10/2015 – Entrepreneurs should always exercise financial prudence
by Tan Thiam Hock
Saturday, 23 May 2015
Here I am in London again, bored to tears while waiting for my medical appointment when one of my whatsapp group chats comes to life with lots of funny stories and pictures plonking in non-stop.
Ah Lai who is a building contractor and a Manchester United fan was lamenting to the group about his collection problems from developers. Late payments of 120 days seems to be the norm. Whilst the Developer Big Boss was being chauffeured around in his Range Rover and other exotic cars, Ah Lai had to fork out from his own pocket, advances to his Bangladeshi workers and part payments to his suppliers.
To add to his woes, Manchester United are having a relatively poor season as judged by their normal high standards. Not sure which woe he suffers more.
Meanwhile I had just fully prepaid my interventional radiologist, anaesthetist and hospital charges before I even checked into the hospital room. Since I am not covered by any insurance, I have to pay up before they even acknowledge me as a patient.
This is no laughing matter in private hospitals in London No laughing gas for non-paying guest. You might just wake up with a needle still stuck to your body if your payment transfer did not go through as promised.
So it was strange to note in the business section of the newspaper that big brother and big businesses in UK do delay payment to the SMEs to the tune of £32bil. Since payment of 30 days is quite the norm here, then delay payment would mean 60-120 days from invoice date.
Mind you, GST or VAT in UK is at 20% so after billing, you have to pay to the government first if collection is delayed.
So the new UK Conservative Government’s Business Secretary has promised to cut red tape in government and big business processes to ensure that £10bil is promptly paid to the SMEs within the next 5 years. That is £10bil less in trade receivables in the SMEs’ balance sheets!
Developing countries generally have “late payment” culture. This is caused by a shortage of capital formation in the early years of national development coupled with weak and small financial institutions. Despite the Malaysian economy growing into a developed nation, this late payment attitude still persist in many industries, the delayed cash outflow generally considered as a primary source of financing for businesses.
Cultural habit of this nature is extremely difficult to change. Coupled with a mentality of spending beyond your means, the problem is compounded to the extent where personal household borrowings have reached a dangerous level in Malaysia. The high level of personal loans extended to civil servants poses a systemic financial risk to the Malaysian economy.
What happens if the Malaysian government goes bankrupt like the Greek government and is unable to pay salaries to the massive civil service workforce? What had seemed unlikely just last year suddenly looks plausible.
To avoid default payment by 1MDB, the government might have to step in to pay off its RM42bil debts. Now that the public outrage has prevented 1MDB from plundering the various savings and retirement funds, the government might be forced to source funds from additional borrowings or cut operational budgets from other key sectors like defence or education. Dr M’s warning on our government going broke warrants immediate attention from our key financial authorities.
If you are on your own right now, it might be wise to re-strategise if your business is wholly dependent on government contracts. Either you work smart and fast on your collection or you start diversifying into the private sector where there is still ample liquidity. Yes you might suffer from delayed payment syndrome from your private sector customers but at least you face less risk of your main customer going broke on you.
If any of your customers is able to borrow RM42bil with just a paid up capital of RM1mil, then I suggest you collect your receivables immediately and get the hell out of this business relationship. Hopefully you get to collect before the hordes of bankers already standing in line.
I hope none of you entrepreneurs ever believe that you can leverage like 1MDB with borrowings at 42,000 times per ringgit capital. This is financial insanity of epic proportion!
There exist in Malaysia another significant cultural syndrome of “no need to pay back” attitude among politically backed businesses. Government grants are considered as free loans and rarely paid back in full or at all.
Somehow these debts disappear into a black hole and are never mentioned again. I would term these as invisible receivables. Now you see it, then you don’t.
So it irks the heck out of me to hear of the many financial problems faced by small and genuine entrepreneurs when it comes to bank loans and trade receivables in the midst of such wanton financial mismanagement in this country.
It freaks me out when I realised that all these financial debts accrued by our government are going to be credited as accounts payable to my children and to your children. It is now tax payer’s debt.
Entrepreneurs whether big or small should always exercise financial prudence. Never spend more than what you earn. Never borrow more than what you need.
Now I have to whatsapp Ah Lai to advise him on how to improve his collection problems.
Just avoid doing business with such big boss developers who uses his contractor’s money to maintain a collection of exotic cars and probably a collection of mistresses too. This “collection syndrome” is just another unique culture prevalent in our beautiful country.
In the meantime, month end is near and his Bangladeshi workers need to remit money back to their families. Ah Lai was last seen driving his Proton furiously after an exotic Range Rover.