I have found that one of the challenges many individuals and business persons have is that they do not learn from the mistakes they make.
A person is not a failure if you fall down. You are only a failure if you refuse to get back up. And so it is with many persons I speak with. They get disheartened easily by their first failure and never try again, whether it is personal relationships, business ventures, or even school.
The quality to persevere is a very significant characteristic of successful entrepreneurs and individuals. And this quality is not something we are born with, but in many cases it is a part of our socialization growing up when your parents or a close relative would encourage you to go again when you fail. What I find with many people though, particularly those who always complain about the low wages they receive or challenges in life, is that they are so fearful of failing that they do everything not to fail, including not succeed.
In other words your fear of failure restricts the risk you take and if you take no risks then there can be no reward.
Yesterday I had a meeting with someone who is trying to start a new promising business venture, and naturally they were trying to eliminate every risk to the business failing. And it is a good thing to look at risk management from this point of view but it is also very important to realize the practicality of risk management, that is that you can never eliminate every risk. So I had to say to him that if you eliminate every risk there is then what you do at the same time is eliminate profit.
This is the nature of business. All risk cannot be eliminated but risk can be managed.
The important thing is not to avoid failure by doing nothing, but to (1) ensure that failure has a limited effect; and (2) learn from your failures.
The fear of failure though is what drives many of us to be complacent and not do anything that could give us what we dream about. Risk is not bad by itself but is catastrophic if not managed.
But when we fail we need to relook at everything that happened and do a proper assessment of what went wrong. One mistake that many people make in doing this assessment is that they try to cast blame on others and always try to pull themselves away from it, even if they had sole responsibility of it. This is the first failing that will ensure that the mistake is repeated again.
The first step of dealing with failure is to take responsibility. If you do not do that then you can never do an objective assessment and will make the same mistake again.
You should then carefully look at the timeline of events and speak to people about why they think something happened, and why the expected outcome did not happen. Make a careful note of everything that went wrong and ensure that when you do your next plan that those errors are eliminated, and by doing so you will also eliminate your risks and increase your chances of success.
You can access expert advice and coaching on this by contacting us at www.mindyuhbusiness.com through the Contact Us menu.
One of the questions I have been asked by many persons recently is how can a company as large as General Motors (GM) find itself in bankruptcy?
After all one would expect that a company as large as GM must have significant assets and have been very profitable over the years. So how does it get to that point of having to file for Chapter 11 protection, and seeing its shares trade below US$1.
The truth is that it can happen to any business that does not stay on top of managing their liquidity position. Many persons do not realize that they are in a liquidity trap, or never did, because they were able to disguise this by borrowing money. So while they were always having an underlying liquidity problem it was hidden by their ability to borrow. But one of the side effects of the credit crisis is that the ability to borrow was disrupted and when that happened many companies soon started to realize how exposed their balance sheet positions were.
So even though they were showing significant asset values on their balance sheets, the fact is that unless you are able to convert those assets to cash then it is like the blood leaving the body. Just as a body cannot survive without blood, a company (or individuals) cannot continue to operate if they run out of cash.
So what happened to GM was the same thing that happened to CLICO and the other large US financial institutions that failed in the recent credit crisis. The operations came to a standstill because they simply ran out of cash. So as I always say a company never goes out of business because it makes losses, but because it runs out of cash. For example, one could make significant profits but if you are unable to collect the sales then you will inevitably cease to operate.
This is why liquidity management is so important. Proper liquidity management does not start the day you can’t get money to borrow anymore, but from the first day you start doing business. It is more important to stay on top of your liquidity management than any other aspect of your business.
There are several ratios that the business person can use to manage his/her liquidity, which are called liquidity ratios. These include current ratio, acid test ratio, and days receivable ratio. In addition the business owner would want to monitor the receivables ageing and ensure that your costings are done properly so that you not only do not sell your goods for less than the cost, but also ensure that you manage your prices to consider inflation when replacing goods in the future.
A lot of this management of course requires good information systems and professional analysis, such as done by accountants. Hiring this expertise and putting good information systems in place is critical to avoiding future liquidity traps.
For the small business owner this may mean asking a professional accountant to set up certain ratios for you to look at and that can alert you to asking for greater analysis when these are out.
You can access expert advice and coaching on this by contacting us at www.mindyuhbusiness.com through the Contact Us menu.
One question that people always ask me is I have X amount of savings. How should I invest it to maximize my returns. Recently this question was put to me in another form. The person indicated that they earn a certain amount of money monthly and outlined what car payments were and living and other expenses. It was explained further that the car payments will soon come to an end and thereafter they wanted to know if they should buy a house, or invest in something else.
However the question is posed it simple can be interpreted as, what is the best use of my money? And this is a reality for most people, especially the employed, as one’s income will limit the amount of choices one can make, and this is why it is important to spend your money on what gives the greatest opportunity benefit.
So for example, if you earn $100,000 per month and you have three choices in front of you. invest $50,000 in option 1 that pays 10% per annum, $30,000 in option 2 that pays $15% per annum, or $60,000 that pays 8% per annum – you would first invest in option 2, followed by option 1, and the remainder in option 3. In this way you maximize your returns. This example of course is simplified as risk tolerance has a lot to do with it, which I will explain at another time.
My answer to the question of whether to invest in a house or a business would of course differ depending on the persons circumstances. Some of the variations would include:
If the person did not own a home but is young and lives at home with their parents: the best thing to do would be to invest in a business that will give you a greater return and allow you to buy a house later, while still getting income from the business.
If the person does not own a home but pays rent, then you might advise the person to invest in a new home, as long as the mortgage is not much higher than the rent. That way the person substitutes the rent with a mortgage payment, and therefore builds equity with the payment in lieu of rent, which is not building any equity. The problem with buying a house is the down payment, and an alternative is to use the down payment to start a business that gives a greater return and allows you to be able to buy the house later, while having the revenue flows from the business.
If the person already has a house but does not own a business, in this case the person should assess the businesses viability and determine if it is better than purchasing a new home for commercial reasons.
The person may also have other expenses that are discretionary, and do not generate future earnings, which they can eliminate and put the money into a new house.
What this shows is that the decision of whether to purchase a house or not should be the same investment decision as when making any other investment. The analysis should always be based on the opportunity cost/benefits of the choices you have. I say the choices you have because if you are employed then you may not have considered starting a business and therefore your choices will be different from an entrepreneur.
The incorrect choices people make about the capital in their own businesses and personal income has led to many failures. It is therefore worthwhile to always seek proper advice when making these types of decision, as in the long run it will serve you better.
You can access expert advice and coaching on this by contacting us at www.mindyuhbusiness.com through the Contact Us menu.
One of the problems I find with many small businesses and individuals is that they get comfortable with the knowledge they have. The truth is that many people do not realize how important it is to be constantly learning new things, and by doing so constantly reinventing yourself and your business.
Since the 1970s the competitive edge shifted from just merely owning capital to who has the greater knowledge. As the world became smaller though globalization, and even more so the internet, knowledge has been the competitive edge.
For this reason the human resource factor has become the most important factor of production in any company serious about succeeding. We only have to look at the inability o companies to grow that marginalize their human resources, and in companies that do not address the need for continuous training of their employees.
Many individuals and businesses also believe that to acquire new knowledge it has to be an expensive venture. Individuals think of expensive formal education and companies think of expensive trade shows. My own view is that unless you can add value by going the expensive route for new knowledge then it can be easily obtained at minimal cost.
Examples of when expensive formal education or training seminars are necessary include when one is required to have a university degree or by travelling to the seminar one can acquire some benefit from the face to face networking. Outside of this the same knowledge can be obtained through informal reading, or local seminars.
Sources of inexpensive information that can provide a competitive edge include:
Internet – this is my preferred choice, as there is a lot of information that can be easily accessed. The internet is the best source for information because there is so much. One of the things I do is commit two hours per day just reading new information and news on the internet.
Publications online and printed publications
Discussion forums, this will give you new ideas and different perspectives (such as discussion forums on www.mindyuhbusiness.com)
Seminars – put on by local professional or government organizations. Especially as a professional this is a good source professional education.
Business and documentary television channels
Radio discussion programmes
There is always a lot of knowledge we can get that is relatively inexpensive. And this is necessary for creating a competitive edge as a business or employee, which is critical under the current economic climate.
What we will see in Jamaica is a further decline in personal credit and other retail loans. It is therefore very important to ensure that your lifestyle is not dependent on credit.
I have discussed in a previous article at money management principles, and want to look briefly now at what can be done to diversify your income sources into resilient income types.
Investments – there are some investment types that I think will do well, although riskier than savings. These include currency plays and investments in certain commodities and ETFs. These require expert advice, however, and would not recommend that individuals go alone on this. One can either seek professional advice or discuss these options in a forum type group to get varying perspectives. One of the things that people overseas have done successfully is to have meetings where a group would invite different experts to give their advice. This is cheaper than one person going it alone.
Agriculture / food – irrespective how bad things get people will have to eat and certainly in the case of Jamaica we have seen where agriculture was the only sector growing in the last quarter (10%), and will continue to be so.
Cost effective services – one should think about cost effective ways of providing services, which will bring market share to your own venture.
These are just a few ideas, and there are many more that we could think of but space does not permit. Mindyuhbusiness.com has a new feature, where registered users can list their business ideas and get it rated to see how others feel about it. Of course you would not put the full details but just enough to get some free feedback.
You can access expert advice and coaching on this by contacting us at www.mindyuhbusiness.com through the Contact Us menu.
Yesterday I attended the members meeting of the Small Business Association of Jamaica, and two things were confirmed:
1.  Jamaica’s (and global) growth will definitely come from the growth of small to medium enterprises (SMEs), not large businesses or the public sector; and
2.  SMEs need to put a structured plan in place for them to realize their full potential
When I asked questions about what were the major inhibitors to growth, most responses were the lack of capital. I beg to differ from that, as I believe it is the fact that people have put too much capital into businesses that creates the first hurdle, as the more capital input is the greater the profits needed to realize a decent return on capital/investment.
The main challenge I think that many SMEs face is (1) not starting with a properly defined product/service and distribution plan; and (2) an improper structure/plan for development. It is this lack of proper planning that causes businesses to have to seek additional capital – sometimes expensive – and to have a clear development path for growth.
It is therefore critical for SMEs to start their planning process at the get-go and even if they are currently in business a proper strategic planning session is in order. Having worked with large organizations I realize a few differences that SMEs can learn from is they want to grow into large businesses.
Large organizations
SMEs
Spend money on due diligence to assess viability and avoid total wipe out of capital
Put all of capital in business at start and then does due diligence after business start
Carefully define product/service and marketability
Implements raw ideas and then refines to market at substantial cost
Hires professionals to help them with planning
Goes it alone or calls a favour
Properly structures costs – set amount for pay to shareholders
Mixes capital and personal funds
Properly sets up accounting systems and administrative controls
Lax accounting and administrative controls
Does a budget and development plan at least once per year
Does not do budgets
Develops many income streams
Usually has one source of income
Cuts losses if product/service does not meet plan
Continues to follow a losing product/service
These are some of the differences between large organizations and SMEs, but are by no means an exhaustive list.
If SMEs put a proper structure and plan in place I have no doubt that they can significantly improve their chance of success and can grow to be large organizations. This point is reinforced in my mind seeing some of the products/services being offered by some of the members last evening.
You can access expert advice and coaching on this by contacting us at www.mindyuhbusiness.com through the Contact Us menu.
Now that the FINSAC commission of Enquiry is again in the news, it is good to reflect on how important debt management is. The truth is that many companies suffered during that period because of how highly leveraged they were. Similarly in the US, the whole subprime crisis occurred because of people being too highly leveraged. While debt can provide the entrepreneur with significant growth, it needs to be carefully managed. Mismanagement of debt has led to the downfall of many businesses and individuals. < The businessman or individual needs to be very careful about how they manage their debt/equity ratio. The debt/equity ratio is the amount of debt divided by the amount of equity, and is similar to a country’s debt/GDP ratio. We have all seen in Jamaica what a high debt/GDP ratio has done, in terms of ensuring that Jamaica has little fiscal space to accommodate social and infrastructural spending. Similarly a business that has too high a debt burden will find itself paying a significant part of its cash and profits outside in debt payments. So while the business might appear to be successful with the cars, buildings, and other things debt allows one to acquire, the truth is that the company, may be suffering from a cash strain or low profits. This is the consequence of not properly managing the debt/equity ratio. One should always strive to manage debt in two ways: Ensure that you maintain a manageable debt/equity ratio, so that if there are any sudden movements in circumstances that allow debt to become relatively expensive you can pay it down quickly. For an individual one should try not to accumulate debt that cannot be covered from short term resources or you are certain of the effect of any variations in rates; and
Long term debt should always be utilized where a specific return on investment can be determined. In other words long term debt should only be taken on when the marginal cost of the debt is less than the marginal return.
Yesterday an article appeared on Yahoo Finance\’s website, which referred to the onslaught of the recession on the persons in Silicone Valley, California. When I read it a new fear gripped me as it occurred to me that the recent rally in equity markets and signs of stability may in fact just be temporary retracements in preparation for another leg down, as happens with markets and economies all the time.
The fact is that the US is still losing jobs at significant rates, continuing claims are still rising, and very frightening is the possible increase in credit card defaults, which could precipitate another downward leg.
This new founded hope in the economy stabilizing could be in fact a false hope and it is very important for individuals and business persons to not get complacent. Even with any signs of economic recovery, however, it is not good news for Jamaica. The fact is that by the time we start to see any recovery Jamaica’s bauxite, tourism, and remittance earnings will have significantly declined. These represent 75 percent of our foreign exchange earnings.
What this means is that individuals and businesses must of necessity prepare for a long downturn in the economy, as the US is seeing. We always tend to catch the cold after the US has started to show signs of improvement.
What are some of the things that individuals and businesses need to do?
ü The first thing is to ensure that you have minimal debt. I always encourage people to keep debt and credit to a minimum by discarding credit cards if you have too many and not borrowing money for consumption items if it puts a strain on your income.
ü Change your approach to business – the same business model you had before will not work in the coming changing environment.
ü Identify new opportunities for income
ü Review your investment portfolio to determine risk profiles. Many companies that were safe before and now risky. The rules of investing have changed.
These are some of the things – but not exhaustive – about what you should be thinking of in order to cope with the effects of the recession, which I think will be a very long haul for Jamaica.
You can access expert advice and coaching on this by contacting us at www.mindyuhbusiness.com through the Contact Us menu.
The recently released GDP January – March 2009 numbers show that the Jamaican economy declined by 2.8 percent. It also shows that every sector except Agriculture showed a decline or a negligible growth. While the decline was expected, it seems to have been greater than the expectation. The economy is expected to continue its decline for the next two to three quarters at least, and is projected to worsen.
Business persons, and individuals, must be aware of what will happen if they intend to stay ahead of the game. My own view is that the economy is going to go through a significant restructuring period but underlying all the challenges the economy will face there will still be significant opportunities, which will come to those who understand the way the economy is moving and properly structure to take advantage of the changing economy.
As an example, a company that is involved in supplying critical ingredients to the agriculture industry could do very well as opposed to a company involved in the retail clothing. Understanding the growth and decline sectors in the economy is therefore critical if one wants to take advantage of it.
But what are some of the things that businesses and individuals need to do to cope with the economic downturn:
Businesses and individuals must make a plan as to the way forward – in the case of businesses, I have been recommending from 2008 that a professional is brought in to assist with a strategic planning session that will highlight the projections for the economy and make an assessment of the company’s preparedness and what areas needs to be focused on. Individuals need to look at their expenditure and revenue patterns and make the necessary adjustments.
Balance sheet management – company’s (individuals) need to manage their balance sheet (personal financial statement – PFS) so that risks are reduced. For example, company’s need to look at credit terms to ensure exposure is limited and it is always best to manage your current asset/liquidity ration to ensure that assets can be easily converted to liquid positions. One should also try to avoid debt as much as possible unless your homework is done properly to maximize the probability of better returns.
Companies need to ensure that your best human resources remain. In this time of uncertainty any indication that the company is in difficulty could result in the better employees leaving for greener pastures. Make sure to communicate and reassure your best producers so that they do not leave and you are left with the least productive ones.
Manage your expenses efficiently – this is the time to ensure that all expense lines are looked at carefully and make sure to maximize your expenditure efficiency. Always spend on things that will provide a future return first. So for example expenditures such as cars do not provide a future return but training and infrastructure expenditure will.
Market analysis – now is the time to carefully analyze your market opportunities and what is changing in the market. This will lead you to look at the appropriateness of your product/service. If the market has changed significantly you may want to change your business model, or sometimes it is better to cut your losses and discontinue a product/service line.
Although the economy is changing, opportunities still abound. It is very important to re-examine your business as what prevailed even one year ago will not be the same as what will succeed going forward.
You can access expert advice and coaching on this by contacting us at www.mindyuhbusiness.com through the Contact Us menu.
Understanding the economic indicators is important, as just focusing on consumer sentiment from day to day can give misleading expectations and lead to incorrect investment and spending decisions. For example, many people recently have been saying that there will soon be economic recovery based on some better than expected data and the rallying US equities market. The truth is that it could just be a retracement in the longer term downtrend, and so it needs more careful analysis. It is good for business persons to understand this also as it can give a good indication of what products/services are more likely to be in demand, and also how to approach decisions such as inventory stocking etc.
It is with this in mind that mindyuhbusiness.com will do a weekly review of the global and local markets, through analyzing the economic numbers and therefore look at what the likely impact could be on the consumer and economies.
Global market review
The table shows the more relevant economic numbers over the past week (May 18 to 22).
The actual results show that there is still a continuing negative effect on economies from subdued consumer demand and the recovery we have been seeing in retail sales, and optimism for consumer demand is actually coming from reduced prices. So retailers, and producers, have in fact had to be reducing prices to increase demand.
 The US employment numbers (initial jobless claims and continuing claims) shows that the US labour market is still in trouble, as both initial jobless claims and continuing claims are above expectation. Continuing claims are actually higher than the previous number and initial jobless claims slightly below. The more relevant measurement is continuing claims, as it shows the trend.
In the US, housing starts and building permits are below the previous number, and also below expectation, implying that the housing market is still struggling. Mortgage applications are up indicating that some interest is returning to the market but this is at significantly lower housing prices, which could mean that people are just bargain hunting.
This is confirmed by what is happening in the UK and Germany where retail prices and producer prices are lower than the previous measurement. At the same time in the UK consumer prices are up, which if oil prices continue to move up, and demand and retail and producer prices remain low then we could see another round of business failures as stagflation creeps in.
In summary, while there are some indications that consumer demand is stabilizing, this is at lower prices and the continuing claims shows that consumers are still hurting. The decline in UK GDP by 4.1 percent over the past year is evidence of the continuing decline in the global market.
Implications for markets and investors –investors still need to be cautious as there is still no clear evidence that there is a solid bottoming of the economic downturn.
Dow Jones Industrial index – The DOW started the week at 8380 and closed at 8280. The longer one year chart shows that the DOW is still not in an upward trend and the rally we are seeing could actually just be a short term retracement on the longer term down trend. In order for any uptrend to be verified, I think the DOW would have to close above 9000 combined with some real recovery in consumption at higher prices, and a stronger recovery in the housing market.
The one year chart indicates that the top might have been capped if the market cannot break above 8600.
Currencies – the currency charts show that the USD continues to depreciate against the other major currencies, particularly the Euro and Australian dollar. This trend is expected to continue and presents good buying opportunities in currency pairs such as EURUSD and AUDUSD. I expect that the USD will continue to weaken further and as the economic news in the US continues to show some amount of stabilization, and less uncertainty abounds about the economic prospects then more investors will sell their USD holdings and move towards riskier assets. This combined with the large amounts of USD being circulated, as a result of the stimulus will mean US interest rates are projected to be lower than other major markets.
Oil – Since oil broke above $54 per barrel at the start of May 2009 it has been on an upward trend. Indications from the start of this year were that oil would reach US$70 per barrel by year end, which would mean that oil would have risen by over 100 percent this year. Based on the weakness of the USD oil could easily climb to above US$70 per barrel by the end of the year, especially with the expected recovery in the Chinese economy. Oil closed the week at US$61.55 per barrel.
Jamaican market review
In the last week the PIOJ came out with GDP numbers for the January – March 2009 period. The numbers show as expected that the economy is in decline, as it goes through a period of significant restructuring. The only area of any growth as I expected is agriculture. The numbers show that the goods producing sector declined by 5.9 percent and the services sector by 1.6 percent, amounting to an overall GDP decline of 2.8 percent.
Construction was down 7.0 percent, Manufacturing down 4.3 percent, and Agriculture was up 10.0 percent. All areas in the services sector declined with the exception of the financial sector, which showed marginal improvement. Inflation was 1.3 percent, fiscal deficit $18.4 billion, and the J$ depreciated by 13.5 percent against the USD.
The numbers for the first quarter are worse than I expected they would be and this trend I expect to continue and it has implications I think for businesses from a planning point of view.
It shows that the economy will get more difficult to transact business in and means that certain operational decisions need to be taken to reduce the risk of succumbing to the down turn. I will look at the options in more detail in an article to be posted later at www.mindyuhbusiness.com called “Coping with the economic downturnâ€.
If you want greater insight into the global and local economy you can contact us through the Contact Us menu at www.mindyuhbusiness.com.
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