Just How Small Should Your “Small” Business Be?
Bigger isn’t always better.
In fact, when it comes to starting a business, smaller usually makes more sense. This idea is especially important to remember if you are a foreigner attempting to open a business in the Philippines. Magazines, newspapers and books always note that most entrepreneurs tend to ‘think big’. Extolling the virtues of thinking big by those who have taken their businesses to the highest of heights makes for good sales. But usually these same publications gloss over the fact that most successful entrepreneurs almost always start small. This brings up the question for most foreigners wanting to open a business in the Philippines: ’Just how small should my small business be?’
While there is no easy answer to this question, there are two typical answers offered by most foreigners who have been in business in the Philippines. The first and most frequently supplied answer usually goes something like: ‘don’t waste your time and money’, or ‘you just can’t make money in the Philippines, so there’s no point starting at all’. Interestingly, these are the same comments you would normally get from concerned friends, colleagues, and family members if you mentioned you were going to start a business in your own country. Starting and running a business in your home country is hard enough. Starting a business in a foreign country raises even more concerns and prompts most to urge for even greater precaution.
A second answer from foreign business owners in the Philippines is typically less dire than the above answer, but still tempered with a call for restraint: ‘You should start out by being just big enough’. Now what does that really mean? Well, it means start out as small as possible given the demand for your product or service. Starting out ‘just big enough’ is more prudent than ‘going for scale’, because doing so limits the size of your initial investment, meaning a reduction in unnecessary risk and freeing up more of your resources to ride out rough patches after you have opened for business. Furthermore, by starting out ’just big enough’ you leave yourself in a better position to start over again if your venture performs poorly. [Remember in my last article how I discussed the need for a back-up plan? Well, starting small, or 'just big enough', helps you retain the ability to start over again and learn from a failed venture if you aren't so successful at first.]
Bottom line: Starting ‘just big enough’ almost always means a slower path to success, but it is also generally a safer way to build both a sustainable business and an enduring career as an entrepreneur.
Starting small has other concrete advantages. Starting smaller limits the size of any mistakes made, and just ask any foreign business owner in the Philippines and they will confirm that every entrepreneur makes mistakes at start-up. By consciously trying to start up small, you avoid the biggest mistake many foreigners make when opening a small business. What is that biggest mistake? Throwing money at any problems faced! By focusing on keeping your initial investment small, you also force yourself to be creative when solving problems, and this is a habit worth learning from the start for any entrepreneur.
How then can you keep your initial investment small enough to be ‘just big enough’? For starters you should decide to purchase only those items of equipment that are absolutely necessary to get your business started. There is absolutely no need to spend precious resources on items or equipment that is not used on a day-to-day basis unless it is absolutely critical to your final product or service delivery. It is better to stock up on a back-up piece of essential equipment than purchase equipment or make improvements that do little to add to your initial sales. Remember, you can always add ‘window-dressing’ later on after you have established consistent and stable cash flow.
A second tip is to avoid debt as much as possible. I can’t emphasis this enough. There is nothing worse than having to make interest and principal payments before you have even made a sale! Most small businesses opened by foreigners fail because of under capitalization and this combined with debt repayments at high interest rates absolutely kill foreign started small businesses no matter what the market niche.
Finally, use only a small portion of your nest egg to open a small business in the Philippines. If you don’t follow this last tip, you not only risk putting your entire family at risk if you are unsuccessful, but you also severely limit any chance of starting up a new venture in the future. No matter how successful you become, when you look back on things, chances are you’ll be glad you started ‘just big enough’!
Hi Martin, thanks a lot for another great and informative post. I would say: START THE SMALLER THE BETTER, and wait and see - and then let it grow…
Hi Klaus,
I agree with your sentiments. It is perfectly fine to dream big for your business, but starting out small as opposed to big makes more sense from a risk standpoint. Entrepreneurs do take risks. However, they generally take calculated risks as opposed to risk simply because they dare to do so. It is much easier to ramp up a small, successful business than redirect and reinvigorate a relatively new but struggling business.
Thanks for sharing your experience!
Hi Martin,
I find it more enjoyable to have a smaller size store - so much more fun, manageable and the customers love the coziness, personalized set up. Another advantage… it would always look full of stock. Rearranging displays once a week would also appear to have constant fresh arrivals to the frequent shoppers.
Have a gainful business day!
Hi Marcelina,
I agree with you on the advantages of a small store size. When we set up our business in 2002, we purposely chose a space that was ‘just big enough’, and for two reasons: (1) less space = less expense, and (2) people always seem attracted to the places that are always full! By staying small, you can create more cozy environments that appeal to a lot of people, and at the same time keep your rents lower. I think it wouldn’t be a plus for those businesses whose products sell best in a more a spacious atmosphere, but for a great deal of businesses, smaller space requirements aren’t a drawback, but a plus!
Thanks for giving others a good example on how it can pay to be small!
Hi Martin,
You’re right! I had the opportunity to experience both – my first business, opened in 1983, a ladies tailoring business, started on a 600 sq. ft, had 2 full time and 1 part time employees. It was great, made a pretty good living even after doubling the size of the space. (The only woman owned tailoring in the area at the time).
Three years later my husband and I opened a retail business – a combination of books, music and gifts items. We needed 1600 sq ft. plus we had to hire a store manager and two full time employees - neither my husband nor I could be there to supervise on a daily basis. It started to become strenuous - the outgo was higher than income. Retailers only get 40% on books, and the shipping was exuberant. When the three-year lease was up for renewal we decided to relocate and choose to go smaller - to 900 sq. ft. The amazing thing is…with the creative layout of the space I was able to display as much stock plus more in the new space. The rent and utilities were reduced and we only needed one full time plus myself. We got back on our feet before the business went south, thank God!!.
Cheers!
Martin… Good article. Can relate it to the ponds we are developing. We have 26 hectares to work with. At 1mm pesos per hectare, the capital investment gets very large really quickly. We have started with 2 unimproved and 2 improved ponds… 4mm pesos and we can see what works best. We look at it like this: the land is wholly owned and not going anywhere. It will always be there for expansion and growth.
Hi Marcelina,
I’m really glad to hear your move to a smaller space worked out so well for you. Sometimes it is hard to know at the beginning exactly how much space is really needed. Your decision to downsize your space requirements surely played a big role in turning things around for your small business. It’s amazing how keeping things small can drastically reduce costs, which in turn may be just what is needed to get a business back on track. Thanks for showing us an example on how scaling back to a smaller size can pay big dividends in a short amount of time.
Cheers!
Hi John,
Thanks for your comments! You bring up a really important point regarding flexibility. You’ve painted a nice picture of how an entrepreneur can plan for growth by securing land in advance, but at the same time keep your initial investment small by limiting the amount of land you actually develop as a start. Now you have the chance to find out what works best and then you can replicate it on larger tracts of land at a later time. By approaching things this way you can limit potential mistakes and take advantage of what you learn as you go to the benefit of your business.
Thanks again for another great example on how people can keep their business ‘big enough’!