Meshio.com

Chong was running an electrical store business. Business was very good in the beginning and in the next 3 years, he was able to expand his electrical store into a 2 more outlets. One day, he discovered a ‘method’ that could drive up sales even more. An electrical factory owner from China, Ah Chin, suggested that they could make a killing together by selling bootleg electrical appliances. They will still use the same branded logos on their products, but the actual goods would be those manufactured at a fraction of a cost in China, and imported illegally into Malaysia. Chong could not resist the temptation of making 300% profit from this ‘new idea’.

Chong made a killing in the first 6 months, before the authority receives complaints from the consumers about the ‘bootleg’ items. Chong’s electrical store brand suffered a huge reputation damage, and not long after, sales dwindled to its lowest point. With more than 10 outlets nation wide in Malaysia, Chong desperately need cash to sustain the operation or risk winding up the entire chain of outlets. Chong begin to source for ways to borrow money- borrowing from relatives, friends, and even loan sharks.

In this scenario, Chong is said to be facing a solvency crisis.

Muthu recently open a mamak stall in one of the most populated area in Petaling Jaya. Muthu’s specialty is the ‘Nasi Lemak Telur Burung’, a special mix of bird eggs dipped in sambal ikan bilis. Words travel fast about this unique ‘Telur Burung’ delicacy. Business just got better as his menu is often featured in food magazines and he even had 10 minutes of airtime on one of Astro’s food programme.

As conservative as Muthu is, he realized that his small mamak stall is no longer enough to cater to his ever increasing customers. Besides, eating ‘Telur Burung’ by the roadside can be a very risky act, and he don’t need bad publicity to ruin his budding business. Muthu decided to buy up the shop lot next to his mamak stall. He spoke to his cousin, Rama, who happened to be a real estate agent. Rama quickly prepared the documents and Muthu was asked to pay the RM500,000 deposit in cash. Muthu, who trusted his cousin Rama, paid the RM500,000 and before he could say Jack Robinson, Rama was reported missing with his new girlfriend.

Poor Muthu (literally) just lost his life savings of RM500,000, and a cousin. His dream of owning a shop lot just evaporated, and he is now faced with the bills for his new furniture and kitchenware that amounts to more than RM50,000. He had no choice but to start looking for money to pay off his debtors.

In this scenario, Muthu is said to be in a liquidity crisis.

Let’s look at both the scenarios, Chong and Muthu. Both of them starts their business and got on track. However, a major setback caused them huge losses on their balance sheet.

So, if Chong and Muthu came to you and ask you for help, who do you think you would help? Chong with the solvency crisis, or Muthu, with the liquidity crisis?

• A Crisis of Solvency and Liquidity (Part 2)
• 12 Selected 2008 Articles on Meshio.com
• Personal Finance: Emergency Fund
• Badminton Muscles
• Overnight Policy Rate Reduced to 3.25 percent
• Whole-life Insurance Policy
• Failed State Redefined
• PB Asean Dividend & Islamic Cash Fund