Personal or Business Finance - An Empty Sack Cannot Stand Upright

 Ahh..  It's been a long time since I wrote here.  I now have 3 children, an ex-gf who is now an incredible wife, and more or less still the same businesses when I started working after college.

There's been a lot of ups and downs since I last wrote.  Some blessings that are more than what I deserve and some challenges that I would've preferred not to have experienced.  I guess I'll console myself in rationalizing that having both makes life truly richer overall than having just one of them.

Back to the main topic.  As I write this, the world is in the middle of a pandemic.  Many businesses and jobs around the world suddenly lost their incomes.  It is during these times which happens around once every 50 to 100 years where you have no control and there's nothing you can do in losing your job and your income.

At the moment, I think the best thing I learned from this event is not so much on the benefits of having ample reserves (cash) in your company or your personal finance but more important is how the difficulty in accumulating or saving enough reserves is not so much in not having the opportunity to do so but in avoiding the temptation to spend and grow your business and assets while you're making your money.

The tendency for most companies when they are making money is to expand their businesses even more in the current areas of their businesses or in other areas.  Usually they will spend much more than what they are earning and therefore borrow money to supplement.  That is okay as long as your balance sheet is strong and you can weather the down times.  But what you will see is that most of these businesses around the world and especially the large publicly listed companies in the Philippines have growing debt and growing earnings but almost negligible amount of cash in their balance sheet or pockets.  So when bad times hit such as the pandemic, these companies who have to sustain losses for a certain period of time (months or years depending on their situation) are unable to do so because they have no cash reserves to help them ride through the crisis.

I admit to be guilty of this somewhat.  I leave very little cash as I can never buy enough stocks and investments.  Like my father before me I throw almost everything I have into stocks (not for my father) and businesses and whatever asset appreciating investments we can find in the hopes of growing our wealth.  Like many others including the richest entrepreneurs in my country, I have failed over the years to FIRST ACCUMULATE CASH RESERVES which takes time - years to accumulate a solid level of cash say roughly equivalent to your annual sales.  I know of no company among the listed conglomerates that have cash reserves near half of their annual sales.  I remember watching Ayala Corp's CEO's interview during the beginning of the pandemic saying that they have liquidity in terms of cash plus borrowing capacity of 20 billion pesos.  That is extremely tiny relative to their company's main businesses that have sales of over 200 billion pesos a year and can easily wipe out their businesses immediately if they lose money for 2 years or more.

One of my father's brother in law together with his brothers earn a total of almost 100 million a year for 20 years.  You may say that each sibling earns around 10 million pesos a year in the last 20 years.  Yet despite each brother earning a total of around 200 million pesos over 20 years some of them are still illiquid and poor today.  This is most likely attributable to their misspending in luxuries and money losing business ventures.  Some of his brothers have multiple expensive cars and another one of his brother has more than 1 family, possibly 3 families.  My father's bro in law seems to be the biggest miser or scrooge among his brothers (but his kids are a different story) and it seems like he is also the wealthiest among all of them today with cash reserves of over 300 million pesos as of last year.

Overall, we have been blessed to be spared what has befallen majority of the world's businesses and we are able to continue to earn money and accumulate cash.  But we may have our own business storms in the future such as our services becoming obsolete or getting crushed by some competitor.  Recognizing the difficulties and challenges of accumulating cash - forgoing investment temptations for at least a few years, the priority of my family business today must be accumulating cash and at most only invest a minority of the annual earnings (say no more than 20% of annual earnings) for any other investments until we accumulate over 50% of the business' annual sales.  After we have accumulated such levels of cash reserves, we can hopefully feel confident in spending big amounts of money for investments while at the same time we can feel secure to face all kinds of business storms that can potentially wipe out our business' earnings.  With the right cash reserve levels in our balance sheet we can stand upright no matter what happens.  

It is better to be small and full sack than it is to be a large empty sack that cannot stand upright when a storm hits.  So keep your balance sheet balanced like Berkshire Hathaway or Daily Journal Corp or Google or the China Gov't or Cham Samco & Sons did!  The solution to being a full sack that stand upright is accumulating a lot of cash reserves.  This was how my ancestors survived world war 2 when they had almost 0 earnings during the japanese occupation but they had cash reserves equivalent to several times the capital needed to run their business kept in Taiwan or U.S.  Although their business is not that large anymore, their business is the longest lasting one in their industry.  They have definitely won the game when it comes to longevity.  In terms of survival, there's a lot to learn in practicing what the founding ancestors practiced that resulted in their company being one of the best there is in terms of longevity.