The View From Taft
By Benel D. Lagua
Small enterprises face major challenges in 2021. Studies done before the pandemic revealed that about 20% of small businesses fail by the end of their first year. By the end of the fifth year, 50% go under, and by the 10th year, that number rises to 80%. With COVID-19, however, the attrition rate has accelerated substantially. In the Asia-Pacific region, nearly one-third of SMEs expect to lay off 50% or more of their workers just to survive.
Last year, the Philippines implemented one of the strictest lockdowns in the world which disrupted supply chains, introduced transport restrictions, reduced customer demand and affected the life blood of small business — cash flow. With dwindling working capital, rentals, wages, suppliers and creditors could not be serviced.
A survey by the Asia-Pacific MSME Trade Coalition in the first week of April 2020 revealed five major challenges that face small and medium enterprises. Foremost is the lack of operational cash flows as almost 50% of MSMEs (micro, small and medium enterprises) surveyed had less than a month or just a month of cash reserves. The other concerns include low customer demand, business closure due to state lockdown policies, and reduced opportunities to meet new clients. Finally, with the restrictions due to social distancing, MSMEs need to change their business models just to survive. Other concerns are obtaining raw materials, providing logistics, and physically moving products.
Workers are also not able to return to their jobs.
The Asian Development Bank has listed policy instruments that many governments have employed to support small businesses and address the short-term liquidity crunch. Income taxes, property taxes, and other payments due to the government are allowed to be deferred. Governments increased the availability of credit to SMEs through direct lending by state-owned banks, reduced interest rates, expanded credit guarantee schemes, and extended grace periods.
Some governments partially covered the cost of enterprises by providing wage subsidies and income support for the temporarily laid off. SMEs were encouraged to pivot to other business models, mainly by using digital solutions.
In the Philippines, the most visible support came in the form of the Bayanihan Act, which allowed the deferment of loan obligations to banks and a budget for MSME support. Credit assistance was made available through state institutions although its scale and availability remain to be validated. However, the wage subsidy scheme was something that our country could not afford. Many enterprises pursued digital finance and online sales, delivery, and customer service, but the low ICT investment in the country and poor internet connectivity were major bottlenecks.
To bounce back, Philippine MSMEs have to understand their pain points. Some government policy measures are on the way, but these are not sufficient. Our MSMEs must help themselves. Following are key areas that small businesses must address: 1.) find new customers; 2.) build brand awareness; 3.) delight customers; 4.) hire good and reliable people; 5.) improve processes; and, 6.) execute solid financial plans. These should be pursued within the context of adapting new business models.
Identifying the customers means figuring out the ideal customer targets so that appropriate content can be developed for them with recognizable brands and good reputations. Any serious small business today should have a website with a successful lead generation engine that turns visitors into customers. Businesses should understand what customers need, and deliver on their expectations. Whether a transaction is handled digitally or not, a business exists for its customers.
Amazon’s Jeff Bezos refers to the need for obsessive customer focus. Hiring is one of the biggest challenges for small businesses especially in these trying times. Businesses should hire people who are excited about the products and services. The next challenge is to manage the workflow whether it be in the production side or in the logistics end.
Finally, decisions must be financially solid. Businesses should use credit wisely, cut costs where possible, manage cash flow by staying on top of billings and suppliers’ concerns, do cost-benefit analyses, and maintain reliable records. Family businesses must separate personal expenditures from business expenses.
We can only hope that our government will muster enough discipline to choose the right policy tools, and more importantly, execute them well for our small businesses. For their part, entrepreneurs need to retool, re-engineer, and rehash their business models if 2021 is to be their year for bouncing back.
Benel D. Lagua is former Executive Vice-President at the Development Bank of the Philippines. With an AIM-MBM and a Harvard-MPA, he is a part-time faculty member of the Ramon V. del Rosario College of Business of De La Salle University.
benellagua@alumni.ksg.harvard.edu
