Repair, Rebalance and Reform By JR Maniego Repair, Rebalance and Reform.

These were among the key talking points by Christine Lagarde in this months Annual IMF Meeting. Although this guidance was made to aid global policy makers in crafting a roadmap for a sustainable global recovery, I think as managers of our own personal finances it is also imperative that we try to apply such directives to ensure that we prevent if not recover from our own little financial crisis. Just recently, I was approached by a married couple who needed help in creating a comprehensive financial plan. The couple were SME entrepreneurs that operated a small chain of wellness establishments, an auto shop and a clothing/apparel franchise located in Angeles, Pampanga area. The couple has recently been experiencing a significant strain in their cash flows as a result of increasing debt payments from both individuals and banks, and weak sales turnover. Thus as a consequence of these on-going circumstances, the couple was forced to return its clothing/apparel franchise back to the franchisor resulting in 100% loss in their equity on that business. Now, the couple is left with ailing cash deficient businesses with minimal potential to repay debt with realized net losses for the past two years. The couple has resorted to looking for additional sources of income and use of their retirement savings to cover for any deficiencies on their debt payments. High amounts of debt were incurred because the couple took a risk of borrowing equity to fund their businesses and given challenging times, weak sales has brought challenges in their financial management. Upon hearing the couples unique financial situation, I realized that they were fighting two enemies from the flank - debt, on one side with weak sales on the other. So to help the couple in finding solutions to their financial challenges, I went on and recommended three major initiatives that were needed to reduce debt, revive their existing businesses, and minimize possibility of future financial difficulties from happening again. Consolidate finances to reduce debt (REPAIR) The main priority of the couple is to try reduce debt. Maintaining a huge amount of debt in our balance sheets is a drag. This is because interest payments are fixed expenses thus coupled with falling sales will definitely strain cash flows. One avenue that the couple can explore is to consolidate and restructure their debt. Interest rates have settled to all-time lows hence will provide the couple with more breathing room to free-up cash, maneuver their finances, and pay off debt. Cut expenses at acceptable levels (REBALANCE) Like the recommended solutions proposed by economists and the like to solve the on-going sovereign debt crisis in Europe and a prolonged slow down in the global recovery, I also recommended the couple cut spending. Like in advance countries, austerity is the way to go. And in difficult times, unnecessary billings must be cut thus rebalancing cash to fund more productive parts of the business.

Additionally, the couple can also learn from big corporations on how to manage their expenses. For example despite weak demand in the 1st quarter of 2011, the combined core profits of publicly listed firms in the 1st half of 2011 registered a higher than expected 22.6% growth as a result of significant cost savings made by firms from lower fuel costs and lower electricity expenses through the use of schemes such as Time-of-Use (TOU). Another initiative made by firms to manage expenses was to lock-in on low rates. Hence, cost saving initiatives enabled firms to minimize drag resulting into Establish Chinese walls (REFORM) Chinese walls are hypothetical barriers used by financial firms avoid any conflicts of interest that may arise from its operations in various businesses. One of the main reasons why the financial crisis of the 2000s have severely affected the real economy is because of the failure of banks and financial institutions to bifurcate or establish Chinese walls to separate the deposit taking arm from its investing arm. Hence, banks were not able to isolate the risk that was evidently transferred to depositors. Thus, entrepreneurs must also try to erect walls to separate personal from business finances. Hence, all transactions made by the business with its stakeholders must be done on an arms length basis. Cash withdrawals made by business owners must be considered as loans with interest. Chinese walls may actually force small business owners to reform their thinking and instill in them a risk based attitude separating personal activities from that of their businesses. In hindsight and given the recent guidance of the current IMF chief, I think I might have given a sound advice to my client. I think that financial crisis are to some extent self-inflicted and is a result of faulty attitudes and practices. Hence to get out of a crisis, one must undergo a process of self reformation and a major rehabilitation of habits and behaviors towards becoming stronger both emotionally and financially in the end.