On Your Own

The writer is an entrepreneur who hopes to share his experience and insights with readers who want to take that giant leap into business but are not sure if they should.

6/2020 – Government needs to do more to help ailing SMEs

IT has been a week of lockdown – staying at home – so I assumed that everyone gets to spend quality time with their family at home, all chilled and relax.

Instead I have been inundated with texts from small and medium enterprise (SME) owners who are worried sick at the total shutdown of economic activities in this country.

Do we have to pay the employees or can we ask them to utilise their annual leave or ask them to take unpaid leave?

The Human Resource Minister said we must pay, the Malaysian Employers Federation (MEF) differs and the National Union cries foul. It is only for 14 days for god’s sake, the employees pleaded. We can’t survive on half month’s salary!

Out come the lawyers with their different interpretation and the legal avenues available to all concerned. So I seek out an opinion from a very senior lawyer and his opinion is stated below:

The movement control order (MCO) issue is not governed by the Employment Act (which applies only to to employees earning RM2,000 or less per month and manual labourers or daily wage etc) but one of contract.

So it is a contractual issue between the employer and employee as stated in the terms of employment. The employment contract will normally state that salary must be paid. Unless the contract says salary must be paid for work done, then there may be an argument for not paying.

If there is force majeure or frustration (argument by MEF) in common law and Contracts Act, the remedy is to terminate – not suspension of pay. Some may say the underlying foundation of the employment contract is that the employee works.

However, the present circumstance is not that the employee is not willing to work. He/she is unable to work through no fault of theirs. The employer may likewise say the same.

Again, as a matter of contract law, it does not allow for suspension of pay. If at all, it is an issue of termination. If the business is ongoing, then selective termination amounts to redundancy or retrenchment issues.

In view of the above, the direction from the government regarding employment and salaries is not relevant.

The government cannot promulgate or change the law by issuing guidelines and orders, unless emergency is declared under the constitution and certain laws are suspended. It is based on and governed by existing legislation, and more pertinently in this scenario, by the law of contracts.

To all the SME employers, my advice to you is to pay your employees for the two weeks of MCO. This is not the time to argue who is right or who is wrong. Unless you do intend to reduce your staff count, then do a proper retrenchment exercise.

Then the announcement from our Prime Minister – that there could be an extension of one to two weeks to the current MCO. What are we to do? Based on the above argument, I am afraid employers will have to continue paying the salaries or retrench.

My lawyer friend then text me to say that her small practice will see a drop of 90% in business as there will be no activity, no production for four weeks.

Can’t have meetings, can’t see clients, land office closed, no litigation, conveyancing or corporate works. On top of that, being an employer, her firm still has to contribute to the employees’ EPF accounts. She is not sure how long her cash reserves will last.

All SME’s face the same problem as my lawyer friend. How long will my cash reserve last?

My accountant friend, who audits many SMEs, told me that most of his clients will not last more than six months if sales drop by 50% or more. Most SME’s will have to start rightsizing (a better word than retrenchment) their staff organisation chart starting April if no government assistance is forthcoming.

So far, Bank Negara has released RM30bil of liquidity into our banking system via the reduction of statutory reserve requirement (SRR).

Our Finance Minister (an ex-banker) has announced a RM3.3bil SME loan fund for those who are qualified (no idea on the qualifications – ask your bankers) and our commercial bankers have started deferring loans repayments etc to ensure the loans/facilities do not fall into non-performing loan (NPL) status.

These steps taken by Bank Negara and the Finance Minister will ensure that sufficient liquidity is available to the SMEs but only for those who qualify.

To date, most of the stimulus measures introduced by our government do not emphasise on job retention by SME employers. Only a RM600 payment a month for employees is introduced if they lose their jobs.

The withdrawal from EPF savings by individuals is a joke, it is not a government assistance. The RM2.2bil development fund is reserved for bumiputra small contractors.

The RM130mil fund for 13 state governments to disperse to petty traders means that RM10mil per state, which is laughed at by the Chief Minister of Sarawak, the only state government to-date to have announced a comprehensive stimulus and assistance programme to its citizens. Kudos to Sarawak.

If you compare our fiscal stimulus programme with that of other governments’ worldwide, France has allocated 13% of its GDP, United Kingdom 12%, Germany 9.9%, the Netherlands 7.7%, the United States 9.3% and Japan 2.5%. Malaysia and Singapore at 1.2% of GDP thus far. I understand that Singapore will be announcing its new stimulus initiative today while our Prime Minister will announce a comprehensive fiscal stimulus on March 30.

If you look at all the fiscal stimulus programme announced so far, the main thrust of the policies is to maintain employment – via direct subsidy on payroll – to encourage employers not to retrench. I am done shouting my voice hoarse at the Economic Action Council to act fast and decisively to save our biggest employers, the SMEs, and to encourage a continuous employment for our workforce.

If the government is broke and cannot afford a direct subsidy, then help the SMEs reduce their cashflow that is necessary to maintain their continuous operations. For just six months, suspend all EPF payments, all Inland Revenue Board prepayments (which is based on past year profits), sales and service tax, taxes by local governments etc. Make sure our SMEs can survive for the next six months.

Our Finance Minister, who is an ex-banker, must surely understand the systemic risk to our financial institutions and our economy should we fail to save the economic backbone of the country. Not to mention the human sufferings when mass unemployment occurs.

To our Finance Minister and the Economic Action Council, search your conscience.

Published: https://www.thestar.com.my/business/business-news/2020/03/25/government-needs-to-do-more-to-help-ailing-smes

5/2020 – Exempt EPF contributions to save jobs

For people of my age (60 and above), we have experienced three recessions, one financial crisis and one coronavirus (SARS) epidemic in our lifetime. We are about to witness the biggest (three-in-one) economic disaster ever if the world is not able to contain the transmission of Covid-19 within three months.

Covid-19 is easily transmitted and has now spread to 173 countries. The only way to stop it is via social distancing, which means a lockdown – basically staying at home and closing businesses.

The whole economy will come to a standstill as the supply chain and economic activity is disrupted. The global economy is now at a standstill as each country carries out different levels of a lockdown.

Even though the global stock market was due for a major correction after 13 years of an extended bull run, the coronavirus fear exacerbated its severity.

Again, depending on the severity and length of the Covid-19 crisis, this could be the mother of all stock market crashes. Watch it unfold. Trillions in economic value can disappear, impoverishing individuals and corporate entities in the process.

In times of crises, exchange rates worldwide become erratic and massive devaluation adds unique problems to countries. As industrial and economic output plummets, severe cash-flow deficits and non-performing loans (NPLs) will increase. All factors point to a financial crisis in the making.

A global recession is definitely on the way. Just like how Covid-19 made its way to Malaysia, we are seeping into an economic and financial crisis as our financial institutions become plagued with NPLs from failed businesses and unemployment.

Quite a grim scenario for Malaysia, assuming the recently announced stimulus package is our only solution to fight the imminent recession.

Luckily, it is understood that there will be a second stimulus package as soon as the National Economic Council is able to meet, which is most likely after the restriction order.

Assuming they meet in April, and hopefully not later, they will have to decide on a few key issues which I hope includes saving businesses and jobs (and not just their own jobs).

Malaysia will go broke this time around if we undergo a severe recession. Limited Petronas dividends, a much lower company and individual income tax rate if many businesses go bankrupt and paycuts will add on to a high unemployment rate.

We might not even have sufficient revenue to cover our high operating expenses and civil service wages.

Remember a bankrupt Greece some years ago having to cut civil servants’ pay by 40%?

Keeping Malaysians employed must be the main consideration. I have no clue what we can offer the illegal immigrants, who are a burden to our health system and the social fabric of our society.

To ensure employment for Malaysians, we need to ensure employers can survive this recession. The biggest employers are the SMEs. How can we help them?

For the service industry, normally, the biggest operating expenditure is salaries plus the 12% employer EPF contribution. When any business suffers a sales decline of more than 30%, it starts slipping into a loss position unless it cuts cost.

The Covid-19 affected industries are suffering from a sales decline of 50% to 80% and no company can survive this beyond six months.

The best solution is to exempt EPF contributions by both employer and employee for six months starting April 1,2020. This is direct help to preserve cash flow.

The most severe paycuts are normally in the range of 30% to 50%. For employers, a paycut of 30% plus 12% in EPF savings would mean saving cash flow by 42% instead of retrenching 42% of employees. For the more severe cut of 50%, the savings would be 62% of total payroll.

For employees who suffer paycuts of 30%, their take-home pay will only decline by 21% (EPF not deducted), which can still sustain their current lifestyle, albeit with some tightening of the belt.

Despite losing six months of savings in the EPF, it is still a better option to be employed, as it would be extremely difficult to look for another job in a recession.

Employers are advised to retain their staff strength, as when consumer confidence returns in six months’ time, there will be a boom in traveling, shopping and eating. Pent-up demand will be met by a fully experienced team.

Employers who make decent profits at the end of the year can always make it up to the employees by paying higher bonuses to replace lost savings.

There are some industries which are displaying Covid-19 symptoms – respiratory problems and difficulty in breathing, with some already in the intensive care unit suffering from severe no sales-no cash flow syndrome. The aviation, tourism and retail industries need a direct injection of immediate help in cash flow.

I believe the government needs to set up a Covid-19 rescue fund of at least RM20bil to tide things over. Khazanah Nasional Bhd, famed for its generosity, could pump another billion into Malaysia Airlines Bhd perhaps.

This fund should be implemented with full transparency and be fully recoverable from the beneficiaries. It should not be diverted into unintended pockets.

Perhaps, Bank Negara could cut the overnight policy rate by at least 50bps. The coronavirus does not wait and see. Everything is falling off the cliff. It is best to cushion the fall.

The first quarter of the year has been disastrous for business and individuals. Sales have fallen off the cliff, as Covid-19 hit the nation like a tsunami, leaving everyone with no time to prepare for a soft landing.

Published: https://www.thestar.com.my/business/business-news/2020/03/21/exempt-epf–contributions-to-save-jobs

4/2020 – Save the people, business and nation

The sequence of political events in the last three weeks was full of intrigue and suspense. Acts of twist and turns over breakfast, lunch and dinner, the actors were truly acting out their roles in a pre-written script known only by the master politician.

Betrayals, deceits, back-stabbing, pledge of loyalty, back tracking pledge of loyalty, conspiracies, palace intrigue and back door negotiations.

Personally, this has to be the most exciting political drama that I have ever seen. Better than Hollywood or Bollywood. As the last act of reconciliation is being played out right now, I am left with this flat feeling that I actually knew how this saga would end. The master politician have won…again.I am even more depressed now that Covid-19 has been declared a pandemic by World Health Organisation (WHO). According to a McKinsey article before this declaration by WHO, they were looking at three scenarios for Covid-19 for the world which was:

Quick recovery: Public health response by countries has similar effectiveness to China. Virus is seasonal (disappear towards summer), and fatality ratio is similar to flu. There will be change of behaviours but most economic activity persists.

Outcome of a quick recovery: Recovery of China is largely complete, including Hubei by the second quarter. Relatively fast rebound by end of the first quarter in Europe and the United States after initial acute drop in consumer demand.

Global slowdown: Public health response by other countries less effective than China. Virus is seasonal. Fatality ratio is higher than flu. Greater shift in daily behaviour, economic activity slows down

Outcome of a global slowdown: Recovery in China is largely complete by the second quarter, Europe and the United States see economic slowdown until the middle of the second quarter, certain sector (aviation, hospitality, tourism) deeply affected. Other sectors like consumer demand see acute initial drop but recover by end of the second quarter.

Global pandemic and recession: Public health response by other countries less effective than China. Virus is not seasonal, fatality is higher than flu and major change in daily behaviour.

Outcome of pandemic and recession: Recovery leads to resumption of pre-outbreak routines which drives new transmissions, complete by the third quarter. Global recession, Consumer confidence does not recover until end of the third quarter or beyond.This article was written just before Black Monday March 9. The sharp drop in crude oil price was just being played out by Russia and Saudi Arabia. WHO declared pandemic crisis just two days ago. Italy is in full lockdown. The United States just stopped all flights from Europe, India blocked all entries by not issuing visas.

The transmission of Covid-19 is accelerating outside China. To make matters worse, global stock markets crash wiping off trillions in net worth.

In just five days since March 9, we are staring at a global pandemic and possibly recession.

Unlike the Singapore government who have past reserves to tap on, the Malaysian government is broke and with falling crude oil prices, the safe dividends from Petronas will not be forthcoming this year. With recession looming, quick action is needed by the government and the private sector. Bold steps need to be taken to soften the impact, keep liquidity in the economy, help save companies stay afloat and local workers stay employed.

And all the actions to be taken are based on the assumption that the Covid-19 pandemic will last six more months at most.

With unemployment on the rise, many families will have to dip into their savings for their normal monthly expenditure. My suggestion is to suspend payment of EPF by both employer and employee for six months starting in April 2020. This will put RM2bil to RM3bil a month liquidity into the economy. Companies will be able to preserve cash flow and employees will have additional cash income for daily expenditure. Current 4% waiver in contribution for employee is insufficient.

This temporary shortfall in contribution is actually a blessing to EPF who will be under less pressure to find suitable investments in the midst of global stock market crash.

Bank Negara should react more aggressively to lower the OPR by another 0.5% to reduce the burden of interest payment by both corporate loans and private mortgages. This is not the time to wait and see as the economy will spiral into recession as fast as the Covid-19 is transmitted.

While the new government sets up another economic action group to mull over the first stimulus plan (which is not enough), our aviation and hospitality industry is already on its knees begging for fresh air which is not forthcoming for the next few months. Extensive direct financial assistance should be given to the industry immediately.

Senior management must take equal responsibility if not more in terms of pay cut or unpaid leave. When sales drop by more than 50%, our MAS CEO is talking about a personal 10% pay cut. The Qantas CEO in the meantime announced that he will not be paid a salary and his senior management team takes a 30% salary cut. When the airline goes under, everyone will be retrenched. Unemployed. Zero income.

For the SME owners, you are on your own. Do what you need to do to survive. Be agile, be smart and be lucky. Pivot if you must, look after your staff and then look after yourself. Be ready for the next upswing and recovery.

Just when this crisis loom, we have a new government with a bloated cabinet. I guess a bloated cabinet is needed to manage a bloated civil service. The best employer during a crisis is definitely the government because rain or shine, the wooden bowl is always filled at the end of the day.

During a pandemic crisis, all parties have to make personal sacrifices just to survive to live another day. The national agenda must be safety first. Save the people. Save the business. Save the nation. I am just glad that we do not have to worry for the politicians. They are so skilled in saving themselves. Life goes on as usual.

3/2020 – Time to prepare cash flow reserves

Almost every month I would hear a few cases of friends and a friend’s friends being diagnosed with cancer, mostly advanced fourth stage cases.

Discovery at our age is normally advanced, comes as a shock and requires immediate treatment.

Just two days ago, I was having a chat with my oncologist while in hospital to be fed intravenously my second course of a targeted therapy which has gotten more expensive compared to some six years back.

The regular chemo drugs which has been around for the last 20 years are not too expensive but if you can afford the newer targeted and immunotherapy drugs, go for it as they are less damaging to your normal cells, more effective and causes more tolerable side effects.

My oncologist was very frank with me. Cancer treatment can be very expensive and it could drain your savings if you do not have extensive insurance coverage or a strong cash flow.

I would recommend to the young working adults to buy life insurance with high coverage on critical illness.

Forget about investment linked products and go for plain life insurance plans with a high rider coverage on critical illness to reduce your insurance premiums.

Your savings could be used for your children’s education instead of being spent to prolong your life. Cash flow planning is essential not only for businesses but for personal family matters.

Looking after old parents, having a roof over the head, educating children and planning for the unexpected medical expenses.

Like all businesses, having sufficient cash flow for day-to-day operations is just not enough for the long-term survival of the company as businesses go through cycles of boom and bust.

Saving for a rainy day means increasing your cash reserves during the boom time so that you can ride through the down cycle and the unexpected crisis like the current Covid-19 saga which is still being played out without a solution in sight.

Many industries have been affected by the lockdown in China. From non-delivery of critical parts to manufacturers, to closure of restaurants and shops, complete shutdown of tourism-related businesses from airlines to hotels to travel agencies, the list is endless as once confidence waned, business and consumer consumption drops off the cliff thus affecting the whole economy of a country. This crisis could be over in three months time but by then it would be five to six months into our 2020 business budgets and I would say most businesses would miss their budget forecast by a big margin, some more than others.

Many small businesses will not survive if there is insufficient cash flow to weather the storm.

Companies with heavy borrowings and big wage bills will suffer massively and will require more borrowings or cash injection by shareholders.

Airlines with heavy exposure to China routes will suffer the most.

With heavy borrowings due to high capital expenditure, cash flow from forward selling has trickled down and if full refunds were made for all the cancellations, I wonder how long their cash reserve will last.

Having experienced SARS in 2003, Cathay Pacific was the first airline to react in terms of preserving cash flow.

By asking their 27,000 employees to take a three-week unpaid leave, it could effectively reduce their cash outflow by HK$400mil to HK$500mil in the next two months.

Together with lower fuel cost, the damage to their cash flow reserves might not be as bad.

If the situation does not improved, they will start a lay-off exercise.

In Malaysia, a few industries have called for help from the government.

Hotels, travel agencies have asked for immediate reduction in water and electricity tariffs, banks to help out by stretching loan repayments.

The Finance Ministry (MoF) has had meetings with the affected parties and said that it is monitoring the situation and will make a decision by end-March.

Unexpected crisis requires immediate decision-making. China imposed a lockdown on Wuhan to prevent the virus from spreading. Chinese New Year holidays extended for one to two more weeks. Hong Kong closed schools until March 15. Singapore has taken dramatic steps.

But no government has taken steps to alleviate the cash flows of the small and medium enterprises and the affected businesses. It is during such crisis that Malaysia Incorporated must band together to help each other survive this crisis.

We need immediate decisions both by the government and the private sector to help reduce cash outflows and ensure survival for all businesses.

The MoF must act immediately and not wait 45 more days.

Decisions should not be incubated or it might be too little and too late in saving our economy.

From the government side, a reduction in contribution to the Employees Provident Fund would be a big relief to the companies and put more cash into employees’ pockets.

This has been done before and nothing new.

Our utility companies should support the affected industries by reducing the tariffs for water and electricity. Banks should be more supportive by letting borrowers pay interest only and where possible extend temporary cash line to their affected customers.

Malls should help out with reduction of rental for their tenants for a certain period of time if footfall to their malls trickle down dramatically.

Electricity and water tariffs should be reduced for the mall operators so that they can help their tenants. Traders should not benefit from shortage of protective gear by raising prices. Neither should trading companies make extraordinary profits from shortage of food supplies.

Businesses must look at various options to reduce cash outflow.

For those badly affected businesses, you can be guided by Cathay Pacific’s strategy and ask for employees to take unpaid leave over the next two to three months. Companies could hold back the increments and pay back the staff when cash flow improves.

Cost control measures like reducing electricity usage and office expenses should be in place.

To the young entrepreneurs, this is probably your first global crisis and I can guarantee you that it will not be your last.

You will find that your sales projection will suddenly turn upside down and you will start looking at a shorter cash flow runway. Are you able to make tough decisions on managing your cash flow? Or will you wait and see like our MoF?

Managing cancer and virus epidemic is all about preparing cash flow reserves for the unexpected occurrence that you never thought will happen to you.

Life is full of surprises, most times pleasant and sometimes not so pleasant.

Published: https://www.thestar.com.my/business/business-news/2020/02/17/time-to-prepare-cash-flow-reserves

2/2020 – Of Komodo dragons and iguanas

It is a calm and cool morning in Bali after three days of continuous rain. Sitting on the terrace facing the swimming pool and the ocean with a cigar in hand, one can easily forget that there is a world full of problems awaiting on the other side.

Maybe seeing the Komodo dragons in Komodo National Park just a few days earlier have made me wonder about civilisation and our existence on earth. Reportedly one of the few surviving creatures from the dinosaur era millions of years ago, Komodo dragons are the biggest lizards in the world. Carnivorous with a venomous bite, they can grow up to three meters in length and can live up to 60 years.

Very much like the humans of yesteryear, the Chinese civilisation which started some 5,000 years ago believes that a full life cycle of a human being is 60 years, as evidenced by the five times 12 years of the Animal Zodiac Year calendar. Between war, famine and the lack of medical care, the Chinese of yesteryear must have statistically worked out that a human being can survive up to 60 years.

Having been born in the Year of The Rat back in 1960, I would have survived my intended full life cycle this year. Being alive any day and month after July will be a bonus to me. I am contented and now live a life without regrets. Life goes on. We just have to keep moving on.

Having spent 35 years of my life in the trading and distribution business, my companies have been sole distributors of many brands from so many different countries. The principals (brand owners) come in all shapes and sizes, from small set-ups to major international companies. Small companies come with small problems and big companies come with much bigger problems.

Like any business relationship, there are ups and downs, good days and bad days, but above all, if both sides approach the relationship with integrity and honesty, most of the problems can be resolved. I have lost many agencies and have also dropped many agencies. There are so many reasons for the termination of a distribution agreement – poor performance from either side, products not being competitive, difference of opinion on how to manage the market, etc.

To the young entrepreneurs who have decided to take on exclusive distributorships, the distribution agreement is the most important document in the relationship. Treat it like a pre-nuptial agreement. It will come in handy during the divorce proceedings. It is all about damage control when a relationship breaks down – the financial and emotional cost.

When our company lost the Revlon agency some six years ago, we had to downsize our operations, as Revlon was contributing to almost 30% of our total revenue in Malaysia, Singapore and Brunei. We had to downsize our Singapore team by half and refocus our efforts on our own brand, Silkygirl.

The emotional side was more difficult to resolve, as when we took over the Revlon companies in Malaysia and Singapore back in 2000, almost all their staff stayed back. In a way, most of the team were still very attached to the brand, as we were the team that was responsible for rebuilding the Revlon brand, growing the business year-on-year for 14 straight years.

The divorce proceedings were deftly handled, as the Americans stick strictly to legal terms as per distribution agreement. The cosmetic counters, merchandising trays and materials and balance stocks were handed over to the new distributor, we were compensated and the Revlon business continued like before.

My partners were flabbergasted as to why we were not compensated for the 14 years of hard work spent on the brand. I had to explain to them that we had made good money from the Revlon agency. We learnt about brand development and brand marketing from an international agency and we successfully built our own brand while still managing Revlon.

No regrets. Life goes on. Let’s move on.

We have a Chinese saying – “In business, if we are able to pick it up, we must be able to put it down”. Think strategically without emotions and you will survive just fine.

Gone are the days when most of my distribution arrangements were based on friendships and relationships. At 60 years of age, I am considered a dinosaur in this disruptive business world. The principals have changed too.

It is much more difficult for me to understand these young export managers who are impatient, with short-term visions and below-par field experience. And there is this elusive issue of integrity and honesty.

Now, at the tail end of my life cycle, I have much difficulty in staying relevant to the new ways of doing business. Either the young ones do not understand me or have labeled me as an irrelevant Komodo dragon.

Nevermind…life goes on and I have to keep moving along. Maybe I will just do business with my old friends, where a handshake will do and the distribution agreement is locked away until termination day arrives and we try to make some small money together. Just for old time’s sake.

To the young entrepreneurs, every time you sign an exclusive distribution agreement, you have made a vow to do your best for the brand, to treat the brand like your own and to love the brand while you are still in the relationship. Until death do you part.

If the principal agrees with you, all is good. If not, get your divorce papers ready and stop your relationship sooner than later. Like all marriages, why continue suffering? Sort it out and move on.

Life is too short…only a five-by-12 cycle. My next stop will be Galápagos Islands where Charles Darwin based his theory of evolution on his observations of the endemic species on the islands.

Komodo dragons and iguanas…always good to be at the top of the food chain. Life goes on.

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