A Small Business with Pigs

Again, Joyce the wife of an OFW continues to ask me questions on how she can use the $300 or PhP15,000 that her husband sends her monthly.  I have discussed the possibility of franchises and buying real estate with her.  She is now considering a business that is not a franchise and that is not real estate based.

She asked me: “ FJC, how can I raise one or a few pigs in my backyard?  At the right age and weight, I will either sell them as is, or have them slaughtered and sold retail by the kilo I think this is a possible business considering the PhP15,000 I receive monthly.  How do I analyze my decision?”

To be able to make an intelligent analysis, I told Joyce that she must go back to a most important issue.  She must make sure that she has the capability for the business that she chooses. In the example of buying pigs to grow and sell/slaughter or just buy to slaughter, I advised her to consider these questions:

a) Does she really like this business?

b) Does she know how to choose the healthy piglets, how to grow it to the proper size without any disease, how to slaughter it  (or have it slaughtered) and sell the parts at the right price?

c) If she does not have the skills required, will she be fully dependent on somebody to operate the business?

d) Or will she go through some kind of training  to learn to do it herself?

Notice that I am emphasizing the need for Joyce to have a strong personal interest in the business and not just forcing herself to have a business.  She has a strong chance of success in the business only if she has real personal interest and hopefully sufficient technical skills.  Otherwise, she is taking a big risk unless she has a good and trustworthy partner/employee who has the skills. 

Remember though that she has to keep her partner honest.  If her partner has nothing to lose and everything to gain, it would not be a fair partnership.  If the partner has no money to contribute, Joyce should at least make sure that there would be some penalty for him, if he were negligent.  For example, in this case, they should have an agreement beforehand that if something happens to the pigs because of his negligence, his share in the revenue or profit could be reduced.  Of course, there is also that possibility that the business will end up with no profit at all and Joyce might be burdened with the entire loss.

If the decision is to proceed, Joyce should now concentrate on the financial study to make sure that the business will make money.  I asked her to work on the following:

a)     Identify the location that she wanted plus the equipment and manpower  needed.  Make sure the neighbors will not be upset with pigs growing and smelling beside them.

b)    Understand the technical issues of growing and slaughtering pigs.  She can try to get information from the Bureau of Animal Industry of the Dept. of Agriculture.

c)     Establish the kind of capital that will be needed.  For example, she needs to compute how much each pig will cost and how much feeds, medicines and vitamins will be consumed.  The number of pigs can then be adjusted to the portion of the PhP15,000 that she wants to put into the project.

d)    Is there a marketing plan to ensure that the entire carcass will be sold immediately?  Otherwise, she has to estimate the storage cost and/or cost to sell at a lower price.

e)     Study in detail the more likely behavior of cash flows…cash that is put out and cash that is collected each week or at least each month until you get back your initial capital.  In this business, monthly cash flows must always be positive.  This is a cash business.  Buyers must pay within the month  Otherwise, more capital will be needed.

f)     Make sure funds are available. The same funding procedure I talked about in relation to franchises can be applied.  Loans to buy more pig are also available from both government and non-government lending institutions.

 

More Tips for Joyce

If she really wants to have a small pig trading business but is afraid to invest a bigger amount, she might want to consider buying the pig at a certain size and slaughtering it to sell.  She should look at the following:

-       A real need in her barangay for such a service because she should be able to sell immediately upon slaughter to prevent storage cost and to keep the quality of the carcass. 

-       The technical skill to buy the right pig at the right price, the capability to slaughter and carve out the correct cuts for the market. 

-       Computation of profits after considering the shrinkage from the live hog to the slaughtered carcass, delayed or non-payments by customers and the cost of slaughtering.

-       Selling prices of each type of cut to be sure that she is competitive with the market.

-       If too many in her barangay decide to slaughter pigs on days too close to each other and they are all looking at the same limited market, they may all lose money unnecessarily.  It may be good for those who have the same technical skills to get together to schedule for maximum benefits for all.

There are still so many more questions to ask but these are a start.  Again, there is no sure business of any kind.  But going through the questions and a thorough study will help reduce the risks.

Entrepreneurship is first and foremost a very personal matter.

Joyce, an OFW wife came to see me the other day and asked how she can best manage her monthly allowance remitted by her husband.  Her husband wants her to get into some form of small business. She is clearly motivated and wants to get started right away. She asked me: “What is the best business I can get into with this limited amount of $300 or PhP15,000 per month, or a total of PhP 180,000 in one year?  Is this enough capital ?”

The process of getting into business

Ellen, a former OFW who wanted to be self-employed wrote me, “FJC, I invested my life savings in a balloon making business and lost all my capital in six months.  Can you tell me how or why this happened”?  When I asked her what her real interests were and why she went into balloon making, she told me that she was really into cooking but that her auntie had strongly recommended balloon making because she had enough money to start such a business.  Her auntie also told her that it is a good business because she has a friend that does well in that business.

The cause of failure was quite obvious.  First, she took the advice of one who was clearly not a capable business advisor.  Second, she decided based on the amount of capital she had readily available.  Third and the biggest mistake of all is that she went into a business which she did not know anything about and where she had no real personal interest in, and most likely, had no technical capability to contribute.   It was clearly a wrong decision for Ellen. 

Joyce, on the other hand, wants to know what her business options are.  She is an undergraduate in accounting and had some work experience with an appliance sales and service company before.  In that company, she worked as part-time bookkeeper and customer service in-charge for more than three years.  She told me she really enjoyed the customer relations part of her experience. She also told me that she is also very much at home in food related activities. 

Given this personal background, Joyce would probably do well in food and/or service type businesses.  The question is what type of business and will she have the necessary capital to do it? 

I gave Joyce the list of Filipino Franchisors and their broad range of small businesses available.  Some are new but quite a number have proven track records.  From this list, she chose a few which required first year investments (including franchise fees) of around PhP200,000.  Most had demonstrated payback of about three (3) years and most had quite impressive service support.  I encouraged her to seriously consider a food-stall business, which had in fact an available franchise near her home. As my partner Entrepguru Andy always says, most opportunities can be found just around your neighborhood.  Look around you and observe what is it that your community badly needs?  Don’t just follow what everybody is already doing.

Another good thing about Franchise businesses is the business training included in the package.  In this case, the training period is three months but she would need to pay 30% (subject to negotiation with the Franchisor) or about PhP50,000 as soon as she signs the franchise agreement.  The Franchise business projected minimum of net cash earnings of  PhP10,000 and possibly up to PhP18,000 per month.  If successful, this business would double the amount of monthly cash flows Joyce will be receiving.  It would also provide her family good back-up income in case her husband has to stop being an OFW.

Here is what I advised Joyce to do:

1.      Validate the Franchisor’s claims through the Association of Filipino Franchisors, Inc;

2.      Validate the actual experience by directly interviewing the FIRST Franchisee, or if not available, other Franchisees and validate the truth or falsehood of the market and financial claims of the Franchisor.  I am personally aware of situations where franchisors do not live up to their claims. ;

3.      Find out if the Franchisor has any pending legal cases with any of the Franchisees, and if there is any, find out why;

4.      Secure serious legal advice on the merits and demerits of the Franchise Agreement. Make sure that she is satisfied with all the provisions of the Franchise Agreement, particularly on her option to terminate Agreement without any difficulty.

5.      Be aware that anything not written in the agreement, even if promised by the Franchisor, may not be fulfilled.

6.      Make sure that all the sources for funding are in place.

Now, for the hard part.  How will Joyce raise the PhP200,000 for the Franchise?  First of all, Joyce has a very good source of future cash flow.  Her husband is able to send her PhP15,000 every month and Joyce tells me she can prove that this regular remittance will be made for at least three more years.  This situation is BANKABLE! With this assurance, Joyce can negotiate with the Franchisor for installment payments on the Franchise fees. First, she can propose to pay the down payment of PhP50,000 partially every month during her three (3) month training. Second, she could offer to pledge the assets to be acquired by the Franchise business itself, and, if necessary, she can also offer to pledge the future remittance of her husband until the full Franchise fees are paid.  Under this arrangement, the total capital requirements of PhP200,000 can be fully met in less than one year.  The monthly remittance plus the earnings of the business will make this happen.

What if Joyce can only use PhP5,000 per month to invest in this business?  Is there a way she can still get into this business?  

The answer is yes.  However, this will require some detailed negotiations with the Franchisor and some funders like the Small Business Lending Corp.  In certain cases, the Franchisors will even guarantee the loan of the Franchisee so that Joyce, in this case, can get into the business earlier.  This is good debt in action, the proper use of leverage. 

Joyce asked if I was sure that she would succeed in a franchise business.  I emphasized that in any business, there are no guarantees but there are ways to reduce the risks.  If she at least follows the advice already given above, she has a good chance of success.