Lucky Prawn Farm
CASE CONTEXT The aquaculture industry in the Philippines is a major livelihood and employment opportunity, banking on the country’s rich supply of consumable marine life from its aquatic resources. Giant Fresh Prawn farming makes up a portion of the aquaculture industry. The Giant Freshwater Prawn locally known as ulang in the Philippines, is valued for its nutrition content and considered a promising aquaculture species for their high survival rate. Freshwater prawn can now give large ireturns with small investment. Prawn farming has started as an incidental harvest in milkfish water ponds. It was popular during the mid-1970’s in Japan and this gave way to prawn exports in 1975. Prawn farming was first introduced to the Philippines before the 1980’s. The real boom in production began in the mid-1980’s as rich families in the Visayas region started converting their sugar plantations into aquaculture business. They saw prawn farming as a more profitable alternative to sugar. In 1992, the prawn industry had its peak, earning approximately US$ 300 000 000 and became the top marine product export from the Philippines. However, certain diseases from marine products in the early 1990s caused significant decline in production. Prawns are typically cultivated in freshwater. A female prawn lays thousands to millions of eggs, which hatch after about a day. The hatched prawn are fed and develop into young prawn after about 12 days. Then, the post larvae are put either in nurseries or acclimation tanks before transferring them to grown out ponds. The transfer usually occurs around the 25th day. The young prawn stays in the pond until they are harvested after about three to six months after hatching. During their stay in the ponds, other measures regarding the pond like discharging of water, water cultivation and filtration must be taken. Prawns are harvested by net fishing or by draining the pond. Harvests are done once a year, but in tropical climates like in Philippines, where water temperature is higher, a farm could harvest two to three times a year. Aquaculture shrimp production by major producer nations are shown below:

EXECUTIVE SUMMARY In the early 1988, three of the four partners agreed to put up 25 000 pesos each as initial capital to launch a prawn farming venture in Zamboanga City. One of the partners, Ben Torres has acquired know-how on prawn farming culture after working as an engineer in a firm near the prawn ventures. Due to experience and proximity to the location, Ben Torres was given the opportunity to become an industrial partner to the new business. To reduce the financing cost, it was decided to lease an existing fishpond in the area instead of developing a new one for their first crop. Having no prior experience in prawn farming, the partner wanted to minimize the risk by starting at a small scale. If the two-hectare operation proved successful and profitable, it will be just then that they’ll consider expansion by putting in more capital and developing additional fishpond areas. The first crop was started in the late 1988 with a one hectare pond stocked at the rate of 35,000 fingerlings. By February 1989, an additional P30 000 was raised from the three non-resident partners to sustain the venture. Despite problems, first crop was successfully harvested in April. An additional P30,000 was added as a working capital as well as to improve the crop. Improvements involved deepening the pond and construction of a second watergate which will reduce problems arising from water quality. The second crop was started in June 1989 and was harvested and sold in December. From the result of the second crop, more infusion of capital was proposed by Ben Torres. However, Ric Solis became wary because they were not informed that P20,000 had been spent during the period to acquire a water pump. He was also surprised that P8,000 had been spent to begin the deepening of the other one-hectare pond. With these, Ric Solis recognized that Ben Torres should be given some leeway in running the venture and in making day to day operating decisions without consulting his partners. On the other hand, he also recognized that there had to be some way to better plan the financial expenditures of the farm and to limit Ben Torres’ discretion in making investment decisions which would result in additional financing requirements for the venture as had happened during the second crop.

PROBLEM What necessary actions must be undertaken to ensure the active involvement of all partners in decision-making while instigating efficient control of the overall operations of the business?

POINT OF VIEW We will assume the point of view of the consultant.

AREAS OF CONSIDERATION Informal control. No official standards and guidelines govern the operations of the prawn farming business. Acceptable returns for the initial investment and the startup period for

stabilizing the venture were not well-defined.

Nature of partnership. Ben Torres is an industrial partner while Ric Solis and the two other relatives are silent partners or those who invest capital but do not take part in the operations of the business. Nature of the business. Lucky Prawn is a small-scale aquacultural business specializing in the culture of prawn. Lack of transparency. The three investing partners are not informed of major decisions made by Ben Torres which have direct impact on the business. Lack of inventory control. A surplus of prawn feeds and other supplies remains after the second crop. Lack of formal knowledge on prawn farming. The partners started the business without any firsthand experience about running a prawn farm. Binding. The actions of Ben are binding on all partners although the other partners are not privy to the former’s decisions.

ASSUMPTIONS The partnership was formed without any legal and official agreements between the partners. The silent partners do not hold regular visits to their farm. The goal of the company is to stabilize its financial position and profitability. An excess of supplies could result in high costs, which includes storage costs, loss from spoilage.

ALTERNATIVE COURSES OF ACTION We did not find it necessary to enumerate alternative courses of action as we are working under the definition of alternative courses of action as being mutually exclusive.

DECISION Lucky Prawn Farm should take the recommended steps following the traditional control techniques and devices which include both budgetary and non-budgetary controls. The recommended steps address both short-term and long-term control of the business.

EXECUTION Establish a business charter. Lucky Prawn Farm should establish a contract which will be agreed upon by all the partners of the business. Not only will this grant formality and legitimization to the partnership but also serve to specify the functions and limitations that goes to the respective partners. It will be specified in the written contract that Mr. Torres should consult the other partners before deciding on matters involving major cash outlays and long-term effects. Through this, the silent partners will be able to participate in deciding on important issues.

Set well-defined standards and goals through budget plans and production and sales targets. Before the start of a new operating cycle, Ben Torres should come up with an estimated budget plan to serve as a baseline for the forthcoming expenditures and disbursements. These plans are subject for review by the silent partners so that they are aware of the farm’s financial matters. Prepare periodic financial reports with proper documentation. In order to monitor the flow of cash disbursements, proper documentation of transactions must be kept. This would reflect consistency of the financial reports with the actual cash receipts and disbursements. Evaluate actual performance. Management should evaluate whether the proposed budget plan is in congruence with the actual operation of the farm. Determine any deviations and discrepancies between the actual and target performance based on periodic reports. Initiate corrective actions. Proper measures should be taken to eliminate the gap between the actual performance and the plan. The presence of deviations may merely require a revision of budget plans. Facilitate smooth implementation of the proposed control system. This is to ensure that every aspect of the business will be in line with the company’s goal and work towards the achievement of their goal by following the set standards. Hire a controller. The control personnel shall assist Mr. Ben Torres in making the financial statements to maintain a healthy cash environment. This will integrate the “check-andbalance” principle.

ANALYSIS The primary concern of Ric Solis and his business partners is not the continuous inflow of money into the business but whether this money is utilized for the immediate operational needs of the business. From this, it can be said that the three silent partners are more inclined towards the management side of control rather than the operational aspect of it because unlike Ben Torres’ actual involvement in running the business physically, they are more focused on the overall performance of the farm. Operational and management control happens simultaneously because the operational control system involves actions to be taken that are decided by a set of logical rules which are based on targets and standards set by the management control system. As co-owners of the business, Mr. Ben Torres’ and his other business partners all have the common goal of stable profitability, continued life and expansion of their business. However, as can be seen from the financial statements and the excess supply of feeds left after the second crop, it can be deduced that Mr. Torres is less concerned with maximizing the utilization of the capital that is given by his other business partners since he does not need to invest any cash on their partnership. Setting a budget plan would bridge this gap between their respective goals because Mr. Ben Torres now would have to work under the limits of the said budget.

RECOMMENDATIONS Control through personal ocular inspection. The silent partners should conduct regular and/or sporadic visits to the farm to personally monitor and evaluate the current the overall condition and performance of the prawn farm.

Improving the means of communication. More open lines of communication must be developed between the managing partner and the silent partners so that each partner would participate in the operational planning and remain well-informed regarding the activities within the business. Fax machines and beepers are the modes of information transfer used in 1990’s. Develop ways to control inventory. Being able to operate a prawn farm for two years, they should be able to compare supply records from the previous years and estimate the optimum amount of supplies to order to avoid over stock costs. Increase output productivity and improve product quality. The partners should seek help from experienced prawn farmers in order to maximize the yield from the crops. They should also take the expert advice from the technical consultant to improve the quality of crops to be harvested. Have a better understanding of the prawn farming business. The partners can acquire ample knowledge in prawn farming by seeking advices from the experts or by finding relevant information through some studies. This is in order to help them make well-informed decisions regarding the operations of the business. Create an incentive for Ben Torres. Instead of having Ben Torres share in the company losses, he will be given an incentive based on the expense-to-revenue ratio. This ratio will determine what part of revenue actually goes to expenses. This will not only serve to motivate Ben Torres in performing well but also work towards the achievement of the company objectives.