But the reality also for startup companies is bank financing is not yet available eh. Usually the source of cash for a startup, let’s say you’re a retiree or an OFW, it’s your own money. And then in addition you should have a backup, you should ideally have money from, maybe you get an advance from your “mana,” or you borrow from your mga kamag-anak, from your Ninongs, Ninangs. You should have that buffer kasi nga mauubusan ng cash at one point.

BAM AQUINO: And that buffer he tells is another topic for another show kasi that also pretty complicated. Talking about your personal finances, it’s sort of a rule that you should never mix your personal finances and the company’s finances, but as a startup, it’s inevitable that you do that, right?

EDUARDO FRANCISCO: Correct. It’s inevitable. What you have to do is just be ready to, I usually tighten your belt. Because for example you’re an entrepreneur; you put your nest egg into this business, you make sure that you agree with the family that certain cost, you only manage at a certain cost; you do not suddenly get advances from the company to have expensive dinners or trips or to buy a new PSP or iPod for your kids.

BAM AQUINO: Talking about personal finances, what part of your business should you put into savings or retained earnings, and what should you actually liquidate for you, for example?

EDUARD FRANCISCO: Sure. I guess ‘yun nga, you set up a budget at the initial stages palang, you manage that budget; you should not pull out any money if you can, that’s the ideal scenario. Because if you have a successful business, you want to plow all your earnings into the company. It is cheaper to plow it back than to borrow money kasi. And that makes he company stronger.

MONEY MANAGEMENT: If you have a successful business, you may want to plow back all your earnings back into the company to make it stronger.

BAM AQUINO: Is there a, like a rule, on how much savings you should put in? ikaw 100% ‘di ba? But there are some people who start their business, that they don’t have salaries, they’re just hoping na, kung kumita dun lang sila kukuha ng, you know, for themselves. Is there a rulethere, or maybe you should just give yourself a salary?

EDUARDO FRANCISCO: I agree with you. I think I prefer that having a salary. At least it’s a minimal salary muna in a startup stage. Don’t make naman super malaki because the company is not making money yet. You get a salary. You make your budget, household budget based on the salary you’ll get, minimal. As it becomes more profitable, you can increase it. And all the excess profits you retain as the company gets to the initial humps, then you probably can take dividends out already.

BAM AQUINO: Let’s say for example Ed, you have your retained earnings and I know you’re the Head of the BPO Investment Corporation , so would it be wise for you to invest that money again, especially these days that everyone ‘s saying na you know, medyo nakakatakot to invest in anything, at least in financial instruments, no. so is that advisable if you have some retained earnings to invest it again in something?

EDUARDO FRANCISCO: Yup. That’s also good. If let’s say, you don’t have the money to grow your business, medyo it’s maturing o there’s no need, you can take out some of the money, and you’re right, put it in a safe investment. It’s up to you naman because if you’re aggressive, if you see other good opportunities in other start ups, why not, if you’re diversifying. If you want some certainty then you put it in good banks, para at least, or government securities para may, you can sleep well also.

BAM AQUINO: For entrepreneurs, basically Ed, do you have, like, some tips, final tips for them on managing their money and running their business?

EDUARDO FRANCISCO: sure. I think the key of course is having a business plan; execute it well; keep your eye on the ball; don’t lose track; but also have longer cushion, long pisi. Be patient because these things are not suddenly goldmines an sometimes you try to pull out the plug but in reality, if you stay in longer, you’ll really succeed. And I guess, at the end of the day, you should believe in somebody up there who will support you.

MONEY MANAGEMENT: The key to a successful business enterprise is having a good business plan and executing it well.

BAM AQUINO: Who will help you out, ‘di ba? Ed, in your own experience, for example, in Little Gym and your food processing company, maybe you can share with us of your experiences there, in running the money management matters in those companies.

EDUARDO FRANCISCO: Basically, at least, corporate transparency, even at the SME level is important. So you discuss a lot with the Board, you talk about the weaknesses, the advantages, the risks. But at least you discuss them. It’s good to know so you know kung anu ang pinapasukan mo. And then at the same time, then just have to work well together, at least, we plan, and then we also visit, it’s a good, really good to get a sense of how the traffic is, when you have a store, you visit, you see what it’s like, you talk to the people para you always, you’re feet is always on the ground.

BAM AQUINO: Do you have a sort of, parang schizophrenic ka ba when it comes to being the corporate guy and being the entrepreneur or are you able to sort of put things together?

EDUARDO FRANCISCO: No. It’s very different. In fact, I’m sure your viewers have the same concern e. some of the retired corporate people have always been on the other side. They always had long deep pockets. Now it’s your own money already. So you really have to be more careful.