In the Metro, Small Business is Huge
Posted on August 06, 2012 by Lui Tortuya
This is the first of a series of blog entries about some of the fundamental business components that I wish someone had explained to me before I failed my first two businesses. To preface this series of blogs, I probably should give good reason and maybe a little explanation of why the hell you would even listen to my advice about business.
I founded a surf shop back in the day called Fiveforty Surf Co. along Katipunan Avenue
. It was the first custom surfboard shop in the Philippines and later became a retail store selling all the major surf brands. That was my first lesson in how to fail at business. I failed terribly at the surf shop and retail and since then have helped launch Tomato Kick in the same building
. In addition to manufacturing, F&B and retail, I’ve also done water sports in Boracay, Subic and am currently building the Quiksilver Surf School in Zambales.
This series will contain all the things I wish I had known from the very beginning. I encourage all of you to interact with these blogs because I’ll answer any of your questions and try to clarify all the information I put out and since most of this is my own experience in business and I’ve never taken any courses other than basic accounting, I would appreciate any of your input and advice if I need correction. Let’s make this an interactive thing.
There are many types of businesses and business models but I’m being cautious as to not overwhelm you with a bunch of business jargon. For the purpose of this series, I’ll flip around between four different types to give examples: Service, Manufacturing
, Retail, and F&B.
OK, let's imagine that we're all six years old again and you want to start a small business - a simple juice stand. Your parents give you P500 to start your juice stand; this is your starting capital. You put this in your special box and hang the key around your neck. This box is now your first "account". There are different types of accounts. This type where you put your money is "bank
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So you need to buy a container for the juice to go in so you get one of those big plastic jugs
with the nozzle for you to just serve the juice from the jug once it is mixed. This is your first purchase of an "asset" which, loosely defined for our purposes is something you purchase and use for business that has a resale value. Let's say this costs P50. So now you have P450 in your "bank" (again the little box) and a P50 container for your juice that you will use for business. Say you decide you bought the wrong container but you used it a bit so you can't return it so you sell it to your mom for P40. Essentially you have "spent" P10 of the value of the container by using it. This is called "depreciation expense".
All assets depreciate over time and lose value. Six months from now you might be able to sell the container for P20 but a year from now no one will want it. This is one of the most important overlooked expenses in business because you will need to purchase another container in a year, so if you are still in business you need to factor in and plan for this and consider this when counting the money that you have made.
Let me give a real example with the Quiksilver Surf School in Zambales. Each of my surfboards
cost P30,000. I rent them out for P200 per hour. I need to rent one surfboard out 150 times to make back that P30,000 (150 x P200 = P30,000) that I spent. Everything else is money in my pocket and clean profit after that, right? Well, what if a meteor falls from that sky and demolishes the board before I'm able to rent it out 151 times? Then I'm back to step 1 with P30,000 from rental income in the bank. In this case, the "asset" or board is depreciated over 150 times being rented and can no longer be used. It's a waste of time because in all the time you spend renting it out and dealing with customers and energy, you are right where you started at Day 1.
But wait... what about the paper that you recorded the rentals on and the ink for the printer
that you used or the notebook and pens
that you bought to keep records? What about the surf wax that you need to make your surfboard ride-able? You overlooked these small things, and now when you consider and account for them, you're in the negative and you don't have enough money to buy another surfboard. Where are you going to get the money to make up what you need to buy another board? This is a major reason why small businesses get behind and have a hard time recovering.
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This is also true for restaurants because you have to account for broken dishes and your equipment is not going to last forever so you need to make sure that the P100,000 that you spent on that chiller for your meats is back in the bank by the time it depreciates and can no longer be used or you're going to have a big problem down the line.
So back to our juice stand. You have P490 in your box-bank and you haven't started yet. Luckily the right container that you need is P40 so although you lost P10, you still have a container and P450 in your bank.
Next time were going to buy our raw ingredients and begin production of our first batch of juice ready for the market.
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