How Risky is Your Business?

Starting a business is no easy task. And growing it and making it sustainable is twice the difficulty of starting it. Ask any entrepreneur about running a business and you will get an endless stream of anecdotes about the hardships and challenges of developing and growing the enterprise. Of course there is the other side of the coin which is about the excitement, fulfillment, and the fruits of all the hardships that go with being an entrepreneur.

Successful entrepreneurs won’t need to put in words the benefits of entrepreneurship. They are all displayed for us to see---the affluent lifestyle, and for some who lead simple lives, the aura of happiness from fulfilling one’s goal of business success.

Of course Small Business Corporation won’t be around if there was no significant upside in entrepreneurship. For one, the reason for being of the Corporation is to increase the probability of success of the Filipino entrepreneur by providing financing and other services such as technical and marketing, to develop and grow Filipino mSMEs into globally competitive enterprises.

In an interdependent, global environment, there are so many threats to the success of mSMEs.

We’ve seen it happen before and see it happening again today. While the Asian financial crisis of 1997 affected even the developed countries of the world, the financial catastrophe of an imprudent system of investing such as the subprime real estate market in the U.S. has today led to the fold up of established and respected financial institutions and caused the growth of the U.S. economy to go into low gear.

Already, its ill effects are rumbling across the globe affecting small businesses in our region thousands of miles away.

Today the value of Philippine exports to the U.S. has fallen resulting to losses for our exporting mSMEs.

Among our mSMEs, therefore, only those who are able to identify and address these threats will be able to sustain themselves and survive.

Ideally, it would have been better for them if they were able to identify the risk early on and prepared for such a contingency. This is where risk management comes into the picture. An entrepreneur who knows how to manage risks will likely survive economic reversals.

Ronald Inciong, Manager of the Credit Review Department of the Risk Management Unit in SBGFC recognizes the value of risk management and believes that like the entrepreneurs it serves, SBGFC as a financial institution and being entrepreneurial itself, must manage the risks relating to its financing operations.

Accordingly, SBGFC recognizes that mSME lending is inherently risky and that it should be able to manage the risks associated with mSMEs for it to be successful in its development efforts.

Inciong said that in using a risk rating model as a tool to manage credit risk, SBGFC has identified the factors of risk which can spell the difference between a successful and a failed mSME.. Today all its borrowers, especially under the retail lending program, are risk rated. So every borrower is evaluated and given a risk rating which shows the level of credit risk entailed in lending to said borrower.

“Early on we already know the areas of risk of the enterprise and are able to mitigate these risks,” explained Inciong. Consequently, a high risk borrower will need to be monitored more frequently and the loan would be priced aptly, which in this case, given a higher interest rate than lower risk borrowers.

Based on the Borrower Risk Rating (BRR) system, critical factors have been identified that would tell SBGFC whether a borrower is risky or not. “With the use of the BRR system we can immediately see the areas of risk in an enterprise’s operations and know the degree of likelihood it would default in loan repayment, said Inciong.

So what makes an enterprise risky? In reviewing credit applications, Inciong already has a list of what makes for risky borrowers. Following are the factors or situations that Inciong believes, as shown by his experience, make a business a credit risk.

• Poor liquidity and negative cash flows – the enterprise is having difficulty servicing its current indebtedness, because its liquid assets is not enough to pay them off. Simply put, when the enterprise does not have the money to pay its immediate loans, then this is a red flag which would warn both the borrower and the lender that cash is tight and a default in its obligations is a real possibility. This also impacts on the debt servicing capacity of the enterprise. When the cash flow is negative then, the ability to repay its loans will suffer.

• Inefficiency in operations – this is evidenced by poor activity ratios such as accounts receivables, accounts payables and inventory. Any of these balance sheet items going beyond the average 180 days aging, discounting any possibility of being caused by natural market movement of the product or service, extraordinary events or natural calamities, means inefficient operations which may eventually result in difficulties in cash flow management.

• High leverage – enterprises that are with huge debts are always a risk. Debt financing should be leveraged carefully with the revenues being generated by the enterprise. While it is good for the business to finance part of its growth through debt, it should be within certain parameters so that there would not be a mismatch between the earnings from the use of the funds and the cost of the borrowing.


• Inexperience of owners and management – this is self-explanatory. An entrepreneur who lacks experience will always encounter more setbacks and challenges than one who have been through it all before and would know how to handle different situations in running the business.

• Poor health, Old Age, and Lack of Succession – old entrepreneurs who are sickly and are hampered by health issues will tend to perform poorly in business. More significantly, the possibility that such an entrepreneur will succumb to the sickness leaving the enterprise impaired and non-operational is always present. A business whose owner does not have a successor will most likely perish with the entrepreneur.

• Poor financial capacity of Owners – when the owners have poor financial capacity, meaning they do not have any personal assets or have zero net worth (outside of business assets), then it would be difficult for them to inject money into the business should they fall into hard times or crisis situation. This makes the business unsustainable in times of crises.

• Bad Attitude to Banks - they are borrowers who are with negative records with their banks. These adverse records show that the entrepreneur has the tendency to violate the rules of the banks and incur past due on their accounts. At worst, the bad attitude is a reflection of bad character which may affect negatively the other aspects of running the enterprise.

• Dependency on a few suppliers – dependency on a few suppliers will make a business riskier than others. A failure in the supplier will also affect production of the enterprise. A simple scenario wherein when there is no supplies, means no production thereby impairing the business operations.

• Decreasing Sales – a trend of decreasing sales for the past three years does not augur well for the enterprise. The industry where the enterprise belongs would most likely be on the decline. In such a case, it would be better for the entrepreneur to start up another business in another industry.

• Dependency on a few clients – when your business is in this situation wherein it is dependent on just one or two customers, any reversals encountered by your clients will become like a contagious disease and adversely affect your business as well. A better situation is the opposite wherein the there is no dependency on a few clients and regardless if one or two of them goes bankrupt, your enterprise won’t be pulled down by such an event.

• Low production capacity – If the enterprise has limited capacity to produce its product or service, it cannot meet any increased demands for its product or service. This means its potential for growth is limited and therefore hinders the development of the business. Should such an enterprise attempt to service a big requirement beyond its production capacity, it exposes itself to risk of not being able to serve the contract.

• Poor location – Location in this instance refers to proximity and acessibility to its market and suppliers. Usually, a business far from its market and suppliers and business infrastructures will incur additional transport costs, or if not, find itself hampered in its marketing, collection, and delivery efforts.

Presence of any of the foregoing conditions does not mean the businees cannot be financed. “The important thing,” said Inciong, “is that we know the areas of risk and are able to impose safeguards to lessen the risk of default.” For the entrepreneur, knowing these risk factors helps in identifying areas for improvement of the enterprise, and hopefully increases the potential for its growth and development.

Competitive Advantage: the Key to the Global Market

Despite its human, natural and agricultural resources, the Philippines cannot boast of global brands which can compete in the world’s marketplace except for one or two which are known internationally --- San Miguel beer, and perhaps Jollibee.
Our country has been known to be a major producer in the 1900s of agricultural products and ranked among the top in the world. We had abaca, then known as Manila hemp, sugarcane, coconut in the form of copra, and lumber from our then abundant forest resources.
But the competition, technology and the unsustainable exploitation of these resources enabled the world’s markets to find cheaper and better substitutes. These commodities eventually lost their appeal and were overtaken by other commodities far better and cheaper from other countries in the export market.
It will be noted that our top exports then were in the form of raw materials or semi-processed produce which had little value added. Contrast this to the other economies in the world that developed new technology to produce finished products which gave them the competitive advantage.
Our exports then lost, or did not have, competitive advantage so other countries outpaced and outgrew them in the market.
Today, the competition to sell in international markets is as intense and is more difficult. But competitive advantage remains to be a necessary ingredient for any successful entrepreneur to break into and maintain a strong foothold in the export market.
Yes, if you cannot compete well, you are doomed to failure especially in an environment of high risk and constant and fast paced changes. An understanding therefore of the concept of competitive advantage will help the entrepreneur focus on what is important and to build on a business with innate and developed competitive advantages.
As defined by Michael Porter, Harvard University Professor and leading authority in competitive strategy, competitive advantage is the position the firm occupies against its competitors in terms of a superior product and service, and cost leadership.
According to Porter, this position of sustainable competitive advantage is created through cost leadership, differentiation or focus. Cost advantage occurs when a firm delivers the same services as its competitors but at a lower cost. Differentiation advantage occurs when a firm delivers greater services for the same price of its competitors. They are collectively known as positional advantages because they denote the firm's position in its industry as a leader in either superior services or cost.
To further simplify the definition, your business has competitive advantage when you are able to do something different than your competitors in such a way as to make it difficult to imitate. When your ability as a business to create value added products for your customers cannot be duplicated or imitated by your competitors, then you have competitive advantage.
This means that the higher the value delivered to your customers and the lower the cost it takes to produce that value, the stronger the firm’s market position.
However, it is difficult to sustain competitive advantage because the competition will always try to copy your technology and strategy, and steal your customers from you. To be sustainable, the entrepreneur must do two things: set an objective to attain superior market position through value added products and services and put in place a strong defense to protect the market position.
Value added products and services can be developed by using firm-specific resources that cannot be easily imitated or acquired. Examples of these resources are: patents, trademarks, proprietary rights to technology, reputation, customer base and brand equity.
Another valuable input to value added products and services are the capabilities of the firm in the way it does its work. An example of a capability is the ability to bring a product to market faster than competitors. Or the ability to create unique design concepts. Such capabilities are embedded in the routines of the organization and are not easily documented as procedures and thus are difficult for competitors to replicate.
Taken together, resources and capabilities make up the firm’s distinctive competencies. These competencies enable innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage.
Knowing all these, we go back to the most important question, what is the competitive advantage we need to develop as a country to create competitive global brands?
For the Filipino entrepreneur this is an important point to ponder. Indeed knowing one’s competitive advantage will increase his chances of success in competing globally. His efforts would be better used if focused on an enterprise with inherent competitive advantages.
Venturing a conjecture at this point, as a country consisting of numerous tropical islands, populated with a diverse species of flora and fauna, with a climate making possible all-year-round agriculture, and with a robust young and literate population, our best bet would be in agriculture related enterprises specifically agri-businesses, aquamarine, biotechnology, pharmaceuticals, and in the services related enterprises such as Business Process Outsourcing (BPOs), Information Technology, Medical and Entertainment services.
In tandem with these resources, SMEs must develop their capabilities so that taken together (resources + capabilities) they will have competencies that would be difficult to copy.
Once the Filipino entrepreneur consciously identifies and exploits his competitive advantages, then we will see more Philippine-made products and services competing in global markets.

How to Prepare Your Business Against Disaster?

If there is something good from the spate of disasters that have befallen our country in recent months, it is the realization that many of our SMEs are ill-prepared and not protected against business continuity risks. In short, they are not protected against events that would result to the business shutting down.

This grim realization have surfaced after the devastation brought about by typhoons Ondoy and Pepeng. It is a fact that most, if not all SMEs have not provided for business continuity risks; such that when disaster struck on that fateful month of September, many did not have the wherewithal and the plan on how to continue with the business.

If you observed the SMEs affected by the floods, it was already two months after the disaster and yet many businesses remained closed. Apparently only those with a disaster plan or with enough back-up resources were immediately on their toes and starting up once again. Those not prepared will most likely be closed for good.

If it is any consolation to us, we are not alone in this kind of predicament. In fact even in developed countries, it was found out by formal studies that SMEs are likewise not protected against disasters and do not have a business continuity plan.

New independent research, commissioned by the British Insurance Brokers' Association (BIBA), revealed that millions of small and medium sized enterprises (SMEs) across the UK are failing to protect themselves and their employees against emergencies such as fire, flood or an act of terrorism.

As a result, BIBA has launched a high profile campaign to encourage SMEs to get serious about business continuity, the practice of ensuring that businesses are protected in the event of an emergency.

Estimates suggest nearly 20% of SMEs suffer a major interruption every year. Further research suggests 80% of businesses affected by a major incident close down within 18 months, and 90% of those who lose their data are forced to close down within two years.

Small enterprises in particular suffer severe financial loss if closures prevent or restrict trading over a period of weeks or even months.
A Business Continuity Plan (BCP) is the least expensive insurance any company can have (especially for small companies, as it costs virtually nothing to produce). Unfortunately, many companies have never taken the time to develop such a plan.
Here you will see suggested steps and considerations, in an abbreviated way, for small companies to create a BCP that will improve their chances of continuing operations during or after significant disasters. Development of a BCP for larger companies is not within the scope of this document.
Business Continuity Plans are sometimes referred to as Disaster Recovery Plans (DRP) and the two have much in common. However a DRP should be oriented towards recovering after a disaster whereas a BCP shows how to continue doing business until recovery is accomplished. Both are very important and are often combined into a single document for convenience.


Steps
1. Document internal key personnel and back-ups. These are people who fill positions without which your business absolutely cannot function – make the list as large as necessary but as small as possible. Consider which job functions are critically necessary, every day. Think about who fills those positions when the primary job-holder is on vacation. Make a list of all those individuals with all contact information including business phone, home phone, cell phone, pager, business email, personal email, and any other possible way of contacting them in an emergency situation where normal communications might be unavailable.

2. Identify who can telecommute. Some people in your company might be perfectly capable of conducting business from a home office. Find out who can and who cannot. You might consider assuring that your critical staff (identified in Step 1) can all telecommute if necessary.

3. Document external contacts. If you have critical vendors or contractors, build a special contact list that includes a description of the company (or individual) and any other absolutely critical information about them including key personnel contact information. Include in your list people like attorneys, bankers, IT consultants...anyone that you might need to call to assist with various operational issues. Don’t forget utility companies, municipal and community offices (police, fire, water, hospitals) and the post office!

4. Document critical equipment. Personal computers often contain critical information (you do have off-site backups, don’t you?). Some businesses cannot function even for a few hours without a FAX machine. Do you rely heavily on your copy machine? Do you have special printers you absolutely must have? Don’t forget software – that would often be considered critical equipment especially if it is specialized software or if it cannot be replaced.

5. Identify critical documents. Articles of incorporation and other legal papers, utility bills, banking information, critical HR documents, building lease papers, tax returns...you need to have everything available that would be necessary to start your business over again. Remember, you might be dealing with a total facility loss. Would you know when to pay the loan on your company vehicles? To whom do you send payment for your email services?

6. Identify contingency equipment options. If your company uses trucks, and it is possible the trucks might be damaged in a building fire, where would you rent trucks? Where would you rent computers? Can you use a business service outlet for copies, fax, printing, and other critical functions?

7. Identify your contingency location. This is the place you will conduct business while your primary offices are unavailable. It could be a hotel – many of them have very well equipped business facilities you can use. It might be one of your contractors’ offices, or your attorney’s office. Perhaps telecommuting for everyone is a viable option. Wherever it is, make sure you have all the appropriate contact information (including people’s names). If you do have an identified temporary location, include a map in your BCP.

8. Make a "How-to". It should include step-by-step instructions on what to do, who should do it, and how. List each responsibility and write down the name of the person assigned to it. Also, do the reverse: For each person, list the responsibilities. That way, if you want to know "who is supposed to call the insurance company?" you can look up "Insurance". And if you want to know what Joe Doe is doing, you can look under Joe for that information.

9. Put the information together! A BCP is useless if all the information is scattered about in different places. A BCP is a reference document – it should all be kept together in something like a 3-ring binder. Make plenty of copies and give one to each of your key personnel. Keep several extra copies at an off-site location, at home and/or in a safety-deposit box.

10. Communicate. Make sure everyone in your company knows the BCP. Hold training classes – mandatory training classes – for each and every employee whether they are on the critical list or not. You do not want your non-critical staff driving through an ice storm to get to a building that has been damaged by fire then wondering what to do next.

11. Test the plan! You’ve put really good ideas down, accumulated all your information, identified contingency locations, put your personnel list in place, contacts, service companies, but can you pull it off? One thing you will definitely learn in the test is that you haven’t gotten it all just exactly right. Don’t wait until disaster strikes to figure out what you should do differently next time. Run the test. If you make any major changes, run it again a few months later. Even after you have a solid plan, you should test it annually. Pick a day – let everyone know what’s going to happen (including your customers, contractors and vendors) then on that morning, act as though your office building has been destroyed. Make the calls – go to the contingency site.

12. Plan to change the plan. No matter how good your plan is, and no matter how smoothly your test runs, it is likely there will be events outside your plan. The hotel you plan to use for your contingency site is hosting a huge convention. You can’t get into the bank because the disaster happened on a banking holiday. The power is out in your house. The copy machine at the business services company is broken. Your IT consultant is on vacation.

13. Review and revise. Every time something changes, update all copies of your BCP. Never let it get out of date. An out-of-date plan can be worse than useless: it can make you feel safe when you are definitely not safe.

Tips
• All critical personnel should keep a copy. It's not a bad idea to keep one in your car.
• Prepaid cell phones are an inexpensive option for emergency communications. In some disasters cell phones don't work so considering a satellite communications system may protect your ability to communicate.
• The binder you use for your BCP should be very distinctive – bright, neon orange is a good color.
• Keep your BCP out and visible so everyone sees it frequently – that way the idea of business continuity will stay on everyone’s mind.
• Have a weather plan for your employees with a number they can call to get an update on conditions. Look into some of the new Internet phone services with a voice mail message.

Warnings
• Do not rely on a fireproof safe to store your computer media. Fireproof safes are designed for paper; a CD, DVD, floppy disk or a magnetic tape will melt. Get a media safe for those items. Better yet, store data off site!
• Do not make pirated copies of important software. Even if you can do that (often you cannot) they might not work, and you could create serious legal problems for yourself. Contact your software vendor if you don’t understand your options.
• Do not distribute your plan to people that don't need to have it. Your plan will contain sensitive and secure information that could be used by a disgruntled employee for inappropriate purposes.

Van Sweet Home: Recycling Container Vans into Low-Cost Homes

“Necessity is the mother of invention.” This ancient quote from Plato, Greek philosopher rings true today as it aptly describes the transformation of Storage Providers Inc. (SPI) from a simple trucking services business called Sa Tao Trucking Corporation in 1988 to an innovative and specialized enterprise that it is today.

“It was really a blessing disguised as difficulties that started the business of Storage Providers Inc.,” says Socorro Y. Yap, owner and Vice President for Finance and better half of founder and President Ronald F. Yap of SPI.

“In 1994 when constraints in the business such as the increasingly heavy traffic in Metro Manila and government restrictions in trucking operations started severely affecting the business, Management was constrained to reflect on the enterprise’s survival and future direction, and decided to reinvent it.

“We needed to change and evolve the business; otherwise it would not have survived and gone on to do innovative and bigger projects.

“First, it endeavored to become a cargo container and depot and took the name of Human Dimensions Enterprises. This change in its nature of business paved the way to embark on other related ventures such as the fabrication and conversion of container vans into mobile offices and homes and the recycling to second hand containers into 10-footer vans for domestic shipping lines,” relates Ms. Yap.

Soon, they found out that fabrication and recycling activities were the shot in the arm the business badly needed. It became its “goose that laid the golden eggs” and that led to the expansion and diversification of its recycling and conversion activities, and paving the way to the establishment of SPI.

True enough, the change and the evolution that the business has undergone has produced dividends. From an asset size of P 27 million in 2004 when it embarked on recycling container vans as Storage Providers Inc., it has grown today to about P 50 million in asset size.

Using environment friendly materials, it recycled marine container vans into mobile homes and office units winning for it an accreditation from the Housing and Urban Development Coordinating Council (HUDCC) for innovative housing in 1996.

Today, SPI has proven itself as an innovative and creative recycler and converter of container vans and has undertaken projects for big businesses in the country. From a toilet and bathhouse to office buildings and residential houses, SPI has built them all from recycled container vans.

“Our products are better than your regular housing units constructed from concrete and lumber in several aspects.

First, it is typhoon and earthquake proof, says Ms. Yap.

“Their stable structure and steel material can withstand typhoons and earthquakes and not easily demolished by nature.

“They are also less costly to build, can be assembled in less time, and is permanent and comfortable as a shelter,” enumerates Ms. Yap.

“The completion of the house made from recycled container vans does not entail high development cost. The fittings for the house can easily be constructed and adjusted to the terrain of the land without need for the costly and time consuming land development cost normally entailed using traditional construction technology,” she explained

Homes built from container vans using the technology of SPI are less costly than similar modular homes and even those built using the traditional construction technology. Based on parallel studies done with other construction technology, it was found out that container vans are less costly to build into homes.

For example, a 30 m2 home would cost anywhere from P250, 000 to P 300,000 which is about P 8,000 to P 10,000 per m2 cost. This is at least 25 percent lower than those built using reinforced concrete and traditional construction technology.

“The container van is versatile. While being sturdy and low cost, a family can gradually upgrade their house using the existing structure as they generate more income for expansion, adds Ms. Yap.

SPI is a client of Small Business Corporation since 2005 when it availed of a P 2 million credit line for receivables financing. The line was used to finance a contract with SMART Communications to fabricate and convert 40 container vans into 60 units of SMART “Click” Internet Café’.

Over the years and many projects later, its dealings with SB Corp. has remained satisfactory and its credit line has increased to P 6 million. At present, SPI has financed from SB Corp. credit line a total of about P 23 million worth of projects.

As one of the major players in the container van recycling and fabrication business, SPI continues to deliver creative, dedicated and personalized service to its clientele. Aside from container van recycling and fabrication, its other products and services are: container lease and sale (of 20 foot or 40 foot container vans), and trucking and logistics which consist of general cargo handling, materials delivery handling, warehousing services and equipment rentals.

Already, SPI has provided its services to some of the country’s big companies and institutions such as the Armed Forces of the Philippines, Pagcor, Land transportation Office, EEI Corp., Stradcom Corp., PNOC, Leighton Corp., Jollibee, Rotary Club, Netopia, Smart Mobile, Sage Water Co., Universal Robina Corp., and the Tollways Management Office. It also did a project for the Republic of Palau.

The dream of its founder is to build a business that is sustainable with a market that will not run out. True enough that is what SPI’s housing and shelter development products and services are turning out to be. In addition, part of the SPI vision is to make warehousing an institutionalized service through the provision of mini-warehouses wherein clients can drive in, put in or withdraw their goods, and drive out again in a jiffy.

Apart from growing a profitable business, SPI owners are happy to say that their business has contributed in making the environment a better place to live in. Recycling container vans into homes has big environmental benefits.

“One is that with the SPI technology, less wood is needed to build homes, saving trees for the environment. Second is that the technology used by SPI in recycling worn out container vans does not entail melting and reprocessing of the steel which saves on energy costs, and does not involve emission of pollutants into the environment as steel mills are disposed to do, explains Ms. Yap.

Still SPI has remained relentless in its pursuit of advancement and has not let down its sights on its vision to someday become the leader in a sustainable and profitable business. It continues to grow and SB Corp continues to provide the financing needed to reach its vision.

Indeed with its persistent effort in improving its technology, and its open-minded adoption of best practices in the management of the enterprise, it would not be long before we see it become a big enterprise and a major player in the housing and storage market.