May 31, 2010
How to grow a small business
Illustration by Roberto Regachuelo Jr.
Dear Mrs. Colayco,
My husband and I recently started a party needs business here in Tarlac. We have many customers who order our cakes and balloons and our business is growing slow but steady.
My problem is that we earn only so much to replenish our stocks. We want to expand to other party needs such as chairs and catering food but do not have the capital for it. I do not want to borrow from the bank because I had a bad experience with the one in our province (it is a large bank and the interest was very heavy on us). We need many other things like a bigger oven and industrial cake mixers but these cost upwards of P20,000 each. We do not have that cash. Could you give us advice as to how to grow our business without borrowing from the bank?
—Noemi of Bamban, Tarlac
Mrs. Colayco replies:
You must have made a Profit and Loss and a Cash Flow projection of your business before you started it. If you did, you are in the best position to check:
• Is your business providing the returns or profit on your investment according to your expectations?
• Is your problem of insufficient cash flow really because of your expansion?
• Is it possible that your business is really at a standstill and you are just getting back the cash to keep your inventory at the same level as when you started?
• Are you putting in more cash a little at a time to replenish your stocks without realizing that you are not making profit on your original investment?
• Are you paying yourselves salaries as employees of your business? This is very important because many times owners believe their business is doing well with a little profit but actually, the profit is really the equivalent or even less than what they should be paid for the work they do.
When you last borrowed from the bank, did you have any collateral? Having collateral (usually a real estate to mortgage) brings down the interest rates versus clean loans (no collateral).
Some banks will give personal loans without collateral but these will be at higher interest rates. If you found the interest heavy:
• You must have placed it in a business that was not earning enough to cover the interest and principal amortization.
• You might have purchased something that you could not yet afford given your income. Perhaps it was not yet the right time?
Borrowing is actually good leverage for a business. You are using “other people’s money” to make profit for yourself. What is important is that your business will generate the income needed to pay the interest and still leave you a decent profit. This is why your projections are very important. If your business is not profitable enough, then why go into the business?
Anybody who lends you money whether a bank, a person or some other entity will need a clear understanding of your business and the money it will make. I cannot overemphasise enough the need for your analysis of the real financial condition of your business. Realistic projections of your cash flow for the future are very important to understand how much risk you can take to grow the business.
How can you grow your business without borrowing from the bank? Here are some things you can do:
• Assuming your business is really good and will give you real income, you can sell some of your properties that are not earning any or not enough income and use the money for your business.
• Find partners for your business who will share the additional investment with you.
• Try government agencies like Small Business Guarantee and Finance Corporation.
To help you cope with your financial issues, join any or all of our seminars: Pera Mo Palaguin Mo Workshop on June 12, INVESTability: The Stock Market on June 18 and INVESTability: Invest for Regular Income on June 25. Call us at (632) 637-3731 or 637-3741 or email info@colaycofoundation.com for details.
Mary Anne B. Colaco is a happy wife, fulfilled mother of three beautiful ladies, helpful mother-in-law of two handsome gentlemen, doting grandmother of two adorable girls and the diligent President of Colayco Foundation for Education (CFE). For over 40 years, Mabsi, short for MAB-C, was in executive-level finance-related positions, as well as general management positions in Ayala Corporation subsidiaries (then, Pure Foods and Globe Telecom among others) and also served as a Commissioner of the Energy Regulatory Commission.
She joins her husband, author-entrepreneur Francisco J. Colayco in their common advocacy of teaching financial literacy to income-earning Filipinos. Herword.com draws from Mabsi’s wealth of life experiences in giving advice on personal money management.
If you have any questions about personal finance, e-mail feedback@herword.com.
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