Republic of the Philippines

Bangsamoro Autonomous Region in Muslim Mindanao

MINISTRY OF BASIC, HIGHER AND TECHNICAL EDUCATION
UPI AGRICULTURAL SCHOOL
Nuro, Upi, Maguindanao

OBE MODULE

Entrep 221
Entrepreneurship

BERNADETTE A. PANISIGAN
College Instructor
09173017188

Entrep 221 Entrepreneurship

 Module 1
ORIGIN AND NATURE OF ENTREPRENEURSHIP

Introduction

The concept of Entrepreneurship has gone through an evolution or process that commenced with
providing service in a feudalistic society. Even in its early beginnings or inception, there was no indication that
Entrepreneurship or Entrepreneurism was not purely a business activity with profit as the primary motive or purpose.
From the service orientation, it has evolved into king of endeavour still without definite bias as to whether an
entrepreneur exists in the business that is purely meant for personal gain (profit) or simply providing services in general.
Nor was there also any categorization that an entrepreneur is the capitalist or the business owner and at the same time, the
manager himself, or that entrepreneurship means small-scale business.

Moreover, an entrepreneurship is an inventor and developer of ideas, change agent, creative, persistent, and a
class of his own having own value system. Entrepreneurship is now prevalent in various professions from education,
engineering, law, and other areas of orientation, including those who never had any formal schooling in business
education. Further characterization of Entrepreneurship is that it is an approach and a dynamic process. The approach of
an entrepreneur is focused on growth and expansion orientation. As a dynamic process, an entrepreneur goes through a
stage that is nurtured by his immediate environment and the kind scenarios and experiences he has gone through.
Entrepreneurship is a culture that is not a fad, but very promising career option that can prepare a person for a prosperous
future and a nation that is progressive and prosperous as well.

Objectives

 Identify the origin and nature of Entrepreneurship

 Distinguish newness from innovation
 Enumerate the broad impact of Entrepreneurship upon the economy
 Determine contemporary views on Entrepreneurship

Origin and Nature of Entrepreneurship

Evolution of Entrepreneurship

The term and idea on entrepreneurship appears to be familiar, however, there is much more that what is
commonly perceived. Its origin remains to be unclear, but there are indications that the term entrepreneur or
entrepreneurship originated in Europe sometime in the middle Ages. There is no controversy that the word entrepreneur
is of French origin from the word entreprendre, which simply means “to undertake”.

There was, however, a convergence of views among researchers and scholars that entrepreneurship refers to
undertaking a business endeavour though no specific reference as to whether it meant undertaking the business for
himself (i.e. self-owned and self-manage business) or doing it for someone else (i.e. employment in a business
enterprise). From the literature available, it was reported that early entrepreneurs provided men and materials needed by
feudal lords to wage war against their enemies. The emergence of entrepreneur or entrepreneurship at the height of feudal

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conflict in France is an indication that kind of activity is “provision of services,” and there was even no hint at that time
that entrepreneurs were doing it for personal gain or profit.

Aside from the above-mentioned notion, there are also other terms an entrepreneur has, that it can also be
translated to mean “between-taker” or “go-between”. Cited as a typical example reflective of the term entrepreneur as
“go-between” or between-maker” is Marco Polo who attempted to establish trade routes to the Far East during his time.

The twentieth century saw a number of scholars focusing their research and studies on the concept of
entrepreneurship. With the growth of academic offering in the field of business, management, and finance, the subject
area of entrepreneurship has been added to the list of curricular directions among schools.

Contemporary Views on Entrepreneurship

Lloyd Shefsky, in his book entitled, Entrepreneurs are made not Born, defined entrepreneur by dissecting the
word entrepreneur into three parts as follows:

 Entre means to enter

 Pre means before; and
 Neur means nerve center

Shefsky’s practical view on the term entrepreneur leads to a definition of the word as someone who enters a
business-any business- in time to form or change substantially that business nerve center. It is not concerned with
whether people start their businesses, buy them, inherit them, win them in a poker game, gain control of them in a proxy
fight, or even own them. All that matters is that individuals develop or change the nerve center of the business.

Karl Vesper describes an entrepreneur in a broader perspective by postulating that entrepreneurship is now a concern
of various professions. For instance, to an economist, an entrepreneur is one who brings resources, labor, materials, and
other assets into combinations that make their value greater than before, and also one who introduces changes,
innovation, and a new order. To a psychologist, entrepreneur could refer to such a person as typically driven by a certain
forces: need to obtain or attain something, to experiment, to accomplish, or perhaps to escape from authority of others.
To one businessman, an entrepreneur appears as a threat, an aggressive competitor, whereas to another businessman, the
entrepreneur may be an ally, a source of supply, a customer, or someone good to invest in, the same person is seen by
capitalist philosopher as one who creates wealth for others as, who finds better ways to utilize resources, and reduce
waste, and who produces jobs others are glad to get.

Professor Robert Nelson of the University of Illinois defines entrepreneur as “a person which is able to look at the
environment, identify opportunities to improve the environment, marshal resources, and implement action to maximize
those opportunities.” He further emphasises that the term entrepreneur is meant to be used in the large, medium, and
small business enterprises, as well as those in cooperatives and government.

In his essay entitled Change and Entrepreneur, Joseph Schumpeter describe entrepreneurship as doing things that
are not generally done in ordinary course of business routine. It is essentially a phenomenon that comes under wider
aspect of leadership.

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 For its part, Jeffrey Timmons and his co-authors of the book entitled New Ventures Creation, has described
entrepreneurship as “the ability to create and build a vision from practically nothing.” Fundamentally, it is a human and
creative act. This vision requires a willingness to take calculated risks-both personal and financial-and then to do
everything possible to reduce the chances of failure. Entrepreneurship also includes the ability to build an entrepreneurial
or venture team to complement your own skills and talents.

Author Albert Shapero who has studied other works on entrepreneurship has opined that in all of the definitions of
entrepreneurship, there is as agreement that we are talking about a kind of behaviour that includes the following:

 Initiative taking
 The organizing and recognizing of social/economic mechanisms to turn resources and situations to practical
account
 The acceptance of risks and failure

Entrepreneurship is the process of creating something different with value by devoting the necessary time and
effort, assuming the accompanying financial, psychic, and social risks, and receiving the resulting rewards of monetary
and personal satisfaction.

It now appears that in the studies about the evolution of entrepreneurship, doing actual creation service is
nowhere to be found or ascribed to as the main role of entrepreneurs as perceived by many. Nor was there any emphasis
on describing the entrepreneur as owner of the business itself.

Dr. N. A. Orcullo, Jr., in his book Contemporary Entrepreneurship, mentioned William Bygrave about his recent
studies on entrepreneurship declaring the last decade of the 20 th century as the entrepreneurial age. His idea of
entrepreneurship revolves around the notion:

First, an entrepreneur is someone who perceives an opportunity and creates an organization to pursue it.

Second, the entrepreneurial process involves all the functions, activities, and actions associated with perceiving
opportunities and creating organizations to pursue them.

Other Definition of Entrepreneurship

Entrepreneurship is the act of being an entrepreneur, which can be defined as “one who undertakes innovation, finance
and business acumen in an effort to transform innovations into economic goods. Entrepreneurship can create new
organizations or develop a strategy to revitalize mature organizations in response to a perceived opportunity. The most
obvious form of entrepreneurship is that of starting a new business also called As “startup company”. More recently, the
term has evolved to include other types of entrepreneurship such as:

 Social entrepreneurship that applies the “entrepreneurial principles to organize, create and manage a venture to
achieve social change” and
 Political entrepreneurship or “starting a new political project, group, or political party.”

No society can exist without entrepreneurship. Every society depends on entrepreneurs.

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Entrepreneurship is a process and approach

Entrepreneurship is also described by renowned scholars as a dynamic process and an approach.

As an approach, the entrepreneur considers the business opportunity as a chance to solve the problem rather than
solving the problem itself. A striking difference between a traditional manager and entrepreneurial manager is the bias
towards growth and expansion scenario. As Camposano puts it, the entrepreneur differs from the manager or small
business owner, not so much on goals or in activities, but in approach in doing business. As cited also by Hisrich and
Peters, the growth orientation can be measured in terms of owner’s intention when starting the business, their propensity
for fostering the firm’s growth, or their initiation of strategic plans designed to promote growth in the firm. It should be
recognized that growth-oriented managers in larger corporations share these orientation. Hence, growth orientation may
be a means of differentiating an entrepreneur from a small business owner but it does not differentiate between growth-
oriented people in their own or in large corporate organizations.

Albert Shapero pointed out that entrepreneurship is a dynamic process of innovation and a new-venture creation
through five major dimensions-Individuals, organization, environment, process, and institutions. Shapero further
postulated that the particular action taken by an individual is a major shift from one path to another is a product by
situational environment. The entrepreneurial event focuses on the process of entrepreneurial activity and includes the
following factors:

a. Initiative: an individual or group takes the initiative.

b. Organization: resources are brought together in organization to accomplish some objective (or the resources
in existing organization are reorganized.)

Definition of Entrepreneur

An individual who, rather that working as an employee, runs a small business and assumes all the risk and
reward of a given venture, idea, or good or service offered for sale. The entrepreneur is commonly seen as a business
leader and innovator of new ideas and business processes.

The Filipino Entrepreneur

With influence of western culture, having been previously colonized by Spain who introduced trading business,
as well as having realm of entrepreneurship, that Filipino stand to duplicate how its former colonizers really undertake its
business. In fact, the generic views about entrepreneurship in the United States, according to Dr. Orcullo, Jr., as reported
by Peter Drucker, “entrepreneurship is essentially starting a business of his own, new and small-scale business.” Being
no purely copycat, however, there are some differences and/or variations principally brought about by culture and
traditions which, unfortunately, some of which are constraints to entrepreneurism.

Unlike the Westerners who have spent substantial research on the subject of entrepreneurship and whose state of
economy favors entrepreneurial spirits, there has been no exhaustive write ups and documentations of various “successful
entrepreneurs” have, in many ways, provided a compendium of materials pointing to various traits and characteristics of
a successful Filipino businessman or entrepreneur. Quite obvious is that many of the documented success stories were

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focused on the notion that entrepreneurship means or refers to that of being engaged in small and medium enterprises or
establishing and managing a business of his own.

Who is an entrepreneur? What characteristics define an entrepreneur?

Dan Sullivan says:

“An entrepreneur is someone who does not expect compensation until he has created value for someone else.”

Jean-Baptist Say, says that:

“Entrepreneur is someone who takes resources from a lower level of productivity and raise them to a higher level.”

What are the major obstacles in starting a company and becoming entrepreneur?

The life cycle of any business has four stages:

1. Starting a business
2. Staying in business
3. Growing a business
4. Exiting a business

And at every stage, companies and entrepreneurs face numerous obstacles. Each stage has different challenges. For
example, a player who is new to a sport will have different challenges a player with 10 years of experience.

In the start-up stage, a company might be dealing with issue like funding, rpicing a product, or strategies for
service delivery. In the growing stage, the business look for a new entry points or acquire a competitor to gain a bigger
market share.

Whatever obstacle are in the life of an entrepreneur and a company, it is important to identify them. The last
thing anyone wants is to fight an unseen enemy.

The next step is to create a plan of action to overcome each of the obstacles. The most important step is
execution.

The rule of thumb is: Prioritize all of the challenges ahead of time. Plan to attack each one starting from the
most important to the least important.

Personal and business obstacles are also part of the game. Just like wind or rain are part of a football game,
obstacles are part of our lives. Entrepreneurs must accept this as a fact and learn how to overcome whatever life presents.

The Challenge of Entrepreneurs

Unlike the previous decades where technology, globalization and trade liberalization did not play a dominant
role, the third millennium is mainly characterized by globalized trading system and the predominance of the
revolutionary information technologies. This scenario, according to Dr. Orcullo, Jr., is where the real challenge for the
entrepreneuristic persons and organizations in the so-called “borderless world” is both a challenge and opportunity.
Where the Filipino entrepreneurs used to develop and market his products locally, he is now faced with local competition

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not anymore with Filipino entrepreneurs themselves, but also with imported products and services now available in the
local market. Filipino entrepreneurs have to contend with casting out the colonial mentality of the local market with its
preference for imported brands. Where before it is deemed a bit relatively difficult to export a locally made product, the
environment nowadays is such that it is conducive to developing and marketing export-quality products owing to the
various incentives and supports available.

The resurgence and constantly improving information technology sector is a development to watch, and its
benefits for entrepreneurs to grab and exploit. Entrepreneurship and innovation are important tools for productivity and
competitiveness vis-a-vis the large business organizations and the foreign competitors in general. By exploiting the
benefits of the so-called cyber space or information highway and the various software available in the market, one can
easily network with the foreign markets. The proliferation of computers both in offices and in households has
revolutionized business operations and systems, allowing every place practically a base for business operations.

The third millennium is surely a challenging and exciting world for businessmen with entrepreneurial
orientation, it is an opportunity for stretching out the limits of one’s brain. There is a lot of room for innovation, ventures
creation, strategic position, and business alliances and partnerships. Such a kind of scenario, which is characterized by
high competitive market and with various technologies now available to him, is the opportune time for outward-looking
and quality conscious entrepreneurs and a doom scenario for traditional management systems.

Entrepreneurship and Philippine Education

With the perennial problem on unemployment, self-employment and livelihood opportunity to every citizen is
the cry of politicians and unemployed. It is in fact the continuing dilemma on the lack of job for everyone that
entrepreneurship as self-employment option has become popular in recent years.

There are indications that entrepreneurship in seeping into the Philippines educational system at the secondary
level. In fact, some vocational courses/subjects and books at the secondary level includes chapter dealing with
entrepreneurship. To drive home this point, former Education Secretary Andrew Gonzales said that college education “is
not a right of every citizen” as he suggested that higher education was better left to students who have aptitude and talent
for it.

More than just capitalizing or banking on entrepreneurship as a potential cure to solve unemployment dilemma,
the culture of entrepreneurship has been made a part of the curricular offerings in some schools at the secondary level.
Moreover, courses leading to specialization on entrepreneurship or major area of study subsumed under the course
leading to s degree in business management or business administration.

The need for policy shift of the educational sector, particularly in the area of business education program, has
been long-delayed. We now have new guidelines for a degree program in entrepreneurship.

The Council of Management Educators (COME), comprising of academicians, has in some ways acknowledged
entrepreneurship as part of the management education. Recently, the Society for Entrepreneurship Education, Inc.
(SEED) has come into the arena of further promoting entrepreneurship education both in formal and non-formal sectors

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and a number of entrepreneurs themselves who continually talked about it and unwillingly share their experiences and
expertise, hoping that doers and believers of entrepreneurship will multiply in number.

Socio-economic benefits from Entrepreneurship

For years and decades, the role of entrepreneurship in the economy appeared not so well-emphasised in
literatures. Entrepreneurs have seldom received the attention and respect shown to the executives of large corporations.
Early economists recognized the essential role of the entrepreneurs in ensuring the welfare of a free enterprise economic
system. Entrepreneurs have proven over and over again to be the pioneers who convert ideas into products and dreams
into reality. Entrepreneurs blend creativity, innovation and risk taking with hard work to form and nurture new ventures.

Today, entrepreneurs play a major role as a provider of employment for the entrepreneurs himself and his
immediate environment. Small and medium-scale entrepreneurs abound and co-exists with large business organizations.
Entrepreneurs and entrepreneurship culture as well-are now regarded as a potent force and recognized sector of the
economy, and one that is to be relied upon, given its number and the magnitude of contribution it provides to a country,
may it be a developing one or a developed country.

Other than the aforementioned broad impacts of entrepreneurship upon the economy, it also brings the following socio-
economic benefits:

a. Promotes self-help and unemployment. Through entrepreneurship, the spirit and culture of self-help, self-
reliance, self-sufficiency not only by providing employment for himself, but also for providing employment for
those employed by the firm.
b. Mobilizes capital. Every person that goes into entrepreneurship or puts up his own business means releasing or
mobilizing capital that should fire up the economy. Idle capital kept in vaults of households will now be
mobilized and pumped into the financial system and the economy which means more business options for others
and more income or returns for the capital owners themselves.
c. Provides taxes to the economy. The entry of the entrepreneur into the world of business means tax sources for
the government. Every entrepreneur contributes to the economy a kind of income out of the real state, income
tax, sales tax, fees, and all other forms of payment to the national, as well as local government.
d. Empower individuals. The real indicator of the economic well-being among citizens and the masses are in some
ways gauged by the amount of financial that every citizen accumulates. Because of the high income-earning
potentials of entrepreneurs as compared to those who are employed, the possibility of wealth accumulation is
enhanced and is his economic standing in society, and so the powers that go with money and other financial
resources that goes with entrepreneurial endeavors.
e. Enhance national identity and pride. The quantity and quality of products and services produced by every
entrepreneur is a source of pride and identity for a country. It is not only the entrepreneur that directly benefits
from his/her entrepreneurial endeavors, but the country also takes pride in the honor that goes with it.
f. Enhance competitive consciousness. Innovation, being the essence of entrepreneurship, is a catalysts to a
consciousness and culture of competition, which, in the long term breeds quality and international/global
competitiveness. An entrepreneur, therefore, does not only bring in competitiveness for his products and
services but it goes with it an aura and image that can benefit other people or sectors as well.

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g. Improves quality of life. The entrepreneur’s penchant for innovation and development of new product, as well
as creation of new markets, redounds to the betterment of the products and services – and hence the quality of
life.
h. Enhances equitable distribution of income and wealth. With entrepreneurs succeeding in their respective
endeavors, chances are that equitable distribution of income and wealth can be likewise expected.

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 MODULE 2:

THE PHLIPPINE ECONOMY: HOW DOES AN ECONOMY GROW

Introduction

It is the intent of this chapter to present and orient the reader about the present status of the Philippine economy,
the history behind the development of our economy, and the factors that affect the development and growth of the
economy. This chapter seeks to re-orient the school system to respond more positively to the need for more
entrepreneurs on whom development depends. It aims to inculcate entrepreneurship into the consciousness of young
people as prestigious, challenging, and possibly more financially rewarding than law, medicine, engineering,
education, the arts, and other more conventional professions.

Objectives

 Orient people on the status of the Philippine Economy

 Identify factors that greatly affects the business establishments in our country
 Explain how s specific economy grows
 Discuss how entrepreneurship could help improve the quality of life.

The Philippine Economy: How does an Economy Grow

The Philippine Economy

1. The national economy is composed of business enterprises, household, and the government.
2. There are economic freedoms, like free competition, free choice of investments, and the prices, which are
determined by the interaction between demand and supply.
3. In economic development, knowledge, skills, values, values and the quality of people are the main determinants
of economic growth.
4. There were inhabitants in the Philippines about 250,000 to 300,000 years ago. They arrived from other countries
through the land bridges. They had primitive economic existence. More civilized migrants came in later years.
5. The Philippines was a slave of the three colonial masters: the United States, Japan, and Spain. Nevertheless, the
Chinese dominated the retail trade even before the Spanish time. The Spanish rule introduced the tobacco
monopoly and galleon trade for the benefits of top-ranking Spanish citizens. Similarly, the Americans exploited
our agricultural economy. Japan completely ruined our economy.
6. The Philippine Government got its political independence in 1946, but not economic independence from the US.
The import control program of President Carlos Garcia have a breathing space for Filipino entrepreneurs.
However, this did not last because the US had its own way of dominating the Philippine economy.

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 7. Under the Martial rule, the friends of the Dictator controlled Philippine business. Democracy was restored
finally upon the assumption of Corazon Aquino as president. Under her administration, the engine of economic
development has been assigned to the private business sector. The Ramos government has sustained most of the
good programs of the Aquino administration.
8. The national government, in its effort to alleviate poverty, has been promoting the growth of the
entrepreneurship. It has several financial and technical assistance programs for the poor who are interested in
putting up their micro businesses. Even some NGOs are actively involved in entrepreneurial projects for the
poor.

The Role of Entrepreneurship in Economic Development

1. Entrepreneurship offers an economical and faster method of distributing goods and services that accelerates
economic development.
2. Entrepreneurship is capable of generating more jobs, income, goods, and service.
3. Entrepreneurship improves the quality of life.
4. Entrepreneurship contributes to more equitable distribution of income, and therefore, eases social unrest.
5. Entrepreneurship utilizes and mobilizes resources to make the country productive.
6. Entrepreneurship brings social benefits through the government.
7. Entrepreneurship has several definitions. Any person who takes the risks and invests his resources to make
something new or better is engaged in entrepreneurship. This applies not only to business, but also to social
services.
8. Economic development is a process, while economic growth is a product of economic development. Both
economic and non-economic factors constitute the determinants of economic development. In less develop
countries, economic development refers to the progressive process of improving human conditions by reducing
or eliminating poverty, disease, injustice, illiteracy, and exploitation.
9. Development and Growth Theories
a. Laissez-Faire Theory explains that the government should not interfere in economic activities.
b. Keynesian Theory explains that the government should play a key role in economic development.
c. Ricardian Theory. This is the theory of David Ricardo focusing on agriculture playing the mayor role in
economic development.
d. Harrod-Domar Theory, conceptualized by Sir Harrod England and Prof. Domar of the U.S., claims that
more products can be produced through the use of machines.
e. Kaldor Theory, by Nichols Kaldor, maintains that the key factor is technology. This theory explains that
the application of modern technology in the production of goods and services has been responsible for the
economic success of the highly developed countries.
f. Innovation Theory, developed by Joseph Schumpeter, stresses the role of innovators or entrepreneurs
development.

10. The contributions of entrepreneurship are: 1) development of new markets, 2) discovery of new sources of
materials, 3) mobilization of capital resources, 4) introduction of new technologies, and creation of employment.
11. There is a need for a Filipino entrepreneurial economy. This means our productive resources should be in the
hands of Filipinos for their own benefits. A reasonable economic nationalism should dominate our business

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 culture for our own prosperity as a nation. Schools should stress the value of entrepreneurship based on just
economic nationalism.
12. The government can support entrepreneurs from their various assistance programs on the following: Peace and
order, Political Stability, Price Stability, Taxes, Infrastructures, Education and Training, Public Administration,
Production Technology, Marketing Assistance, and Financial Assistance.
13. We have seen that entrepreneurship directly affects the social and economic development of people. The more
society engages in entrepreneurial undertakings, the more it is likely to develop economically and socially. Our
country still has a long way to go in order to catch up with more developed countries.

How does an economy grow?

A. Theories of economic growth may be classified into three broad groups. One group consists of theories viewing
economic growth as a natural and inevitable process. The second group of theories explains economic
development as a rational process brought about when men respond to opportunities in the environment so as to
promote their own self-interest or social welfare. The last group of theories views economic development as a
result of seemingly economically irrational yet psychologically and sociologically satisfying activities of
enterprising men. We shall label these groups as general. Economic, and socio-psychological theories.
B. General explanations of Economic development
1. Economic development proceeds according to a master plan or “Law of Nature”.
2. Economic development is brought about by an “Invisible Hand”.
3. Economic Development is brought about by “Cultural Diffusion”.
4. Racial heritage determines the economic development of people.
5. Climatic conditions determine the energy levels of people and in turn its rate of development.
6. The challenge of the natural environment is responsible for the rise of civilization.
C. Economic explanations of economic development
1. Technology improvements and division of labor lead to development.
2. Population changes affects development.
3. Entrepreneurship is an important factor in development.
D. Socio-Psychological explanations of economic development
1. According to the work of Talcott Parsons, individuals in modern societies. Are:
a. Unemotional;
b. Interested in themselves;
c. Able to relate to others in terms of their social roles or their ability to do a job;
d. Known for their accomplishments; and
e. Able to relate to others in specific economic terms.
2. In contrast, members of traditional societies tend to:
a. Be emotional;
b. Be more interested in the general welfare of the community;
c. Relate to others in terms of their unique qualities;
d. Be known for who they are; and
e. Tie up economic relationships with all sorts of other relationships involving kinship and political,
religious, and other social structures.

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 MODULE 3:

ATTRIBUTES, QUALITIES, AND CHARACTERISTICS OF AN ENTREPRENEUR

Introduction

Before looking at the attributes, qualities, and characteristics of an entrepreneur, we need to define the word
“entrepreneur”. An instantaneous or spontaneous response, when one is asked who an entrepreneur is that; 1) he is an
individual or a person who owns and manages his own business, and is engaged in selling, and 2) a middlemen who
stands between buyer and seller. He is one who takes risks and makes innovations on the factors of production, an
adventurer, undertaker and projector. His function is to supply and accumulate capital. He is an innovator who does new
things or does things in a new way. He supplies new products, makes new techniques of production, discovers new
markets, and develops new sources of raw materials. He always searches for change, responds to it, and exploits it as an
opportunity. He is one who shifts economic resources from an area of lower productivity to an area of higher productivity
and greater yield; a person who organizes, operates, and assumes the risks for business ventures. Entrepreneurs develop
scarce resources into successful business by their instinct for opportunity, sense of timing, hard work, and idea-producing
activity. They accelerate the development of our economy. Finally, entrepreneurs are people who have the ability to see
and evaluate business opportunities, to gather the necessary resources and to take advantage of them and to initiate
appropriate action to ensure success.

Objectives

 Identify the attributes of an entrepreneur

 Emulate the different attributes of and entrepreneur

Self-awareness. He knows who is, what he is good at, and what he likes to do. He starts a business that is based on his
expertise in a specific field, and focuses on involvement in an area he thoroughly enjoys.

Self—motivated. Also known as drive, self-motivation is one of the most important personality traits of successful
entrepreneurs. This is the characteristic that he gets him going and keeps him moving when he is in business. It is what
helps him keep on turning out those craft items, upgrading his technical skills, or developing new and improved
promotional techniques when business is slow. It is what gives him the tenacity and confidence to call on a potential
client, even though he has heard “No” three times.

Courage. Courage, or the willingness to take risks is a valuable trait when striving for success. A successful person
might say something like “I do not know I did it; I just made a phone call and asked for the money I needed.” It was
more than luck that made it possible for this person to raise the needed capital to get a business off the ground; it was the
willingness to take a chance and hope for the positive response to the request.

Confidence. The age-old philosophy of positive thinking is a major step in the direction of success. By behaving as if
one already is success at what he does, it follows that he will be, and his customers will believe it . A confident attitude is
one of the most appealing traits he exhibits to prospective clients, for it leans them that they will be getting the best their

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money can buy. He is aware of his capabilities and does not doubt that he can accomplish the most challenging tasks on
hand. Confidence is achieved because of positive thinking. Thus, entrepreneurs should be positive thinkers.

Positive Thinkers. Entrepreneurs are positive thinkers. They think of success and bright sides. Such success leads
entrepreneurs to success. Success beget success. Dr. Charles Flory, a noted American psychologist, said that wealth does
not always come to the most intelligent or the most ambitious individuals, but those individuals who think money.

Patience. When owns his business, there will be times when he feels like the roof is craving in, especially when the
suppliers seem to be taking their own sweet time in fulfilling an important order or when a customer’s demands seem to
be unrealistic. Although he may be able to hurry the supplier along, he must remember that his customer are always right,
since they are the ones who will make or break in business.

Decisiveness. Business has been described as a process of making one fast decision after another. Often, a decision has to
be made immediately, on the spur of the moment. In those instances, one should go with his institution and trust that he is
doing the right thing.

Experience. A primary reason some business fall within a few years of start-up is lack of business experience. Whether
or not one’s experience is directly related to business he is planning to start, it is a key component for growth.

Knowledge. Experience in one’s field is invaluable, but it is not enough. One has a better chance of succeeding by
knowing, as much as possible, about factors such as business basics, the product or service that he want to sell, the
industry he is entering, his competition and the local, regional, state, and/or national markets.

Information-Seeking. To assure accomplishment of his entrepreneurial goals, the entrepreneur continuously seeks for
relevant information regarding the market, clients, suppliers, and competitors, and consults experts’ advice on business
and other technical matters.

Perseverance. One of the adages one will hear time and again when thinking to entrepreneurs is that perseverance is
90percent of the battle to succeed. If you are majority of the new small business owners, the entire staff and support
system for your venture is probably you. Making a dream come true can be a lonely task, especially when one is just
getting started, and ensuring that it works often means little rest or relaxation. One must be willing to persevere during
the rough times, to hang in there during the slow periods, and to maintain one’s belief in your product or service, even
when it seems like no one else in the world knows one exists. It has been written that through perseverance the snail
reached the rank. So it is with success!

Drive. One must believe in his goal and be determined to succeed the successful businessperson does not view obstacles
or stumbling blocks as problems, but rather as challenges. To make his business a success, he needs to be totally
committed and willing to work long hours, especially in the beginning. If one do not have the time or commitment to
dedicate his dream, then, he is better off working with someone else.

Risk-taking. Entrepreneurs are known for being risk-takers. They prefer tasks, which provides them some challenges.
They are not afraid to take risks. However, the risks they take are “calculated”. In other words, they are not so fool hardly
as to undertake activities where they know nothing at all about the possibilities for success. Further, entrepreneurs also
avoid low-risk situations, because there are no challenges. A risky situation exists when results are not certain. Either it is
success or failure. In business, it is profit or loss.

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Innovative. Entrepreneurs are creative. They do things in new and different ways. For example, they create new products
or services, new methods of production, new markets, and new sources of raw materials. They love to explore the
unknown, and to blaze new paths of progress.

Opportunity-Seeking. An entrepreneurs readily identifies opportunities for going into or to improve his business. He
does not merely spot opportunities to set up a business, but more importantly, act on these opportunities like actually like
actually setting up the business. Moreover, he will seize unusual opportunities to tap sources of financing, acquire
equipment, land, workspace, or business information and assistance.

Demand for efficiency and quality. Setting high, but realistic standards of excellence for himself for himself, he finds it
difficult to compromise on those standards. So, in order to meet these standards, the entrepreneur always strives to find
ways to do things better, faster and at a lower cost.

Systematic planning and monitoring. As a careful planner, the entrepreneur sets what are to be accomplished, and
meticulously assesses how today’s activity can contribute to the accomplishment of his long-term goal. He, therefore,
introduces some system in achieving his goal by breaking this goal into short-term and long-term goals. Furthermore, he
keeps on monitoring his progress in order for him to check whether he is in the right direction, or if modification is
needed along the way.

Persuasion and networking. A persuasive person, the entrepreneur easily establishment a network of personal and
business contacts around him. An entrepreneur is aware that power is required to achieve his business objective. He is,
therefore, quick to identify sources of power, if he cannot source power from within him.

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 MODULE 4

Search For Business Opportunity, Ideation, Innovation, and Creativity

Introduction

There are many business opportunities for an individual with a creative mind. All business starts with an idea,
and it is said that creativity, through innovativeness and the capacity of bringing something new in the market, spells the
difference a traditional businessman and an entrepreneur.

A smart entrepreneur may decide to have a small or large business, but it is important to follow the process of
identifying and evaluating the various options in generating ideas that can be transformed into a profitable business
endeavour.

Objectives

 Discuss entrepreneurial activities in search of business opportunities

 Describe the concept of ideation, innovation, and creativity
 Discuss the factors to consider in evaluating the business potential of an idea

The Search for Business Opportunity

In selecting a business, option should not be based on luck and immature thinking, but on a thorough evaluation
and systematic process. Start by developing long and short lists of potential business opportunities. Likewise, the
resources, skills, and technology available in the community are to be evaluated if these are not fully or efficiently
utilized.

In discovering business opportunities, the following factors on resources have to be evaluated:

1. Markets. This refers to the number of prospective buyers, competitors, the price and the quality of goods and
services that have to be analysed. Business opportunities exist in areas where consumer satisfaction is weak or
incomplete.
2. Individual Interests. Business interest of individuals should match business opportunities. For example, if one
is a good cook, he could venture in the food business.
3. Capital. This serves as the fuel that keeps the business operating. The availability of funds should fit the type of
business to organize.
4. Skills. The entrepreneurship should have the proper skills in the business he is going to undertake.

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 5. Suppliers of inputs. It is important that there are steady suppliers of material and other inputs to the business.
6. Manpower. The success of any business also depends on the efficiency of its employees.
7. Technology. Entrepreneurs should be aware of the presence of technology to improve their products or services,
or introduce new innovations in the market.

Among the productive resources, people are the most important because they are the ones who organize and
manage the other productive resources such as money, materials, machine, and manpower.

Other opportunity-seeking processes that can guide a prospective entrepreneur as to what kind of business to
establish are as follows:

1. Look at other successful business/entrepreneurs. Looking up at other entrepreneurs. Looking up at other

entrepreneurs as a role model that could by an inspiration.
2. Problem to a problem area. The solution to a problem might be transformed into a business venture.
3. Home-based business option. These must not be taken for granted, for these are some big businesses that
started as a small business at home.
4. Linkage of Resources. The entrepreneur can produce his own input instead of buying them.

The way best to evaluate business opportunity is through Market Research, which is defined as the study of all problems
in marketing a product.

The step in Market Research are:

 Defining the problem

 Making a preliminary investigation
 Planning the research
 Gathering the data
 Analysing the data
 Reaching a conclusion
 Implementation and evaluating decision

Through Market Research, the entrepreneur can be guided in identifying the profitable markets, saleable products,
the strengths and weakness risks, trends in consumer tastes and preferences, better marketing strategies, proper business
location, new market opportunities, and realistic objectives.

Location of the business is a key factor in business success. In selecting a location, the population, income,
competitor, government policies, peace and order, and others are being considered. This requires a market survey.

To be able to translate business opportunities into profits. The SWOT (Strength, Weakness, Opportunity, and Threat)
Analysis is applied. These are tools for evaluating the strengths, weaknesses, opportunities, and threats associated with a
particular product service. In knowing this, the entrepreneur must be able to have an idea or a precautionary measure
even before the start of the business. Excellent knowledge about life cycle of the products provides the entrepreneur
business opportunities to continuously start in business. The following are the best description of the various stages of a
product life cycle. According to Fajardo, products have their own life cycle. It is composed of four stages: introduction,
Growth, Maturity, and Decline. Some products have long life cycle, while others have short. Here are the description of
various stages of product life cycle, particularly are sales volume and profit.

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  Introduction. If consumer awareness and acceptance of product are low, launch through the use of
marketing activities which make the profit low due to cost of development and marketing activities.
 Growth. To meet the growing demand, product distribution is expanded. Sales rise rapidly as product
becomes popular.
 Maturity. Sales are still rising, but rate of increase has declined. At the latter part, a sale reaches its peak,
while profit begins to fall.
 Decline. There is a sharp fall in sales volume, while profit curve becomes almost flat or horizontal. There is
also decline in the number of competitors. The only survivors are those who specialize in marketing the
product. Once products is no longer profitable, it is eliminated from the market.

Entrepreneurs should be aware of the duration of each stage of the product cycle. Fajardo had emphasized in his
book, Entrepreneurship, that excellent knowledge about product life provide entrepreneurs business opportunities stay in
business.

Venturing into projects demands a timely and clear decision as to which area or business concern to deal with.
In the selection process, one has to begin with choosing or focusing on a particular business by category or sector.

1. The service-based business. Common examples of service-based are consultancy, barber shops, repair shops,
beauty parlors, caregiving, designing works, rendering professional services, such as engineers, dentistry,
medical doctors, and other where there is no need to manufacture something.
2. Trading or product-based business. This is a buy-and sell transaction than can happen in your storehouse,
showroom, or any other structure less environment. Selling involves a lot of customer contact and requires a
great deal of persistence on the entrepreneurs’ part. An example of this is putting up a grocery store, bakery
products, or general construction materials.
3. Manufacturing business. This is a manufacturing or production-based by creating a product. Manufacturing
can be as simple as creating hand-painted T-shirts or ceramic vases and now, the most popular is candle making,
which can be done in your home.
4. Licensed business opportunities. If you find some difficulties in launching a product or service, it is a good
idea to look for licensed business opportunities. Franchising is a business format somehow very similar to
licensed business operations.
5. Distributorship. This is where an independent entrepreneur, company, or individual enters into an agreement or
contract to offer, sell, or distribute a particular product, but is not titled to use the manufacturer’s trade name as
part of its own trade name. In our country, distributor represents foreign companies who can sell products to
dealers strategically located all over the country.
6. Rack Jobber. This involves an agent or buyer entering an agreement with a parent company to market its goods
to various stores by means of strategically located store racks.
7. Wholesalers. These sell the product of manufacturer or producers to retailers and other distributors who have
direct dealings with the end users or customers.
8. Subcontracting. This is a familiar form of business format in the garments sector, as well as the shoe industry.
This involves signing up an arrangement with a major producer to complete a set product components on a pre-
agreed price.

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 9. Vending Machine routes. These are placed in various places or locations. The entrepreneur needs to have
substantial capital outlay as he had pay for the vending machine, including the stocks to be vended.

Ideation

The beginning of a business endeavour is ideation. This should be the first investment of anyone who seeks to
be an entrepreneur; and to be called an entrepreneurial business opportunity, such idea has to be new, of if not, should be
innovative. The best source of ideas are the consumers of the market in general, since they are the ones who are in need
for a certain product or service. For a creative person, ideas are in him in his mind, but for those deprived with creative
thinking, they can get ideas through reading books and talking to someone with creative thinking. There are some
specific sources like trade journals, trade associations, conventions, exhibits, trade shows and consumer shows, country
government affairs, and others.

Ideas that are worth a business should be the one that has a market now and in the future. This could be a
product, a service system, and the like, which could fall in any of the following categories:

a. Need/want drives
b. Time-saving drives
c. Money savings
d. Unique or incorporating strong competitive advantages
e. Link to personal interest, preferably passion

The more idea a person produces, the more original and the better quality ideas one will find among them. When you
come across an idea, you should put it in writing.

The most common way of developing ideas is as follows:

 Recognizing the need. Develop an idea or a product that can satisfy a need, and respond to the need by
establishing a business concern.
 Improving an existing product. The result of consumer dissatisfaction to the existing product could open the
door to introduce innovations or improvements.
 Recognizing trends. Entrepreneurs should be able to recognize the opportunity to develop a product and set
trends that can make them leading entrepreneurs.
 Be aware of everything. There is no other way to know about what is happening around you, but to research and
read.
 Questions and assumptions. Anybody can question the relevance or quality of any product or services, provided
that, there is an effort to improve the product.
 Naming it first, then, develop it. If you have the idea, study it and develop it to something that is worth a
business.

Earlier, it is said that ideation is the beginning of a business. A wrong choice of idea could be the cause of the business
failure, so ideas need to be evaluated if it can be profit potential. The following are some tips in evaluating ideas:

a. Do not let your idea follow money, let money follow your ideas. If the idea is clear and viable, there should be
clear options for the business out of the idea.

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 b. See yourself as a problem solver. Ideas should be a solution to an existing problem of the consumer or the
market in general.
c. Use research as a weapon against failure. This is an important fact in decision-making process; most business
failed because of lack of information.
d. Make sure your idea has longevity. An idea that is worth pursuing into a business is one which has a long-term
purpose and not only a fad.
e. Take a risk on your ideas. Venture into a business by using your own ideas.
f. Test your idea against the past, present and future. The market needs and demands will not be far from what is
happening in the past, so it is better to get information about the past, present, and future.
g. Know the idiosyncrasies of your market. Know the needs of your market and all the factors that affect the
buying process. Your idea will depend on this.

Once you generate an idea, it has to be protected because it can make you a potential millionaire, like in the case of
Bill Gates. There are many ways of protecting your idea from being stolen or claimed by others, and losing the
opportunity to be known as the creator and the originator of the ideas. Aside from this, no company will pay you a
royalty if the idea presented is not legally protected. The following are the ways of protecting your ideas:

a. Confidentiality Agreements. It specifically provides that a signer will not share the idea to anyone. This is a
typical agreement or contract where no one should ask advice to a parent’s attorney or those with experience
and expertise in the intellectual property rights.
b. Patents. These gives the inventor exclusive legal rights to exclude anyone else from manufacturing, selling,
importing or using an invention during the life of the patent. The three classifications are: Design, Utility, and
Plants Patents.
c. Trademarks. This is a word, name, and symbol, or device used by manufacturers on merchants to identify their
goods and distinguish them from others sold in the market. This should be used in conjunction with a business
or a product, otherwise, this will not be granted.
d. Copyrights. A copyright protects the creative works of composers, authors/writers, artists, and others. This is the
easiest form of protection for Intellectual Property.

Entrepreneurial Creativity

Creativity, innovation, and entrepreneurs are inseparable. Creativity is an essential part of innovativeness, the
starting point of a process, which is skilfully managed, and brings an idea into innovation. It is considered as a
characteristic that is innate or inherent to every individual, but the social environment can influence both the level and
frequency of creative behaviour. It is particularly important to understand the role the environment can play.

Environmental Stimulants to Creativity

a. Freedom – a sense of control over one’s work ideas.

b. Good Project Management – a manager serves as a good role model.
c. Sufficient Resources – access to necessary resources.
d. Encouragement – management enthusiasm for new ideas.
e. Various Organizational Characteristics – a mechanism for considering new ideas.
f. Recognition – a general sense that creative work will receive appropriate feedback, recognition and reward.

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 g. Sufficient Time – time to think creatively about problem.
h. Challenge – a sense of challenge arising from intriguing nature of the problem itself
i. Pressure – a sense of urgency that is internally generated from competition as a personal sense of challenge
j. Outside Organization – from a general desire to accomplish something important

If there is an environment conducive to stimulating creativity, there are also environmental obstacles to creativity.
These are the various organizational characteristics, which are an inappropriate reward system, lack of freedom in
deciding what to do or how to accomplish the task, and the organizational disinterest which result to lack of support,
interest, or faith in project. It could also be the inability of the manager to see clear direction and the reluctance of
managers and co-workers to change their way of doing things. Included also is the lack of appropriate facilities,
equipment, materials, and the time pressure to think creatively about the problem.

The Concept of Innovation

Innovation is doing something different. It could be introducing either something new or different.
Innovativeness is a characteristic of an individual, team, or organization. This is also the capacity to create ideas and
develop them to usable products or services.

Impacts of Innovation

Efforts on innovation must have impacts – positive impacts. It must have a positive implication that is
supportive or organizational goals and objectives. The innovative accomplishment exists if the following happens.

1. Effecting a new policy – creating change or orientation or direction

2. Finding new opportunities – developing an entirely new product or opening a new market
3. Designing a new structure – changing the formal structure, reorganizing or introducing a new structure.
4. Devising a fresh method – introducing a new process, procedure, or technology for continued use.

Within the organization, the orientation toward innovation of must come primarily from the higher level of
management. The elements of innovation orientation are as follows:

a. Value placed on creativity and innovation in general;

b. An orientation toward risks;
c. A sense of pride in the organization and its members, and the enthusiasm about what they are capable of
doing; and
d. An offensive strategy of taking the lead towards the future.

The most critical aspect in making a decision to go into self-employment and entrepreneurship is the context of
ideation, innovation, and creativity. The generation of idea and transforming it into a business venture can make or break
a potential entrepreneur. The success of the business could lead to personal prosperity of the owner and help in the
economic condition of our country.

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 Innovation is not only for a change, but also for the search in excellence, not only in producing a product, but
also in the form of innovative system and services. The innovativeness and the creativity of an individual could be the
greatest asset any business could have, so this should be developed and properly taken care of.

The prospective entrepreneur has a variety of option in deciding what kind of business he is going to put up. He
can go on market scanning to see what is needed. He should not limit himself in going into manufacturing of sari-sari
store or market niche, but developing similar product or service should be examined. Buying a franchise, being a
subcontractor, innovating an existing products, systems, or services, sponsoring a start-up business, or acquiring an on-
going business concern are some of the business ideas which are very promising and could succeed eventually.

MODULE 5

The Business Plan

Introduction

Venturing into a new business or doing any form of innovation in a business organization demands or
necessitates a plan. A business plan that is well-researched and well-done is by itself an insurance against the illusive
success that every entrepreneur is looking forward to. Preparing a business plan is not easy. It is a well-written, honest-
to-goodness document prepared by the entrepreneur that will convince the investor to invest, or it is a tool to sell your
business story to financial resources and should be recognized. It is the direction and guide of the entrepreneur as to what
is to be done and how to do it. It details out what is to be achieved over a certain period of time.

Planning and organizing enterprise demands proper evaluation of the resources, skills, interests and attitudes
together with the needs of the community and degree of competition.

Objectives

 Identify the importance of business planning and its advantages, as well as the step by step procedure in
preparing a business plan
 Enumerate the factors and other necessities on how to manage and start a business successfully.

What is Business Plan?

A business plan is a written document prepared by the entrepreneur that describes all the relevant external and
internal elements involved in starting a new venture. It addresses both short and long-term decision making. The business
plan is like a road map for the business’ development. The internet also provides outlines for business planning.

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Entrepreneurs can also hire or offer equity to another person to provide expertise in preparing the business plan. In
developing the business plan the entrepreneur can determine how much money will be needed from new and existing
sources.

Scope and Value of the Business Plan

The business plan must be comprehensive enough to address the concerns of employees, investors, bankers, venture
capitalists, suppliers, and customers.

Four Perspectives need to be considered:

 The entrepreneur understands the new venture better than anyone.

 The marketing perspective considers the venture through the eyes of the customer.
 The inventor looks for sound financial projections.
 The depth of the business plan depends on the size and scope of the proposed venture.

The business plan is valuable to the entrepreneur and investors because:

1. It helps determine the viability of the venture in a designated market.

2. It gives guidance in organizing planning activities.
3. It serves as an important tool in obtaining financing.

Potential investors are very particular about what should be included in the plan. The process of developing a business
plan also provides a self-assessment of the entrepreneur. This self-evaluation requires the entrepreneur to think through
obstacles that might prevent the venture’s success. It also allows the entrepreneurs to plan ways to avoid such obstacles.

Writing the Business Plan

The business plan should be comprehensive enough to give a potential investor a complete understanding of the venture.

Introductory Page

The title page provides a brief summary of the business plan’s contents, and should include:

 the name and address of the company

 the name of the entrepreneur and a telephone number
 a paragraph describing the company and the nature of the business
 the amount of financing needed
 a statement of the confidentiality of the report
 it also sets out the basic concept that the entrepreneur is attempting to develop.

Executive Summary

This is prepared after the total plan is written. It should be three to four pages in length and should highlight the
key points in the business plan. The summary should highlight in a concise manner the key Points in the business plan.

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Issues that should be addressed include:

1. Brief description of the business concept

2. Any data that support the opportunity for the venture.
3. Statement of you this opportunity will be pursued.
4. Highlight some key financial results that can be achieved
5. Because of the limited scope of the summary, the entrepreneur should ascertain what is important to the
audience to whom the plan is directed.

Environmental and Industry Analysis

The entrepreneur should first conduct an environmental analysis to identify trends and change occurring on a
national and international level that may impact the new venture. Example of environment factors are:

 Economy
 Culture
 Technology
 Legal Concerns

All of the above external factors are generally uncontrollable. Next the entrepreneur should conduct an industry
analysis that focuses on specific industry trends. Some examples of industry factors include:

 Industry demand
 Competition

The last part of this section should focus on the specific market. This would include such information as who the
customer is and what the business environment is like. The market should be segmented and the Target market identified.

Description of the Venture

The description of the venture should be detailed in this section. This should begin with mission Statement or
company mission, which describes the nature of the business and what the entrepreneur hopes to accomplish. The new
venture should be described in detail, including the product, location, personnel, background of entrepreneur, and history
of the venture. The emphasis placed on location is a function of the type of business. Maps that locate customers,
competitors, and alternative locations can be helpful. If the building or site decision involves legal issues, the
entrepreneur should hire a lawyer.

Evaluating business plans

The following areas are of interest to lenders and investors:

a. The purpose of the loan (expansion or star-up business)

b. Sources and uses of the funds
c. Management of the business
d. Industry information
e. Financial analysis
f. Collateral (secured)

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 g. Personal debt/credit history of borrower

Technical Business Plans may be evaluated on the following:

1. Viability
2. Management background
3. Market advantage
4. Technology

Viability

The viability of the business is measured by its long-term survival, and its ability to have sustainable profits over a period
of time. if a business is viable, it is able to survive for many years. The longer a company can stay profitable, the better
its viability. Example The small company showed its viability by making a profit every year of its existence.

Management Background

For every Business Plan we have to check the background of management because for every business finance is
very important without capital no business will run.

Market advantage

It means that if the product is giving less profit means profit means Entrepreneur has to introduce several offers
and discounts to give pick up of the product. It means that taking the Market to sell as they wish.

Technology

Technology gives to evaluate the Business Plans efficiently and lastly for better output. Now a day’s technology
plays a vital role in the business world.

Using and Implementing Business Plans:

The core of your business plan is your vision for the future. From this vision, you will be able to set objectives
for various parts of the business and these objectives will need to be well communicated to all involved to ensure a
coherent approach to the tasks in hand. Your business objectives are statements about what you want individual parts of
the business to achieve. You may, for instance, have a series of objectives about the financial side of the business, or
about it’s products and services, or about your marketing. The objectives you set create a strategy for the business.

Business Plan Implementation

A vital stage in business planning:

Business Plan Implementation: here is where the business plan implementation puts theory into practice. If theory and
practice do not come together, the plan will remain on the drawing board. The business plan must be implemented with
due regard to deadlines set. The responsibility of each individual involved in the plan must be clearly delineated. The
implementation must form an integral part of the business plan. The manager must have a clear idea of the practical
impact of hid business idea.

Business Plan Implementation Steps

 Establishing the Business objectives

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  Defining and assigning the tasks needed to attain the objectives set
 Setting out a timescale
 Monitoring activities and progress

Business Plan Implementation Objectives

The objectives must be clearly and concisely set out, with the planning of key way stages. They must at the
same time be realistic, demanding but achievable.

Tasks
The tasks must be listed with the individuals responsible for completing each task. They must be simply and
clearly stated, and need not be oppressive. The results envisioned should outweigh the time and effort devoted to the
tasks.

Timescale
Each task and its duration, must be framed within a clear timescale. The result clearly displays all the activities
necessary with their deadlines.

Monitoring Activities and Progress

During the monitoring process, delays must be highlighted. This stage identifies and rectifies the delays. Within
a business plan, several implementation plans will be needed for the particular aspects of the business: product planning,
financial problems and human resource management (Business Plan Implementation).

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 MODULE 6
The Marketing Plan

Learning Objectives
 To understand the difference between business planning, strategy plan, and market planning.
 To describe the role of marketing research in determining market strategy of the marketing plan.
 To illustrate an effective and feasible procedure for the entrepreneur to follow in engaging in a market
research study.
 To define the steps in preparing the market plan.
 To explain the marketing system and its key components.
 To illustrate different creative strategies that may be used to differentiate or position new venture’s
products or services.

Purpose and Timing of the Marketing Plan

The marketing plan establishes how the entrepreneur will effectively compete and operate in the market place.
Marketing planning should be an annual activity focusing on decisions related to the marketing mix variables. The
marketing plan section should focus on strategies for the first three years of the venture. For the first year, goals and
strategies should be projected monthly. For years two and three, market results should be projected based on longe r-term
goals. Preparing an annual marketing plan becomes the basis for planning other aspects of the business.

Market Research for the New Venture

Information for developing the marketing plan may require some marketing research. Marketing research
involves the gathering of data in order to determine such information as who will buy the product, what price should be
charged, and what is the most effective promotion strategy. Marketing research may be conducted by the entrepreneur or
by an external supplier or consultant. Market research begins with definition of objectives. Many entrepreneurs don’t
know what they want to accomplish from a research study.

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Defining the Purpose or Objectives
One effective way to begin the marketing plan is to make a list of the information that will be needed to prepare
the marketing plan.

Possible Objectives
 Determine what people think of the product or service and if they would buy it.
 Determine how much customers would be willing to pay for the product.
 Determine where the customer would prefer to purchase the product.
 Determine where the customer would expect to hear about such product or service.

Gathering Date from Sources

A secondary income source interprets and analyses primary sources. These sources are one or more steps
removed from the event. Secondary sources may have picture, quotes or graphics of primary sources in them. Some types
of secondary sources include:
 PUBLICATIONS: Textbooks, magazine articles, histories, criticisms, commentaries, encyclopedias.
Examples of secondary sources include:
 A journal/magazine article which interprets or reviews findings a history textbook.
An obvious source is data that already exists, or secondary, found in trade magazines, libraries, government agencies, and
the internet. The Internet can provide information on competitors and the industry, plus can be used for primary research.
Commercial data may also be available, but the cost may be prohibitive. Free secondary information is available through:
 Census and the Department of Commerce.
 State departments of commerce, chambers of commerce, and the local banks.
 Private sources of data, such as Predicates the Business Index
Development Publications can be found in a good business library.

Characteristics of a Marketing Plan

An effective marketing plan should:
1. Provide a strategy to accomplish the company mission.
2. Be based on facts and valid assumptions.
3. Provide for the use of existing resources.
4. Describe an organization to implement the plan.
5. Provide for continuity.
6. Be simple and short
7. Be flexible.

There are five Business plan to implement

 Marketing Planning
From the analysis carried out, you will have no doubt to set some objectives about marketing. Marketing is a
very broad area of the business – indeed there are likely to be marketing implications associated with almost all
your objectives. Your marketing plan will include detail about:
 Your products and/or services
 The place in which you sell them and the way that you distribute them
 The price you charge for them

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  The promotion you undertake

These are commonly described as the 4P’s of marketing.

The plan will show your intention of how you will undertake the full range of marketing activities. It will be based on the
data you collected about your competitors, your market places and other areas discussed earlier. It will also reflect the
potential you have identified through analysis for:
 Adding or amending products and/or services to your range
 Finding new customers or better satisfying the needs of existing customers.
 Finding new markets
 Taking advantage of changes in business environment, especially changes in existing marketing places
 Combating threats posed by competitors and taking advantage of their weaknesses

 Finance Planning:
 A financial plan is often seen as the basis for many other parts of the business plan. This particular
plan, designed to meet the financial objectives you have set, is important in that it pulls together the
one common denominator of all other plans – and that is cash. The financial plan for the business will
have at its heart standard features:
 Profit forecast
 Cash flow forecast
 Projected balance sheet

The financial plan you set should be tailored to meet your individual business [Link] do so, it will refer to your
particular business circumstances and may also include one or all of a range of other financial tools, such as:
 Business funding structure
 Working capital analysis
 Sales forecast
 Returns achieved on sales
 Break-even analysis
 Contribution from production
 Stock analysis

Looking into these different forms of analysis will quickly show you that they individually serve differing
business requirements. You will need to decide which are most relevant to your business situation and from which you
will gain most advantage.

People Planning:
Having the right people with the right skills is vital on every business. A successful business will recognize that,
to be competitive in the 21st century, it must be proactive in training and developing it employees and it must have in
place a strategy for achieving this.
The plan needs to concentrate on the objectives which arise from the business vision. It could cover a wide
range of business including the identification and satisfaction of training and development needs to meet business and
individual requirements. People planning can be crucial in achieving longer term objectives by equipping employees with
the right skills – and it is on those skills that the business will be competitive in its market places. The plan will also
cover broad statements on recruitment, employment, induction, training and a range of other related business functions.

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 The Employment Department’s Investors in People initiative centres on the proven fact that concentration on
people issues can bring significant business benefits. Your local Training and Enterprise Council in England or Wales, or
your Local Enterprise Company in Scotland, will be able to offer help and guidance of this matter.

Product Planning:
Throughout this guide, product is taken to mean your product or – if you are a service provider – your service.
Whichever your areas of activity, today’s changing business environment and trends in customer buying patterns have to
be closely monitored. The business needs to be able to react quickly effectively when changes occur. In addition, you
will want to influence future trends throughout your own marketing effort – but you need to carefully plan future product
and service developments to coincide with likely changes. The lifecycle of a product or of a service can be estimated and
the various stages it goes through will determine its contribution to the business. The effect of this is that your plans for
improving or extending products and/or services are closely linked to your marketing and financing plans.
Quality of your products and services is an important area within your plan. Closely linked to your pricing
strategy, the question of product development affects the whole of the business – and everyone in it.
You set your quality standards to satisfy the needs and desires of your customers. Many industries have
acknowledged quality levels and the concept of benchmarking is an innovative way to create partnerships from which all
parties through exchange of information.
Supply Planning:
The relationships you develop with your suppliers and your customers are also important influencing factors to
be addressed when looking at your product plan. Associated with the issue of quality, these relationships are crucial to
future business success.

Financial Plan and the Organizational Plan:

Financial Plan:
Most people have heard of the benefits of personal financial planning and want to better manage their personal
finances. Yet it can seem so overwhelming. If you’re not sure where to start, this financial planning primer can help. It
establishes priorities for anyone at the financial stage of life and lays out, in eight simple steps, just how to take control of
your finances.
1. Create and Review Financial Plan. Basically, a financial plan is a written set of goals, strategies and timelines
for accomplishing these goals: buying your first home, funding or managing a retirement nest egg, funding your
children’s education, paying off debts, and so on. Writing out this plan whether on a yellow pad, a spreadsheet
or with the help of a certified financial planner (CFP) professional motivates you to be accountable and
implement you to-do list if action steps. It provides direction, gives you a benchmark from which to evaluate
your progress, and helps you prioritize the most efficient use of your financial resources.
Be sure to review your plan periodically to adjust for changing financial circumstances or desires, or life events
such as a change in marital status, job loss, retirement, the birth of a child, or a death in the family.
2. Organize your financial records. It’s much easier to successfully manage your finances if you know what
those finances are. So gather up the following financial records:
 Investment accounts
 Bank statements
 Tax returns
 Mortgage and credit card statements
 Insurance policies

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  Estate planning documents
Then organize them so you can find and access them easily. By getting them all together, you’ll be able to more
easily evaluate where you’re at today and can set the stage for your goals and priorities going forward. And
while you’re at it, don’t forget to inventory your personal possessions. This documents not only their value for
planning purposes but also provides a record for your insurance company in the event your possessions are lost
due to a theft or natural disaster.
3. Calculate your net worth. Once your financial records are organized, calculate your net worth. This is simply a
matter of figuring out what you own less what you owe. If your assets (house, bank accounts, investments and
so on) exceed your liabilities (mortgage, student loans, credit card debts,etc.), then your net worth will be
positive. On the other hand, if your liabilities exceed your assets, you’ll have a negative net worth.
Net worth is the best measurement of the state of your financial health and should be used as the basis
for any financial decisions you make. Your goal should be to increase your net worth on an annual basis. At
year-end, you should recalculate your net worth and compare it against last year’s benchmark. By doing this,
you’ll instantly be able to see your progress.
4. Establish a spending plan. A spending plan details where your money comes from and where it goes. The
inflows include your salary, bonus, interest income and any other source of income you have. Inflow is the part
that’s generally easiest to recall. The outflow section is a detailed listing of where your money goes. The most
important outflow should be your savings. If you’re living within your means, then your inflow will equal your
outflow.
Having a balanced spending plan should be financial priority regardless of where you are in life or
what your net worth is. A spending identifies the key areas where you want your resources to go and highlights
wasted spending. It can also provide an early of impending financial problems.
If this is your first time establishing a spending plan, consider using a software tool such as a
spreadsheet or a software package like Quicken to help you. These tools could significantly cut down the
amount of time and effort it takes to develop your plan.
5. Build an emergency fund. Ideally, you want to have enough cash on hand to cover three to six months of basic
living expenses should you lose your regular sources of income. Depending on your job security, you may want
to increase the number of months’ worth of reserves. For example, self-employed individuals may want to have
twelve months of reserves, especially if their income is variable in nature.
6. Reduce or minimize consumer debt. Debt drags down the rest of your financial efforts like a heavy anchor. If
your consumer debt—credit cards, student loans, auto loans and personal loans—is eating up 15 to 20 percent or
more of your monthly spending, make reducing it a priority. And why waste funds paying what are most likely
very high interest rates on your cards and loans?
7. Draft four, key estate-planning documents. Every adult should have (1) a will; (2) a durable power of
attorney, which appoints someone to handle your legal and financial affairs if you’re unable to; (3) a living will,
which declares what life-sustaining medical treatments you want should be incapacitated; and (4) a health-care
durable power of attorney, which appoints someone to oversee your medical interests should you no longer be
able to. Different states have different names for the medical documents, but they’re all critical to your smart
financial planning.
8. Obtain adequate insurance. Managing risk is essential to your long-term financial security. The point of having
insurance, from medical and disability coverage to life, auto and homeowner’s, is to protect you from financial
catastrophe. Simply stated, you buy insurance to cover expenses you couldn’t make out of your own pocket. It’s
imperative to keep in mind that you should buy insurance when you don’t need it, because when you need it,
you can’t get it.

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The Organizational Plan:
Organizational planning should include long-term and short-term planning. The plan should predict where the
organization will be in two or five years, listing specific, measurable goals and results. The plan should also include a
specific “to-do” that keeps everyone informed of the necessary actions and resources, as well as listing who is
responsible for the tasks. It should also include a reasonable time frame for these tasks to be accomplished. Failure to
plan will damage the effectiveness of the organization and can even lead to complete break-down.

Material Resources
Lack of planning is certain to result in shortage or delays of necessary materials. Without an analysis of how
often resources need to be replenished, these necessary will not be found where and when needed. The necessary
resource might be something as small as staples for the stapler, or as essential as running out of the raw material needed
to manufacture the product that is sold. In all cases, a business cannot flourish if the management of its resources is not
being monitored and planned for.

Finances
Cash flow issues are bound to occur if the organization does not plan properly for where and when the finances
are needed. Late payments are likely to result in suppliers becoming unreliable or cutting off the supply of their goods or
services. Late payments can also result in additional interest payments or other financial penalties that cut into profits.
Cash flow problems can go so far as to result in the inability to pay employees on time. This is bound to have a negative
impact on employee loyalty and retention.

Human Resources—Productivity
Without planning, there will be no mission statement and no vision. Employees are most productive when they
understand the bigger picture behind what they are doing, so productivity will decrease. There is also likely to be much
wasted time, as some workers will be duplicating the work of others, while some essential tasks will overlooked. This is
likely to result in the need for crisis management. Workers will spend a great deal of time “putting out fires” caused by
the fact that no one is able to anticipate the problems that will regularly occur. In addition, larger projects will take longer
than necessary, or may never reach completion, because no one did the planning necessary to break them down into more
manageable segments.

Human Resource—Morale
Employees in organizations suffering from lack of planning are likely to experience low morale. The workers
will be aware of their disorganized environment, and will suffer stress and frustration because they will have difficulty
executing their assigned tasks. There likely will be a high staff turnover rate, which leads to lowered productivity. Some
employees might be laid off because of lowered profits and this will further diminish morale. Other employees might feel
unappreciated and over-worked as the organization will be under-staffed. This will exacerbate the downward spiral and
the business is likely you fail.

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What formalities must you complete?
Before you launch your new firm, you must deal with a few formalities and register your firm with the
following authorities;
Health insurance
The statutory health-insurance fund needs to be informed about the move to self-employment. The fund will
then examine whether this is a “full-time” activity. Here, a role is played by the hours worked and the likely level of
income.

Tax Office.
If you are offering a professional service (i.e. are a member of the “Freie Berufe”, such as tax adviser, doctor,
journalist), you only need to apply for a tax number from the tax office.

Trade office
Anyone else setting up a business must register their project with the trade with the trade office of the
municipality in which the firm is opened.

To do so, you need:

 A valid ID or passport
 A resident permit
 Depending on the sector (e.g. catering), a permit or authorization
 A craft card if you are setting up in business in the craft sector
 A trade card for activities similar to the craft sector
 And between ten and forty Euros for the registration fee
The trade office automatically informs the following authorities with which you also have to be registered: tax office,
accident insurance fund; chamber of industry and commerce or chamber of craft; local court (trade register); trade
supervisory office (responsible for the health and safety of your employees and customers; it checks ovens, drinks
dispenser, etc.) Play safe and check whether all of these bodies have actually received the information.

Health office
Depending on which sector you are working in, you may need a permit or a certificate of non-objection from the
health office. This applies, for example, to new business in creating and the sale of foodstuffs. In the case of start-ups in
catering or childcare, the health office and the trade supervisory office (varies from region to region) will also examine
the standards of hygiene in your rooms. Also, you will need a certificate of good conduct from the police and
confirmation from the chamber of industry and commerce that you have participated in a seminar on hygiene and the
handling of food.

Construction Office
If you wish to use rooms previously used for other purposes as your future operational rooms, you need to apply
for a change in use from the relevant Construction office. The planning of rebuilding work and of new buildings for
commercial purposes must also be co-ordinate in good time with the construction office.
Trade supervisory office

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Find out in good time before operations commence whether the rooms you plan to use meet statutory requirements.

Commercial register
Apart from very small businesses and companies organized as a GBR (Gesellschaft burger lichen Rechts), all companies
must be entered in the electronic commercial register at the local court. The electronic commercial register is public and
provides information about the company (name of company, name of owner, personally liable shareholder, etc.)

MODULE 7
Financing and Managing the New Venture

Introduction
A new business project need not have substantial start-up capital requirement nor does one have to be a
millionaire to start an entrepreneurial business endeavour. Neither a building nor a fully furnished office be made a
requisite to be able to open the business. In fact, many entrepreneurs have commenced their businesses out of shoestring
capital or with little amount as what is in their savings account. Others literally do not have money or capital, but have
good business ideas and the guts, as well as courage to start the business using someone else’s money. If one has good
idea worth pursuing in a business and the person concerned has all that entrepreneurial traits, the problem should not be
mush or a capital or money burden per se, but on more finding or sourcing the capital and this chapter will talk about
that. It will teach us how to fiancé our future business.

Learning Objectives:
 Define what capital is and its kinds
 Enumerate the sources of capital
 Identify the kinds of source for type of business

Capital Requirements
From an entrepreneur’s view point, capital is not all about or does not necessarily mean money. In fact, some
entrepreneurs consider idea (an innovative idea) as a form of capital that is much more precious than money. From
financial viewpoint, however, capital comes in monetary terms and in three forms as follows:

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 1. Fixed Capital. Fixed capital refers to the money needed to purchase fixed assets or capital goods. This includes
amounts meant for the acquisition of machinery, buildings, office equipment, and all those fixed assets or the
items needed in the provisions of services to the customer.
2. Working Capital. After putting up the business with all the basic amenities and capital items in place as
preparation for operationalizing the business, the other capital requirements, which refer to the working capital,
is needed to fund the day-to-day operation of the business. Working capital represents the money or hard cash to
support its normal short-term operations. It is generally used for inventory, payroll, utilities, and
stock/inventory, and also to take care of the unexpected emergencies, as well as to keep the business as ongoing
concern.
3. Growth Capital. Unlike working capital, growth capital is not related to daily or seasonal requirements for
funds of the business. Instead, growth capital requirements are needed when an existing business is set to
expand, diversify, or change its directions.

Sources of Capital
After going through the rigors of preparing the business plan, the search for capital is the next challenge or
headache that the entrepreneur shall be bothered with, in case he himself does not have the personal capital to fund the
business. In searching for capital to launch a company, an entrepreneur faces most of the same issues that small business
owners does in looking into expanding and existing business.
In broad terms, funds needed for the business can be generated either internally or externally. Internal fund
sources generally refers to the funds which are owned by the entrepreneur himself or the company, whereas external
capital refers to those beyond the means of the entrepreneur and the company, or those external to the entrepreneur or the
business organization.
Other than sourcing capital internally or externally, capital may be sourced from formal or informal sources as
discussed hereunder.

The formal and informal sources

Fund sources could be obtained from formal or informal sources. By formal sources, it means sources or
borrowing funds from organizations or institutions duly authorized by government or by law to extend financial
assistance duly authorized by government services to business and industry. They include banks (both private
commercial banks and government-owned or controlled financial institutions), investment houses, lending investors,
mortgage bank, pawnshops, credit card companies, and others. Informal sources include those fund sources other than
formal sources mandated by law to provide capital or financing to business organizations. This group includes
entrepreneur’s parents, brothers and sisters, relatives, friends, suppliers and other fund providers outside of the financial
system.
The very formal structure and bureaucratic nature of formal sources of funds makes it a more difficult source,
owing to a number of documentary, as well as stringent collateral requirements that formal sources usually requires from
the entrepreneur or borrower. The advantage in dealing with formal funds source, such as commercial banks and the
government financial institutions, is that the bank normally provides some technical and advisory services that should be
of help to the entrepreneurs if used and followed to the fullest, as a source of funds for the business, informal sources
have some advantages in the form of minimal documentary requirements that is inherent to an informal organization.
Often funds sourced from informal sources could be more expensive in many ways.

Owner’s Equity

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 In a corporation, the contribution of the owner to the capital of the business is called equity and is evidenced by
the issuance of stockholder’s certificate issued by the corporation. It is also often times referred to as the ownership ion
the corporation and the holders of stock certificates are called stockholders. The stockholding represents a percentage of
voting rights or control of the stockholder in the corporation. A holder of a common stock possesses voting rights and
controlling power at the same time, assuming all forms of risks inherent to the investments in the company. Unlike the
holder of common stock, a holder of a preferred stock does not have the voting right and other privilege similarly
accorded to common stockholders and does not assume the risk of the business. Instead, preferred stocks holders are
guaranteed a fixed return on the investments, regardless of the operational outcome of the business.
As the owner/stockholder of the business or corporation, there is other party in the organization that is anxious
about seeing the business growing and expanding. Hence, should there be a need for funds to expand the business or to
open up a branch or a subsidiary, the business organization can look forward for the owners/stockholders as immediate
source of funds, which can be done either by additional equity infusions or personal loans by the owners/stockholders to
the business as an organization. If there are still unissued or unsubscribed shares, additional funds can be generated
internally by encouraging its stockholders to pay up fully its subscribed shares. If all the stocks have been fully
subscribed and paid up, the company can opt for increasing the capitalization of the corporation (this requires
amendments to Articles of Incorporation and approval of the Securities and Exchange Commission) after which, the
existing owners or stockholders can increase their respective subscription and pay up capital, potion if only to raise the
financial resources of the company through internal cash generation.
Long-Term Borrowings
Long-term, as well as medium-term creditors, refer to organizations whose main business are generally meant
for providing such form of financial assistance. Generally, they include banks and mortgage houses that provide funds or
capital whose payments are made on a long-term basis, say 1 to 3 years (medium-term loans) and 3 years or more (for
long-term loans) these fund sources take the form of the following:
1. Mortgage. A mortgage takes the form of fund generated by way of pledging a designated property as security or
collateral for the loan. If the needs arises, the company can mortgage its equipment or real estate to the bank, a
mortgage organization like a pawnshop(in case of smaller amount), or by way of special arrangement with an
individual who is in position to help an entrepreneur in dire need of funds.
2. Bonds. These are forms of indebtedness of the issuing company that promises a fixed amount of interest to the
bondholders upon maturity or call by its holders. Companies and business organizations with good track record
in the industry can arrange for an issuance of a bond certificate. Like stocks in the corporation, issuing bonds
require approval from the Securities and Exchange Commission (SEC) and traded in the stock market, or it may
necessitate a third party to handle the bond floatation. Bonds generally carry a fixed investment or holding
period of at least one year, running two to five years or even more, depending on the terms of the bond issued.
3. Long-term commercial papers. LCPs are commercial documents issued by large companies with credible track
records. Like bonds, LCPs carry a fixed return promised by issuer, and LCP holders are guaranteed returns by
buying the LCP, regardless of the operational outcome of the business of the issuer. Issuing LCPs also requires
clearance and approval of the Securities and Exchange Commission and may be traded like the shares of stocks.
Third parties are usually involved in issuance of LCPs, and like the bonds, it carries a minimum holding period
and bears a fixed interest rate, guaranteeing returns to LCP holders. Like bonds, LCPs do not carry ownership or
controlling right and voting privileges, but are given preference in settlement in case of the issuing company.

Short-Term creditors
Short-term creditors take the form of financiers on a short-term basis lasting to one year or less. In some cases,
they include fund providers who may not demand voluminous documents like business plans or feasibility studies.

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These creditors can serve as a stand-by credit facility to the entrepreneurs, which can be tapped as needed. When
properly nurtured, short-term creditors can be tapped for cash needs or inventory, even by simple using the phone or
a brief visit to its offices to sign some papers. These types of creditors are briefly described as follows:
1. Commercial Banks. As its charter provides, commercial banks are duty-bound to provide both short-term and
long-term financing to any viable business project. While banks prefer loans and financing on a medium or
long-term basis (as they earn more transactions) these are special financing packages involving short-term
financing for periods of six months or even less. For an export-oriented business, entrepreneurs should explore
special financing package normally offered by export banks or those that are specifically mandated by the
government. Export banks are authorized to offer attractive credit terms to domestic manufacturer and foreign
buyers of their goods.
2. Merchandise suppliers. The company’s inventory or stock can be procured either through cash or credit terms.
Entrepreneurs that can stock their shelves with items procured on credit terms are not only daring, but smart
entrepreneurs as well. Credit terms, with the merchandise supplier being a form of financing, should be explored
to the fullest with the merchandise suppliers. Term like consignment basis, lay-away plans, and similar
arrangements can be made with the suppliers. This will spare the entrepreneurs hard cash that can be used for
some other purpose or simply deposited in the bank or invested in high-yielding instruments. Depending on the
quality of relationship between the company and merchandise suppliers, some suppliers provide such term as
pay-when-able or payments terms up to 120 days. New business ventures are also prospective business partners
of merchandise suppliers and they can be the best of friends on a long-term basis. Such relationship can be
nurtured such that suppliers can provide short-term capital in terms of credit privileges for the raw materials and
production inputs that are needed by the entrepreneur.
3. Credit card companies. Credit card is the most convenient, yet the most expensive loan terms you can find in
town. Credit cards are actually one of the most overlooked avenues in obtaining start-up capital. Though if
offers stringent term loans, it would appear as cheap because one does not need to have business plan or
collateral to get the amount needed. All that is needed by a credit card-bearing entrepreneurs is to walk to the
ATM machine and withdraw the amount needed. If the entrepreneur is only looking at home-based business that
generally needs lesser capital, the amount can be easily raised if you have several cards, or a group of five or
more persons forming corporation can easily combine their card limit and instantly start the business using the
credit card. For instance, a group of five investors/incorporators holding a CITIBANK VISACARD or
MASTERCARD with a P50,000 credit limit each can instantly raise P75,000.00 each cash in a matter of
minutes (with no question asked) which is more than enough for a small business. Or they can put up a
corporation with P1 million authorized capitalization with fully paid up capital stock portion under the minimum
requirements as mandated by law.
The option to tap credit card should be made with prudence and extreme precautions- or a last resort-
because most credit card companies charge extremely high, if not exorbitant rates.
4. Capital equipment suppliers. In their desire to sell equipment, suppliers will often make every favourable term
available even to new companies, this is possible because the equipment itself secures the loan. The contract
may be a lease, held by the seller or leasing company, or conditional sales agreement, whereby the seller retains
ownership or title until the last instalment payment is made and received.
5. Leasing companies. They make possible the procurement of capital items or equipment for the company. This
arrangement can work the other way arounf if the entrepreneur holds the design of the capital equipment. In
such case, capital equipment suppliers can make it possible for entrepreneurs to buy the equipment, especially if
it is a custom-designed, one-of-a-kind equipment.

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 6. Receivable factors. There are many specialized organizations like credit and collection companies or even
individuals who take the risk of buying receivables at discounted rates. By selling the receivables, the
entrepreneur is relieved of the delay and cost of collection efforts at the same time generate funds needed by the
business.
7. Deferral of payables in general. When the economy is in a difficult situation or these are industry or region-
wide financial crisis or when the money (cash) position of the company is tight, most companies lag behind in
their payment of bills and loans. Entrepreneurs should not be afraid or ashamed to negotiate for payment of bills
and loans by not necessarily or immediately going into restructuring arrangement. Moreover, entrepreneurs
should not overlook the fact that in financial crisis periods, some of the employees might be willing to defer
portions of their salary or other benefits either as gesture of solidarity, loyalty, fellowship, or practical measures
to avoid being laid-off.

Venture capital companies

Venture capital companies refer to private and for-profit organizations that provide funds to new business by
way of purchasing equity positions in new or young business believed to have potentials to produce maximum returns
within short period of time, with funding provided for by venture capital companies, the entrepreneur surrenders a
portion of the ownership and control of the business as representatives of the venture capital companies generally. Like
all financiers, venture capital corporations or venture capitalists are interested in the financial track record of the
company in case it is an old one or the profit potential in case of new venture. More importantly, is that venture capital
organizations are more concerned with the future profit potentials the business investment offers. As a result, venture
capital companies invest funds in returns for the share of ownership or a certain degree of control in business operations,
unlike that are more concerned with the payment of the loan amount borrowed. Other than immediate return of
investments, some venture capital companies do seek foothold trying to develop long-term capital gains. Venture capital
companies hope to make an attractive profit when they sell their equity at any time they feel necessary.
Because of the direct involvement in the operations of the business of venture capital companies through its
representatives or nominees, prospective entrepreneurs have certain advantage in that they could avail of the expertise of
venture capitalists on the matter of overall management of the company, and more particularly, on the matter of financial
and marketing management.
Prospective entrepreneurs can inquire with organizations of venture capital firm or commercial banks as some of
them have subsidiary corporations or establishments that operates as a venture capital organizations which provides a
similar form of services. A visit can be made also in Bangko Sentral ng Pilipinas (BSP) of the Securities and Exchange
Commission for the listing of duly authorized venture capital companies.

Other Sources
Other than the aforementioned sources, there are other fund sources, some of which are in fact more
advantageous to the prospective entrepreneurs. These sources includes the following:
1. Lending investors. These are small business organizations duly licensed by the Bangko Sentral ng Pilipinas
(BSP) to provide quick financing with less paper works compared to commercial lending sources like the banks.
These organizations generally conduct a one-time credit investigation including visits to the entrepreneur’s
residence and actual site of business, after which, a standing credit limit is approved or considered set as a
standing credit limit. Entrepreneur’s need for fund is satisfied simply filling up application forms or contract and
cash delivered thereafter and right on the spot. These organizations generally require collateral like car

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 registration certificates, real estate documents/certificates or land titles, or post-dated checks corresponding to
the monthly or regular amortization schedule agreed upon.
2. Government institutions. These are special government financing packages meant for entrepreneurs in need of
funds as seed capital or assistance to those in dire need of funds like victims of calamities or highly
entrepreneurial individuals. All that is needed here are endorsement by barangay officials or other forms of
documentations, sometimes including submission of project studies. Through its various agencies and
instrumentalities the government has a number of financing programs meant for small and medium-scale
enterprises and livelihood opportunities whose terms and conditions are better off compare with that of
commercial banks.
3. Non-Government Organizations (NGOs). There are non-government organizations whose mandates or major
programs are really meant for upcoming small-scale entrepreneurs and providing financial assistance to the
underprivileged. These NGOs charge lesser interests rate and with more noble intentions as compared to
commercial loan providers. An example of this NGO is the Tulay sa PAg-unlad, Heifer Project International,
Plan International, and a host of other NGO just waiting to be tapped for a socially-oriented or business venture,
geared towards self-help and livelihood opportunities.
4. Political sources. Relationships with politicians can go a long way. Some politicians are philanthropists and are,
therefore, in a position to provide grants or financial assistance for self- employment and livelihood projects
without bothering to pay later. These politicians are real entrepreneurs themselves who has capital and resources
or means to broker business deals that can lead to big-ticket projects and windfall profits to entrepreneurs.
Entrepreneurs have to be extra careful, however, as politician’s money and power can be used against the
entrepreneur sometime later, that it might lead to repentance and frustration.
5. Friends and relatives. They are abound or are just around willing to be tapped. However, not all friends are
available for aid in times of financial needs, such as putting up a business project. For sure, however, most
friends and relatives would be around to help or assist a budding entrepreneur for him or her to succeed in
business projects. It is worth it to have a network and multitude of friends or relatives, only to have a multitude
and variety of parties who could offer financial capital that are relatively cheap compared to commercial
banking sources.
6. Purchase order financing. Also called PO financing, this scheme can be arranged with commercial banks or
financing institutions like the technology and Livelihood Resource Center (TLRC). Standing arrangements can
be made with the bank or financing institution whereby for a fee (to the bank), the bank will finance the
production requirement of the company and upon delivery of the goods to the client (buyer), payment will be
made by the client directly to the bank or financing institution. The bank or financing institution will retain the
financed transaction, plus the fees or charges, and remit to the entrepreneur the amount presumed to be
equivalent to his gross margin.
7. Employees. Never under estimate the employees. Nobody has a greater stake in the health of the company other
than the entrepreneur/owner and the employees. Thus, for corporations, seeking to expand capital base, possibly
of having an Employees Stock Option Plan (ESOP) should be explored. This will not only answer the capital
needs of the firm, but it could be also a vehicle for lifelong partnership between capital and labor, and also
reinforce the loyalty of the employees towards the firm.
8. Usurers. It may sound as bad source of financing on account of being illegal fund source and charging high
financing rates. Unknown to many is the fact that usurer have helped a thousand and more small entrepreneurs
mostly in sari-sari store business to bankroll their daily financial needs. Unlike formal sources of funds or short-
term creditors, usurer do not demand collaterals and business plans to avail of financing. In the long-term, this
scenario and their being operating illegally can work to the favour of the entrepreneurs. Unlawful as they are,

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 they can be last recourse of financial source, which in the long-term could be beneficial to the entrepreneur as
compared to the legally existing fund provides.

MODULE 8
Initial Public Offering (IPO)

Going to public is either an opportunity or a threat. The rationale for going public, vis-à-vis other options, rests
largely on the contention that initial public offering – or IPO for short- provides higher evaluation that what an
entrepreneur could expect from other avenues. If better price can be realized from going public, rather than from being
acquired or merging, the IPO is obviously the logical choice. Such a position is particularly in times of hot IPO markets.
Although IPOs are attractive in many ways for a firm needing access to the equity markets, the fact remains that
many privately held firms will never find themselves in apposition to go public. They simply will not qualify, not
because they are not in the right industry, or because they lack the requisite management. Also, if liquidity is an
important issue it may be several years before an entrepreneur could sell any of the newly issued public shares, owing the
legal restrictions placed on such stock. Finally, it may well be that taking a frim public is preferred choice for many when
the IPO markets are booming. However, these markets are unpredictable even for the best IPO candidates. When the IPO
market cools, it can be anxious time for a firm in the IPO rapids. Nevertheless, an IPO is a possible alternative and a
considerable appeal for many entrepreneurs who aspire to take the company public and such, it deserves our attention
here.

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Learning Objectives
 Define initial public offering or IPO and its process
 Enumerate the risk involved in each kind of source

Understanding the IPO

Dealing with IPO means going through the stock market system under the auspices of the Philippine Stock Exchange
(PSE). If contemplating a public offering, entrepreneurs need to have an understanding of the basic nature and
peculiarities of the new-issues market. There are three facts that need to be understood:
1. New stock offering tend to be underprized relative to their trading price in the market. On average, a new stock
will increase by 10% to 15% on the first day the stock is traded publicly. These results are even more
pronounced for smaller, younger companies going public than for their older, more established counterparts.
2. There are cycles in both volume of new issues and the size of the underprizing just mentioned. The periods of
high average initial returns and high volume are known as “hot issue” markets. Thus, timing is terribly
important when taking the firm public.
3. New issues tend to underperform for up to five years after the offering, both in terms of the firm’s stock price
performance. These results are even more pronounced for younger firms than for established firms.
In short, the IPO market has somewhat a personality of its own and one that acts a bit different them the rest of the
capital markets – a fact that needs to be understood by an entrepreneur wanting to take a firm public.

The IPO process

Making the company public via the initial public offering follows administrative processes. Following is a brief, but
factual description of this process:
1. The entire process can take as little as six months to complete, but some companies take eighteen months or
longer to go public. In some cases, where the corporate structure in poorly organized and additional financing is
required to position the company for a more beneficial public offering, the process can take two years.
2. During that time, a minimum of one and preferably two or more officers of the corporation will spend much of
their time interfacing with attorneys, auditors, underwriters, and financial printers, collecting information for the
reams of documentation that need to be submitted.
3. As the effective date approaches, roadshows, as a means of showing off the company and improving the
potential price performance in the after-market, will have to be prepared and executed. The CEO will spend a
fair amount of time making presentations to brokers and institutional investors. Slide shows, product brochures,
and possibly, videos will have to produced and distributed. Trips must be planned to make the presentations
nationally, and possibly, internationally.
4. During this process, the firm’s owner and managers will be answering such questions as:
a. What do we need to do before going public?
b. What are the legal requirements?
c. Who should be responsible for the different activities and how?
d. Should we structure our “team” to make it all happen?
e. How do we choose an investment banker?
f. How do we determine the appropriate price for the offering?
g. How will life be different after we are a public company?
Although the preceding description cannot be faulted for being factually inaccurate, it does not capture the
essence of the journey. Taking a company public is one of the most exhilarating, frustrating, stimulating, and exhausting
experiences owners and managers will ever encounter. They are exposing themselves to the vicissitudes of the capital

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markets and to the world of investment bankers, which few entrepreneurs understand, much less appreciate. The cost of
the process seems excessive and exorbitant. The owners find themselves having little influence in the decisions being
made, which becomes most disconcerting to them. Disillusionment with the investment bankers, and with much of the
entire process itself, may develop for the company’s owners. At some point the owners may wonder where they lost
control of the process. Although it may be of little comfort, these feelings are not unique, but are shared by many who
have participated in a public offering.
The IPO begins with an entrepreneur’s decision to go public and take the plunge in IPO. The entrepreneur than
selects an investment banker to serve as underwriter, who, in turn, brings together a group investment house to help sell
the shares. With the help of the underwriter and a host of other experts, the entrepreneur prepares a prospectus, the legal
document used to satisfy the Securities and Exchange Commission (SEC) that he is telling the whole truth and nothing
but the truth to prospective investors. The managers, along with the investment banker, go on the road to tell the firm’s
story to the brokers who will be selling the stock. The day before the offering is released to the public, a decision is made
as to actual offering price. To this point, any discussion of the price of the stock has been tentative. Then, all the work,
which by now has been months, comes to fruition in a single event offering the stock to the public via the stock exchange
and wait for the results consequence.

Dealing with investment bankers

An entrepreneur or business organization undertaking fund generation via the initial public offering through the
stock market cannot simply do it by himself of the company’s staff. In addition to the issue of who controls the events
and decisions in the IPO process, one other matter is important. Whenever you are negotiating, it is always good to know
the underlying motivation for the other side. In this case, you need to understand the investment banker’s incentives for
assisting with an IPO. For instance, who is the investment banker’s primary customer here? Clearly, the issuing firm is
rewarding the underwriter for the services performed through the fees paid and a participation in the deal. But the
economics for helping with an IPO is not as rewarding as other activities performed by investment bankers, such as their
involvement with corporate acquisitions. The bankers is also selling other securities to the customers on the other end of
the trade. Some would argue that herein lies the reason why IPOs are underprized. Is this being done to benefit their
customer buying the stock? This debate will not be resolved soon, but regardless of its outcome, unless you understand
how the investment banker and others in the process are compensated, your expectations as to what they will do for your
firm may be grossly exaggerated.
Even with the negative aspects associated with the initial public offering, it is a dream come true for most
entrepreneurs. It may or may not be wise to advice the entrepreneurs against pursuing such dream, as long as the
entrepreneur comes into the deal with realistic expectations and asks candidly and honestly, “Does it really make sense?
If so, all go for it!
Going public via the IPO means accommodating new business owners or partners the entrepreneur has never
known before. Some could be friendly while others could be hostile, even armed with a hidden agenda to take over the
management or control the company. Once the firm has been sold , taken public, or merged with a larger corporation as
part of a strategic alliance, and once the money or stock has changed hands, the entrepreneurs is a free person. No longer
are three concerns in losing market share, being sued, or not being able to service the firm’s debt. The unending, and, at
times, chaotic schedule is at last put in order. The entrepreneur has the financial means to do essentially what he wants to
do when he wants to do it. The entrepreneur can begin relentlessly working to improve one’s favourite sports or spend a
lot more time at the lake enjoying his favourite pastime.

The risks in going public

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 Two disappointments frequently mentioned by entrepreneurs who have sold their companies by going public are
as follows:
A. The entrepreneur may lose some focus and direction in life, focus that had been provided by owning a company.
Even for those with a basic value system that reminds then that they are not their work, there is a real change of
some emotional down time. Some wish they had never sold their company, even though they received what was
to them a fair price. They came to realize that the firm served as the base for much of what they did, both in and
out of the business area.
B. Managing the liquidity resulting from the company sale becomes a burden for some. They find managing money
more difficult and less enjoyable than they had expected, and less rewarding than operating their own company.

Borrowing from the Banks

The banks exists to lend money and this is up for entrepreneurs to grab. While the banks have open arms in
entertaining loans for starting-up operations or expectations, entrepreneurs must be careful as banks can also make the
lives of entrepreneurs miserable. Although banks are logical places to go in order to raise capital, they are notoriously
conservative, especially where star-up business venture lack track record.
Most, if not all, banks require collateral as security for the loan. Likewise, business or feasibility studies are
requisites for any bank loan requests. The entrepreneur’s personal background and character will have a direct bearing on
how your loan application will be treated.
To be able to get financing from the banks, it should be of great help if any loan applicants or entrepreneurs
should have ready and clear answers to the following questions that a banker may pose:
1. How much money you really want? Be sure to support figures with a business plan.
2. What are you going to do with the money? Explain exactly and in details how you would spend the money. Do
this in the business plan.
3. Why is the loan needed for the business? Be prepared with specific reasons as to why you need to borrow
money from the bank and convince the banker that indeed you need their support.
4. Why do you need our depositor’s money? Explain to the banker why bank financing is critical to your business
and why you did not consider other fund sources.
5. When will you pay back the loan? In your business plan (i.e. financial portion), propose a loan payment
schedule that will please your financiers, including the bank.
6. How will you repay the loan? Convince the banker of the profitability for your business venture, and convince
the banker as to how you would repay the loan.
7. What happen if your plans do not work out? Assure the bank that should the worst happen (i.e. that business
cannot pay for itself) there are other guarantees and terms in the loan contract that sufficiently covers whatever
loan exposure there will be.

The C’s of credit

To be able to avail the financing from the bank or any other commercial sources, prospective entrepreneurs must
be aware that menders or creditors apply the basic principles of the so-called C’s for credit. By knowing the C’s credit,
the entrepreneurs must know how to get about it, such that come presentation or loan evaluation period, the entrepreneur
knows what to do. The major C’s of credit are as follows:
1. Collateral. All formal sources of funding generally require a collateral in the form of real estate, equipment, or
any other form of easily saleable property. The collateral is the entrepreneur or borrower’s guarantee, such that
in case the borrower fails to repay the loan, the collateral will be foreclosed by the fund provided. The

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 entrepreneur should be aware that a loan applicable with a guaranty cover or collateral has the higher chances of
being approved.
2. Capacity. This refers to the capacity of the entrepreneur or borrower to pay for the loan. Personal possessions
and assets or the existence of real estate property on the part of the borrower, whether they are declared as
collateral or not, is an indication of the paying capacity of the borrower. The business plan of the proposed
venture itself is also another indicator that the business has a high profit potential, and that it has the capacity to
pay for its debts.
3. Character. This is more of the personal standing of the entrepreneur or borrower in his community, as well as
his own personal credibility. A track record of being a constant borrower and regular payor of his loan is an
indicator of his character, which means a lot to creditors or lenders. In fact, some individual with good credit or
moral standing in the community are sometimes given special privilege, known as character loan, which does
not need any form of conventional collateral.
4. Contract. Each loan or borrowing transaction has to have contract or agreement defining the obligations of the
contracting parties. On the part of the entrepreneur, he has to be extra careful about the provisions of the
contract/agreement, seeing to it that provisions should not be too strict or stringent to the extent that the
existence and profitability of the business shall be protected.
5. Conditions. Forming part of the major content of the contract are the terms and conditions set forth in the
contract or agreement. The conditions essentially refers to the terms or mode of payment, interest rates,
penalties, and sanctions in case default, as well as provisions for settlement of disputes as necessary. Terms and
conditions of the contract/agreement has to be mutually agreed upon by both parties seeing to it that mutual
concerns are addressed upon.
Known to many is the other “C” of credit, which is connection or network. It is said that in this world, it is not much
of what you know but whom you know. True enough, the connection and network of friend or entrepreneurs (or anybody
else for that matter) can go a long way not only for entrepreneurial or business venture but also in some other aspects.
Oftentimes, the connections or network even overrun a policy that can redound to business transactions despite some
doubts in the business proposition. Entrepreneurs, however, should be extra careful and cautious in dealing with personal
connections or network, seeing to it that they are not abused or availed of contrary to law and business ethnics.

On using someone else’s money

It is conventional for prospective entrepreneur to shell out personal capital in putting up the business, rather than
borrowing from someone else, or inviting other parties to invest or be a co-owner of the business project. While there is
logic and wisdom in using his savings to fund his business, an ideal entrepreneur-who is supposed to be risk-taker – may
have to do otherwise. Various authors on financing new venture suggest exploring external fund sources. Author G.G.
Green insinuates at using someone else’s money on the basis of an overriding consideration that says:
“If the business is successful, you will need your cash later to help it grow and expand. If is not successful you will have
some cash left to start another business.”

Author G.G. Green even wants to have it emphasized that successful businessman seldom operate on their own
money if they can possibly avoid it. G. Green specifically points out that it is what capitalism is all about – a system in
which professional business operators utilize other people’s money for mutual gain. G. Green calls it the OPM formula.

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 MODULE 9
Start-Up Operations, Getting Started in the Business

Introduction
Starting up a business or operation is the most difficult, yet a challenging stage in entrepreneurial ventures.
There is no shortcut to gearing up or operationalizing the business. It is proper to commence the business by preparing
the business plan no matter how simple or complex it is. A well-developed business plan means achieving at least half of
the business objectives even before doing the business itself. Putting the contents of the business plan into concrete
action means starting up the business.
By the time your business is completed, you have registered your business and determined your personnel
requirements. You must be very eager to start operations right away. You should take in considerations the following
requirements needed in starting business like capital, location, staff and machinery and equipment. Unless you have done
all these, you are not ready to get started yet.

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Learning Objectives:
 Apply the guidelines in starting up business
 Determine how to comply with government clearances; and
 Identify the process on how to register a business name without legal complications
 Identify sources of capital and minimize costs and expenses at start-up stage
 Apply basic guidelines in getting started in the business

Registering Before Start Up

Before the “business of doing or working on the real business” or actually operating the business itself, certain
governmental regulations has to be compiled of the real business. This aspect constitutes the preliminary and preparatory
task of establishing documentary requirements to operate the business as a legal entity. The entrepreneur has to comply
with the legal requirements as not doing so means an illegitimate business operation. To be in the business, therefore,
means necessarily doing it legally and the following tasks have to be undertaken:
a. Registration of the business came with the Department of Trade and Industry, in the case of single or sole
proprietorship
b. Registration of the Articles of Incorporation and By-laws with the Securities and Exchange Commission, in the
case of partnerships or corporations
c. Application of necessary permit at the level of specific location (e.g., village, subdivision, or barangay)
d. Filing/application of Municipal or City permits where the base of operation of the business (e.g., Mayor’s
permit, Sanitary permit, building permit as necessary)
e. Compliance with certain specific permits or clearances may have to be applied for with some specific agencies
of the government before local government agencies can allow the full swing operationalization of the business
(e.g. environmental clearance certificate)
f. Registration with the Bureau of Internal Revenue (BIR) for the tax identification number (TIN) and other
requirements under internal revenue laws and rules.
g. Printing of receipts/invoices of the company (after having applied for a permit to print receipts with the BIR)
h. Registration of the business organization with the social Security System (SSS), Philippine Health Care
Corporation, Home Development Mutual Fund, Inc (Pag-IBIG Fund), and other government agencies.

The major government institutions which a business organization will be dealing with in the course of business
operations and doing the business itself are shown below.
Major government institutions involved in business registration
Agency Function Address

Department of Trade and Industry Regulation of Trade names DTI Building, Makati Avenue
(DTI) Business name registration corner Sen. Gil Puyat Avenue,
Makati City (for thru
Regional/Provincial branches of
DTI)

Securities and Exchange Verification/reservation of SEC Building, Ortigas corner E.

Commission (SEC) corporate name De los Santos Avenue,

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 Registration of Incorporation Mandaluyong City (or through
Documents: Regional offices of SEC)
-Articles of incorporation
-Constitution and By-laws

BIR Road, Diliman, Quezon City

Bureau of Internal Revenue (BIR) Receipts printing permit (or through the Revenue District
Collection of Taxes Office where the actual business
Regulation/examination Business operation is made)
records/books

SSS building, East Avenue,

Social Security System (SSS) Diliman Quezon City
Administration of social security
for private sector, employees and
self-employed individuals
BOI building, Makati Avenue,
Board of Investment Registration of business under the Makati City
Omnibus Investment Code (the
business organization must first
register either with DTI or SEC)

Regulation of trade names

Registration if invention DTI building, Makati Avenue
Intellectual Property Office (IPO) Trademarks, Trade Names, corner Sen. Gil Puyat Avenue,
Patents Makati City (or through
Regional/Provincial branches of
DTI)
Implementation of labor laws
Department of Labor and DOLE building, Juan Luna St.
Employment (DOLE) intramuros, Manila
Implementation of forestry and
environmental laws (e.g.
Department of Environment and environmental clearance permits, DENR building, Visayas Avenue
Natural Resources (DENR) concessions) DIliman, Quezon City

Regulation and implementation

Department of Education (DepEd) secondary education sector DepEd Complex, University of
Life laws/orders or
Regulation/registration of elementary/Ortigas Center, Pasig
Commission on Higher Education higher/tertiary education laws City
(CHED) DAP building, San Miguel

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 Avenue, Ortigas Complex, Pasig
City

Schematically, the basic processes and procedures in legalizing the business existence of the business is shown below

Schematic diagram in registering with the government business organization

It

should be noted that the above procedures or dealing with the above-mentioned government institutions as shown on
table 2 is just a small part of dealing with the government bureaucracy, which the entrepreneur has to live with. Several
other government institutions may have to be consulted in the process of registration of the business and lawyer’s
assistance may be necessary. Sometimes, dealing with government offices or personnel could be a painstaking and
frustrating experience, but which, again the entrepreneur has to abide with if he wants to do business legally and be a
good corporate citizen.

Choice of Business Name

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 Business name refers to the registered business identity (or name) of the business organization. The business
name may or may not reflect the nature of the business itself. As a matter of practice, the business name is usually
represented by an acronym representing a shortcut version of a long business name, and this is done for retail advantage.
There are no specific regulatory or governmental policies that need to be observed or considered in the choice of
business name. However, government organizations like the Department of Trade and Industry (DTI) and Securities and
Exchange Commission (SEC) have the prerogative in approving or rejecting a business name registration. The only clear
policy name registration is that the proposed business name should not be similar with an already existing or registered
business name, or the proposed business name is not obviously misleading or seeming to have legal complications with
registered business name. Prospective entrepreneur must be extra careful in choice of business names; they should not
invite trouble or collision with multinational organizations who are very much particular or concerned with their business
names to the point of legalizing protection on a certain name, like trademark and copyright protections.
For a single proprietorship type of business organization, this can be verified either with DTI or SEC.
prospective entrepreneurs have to file verification and reservation slips for the business name or the corporate name of
the business organization that will be registered. In the case of a partnership or corporation, choosing a name could be a
beginning of debates or conflicts as incorporator or investor has his or her own preference – and this can be resolved
among themselves before a final choice can be verified or reserved with the records division of SEC. a corporate name
that is considered on reserved status with the SEC has 30 days to file the registration papers after which, the reservation
lapses and the corporate name can be issued or reserved by the SEC records office for someone else.

Money Saving Options at Start-Up

Starting on a shoestring budget is common to every entrepreneur venturing into a new business. Hence, it is a
must that all options to save money must be explored to the fullest. The following should be of great help:
a. Organize or register a small business group at minimum capital requirement required by law. This means that,
for the purpose of organizing and registering with government entities, simply organize a small organization
(e.g. single proprietorship or corporation) and this saves you of registration fees, permits, and assessment by
national and local government agencies. This is important because dues, fees, and assessments for registration
are usually tied to the level of capitalization of the business. It is also much quicker to organize and
operationalize a small business organization that with an organization with too many parties involved.
b. Initially, use your home as an office or explore sharing an office or shop space with other company. This option
will result to substantial savings on overhead expenses. There are existing companies which rents mailboxes and
pseudo address complete the global kid amenities like telephone, fax, e-mail, and office cubicles or conference
room, which are available on an “as needed basis”. These rental companies also allows answering and some
secretarial services function which you may not need really at all daily at the start-up period.
c. Do some works like light carpentry, electrical, delivery jobs, or any forms of tasks within your capability to do
or deliver.
d. Purchase used office equipment and machinery, but be wise and take extra precautions in doing so. Preferably,
buy it from friends, or auction houses or surplus shops, and parties who can provide help and assistance on start-
up operations.
e. Use part-time specialists or skilled workers. Specialists and skilled workers may not necessary on a full-time or
daily basis; hence, it should be worth dealing with them on a part-time or on-call basis. These guys can be paid
on moonlight rates and without mandatory budget requirements as required by law.

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 f. Rather than hiring full-time and salaried personnel, begin sales efforts by hiring representatives or agents. This
can spare the entrepreneur of a fixed or regular salary and other overhead budget which start-up stage cannot yet
fully afford.
g. Explore the concept of subcontracting. This means having your product manufactured or produced wholly or in
part outside your company. This will save you the rental cost, machinery items, or other related costs to having a
workplace or plan of your own.
h. If possible, make sure of family labor and other resources within your households. Given proper motivation,
they are just as efficient and effective as employees you have paid for and they are in a position to sacrifice and
work hard for start-up organizations, unlike paid labor that are simply more concerned with their salaries as
workers.
i. Make use of free public relations instead of paid advertising. Send out new releases to your trade associations
and government organizations, and arrange to be interviewed about your product, company, and prospects.
j. Push your customers hard for prompt payment. After selling your products or services on credit basis, convince
them that it is better and divine to pay you on time.
k. Make full use of technology where necessary for application demands. For instance, full knowledge on personal
computer hooked to an Internet system can save you cost on accounting and marketing.

How to raise Capital

As a small businessman, you should know that money can be raised in various ways.
First of all, money can come from your own pocket. This may be in the form of savings or proceeds from sales
of personal belongings, like a car, a house, and jewelry. This money coming from the owner’s personal resources is
called the capital or owner’s capital.
Of course, the safest way to finance a business is with your own money. The next safest way is to borrow
money from close relatives and friends. You will have to pay them back, naturally, but they are usually prepared to be
more flexible about when you repay them. “Payable when able” – this is the softest loan you can get; and you can get it
only from family and friends.
Sometimes, however, what can be raised from your personal resources and those, which can be sourced from
relatives and friends, are not enough to meet all the capital requirements of the business. When this happens, you can
start looking for outside sources.
Many business have failed because the owner did not estimate the financial needs carefully and accurately.

External Sources of Capital

There are wide range choices for borrowing money. These includes:
1. Pawnshops. You can get quick cash by pawning your jewelry and other valuables.
2. Credit cooperatives. These are popular and easy source of credits especially in the rural areas. Usually, it lends
an amount up to three or five times bigger than the money a member has deposited in the cooperative. Interest
charges are often minimal.
3. Money lenders. These are people who lend quick money without collateral, but charge exorbitant interest rates.
They are otherwise known as “five-six” operators, because they usually charge about one peso interest per
month for every five pesos they lend.
4. Lending investors. These are business enterprises engaged in money-lenders and banks, lending investors
extend short-term loans quickly to individuals and businesses with or without collateral. Interest rates are higher
than bank rates, but lower than those charged by money-lenders- usually ranging from three to five percent a
month.

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 5. Formal sources of credit. These include banks, financial institutions, as well as certain government
development agencies and development-oriented, non-government organizations. They are called formal
sources of credit because they have the legal authority or mandate to lend money to individuals and businesses.

These are various types of credit available from formal lending institutions:
 Short-term loans
- payable in one year or less
- these are normally self-liquidating, meaning, that these loans are used to buy raw materials and supplies, labor
and other requirements that will generate funds for the business and in turn, be used for paying back the loan.
- it may come in the form of a revolving credit line – an agreement by the bank to extend a loan, not to exceed a
specific amount, whenever needed by the client. It is automatically renewable as each loan transaction is paid by
the borrower.
- Commercial banks are those most commonly used sources of short-term loans.
 Intermediate loans
- Intermediate loans or term loans provide capital repayable in one to three years.
- These are available form banks and other financing institutions.
- A term loan is backed by collateral securities and is paid back in instalments over the life of the loan
agreement.
 Long-term loans
-these are loans extended to enterprises assured to exist over the long-term period of the loans – up to ten years.
-these are usually extended by private and government banks. Some lending schemes for small entrepreneurs
also provide long-term loans, including:
 Development Bank of the Philippines’ Omnibus Financing Program for entrepreneurs.
 Development Bank of the Philippines’ Industrial Guarantee and Loan Fund
 Land Bank of the Philippines’ Easy Pondong Pang-asenso
 Land Bank of the Philippines’ Easy Term loan for Exporters
 Philippine National Bank’s Overseas Contract Workers Livelihood Loan Program
 Philippine National Bank’s Pangkabuhayan Loan Program
 Small Business Guarantee and Finance Corporation’s Small Enterprise Financing Facility
 Technology and Livelihood Resource Center’s Agro Industrial Technology Transfer Program
 Technology and Livelihood Resource Center’s Export Industry Modernization Program
 Technology and Livelihood Resource Center’s Technology Utilization Financing Program

Some Guidelines in Borrowing

Borrowing from an external source of credit is a major decision for a small entrepreneur to make. The following
guidelines may be useful, especially for first-time borrowers:
1. First, evaluate yourself whether you are in a good position to borrow. Be prepared to put up collateral in the
form of land, building, equipment, motor vehicle, and other valuables.
2. Estimate accurately the amount you need to borrow. It is important not to underestimate the amount required.
Better borrow a bit too much than to little.
3. Choose the bank to borrow. It should also preferably be one that is nearest to your home or place of business.
4. The choice of banks must also be determined by the size and purpose of the loan, as well as the size and status
of the business.

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 5. In comparing banks, find out about the following terms and conditions:
 Repayment period, including grace period;
 Interest rate and processing charges;
 Mode of release of funds, whether in lump sum or in instalment;
 Mode of repayment – whether monthly, quarterly, semi-annual or annual instalments;
 Collateral and equity requirements; and
 Other restrictions.
Here are other important considerations deciding where to locate
1. Raw materials – how close are you from the sources of raw materials? Are the raw materials bulky and difficult
to transport?
2. Customers – how close are you to your target customers?
3. Transportation facilities – if your materials and/or products are heavy or bulky, examine the availability and
reliability of transportation facilities in the site.
4. Labor – can you employ people living in the vicinity?
5. Power and other utilities – are light and water available?
6. Waste disposal facilities – will there be lot of waste by-product during processing?
7. Community – are there rules, regulations, and other restrictions that will affect business like yours?
8. The decision to own or to rent – will you buy the site or rent it?

Equipping your Business

Before you start acquiring machines and equipment for your manufacturing or service business, you should first
determine the manufacturing methods to use. Ask yourself the following questions:
1. What level of technology will I use?
2. Considering the level of technology I have chosen, what activities are required to convert the inputs (raw
materials, components, and supplies) into outputs (finished or semi- finished products or services)? These
activities are called operations. Operations are usually determined by the specialized functions of a worker or a
machine.
3. How can each of these operations be done?

Acquiring Machines and Equipment

The kind of machines and equipment you need to acquire will depend on the level of technology you have
decided to use in your manufacturing operations. For any given operations, there is a wide range of machines and
equipment at your disposal, ranging from the semi-manual or pedal-type, to the semi-automatic machines, to the most
high-tech and computerized devices.
Machines are also classified broadly according to purpose, into general and specialized purpose. General
purpose machines are those that have a wide range of capability in their field. It is best used in a situation of low volume
and high variability of the product design or where conditions warrant flexibility. It is from these machines that
specialize-purpose ones have evolved.

A wrong decision may result in:

 Paying more than what you should to buy the equipment
 Having an equipment that you do not really need
 Spending too much on the operation and maintenance of the equipment because of high energy consumption,
frequent machine breakdown, repair, costs and so forth.

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Hiring and Training Personnel
Before starting to hire employees, it is important to know your manpower equipment first.

Recruiting Personnel
Now, assuming that you know exactly the type and the number of people you need to hire, as well as their
qualifications, you can go ahead with the hiring process.
 Place “Help wanted” advertisements in the newspapers and/or the radio.
 Display “Help Wanted” signs prominently outside your factory or office and in other public places.
 Check with placement units of schools and personnel offices of other companies.
 Check with employment agencies.
 Ask employees, customers, and suppliers for people they know who might qualify.

Selecting Personnel
There are various tools you can use in order to choose the best candidate for a certain job. These tools include
the following:
 The application form
 The interview
 Written tests
 Reference checks
 Medical examinations

Training Personnel
Once you have hired a person for employment, you may still need to train him. You must not overlook the
importance of training. You cannot expect even an experienced worker to do a job exactly the way you want it done.
These new skills, knowledge, and other information are imparted to the new employee through the process of
training and development.
Often in a small enterprise, the preferred method of developing technical skills among employees is through the
on-the-job training. It is simply the coaching of employees by supervisors, managers, or older and more experienced
worker at the workplace through actual work. In on-the-job training, the training is directly related to the employee’s job,
and only specific job-related knowledge and skills are transferred. It can be tailored-made to suit the individual training
needs of employees after taking into consideration their experience and level of competence. In this type of training, the
employee can gain experience in actual work setting and continue to be productive while he learns.

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 MODULE 10
Production of Goods and Services

Introduction
Having organized or started in business, you are now ready to produce the goods or provide services for which
you have gone into business. However, before your start actual production, it will be best for you to have a clear idea of
who the buyers for your product or service will be. “Who is the market for my products and services?
This topic is about the most important function of business, which is the production. We can say that production
is the process of creating or bringing into being the products and services, which the firm delivers and sells to its market.
The efficient utilization of inputs (raw materials, components. Labor, capital, energy, or power) to produce output (goods
and services) at the least costs is the work of the product management. Production management sees to it’s that resources
are effectively utilized to create the product in the right quantity, of the desired quality, and at the right price.

Objectives
 Define production and production manager
 Explain the responsibility of the production manager that is included in production and pricing
 Discuss factors of production and inventory

The creation of goods and services appears to favour big businesses. They have adequate funds, machines, materials,
modern technology, and management specialists to produce goods and services at a lower average cost. Examples of
these are the multi-national corporations, which dominate the global markets.
However, there are some market situations where a small or even micro business has the comparative advantage in
the production of goods and services. For instance, in the field of cottage industries, like toy-making, basket-weaving, or
in personalized services, the big businesses are at a disadvantage.
In transforming resources into products, the principal actor is the entrepreneur. He decides the proper combination of
resources, such as the application of more labor and fewer machines, or the reverse. He also decides what to produce,
how to produce, when to produce, and where to produce. Obviously, the ultimate consideration in such management
decisions is profit. And this is only attainable if buyers are satisfied with the goods and services for sale.
Producing a product or service which is new in the market comes from an idea. Then, the idea is planned and
developed into a product and service. For true entrepreneurs, this is not difficult because they are creative and innovative.
In the case of giant business enterprise, they have R and D (Research and Development) departments. Their job is to
create new products or innovate existing products.
Doing actual production or manufacturing operations as of the business venture is by itself an inherent bias of every
business, if only to control the entire process and in the end rake all the profits he deserves. In some cases, doing the
actual production, creation, or manufacturing of a product may even be the main bias of the entrepreneur’s business
giving less attention to critical business functions like marketing and research. This option is a bit expensive route for the

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entrepreneur simply because of the needed budget or funds for the procurement of capital items and other infrastructure
needed for a production or manufacturing-based business concern.
If at all, the idea of having production or manufacturing is a necessity that is inherent to achieving substantial profits
for the business, then, this is a matter for the entrepreneur to seriously look into. Each production process demands a
detailed study, from technical, economic, and financial aspects as well. Seeing the business plan, specific study, and
analysis of every minor detail of the production processes have to be carefully made, as this is where cost minimization
aspects can be addressed. By using the appropriate production technology, the entrepreneur should be able to hire
appropriate personnel that are well-qualified and motivated to operate the machines and deliver the right quality of
product.
What is Production?
Production may be defined as the processing and/or assembling of raw material by workers using machinery and
equipment to produce a product or provide service.
Production is the creation of goods and services. Or, it is the creation of utility. Utility means satisfaction. Goods and
services are produced to satisfy wants or needs.
It requires a set of inputs to yield a set outputs.
These inputs may include materials, manpower, machinery, methods, management, money, and moment.
The raw materials inputs are converted into finished products ready for market, through successive stages of
operation, assembly, finishing and inspection. The operations may be machining, cutting, plating, boiling, gluing,
chemical reactions, weaving, and sewing.
 Operation represents the main step in a process, method, or procedure where the raw material is changed
into something else. For example, when yarn is processed, either through weaving or knitting, it becomes a
piece of fabric or cloth. Fresh fruit, when squeezed or pressed, is transformed into fruit juice.
 Assembly is putting parts together to form a final product. A radio set is formed by putting together coils,
resistors, transistors, and other parts. Not all production, however, has an assembly stage. There is no
assembly when the product is simple such as steel bars, flour, or cotton yarn.
 Finishing may mean painting, varnishing, polishing, trimming, cleaning, and glazing, among others. Apiece
of furniture is finished by spray-painting it, for example. Marble products, on the other hand, are said to be
finished when they are sanded or polished.
 Inspection makes sure that the operation has been carried out correctly as to quality and quantity.
Inspection, at its simplest, may be done through any of the five senses – seeing, touching, hearing, smelling,
tasting. It may however, be a more sophisticated activity, when using testers, gauges, and other measuring
instruments.
In between the above-described sequence of operations---- assembly, finishing and inspection – the raw
materials or product may be stored temporarily or permanently and transported or moved from one workplace to another.

Factors of Production
In economics, the major factors of production are land, labor, capital, and entrepreneurial ability. The following
are their definitions:
Land – includes natural resources such as forests, mountains and bodies of water like rivers, lakes and seas.

Labor – refers to both physical and mental efforts like the works of farmers, fisherman, workers, clerks, lawyers,
teachers, and doctors, among others.

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Capital – pertains to machines, equipment, buildings and other physical resources, which are used in the production of
goods and services. This is an economic definition. In other concepts, capital refers to seed money which is utilized for
starting a business.

Entrepreneurial ability – coordinates the other factors of production such as land, labor and capital. It is the spirit of
enterprise. Without such ability, the other productive resources tend to be inefficient.

The input-output relationship indicates that productive resources, such as materials, money, machines, and
others have to undergo a processing stage before they are transformed into products like shoes, cars, appliances, and
others. Such process of production is referred to as technology. Clearly, enterprises, which apply proper and efficient
technology have the economic advantage in terms of costs, quality, and quantity. Naturally, such enterprises are the
winners in the market.
Costs of Production
Costs of production represent the payments for the factors of production. These affect the ability and willingness
of entrepreneurs to produce. When production costs are high, prices go up. This decreases the purchasing power of the
consumers. This results to lower quantity demand for goods and services. In other words, there is a decrease in sales,
which is not favourable to producers or sellers.
Producers must choose productive resources, which are abundant in supply, because these are much cheaper
than scarce resources. Cheaper inputs mean lower costs of production. In terms of profits, lower costs of production
favour the producers. In the rural areas, there are many raw materials that can be used for the creation of products. Their
use should be maximized, not only to produce goods, but also to create jobs for the rural poor.
The cost of a product is made up of three parts: direct materials, direct labor, and manufacturing overhead.
Direct materials are material inputs that become part of the product. Examples include: the cloth used in
making ladies’ blouses, wood used to make wooden furniture, the leather used in making shoes, and the meat used in the
making of ham.
Direct labor includes the workers whose outputs are closely related to or associated with the making of the
product. Using the same example given above, the paint for the garments industry, the carpenter and the worker who
paint the varnish on the furniture, the shoemaker, and the worker who cuts up the meat to make the ham, are all
considered direct labor.
Manufacturing overhead are all other costs incurred in making of the products but do not become part of the
product. Examples of this type of costs are:
 The use of the buildings, machine, and equipment, and their maintenance and replacement;
 Power, fuel, lubricants, water, heating, and supplies used to keep the manufacturing resources running;
 Salaries or wages of all workers who are not directly involved in the making of the products, such as
the owner, manager and the foremen;
 Transport costs of raw materials; and
 Office costs such as raw materials; and
 Office costs such as stationery, printing, telephone, and postage.

The cost of production should be kept to a minimal level. There should be a continuing effort on your part, as
entrepreneur, to reduce cost. Cost reduction should also be a concern of your workers. You will do well to inculcate cost-
consciousness among them.

Making Production Efficiency Your Goal

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 As production manager, you should be concerned with the economical and efficient utilization of inputs to
produce output. You must always aim at improving productivity, which is simply defined as the arithmetical ration
between the amount produced and the amount of all resources used in production. In other words, productivity is
synonymous with efficiency in utilizing inputs to produce outputs.
In order to better illustrate the concept of productivity, consider materials and labor as input, in the following
manner:
Productivity of materials. We say that there is an increase of 10% in utilization of materials if a skilful tailor is
able to cut 11 suits from a bale of cloth, from which an unskilled tailor can cut 10.
Productivity of labor. If a worker has usually been producing 40 units of product per day was able to raise his
production output to 60 units because of improved work methods, then, the productivity of the worker has increased by
50%.
Productivity of machines. A machine was observe to produce an average of 1,000 pieces of a particular
component per hour. Adjustment of the speed of the machine increased its production volume to 1,300 pieces per hour.
This means that there is an increase of 300 pieces over the volume previously produced. We can therefore say that the
productivity of the equipment has increased by 30% as result of adjusting its speed.
As production manager, you have a number of management tools and techniques at your disposal, which you
can apply to reduce costs of production and increase productivity.

Plan your work

If you do not plan and schedule your production properly, you will waste a lot of expensive production time.
Without an adequate plan, you may not be able to anticipate any or all of the following potential problems form
occurring:
 Running out of raw materials stock just when you need them furing production;
 Interruption of operation because the next machine or worker does not have a continuous supply of in-process
material from the preceding one;
 Work delay due to machine breakdown; and
 Failure to deliver contracted products or services to customers as scheduled.
With planning, you can anticipate the problems that are likely to occur so that you can work out solutions or control
measurable to prevent these problems from occurring or, if they do happen, to minimize or reduce its harmful effects.
You should therefore, keep in mind the following vital points so that you can cut down on wasted time:
 Plan the delivery and supply level of materials and purchased parts so that you never run out of stock;
 Plan the jobs to be done so that as soon a work has finished one job, there is another ready for him; and
 Plan your machine maintenance so that machine stops only when you want and do not breakdown during
production
Planning needs bot be difficult nor take too much of your time. For every minute you spend in planning, you will
save many minutes on the shop floor.

Produce Quality Product

You are in business not only to earn profit for yourself, but also to serve the needs of your target market. For
every product or service you sell, you will get a corresponding return in terms of revenue or profit. Conversely, the
customer who buys your product expects to get his money’s worth in terms of the product’s utility or functional value to

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him. As a good business man, you have the moral obligation to manufacture the product according to customer’s
satisfactions or expectations at the price he can afford and at the time he needs it.
You should bear in mind that if the buyer is satisfied with the quality of your product, you expect repeat orders
or continuous patronage from him. However, once your product is found to be defective or unable to meet the customer’s
specifications or requirements, then, that is the end of your supplier-buyer relationship. You lose a good customer or
buyer in the process.
Aside from keeping satisfied customers, maintaining product quality goes a long way in reducing cost of
production and improving productivity. When you produce defective products, you incur unnecessary costs. You lose in
spending additional time, effort, and money reworking and inspecting the defective product. On the average, you incur an
additional cost doing repairs.
By producing quality products, you will avoid incurring additional costs, reworks, or repairs. At the same time,
you will increase your productivity. Some people will tell you that high quality and high productivity cannot be achieved
at the same time. They think that a good quality product is always expensive and that a poor quality product is always
cheap to manufacture. This is not always true. A poor quality product is a little value to a buyer so he will not pay much
for it. It does not necessarily mean that it was inexpensive to make.
Quality is an essential part of the productivity formula. In production, you and your workers do not always
produce 100% good products. Almost always, there are rejects – products that have to be reworked, or worse, thrown
away. Basically, productivity is good output over total input. The effort, time, and money spent in reworking and
inspecting parts and the product that is lost due to scrap or waste all reduce productivity.

CYou can achieve quality control by focusing your attention on the following areas:
1. Control manufacturing information. You should see to it that your production workers are given complete,
easy-to-understand, clear, and simple instructions on the process of production. You should provide them with
clear drawings or diagrams. Any changes in policies or procedures should be clearly communicated to them.
You can do this through simple management directives.
2. Control purchases and storage of raw materials. You should obtain the correct materials of defined quality
from suppliers, and see to it that these are appropriately stored to prevent spoiling or deterioration. Check and
inspect raw materials delivered to you by your supplier to verify whether these conforms to your quality
requirements. It is best to maintain good relationship and communication with suppliers.
3. Control manufacturing process. Prevent the fabrication of defective products by instituting inspection points
or simple routine checks on important processes or steps, through adequate planning, good machine
maintenance, and proper motivation of production employees.
4. Control finished products. Verify by means of adequate tests and criteria to check whether the finished
product meets the quality standard or not. Use information feedback from the final inspection to maintain
production process. Use simple sampling plan
5. Control measuring instruments and test equipment. Schedule periodic calibrations and adjustments or
maintenance of test and process equipment for adequate control.
6. Control corrective action. Use information from control areas 1-5 to ensure that deficiencies affecting quality
are promptly and systematically detected and corrected.
Manage and control your inventories properly.
VHGChVVVV
CWhen you are in business, you need to keep sufficient stocks of raw materials, in-process goods, and finished
goods in order to meet your production and sales targets. This is called inventory. Inventory management and control

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means that you must take care not to have too much, nor too little of the required stocks. In other words, neither
overstock nor under-stock.
Keeping far more stocks than what is needed is having working capital tied up and not earning money for you.
In fact, it is costing you more money because goods and raw materials tend to deteriorate while in stock. For example,
iron and steel part rust, wood rots and becomes stained, goods for sale become stained and dirty and can only be sold at a
discount.
On the other hand, you must be on guard against having too little of the materials and supplies you need. It is
always a good idea to have a little more than you estimated to use. Having so much extra materials, goods in process, and
finished products allows you to:
 Meet sudden increase in sales demand; and
 Make up rejected or damaged parts and products.
Running short of raw materials suddenly will slow down or disrupt you production. Workers will be idle while waiting
for the materials to arrive. This is time and money wasted. It might also mean a potential loss of sales or customers.

How to Control the Inventory

The basic idea behind inventory control is to operate your business effectively with the least amount of stock. To be
able to do this, you should know:
 When to order
 How often to order
 How much to order
To be able to answer the above questions, you should know how to distinguish between basic stock goods and
seasonal goods because each kind is controlled in a different way.
Basic stock goods are those, which are either sold at as much the same rate at all times or regularly used in
production. For instance, in a food store, these would include rice, flour, cooking oil and the like. In a garments store
these would be t-shirts, socks, and underwear. In a furniture factory, these include standard-size planks, plywood sheets,
nails, screws, glue, and varnish.
Seasonal goods are those that move quickly at some time and slowly than others. In a bookstore, these would include
netbooks, books, and other supplies that sell heavily just before and during the opening of classes. In a garments store,
these would be warm clothing, umbrellas, and raincoats during or just before the rainy season. In a toy factory, these
could be colored plastic pellets for use in the production of plastic toys before the Christmas season.

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 MODULE 11
Importance of Marketing

Learning Objectives:
 Discuss the importance of marketing.
 Define marketing and marketing management
 Explain responsibilities of marketing manager

There is one thing that entrepreneurs must embrace on a lifetime when he or she engages in a business. This is the
concept of marketing. Marketing is an activity that the entrepreneur will be involved in for as long as the business exists.
Marketing is more than just advertising the fact that the entrepreneur is in the business of producing or providing
something. It involves everything the entrepreneur does to obtain and keep a customer, from conducting market research,
developing customer profile, and positioning organizational identity in the market, to selecting marketing strategies, to
determining location, and how phones are to be answered and customer complaints are to be handled.
Quite often, some newcomers in the field of business brag about their new product or invention and end up nothing
or not going into the business and do it profitably. Most often, this is typical of an inventor unmindful of the value of
marketing aspects in favour of product development. No wonder why there is not a single Filipino inventor who can brag
about having invented something and earned millions out of it.
For a true and blue-blooded entrepreneur, market aspect should be given due importance, if not all, the most
important aspect when one gets into business. This postulation is for the simplest reason: no matter how good or
excellent the product is technically, it is nothing if there is no buyer on the market. A business venture thrives not for the
excellent technical specification of the product per se, but by the market reaction it brings and the volume/amount of
sales, as well as the profits it brings to the capitalist or entrepreneur. For a good or bad product to be relevant to the
entrepreneur, the bottom line is that it should make money for him. Thus, if the product has no market, forget it.
However, if the product appears good and there are market potentials, develop or find a market niche for the product. Or
better else, redesign, repackage, or do anything for the product to have an appeal in the market and make money for the
entrepreneur. This spells out the difference between a traditional businessman and entrepreneur.

Marketing Concepts and Philosophy

Any form of business has to exist not because of the existence of a product or service that the entrepreneur has
developed, but because of the preconceived notion that there is a sure market or market potentials for the product or

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service. What this really means is that the entrepreneur must have the market orientation, instead of product or service
orientation. This also means market-driven or customer-driven.
The foundation of entrepreneurial success evolve around the aspect of marketing concept. The marketing
concept is a customer-oriented philosophy that is implemented and integrated throughout the business, to serve customers
better than competitors and achieve specific goals.
The marketing concept is made up of three components. The first component is the customer needs and wants;
the entrepreneur develops an organization-oriented marketing strategy to accomplish its goals. The principal task of
marketing function, after all, is not so much to be skilful in making the customers do what suits the interested of the
business, but to be skilful in conceiving, and then, making the business do what suits the interests of the customers.
The second component of the marketing concept is the organizational integration. Whether an entrepreneur
owns start-up company of3 staff, he or she hurdles to integrate a customer focus as a philosophy for all the people in the
company. Virtually, all the people in the company directly and indirectly affect how customer perceived the firm. This
early stage philosophy then provides the foundation for developing customer-oriented guidelines as the company grows.
The third component of the marketing concept is the goal achievement. Marketing is oriented toward sales
volume as a success measure, but it is essential to strive not just for the sales, but also for the effective marketing that
contributes to profitable sales.
Marketing management and entrepreneurship has something in common and this is more than just selling,
advertising, or promoting the product or service. It involves a complex system involving taking the risk as an
entrepreneur should be, and bearing with analysing and providing measures to the various components and segments that
makes up the market.

The Market Research

A market research will help entrepreneurs discover who wants to buy the product or service. In other words,
entrepreneurs will be guided as to the particular market segment; hence, entrepreneurs can focus their efforts on doing
something to address that particular market segment. Depending on the product and service to be handled, a market
research may be a simple or complex job to do. Conducting market research is not really that difficult to do, though it is
time consuming. Even before starting your business, do a market research as this can help in production planning,
product development, packaging, and pricing. It can be a simple activity as asking friends and acquaintances what they
thing of the business concept and the product itself. It could also mean studying or spying on the market competitors, and
outdoing them later through excellent products or services.
In specific terms, market research will guide entrepreneurs as to the following:
 Define your product or service
 Define your market – who are your customer?
 Identify what motivates those customer to buy
 Price your product or service
 Reach your customers through advertising, publicity, and sales calls
 Compete with other companies providing the same products or services
 Position your products in the market place.
 Cope with outside forces, such as the economy
 Understand your industry and how your company fits in
 Evaluate your company

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Where to get Information
Getting vital information is what market research is really all about. Some of this information needs to be
purposely researched and some already exists, but needs to be organized and analysed.
Information in whatever form abound town. Some of the most common sources of information on potential
market for new products and services can be generated by way of the following:
1. Library research. The academic and library settings are valuable data providers, particularly those institutions
whose library facilities are updated and computerized. In the library, one can find the conventional methods and
reference materials used in library research.
2. Questionnaire survey. A survey questionnaire is a basic tool in market research, whether it is conducted by
mail, telephone, or personal interview. The questionnaire survey is also a step ahead to marketing, as doing this
means researching out a prospective customer directly, learning about his needs, problems, quantity
requirements, and options regarding the proposed products or services.
3. Existing research report. If the business proposition refers to an existing product or services and is deemed to
be growing and hence you are going such field of business, there must exist information or a subject in the
recent years that could be of help to the entrepreneur. Due diligence research can be of help in finding out this
kind of data information.
4. Publish market statistics. There are published market statistic for some product lines by trade associations or
private market research organizations, which entrepreneurs can simply buy or subscribe to. Some government
institutions, like the Bureau of Agricultural Statistics, also provide market information, which can be either
obtained for free or for a fee.
5. Trade associations meetings and trade shows. In the long-term, it pays to be a member of trade associations.
The meetings and trade exhibits or expositions sponsored by this group can expose to various parties and
suppliers who can provide vital information. You will find out who your liveliest competitors and customers are,
who is the most in spending money on promotion, and what their newest product looks like.
6. Experts. It should be of help to touch base with real technical experts and parties who knows about the market
of the product and services. Much valuable information can be gained from taking to experts and such parties
like trade magazine editors, technical consultants, university researchers and scholars, analysts in investment
firms, and trade association staff members.
7. Phantom products. This is done by smart entrepreneurs in develop countries. It is one of the methods that are
often used to obtain market data done by issuing press statement or announcement of a non-existent or prototype
product, then sit back and see who responds. This is sometimes done rather elaborately, which heavily air-
brushed photographs of mock-up product, or artist’s cutaways. A press release may be distributed to major
journals, sometimes even using an assumed company name. When the direct mail results are analysed and
certain respondents are contacted, you may find this a rather effective method of gathering information. Poorly
handled, it may also backfire, and of course the ethical aspects may be considered somewhat questionable by
some.
8. Professional market surveys. These are large and prestigious research organizations and consulting service
companies who publish documents like market indicators, regional and provincial profiles, investment guides,
and other special series publications that can be of help to entrepreneurs and prospective business investors.

The Need for Marketing Plan

An author-entrepreneur said that many operations plug along without a business plan; however, few of them survive
without a plan of attack for marketing their business. A marketing plan works as a survival, as well as a preventive tool.

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The marketing plan keeps the entrepreneur on track when tempted to impulsively dip into a business, or fall into a deadly
trap of lowering prices to keep pace with competitors. Successful entrepreneurs are proficient at attracting and keeping
customer by satisfying their need and a written marketing plan can help the entrepreneur in maintaining this momentum.
A simple, yet effective marketing plan, should have the following contents:
a. Execution strategies. The execution strategies will spell out the difference between a well-written business plan
and a poorly done one. The execution strategies spell out the concrete operational plan to put forward the
products or services towards the customers’ place ending up in a buying process.
b. Objective. The marketing objective must be specific as to what is there that needs to be accomplished. The
marketing plan should articulate clearly the purpose in terms of specific goals, targets, quantifiable or quality
results, and timetables.
c. Marketing mix. It defines the position of the business or the product in a market place. The marketing mix
should put across the message but corporate or product identity or niche to a target audience. The marketing mix
should work in concert with the product or service, price, place, promotion, and position.

Channel of Distribution
Channel of distribution refers to the marketing institutions and interrelationships of responsible for the physical
flow of goods and services from the producer or manufacturer to consumers or industrial users. Middlemen or agents are
involved in the movement of goods and services from the producer/manufacturer, and the more discounts and incentives
are needed, this means diminishing factor to an entrepreneur’s profit. While it is possible for the entrepreneur or producer
to go directly to the consumer and end-users, such could be impractical as this involves costs and expertise where the
entrepreneur may not possess.
The entrepreneur can use any of the following modalities whichever is appropriate for his business:
a. Direct marketing. This refers to a system of marketing by which an organization communicates directly with
costumers to generate a response and/or transaction.
b. Wholesalers. This is where the producers or manufacturers generally dispose or sell their products, who in turn,
sells the same to the retailers or end-users.
c. Agents. If a wholesaler is necessary, the entrepreneur must determine how to reach them. The individual
entrepreneur may find it possible to contact and service the wholesalers without additional help. In many cases,
manufacturer’s representatives contact the wholesaling companies and are paid commissions on their sales.

Pricing
Price is the value placed on goods and services offered to the public. A product or service may be paid in the
form of money or it could be paid with other goods and/or services. For this transaction to take place, a value is placed on
the product or service.
Having identified your target market and determined the features of your product, the promotional effort you
will undertake, and the middlemen who will sell your product you are now ready to put a price tag on your product. Price
setting seems to be an easy thing to do; yet, it is one of the most crucial aspects of marketing. There are many factors that
affect pricing decisions: the cost of making the product, the marketing and other administrative costs, the prices of the
competitors, the ability of the target customers to pay, the supply and demand situation, and the image of the company, as
high prices are associated with high quality and low prices with poor quality. The ability to price products properly can
mean the difference between the success and failure of the business itself.

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The Concept of Fair Pricing
Fair pricing is not all about what is good for the buyers or consumers; neither does it mean making it cheaper.
Take note that low price is an indication of low quality product or services. Fair pricing is one that is attractive to
potential clienteles or market with reasonable returns for the entrepreneur. In the case of products or services which are
real outputs of highly creative and innovative thinking, price may be perceived as high enough or even exorbitant;
however, markets for these kinds of entrepreneurs usually do not complain as what matters is the value added to their
kinds of businesses or needs. Besides, there is really a premium to intellectual property and this is what entrepreneurs
should really realize or ought to know.
On order to make profit, the entrepreneur must set the price and not the salesmen or the marketing people.
Employees or staffers of the business can only determine parameters for pricing within the framework of what is
discussed in the book, unmindful of the substantial investments of entrepreneurs in seeing the business through, while the
entrepreneur has to be decisive and firm in position on matter of pricing. Fear of charging enough may be a display of
lack of self-confidence. It could also be viewed as an indicator or result of lack of confidence in the quality of the
product, merchandise, or service rendered. If so, better improve the product quality, or switch product or brand. If you do
not have confidence in it, then, who will?
Fair pricing also means looking at the competitors’ prices. Difficulty in setting fair price could be a result of
strong competitive pressure. If the company down the street can price it lower than you do, then, there must be a reason.
Search it out. If your competitor charges less, making little or no profit at all, you may have to drop near his level for a
while and outsell them later.

Basic Pricing Principles

As earlier mentioned, the price you charge to your customers or clientele will have direct bearing on the success of the
business; hence, this aspect must be given due diligence and care. In pricing a product or service, the following will serve
as a fundamental guideline:
 All prices must cover costs;
 The best and most effective way of lower sales price is lowering the costs;
 Prices must be regularly upgraded to reflect market developments
 Prices must be established to ensure sales;
 Product utility, longevity, maintenance, and end use must be judged continually, and target prices should then be
adjusted accordingly;
 Prices must be set to preserve order in the marketplace; and
 Prices must be fixed to support an overall corporate goal.

Pricing a Service
Unlike a product where everything can be quantified to arrive at a production costs, rendering services involves
human efforts and other parameters of factor of production which are quite difficult to quantify. For instance, human
creativity, innovativeness, and ingenuity involve expenses incurred in the past, which shall be applied only now.
Moreover, there are other issues involving use of human resources, whose actual contribution to product development
may be also difficult to quantify. Nevertheless, among service providers, pricing of services rendered vary with the type
of business, but the same three elements are present in every situation. The three elements include:
1. Labor cost. This include salaries, wages, and benefits paid to the employees, as well as
contractors/subcontractors who performed, supervised, or managed the service business. If you, as the owner,
are even partly involved in executing the business operations, then, the cost of your labor, proportionate to your

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 input, must be considered as part of the labor charge, and to which, you are supposed to receive the amount as
salary or wage.
2. Overhead expenses. These items include indirect expenses required to operationalize the business. These
expenses include insurance premiums, equipment depreciation, business forms, rentals, office supplies, dues,
and membership payments. Vehicle maintenance and all those intangible costs associated with the manufacture
of product or rendering of services form part of these costs.
3. Profit. This refers to the amount of income earned after all costs of producing and providing the service have
been met. When calculating the price of a service, profit is applied in the same manner as mark-up on the cost of
the product.
If you are starting out, you obviously will not have the skill of a seasoned professional. If your quote is too low, you
will either rob yourself of some profit or be forced to lower the quality of work to meet the price. If your estimate is too
high, you may lose the contract altogether, especially if you are in the competitive bidding situation. Make it your
business to learn how to estimate labor time accurately and how to calculate you’re overhead properly, so that when you
quote a price, you can be competitive and still make the profit you need.

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 MODULE 12
Understanding the Basics of Accounting and Finance, Financial Management

Aside from recognizing the community’s needs and identifying the products and services that will satisfy these
needs, another goal of an entrepreneur is to earn profit, as well as to find ways on how to increase it. Understanding the
basics of Accounting and Finance will help you achieve the said goal.
The primary goal of Accounting is to provide quantitative information, primary financial in nature, which is
intended to be useful in making economic decision. In the preceding paragraphs, we will be discussing the basic of
accounting and finance, as well as managing the financial aspects of an enterprise. These topics are designed to give you
a better knowledge of the recording of business transactions and how these transactions will be summarized to provide
guides in making financial decisions to increase profit.

Objectives
 Discuss the functions of a financial manager, uses and sources of funds, the rules of sound financing and
financial record keeping
 Be knowledgeable in the analysis of the financial statement, budgeting and cash management, and some of the
reasons why a business fails

The role of Finance in an Enterprise

The role of money in a business enterprise can be compared to the function of blood circulating in the human
body. Any activity or undertaking involves money or cash. Money is involved in the continuous expense-revenue cycle
of the business as long as it is operating. Money is needed to purchase the tools and equipment, materials and supplies,
and other needs of the enterprise, and to pay for the expenses incurred, such as salaries and wages of the employees,
electric and power bills, rentals, and other expenses. On the other hand, when a sale is made, the business receives money
in payment for the goods, products, or services rendered. Money received will then be used to pay for materials, salaries,
and so forth.
The flow of money as described earlier seems simple, but many business have evolved practices that have
complicated the process. An example of this is selling goods and services on which payment will be made after 30 to 60
days, while employees have to be paid on time. On the other hand, a manufacturer can obtain some resources directly
without paying money immediately.

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Functions of a Financial Manager
a. Treasurership. It involves provision of funds, custody of funds or the cashier’s function, credit and collection,
and investments. It is the role of the treasurer to see to it that there are sufficient funds to provide for all the
needs of the various operating units.
b. Comptrollership. Another function is to it that the funds are effectively and efficiently utilized. It involves
financial planning, accounting records and reports, tax administration, government reporting, and internal
control.
Financial planning is important because the funds of the enterprise are limited and must be allocated properly to the
best interest of the business. A financial plan is a course of action for obtaining and using the money that is needed to
implement the goals of the business organization. Once the plan is in action, the performance of the organization is
monitored and evaluated in terms of the attainment of the goals. Just like any other plan, financial planning should be
flexible and realistic. Here are the three steps involved in financial planning:
1. Establishing Objectives. These should be clear and specific to determine their cost or budget. Objectives
should be realistic. That is, available resources in terms of human, material, and financial inputs can support
them. Otherwise, such objectives are not attainable.
2. Budgeting. A budget is an estimated or projected program of expenses and income over a specified future
period. Incomes come from estimated sales, while expenses are based on both fixed and variable costs of
operations of the business like salaries, rentals, materials, taxes, payments of water, electricity and others.
3. Identifying the sources of funds. There are four ways of financing a business enterprise: a) income from sales,
b) owner’s money and sale of shares of stock, c) borrowings from friends, relatives, and financial institutions,
and issuing of bonds, and d) sale of some property of the enterprise as a last resort.

Uses and Sources of Funds

Uses of Funds
Funds refers to money, or its equivalent, which is used in obtaining and bringing together resources for the
attainment of your business objectives.
Funds are used to obtain resources, which are referred to as assets. Assets can be classified as current or
working capital, which are used in the day-to-day operations of the business, or fixed assets, which will be used by the
business for a long time, usually for more than one year.
To illustrate these two types of funds or assets, let us consider a T-shirt printing business. The silk screen
frames, stapling machine, cutting knives, paint brushes, and working table are to be used in the business on a long-term
basis – possibly, for a number of years, and are called fixed assets. While textile paint, thinner, lacquer, worker’s wages,
and rental are the current assets, they need to be replaced or repurchased weekly, monthly, or as the need arises.

Sources of Funds
Sources of funds coming from owners can be identified according to the type of business ownership. When it is
a sole proprietorship or the money comes from one person only, this amount is called capital, owner’s capital or owner’s
equity. If it is partnership, there are several contributors of money, and these funds are called partner’s capital.
Corporations, on the other hand, issue shares of stock to people who contribute and become owners of the enterprise. The
money they put unto the corporation is called stockholder’s equity.
Funds that are borrowed are known as liabilities. Current or short-term liabilities/financing are to be paid within
a year or less, while long-term liabilities/financing are to be repaid for a period of more than one year.

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 There are government and non-governmental organizations that extend both financial and technical assistance to
small entrepreneurs. We have the Philippine National Bank (PNB), Development Bank of the Philippines (DBP), and
Land Bank of the Philippines (LBP). They have their own programs for small and medium-scale enterprises. In the case
of NGOs there are numerous organizations that extend financial assistance to small enterprise, such as the Meralco
Foundation, Philippine Business for Social Progress, and others. Foreign governments, through their embassies, and
international organizations likewise, have their assistance programs for micro and small business. Here are some sources
of funds:
1. Short-term financing (one year or less)
 Trade credit. Goods are delivered to retailers on consignment basis. This means they have to pay the
goods within 30 to 90 days. Such credit lines appear to retailers with good reputations or established
business relations.
 Promissory note. This is a written pledge by a borrower pay a certain sum of money to a lender at a
specified future date. Such loan entails an interest.
 Unsecured Bank loans. Commercial banks grant unsecured shirt-term loans to their customers at
interest rates that vary in accordance with their credit ratings. Borrowers with high credit ratings get
lower interest rate.
 Commercial paper. This is a short-term promissory note issued by big corporations. Commercial
paper is secured by the reputation of the issuing corporation. There is no collateral involved. Bug firms
with excellent credit reputation can easily raise the large amount of money from financial institutions.
2. Long-term financing (more than one year)
 Loans. Many firms finance their long-range activities from loans borrowed from banks and other
financial institutions. These require collateral such as land, equipment, and machinery. Terms of
payment are indicated in a loan agreement.
 Stock. This is a certificate of ownership. A stock is classified as common and preferred. Holder of
common stock can elect directors and can decide major corporate actions. In these cases of preferred
stockholders, they have no voting rights. But they have priority in claiming of profits and assets of the
corporation. In general, only established corporations sell additional shares of stock to the public to
finance their business projects.
 Bond. This is a certificate of indebtedness. It pledges to repay a specified amount of money with
interest. Such certificate indicates also a maturity date. Big corporations issue bonds to raise funds for
their business activities. Bondholders have the first claim on the assets of the issuing corporation in
case it gets bankrupt. Bonds are classified as debenture bonds (supported only by the reputation of the
issuing corporations), mortgage bonds (secured by the assets of the issuing corporation), and
convertible bonds (can be exchanged with shares of common stock)

Rules of Sound Financing

In borrowing, you must be careful not to overlook the financial structure of your business. Ideally, the 40:60
equity ratio must prevail. What does this ration mean? It means that only 40% debt and 60% equity must finance your
business. For example, if you need P100,000 to set up your business, only P40,000 must be borrowed (debt) and the rest
or P60,000 must come from your own contributions (equity). This 40/60 ratio is recommended in order to:
 Provide for future borrowings when the business will expand; or
 Meet changing circumstances and situations.

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 Firms with higher debt/equity ratio are saddled with high loan and interest payments. This situation puts the firm at a
disadvantage, especially when it competes with the other business without a similar debt burden.
In addition to the debt/equity requirement, you must comply with the following rules that your firm will have a
sound financial structure:
 Fixed assets and the working capital requirements, during normal operations must be financed from the
owner’s equity and long-term loans or long-term liabilities.
 Short-term requirements, like additional working capital needed during peak seasons (Christmas, school
opening and other occasions), must be funded from sources that offer short-term loans like trade credits (30,
60, 90 days), short-term bank loans (two or three months), pawnshops (three months), friends, relatives, and
family members.
In summary, short-term capital requirements must be financed by short-term loans. Owner’s equity and/or long-
term loans must finance long-term capital requirements.

Working Capital Management

Working capital is concerned with the day-to-day financial operations of a business and the problem of ensuring
that there is enough cash in the firm to be able to pay what is owed – and still continue to trade. Working capital is
current assets less current liabilities.

Financial Records and Reports

Some businesses fail because the owner or manger unable to keep track of how the business performed. They
may have failed to notice such deficiencies like heavy operating expenses, inadequate sales volume or selling below
break-even, high level of receivable (difficulty in collecting), excessive inventories, and excessive fixed assets.
This failures could have been avoided, if the owner kept adequate financial records. Thus, a business owner
needs to have proper training, not only in records keeping, but also in analysing these documents for management and
control purposes.
In managing the finances of an enterprise, you have to make sound and timely decisions on the fund allocation
of the different operating units, and the sources from which the funds would be taken. To be effective, your decisions
must be based on reliable and up-to-date information. To do this, you, as an entrepreneur need to maintain records all the
transactions the enterprise has made. These transactions represent your enterprise’s operations and affect its financial
status.

Financial Record Keeping

The recording of the transactions within the business is referred to as bookkeeping. The records are called books
of accounts. The effect of the transactions are drawn out from the books of account and summarized in a report called
income statement or profit and loss statement. The resulting effect on the financial status of the firm is also drawn out
from the books and reflected in a report called the balance sheet. The whole system of recording and interpreting the
results of the business transaction is called accounting. Thus, the system is referred to as the accounting system and the
outputs are accounting records and reports.

The flow of recording business transaction is as follows:

 Transactions occur daily (cash, sales, cash disbursements, credit sales)
 Proper supporting documents are prepared
 Debits and credits are recorded in the journals

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  Summary totals are posted on the ledger
 Preparation of the balance sheet and income statement (profit and loss statement)

The features of good accounting system are as follows:

 Simple to understand
 Flexible and adaptable to changing needs;
 Inexpensive to operate;
 Little time to operate; and
 Handy and convenient to use.

Books of Accounts
An enterprise would need the following books of accounts:
 Journal
The journal is a chronological record of the business transactions of the enterprise. It is also referred to
as the book of original entry. The entries show the effects of the transaction on the different items in the balance
sheet.
Sample of General Journal
Date Accounts & Explanations Ref/ Debit Credit
Folio
10/10 Cash 11 10,000
Sales 41 10,000
* Cash sales of the day
10/11 Office Equipment 16 3,000
Cash 11 3,000
*Purchase desk calculation
10/11 Office Equipment 16 35,000
Accounts Payable 35,000
*Purchased from AJ Electronic (1)
computer unit on account

Entries in the general journal must be supported by evidence or documents, such as sales invoices, suppliers’
invoices, official receipts, and purchase orders.
Further, there are basic types of journal that can be kept, such as purchase journal (for credit purchases), sales
journal (for credit sales), cash disbursement journal (payments on cash basis), and cash receipts journal (all cash sales
and payments from credit customers).
 General Ledger
After all business transactions for the day have been recorded in the general journal, the next step in the
bookkeeping cycle requires that all entries be properly transferred to the general ledger. The general ledger is a
collection of accounts, usually bound, showing the different transactions affecting the items (also referred to as
accounts) in the balance sheet.
General ledger provides a summary of all the changes that affect each particular account. Journal
entries only become useful once they are classified and summarized accordingly. Through the general ledger,

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 you are able to classify and summarize all your business transaction, and see at a glance how they affect of your
accounts.
Sample Form of General Ledger
CASH
Account No. 11
Date Particulars Ref Debit Date Particulars Ref Credit
10/11 Sales J-1 3,000
10/11 Office equipment J-1 3,000
10/11 Salaries J-1 14,000

OFFICE EQUIPMENT
Account No. 16
Date Particulars Ref Debit Date Particulars Ref Credit
10/11 Desk Calculator J-1 3,000
10/12 Computer J-1 35,000

Financial Statements
The financial Statements are the means of conveying to interested parties, such as the owner, management, and
other interested outsiders (government agencies, banks, creditors, suppliers, customers), the performance of the enterprise
for a given period (Income statement), and its financial condition as of a specific date (balance sheet)
In working out the financial statements, it is also recommended that a professional accountant be engaged. The
law requires that your year-end report to the Bureau of Internal Revenue and to the Securities and Exchange Commission
(in case of associations, partnerships and corporations be done by a certified public accountant.

Balance Sheet
The Balance Sheet is a formal statement that presents the financial condition of the company as of a specific
date. It shows what the enterprise owns (assets), what it owes (liabilities), what the owner has invested, and the accrued
expenses or losses (equity). Entries in the balance sheet are based on the conventional accounting equation:
Assets=Liabilities + Owners’ Equity.

Classifications of Balance Sheet

A. Assets are items of value owned by the enterprise and include such items as cash, claims from customers (also
referred to as accounts receivable), goods for sale, land, building, machinery and equipment and other property
owned by the firm.
1. Current Assets. These consist of cash and other assets that are expected to be converted into cash during the
normal cycle of the business. The normal operating cycle is generally one year. Examples of current assets are
cash, marketable securities, accounts receivable, stocks or inventories of raw materials, supplies and finished
goods, and prepaid expenses.

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 2. Fixed Assets. These are assets that are acquired for long-term use. Land, building, machinery, equipment,
furniture, and fixtures acquired to be used in the business are some examples of fixed assets.
3. Other Assets. These include patents, goodwill and others which do not fall under the above definitions.
Goodwill is the difference between the price paid to acquire a business (or part of a business) and the value of
the tangible assets acquired.

B. Liabilities are amounts owed by the business. These are classified into current and long-term.
1. Current Liabilities. These are obligations that are expected to become due within the normal operating
cycle. Accounts payable are amounts owed to trade creditors for merchandise, raw materials, services,
supplies, or other items (such as taxes, rental), which were acquired on credit, and thus, have not been paid
for.
2. Long-term liabilities. These are commonly borrowings from banks and/or other financial institutions.
They are to be paid for a longer period of time than the normal operating cycle, usually there years or more.
Liabilities of this kind are normally documented by promissory notes and backed by assets serving as
security or collateral.

C. Owner’s Equity refers to the amounts invested by the owner/owners in the firm and includes profits retained in
the business. This represents the interest of the owner or proprietors in the business. This is affected by the
additional investment or withdrawals of the owner/owners, and by the addition/deduction of the net profit/loss
for the year. .

Valuing Assets
Suppose you brought a typewriter in 2000 P3,000.00. How much would it be worth today? Your answer might
well depend on how useful it is to you now. If it is worn out, obsolete, and on the scrap heap, it would be nothing. If
however, it is in perfect condition, or essential, then its value may be higher.
All assets have to be valued; hence, the problem lies in deciding on that value. Here are three guiding principles:
 The firm is a going concern
 The way you value has to be consistent, year after year; and
 You value prudently.
Current Assets are usually valued at cost. In other words, at the price at which was paid for them, or reflecting the
costs that have been spent on them like prepaid assets and inventory. Of course, cash and cash equivalents or short-term
placement is valued on its actual amount. Accounts receivable is valued net of allowance for Doubtful Accounts (amount
that is estimated to be uncollectible).
Fixed Assets. With most fixed assets (except land), it is assumed that the value will diminish over time. This loss of
value is called depreciation, and is a cost to the company and comes off its profits.
Three basic causes of depreciation:
1. Wear and tear (things get worn-out with use);
2. Obsolescence (things become out-of-date or old-fashioned); and
3. Age (second-hand are not as valuable as brand new ones)
Remember, this all relates to commercial assets, not to antiques, works of art, vintage cars, and suck like.

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 Accounting Treatment of Depreciation. The most common method of depreciating as asset is known as straight-line
depreciation computed as follows where it is assumed that the loss of value is a permanent loss.

Depreciation = Purchase Price-Residual Value

Estimated useful life

Residual value or scrap value is the amount at which the asset can be sold at the end of its estimated useful
life.

Asset Life or Estimated Useful Life. The number of years an asset is expected to be useful varies from asset to
asset and from firm to firm. There are some general conventions, however:
 Buildings: 40 to 100 years
 Ships: 20 to 40 years
 Machinery: 3 to 15 years
 Vehicles: 3 to 7 years.

Land Valuation. What is the expected life of a piece of land? What rate of depreciation should be charge?
The answers are that the life of land is forever (usually) and therefore, no depreciation is chargeable. Instead,
land tends to appreciate in value in the long run, because of inflation and shortage. So, these days, companies tend to
revalue land, and often buildings, from time to time.

Accounting for Appreciation of Assets. Unlike depreciation, which is charged against profits, the increase in value of
an asset (appreciation) is shown as an increase in the underlying value of the business. It makes the worth of the company
greater.

Cash Flow Statement

Cash is the most liquid of all assets and the efficient use of cash is one of the most important tasks of
management. The cash flow statement is a supporting document that shows the sources and purpose of cash payments
during an accounting period.
The cash flow is often prepared in order to give a full and complete picture of cash and disbursements for a
period. A cash flow can be used in the preparation of a cash budget.

Income Statement
The income statement shows the revenues realized by the business, as well as the costs and expense incurred in
the realization of said revenues. This is also called profit and loss statement. Transactions that increase the owner’s
equity are referred to as revenues.
On the other hand, transactions that decrease the owner’s equity are called expenditures. For a given period, the
revenues realized are compared to the expenditures to determine the result of the operation. If revenues exceed
expenditures, the difference is called net profit and is added to the owner’s equity in the balance sheet. If expenditures are
more than revenues, then, the result is referred to as net loss and is deducted from the owner’s equity. Just like the
balance sheet, the income stamen may be prepared monthly, quarterly, semi-annually, or annually.

 Income statement classification

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 The income statement is primarily made up of two sections: revenues and expenditures.
Revenue of a business consist of the sale of goods or services during the period for which the statement was
prepared.

Expenditure consist of production, selling and other expenses incurred in generating the revenues. These
expenditures are as follows:
 Cost of Sales. For a trading firm, this consists of the cost of the merchandise and the cost of transporting or
bringing the products to the firm. On the other hand, a manufacturing firm’s costs of sales consists of raw
materials used in producing the products sold, the cost of labor to products, and the other costs which are
necessary in the production of the products sold.
 Selling expenses. These are expenses incurred in making sales. Some examples are salaries of salesman,
commissions paid, advertising or promotional expenses, delivery expenses, and the like. These are expenditures
incurred in making sales.
 General and Administrative expenses. These include salaries of office personnel, rental, taxes, professional
fees, and other payables necessary in the overall administration of the business. Small business usually lump
selling expenses and general and administrative together, and call it operating expenses.

Some special costs

 Most companies have their accounts checked by independent accountants. This is the audit, and the auditors
are legally responsible to the owners. The audit fee is a cost all firms bear. While some companies have
their own Internal Audit Department, the salaries of which is part of the administrative expense.
 If a company owns an asset that lasts over a year – say a building or a machine – then, any reduction in its
value is considered to be a cost. This cost is depreciation.
 In addition to bank charges, many firms borrow money and the interest they pay is a cost that needs to be
highlighted.
Financial Ratio Analysis
A careful study of the different items in the financial and their relationship with each provides indicators that
lead to a meaningful analysis of the operations of the enterprise.
A number of relationships or indicators for this purpose has been worked out. These indicators are expressed in
ratios or comparisons between figures in the same statement. Figures in one statement may also be compared with figures
in another statement in order to see if a situation has improved or gotten worse, or in order to determine a pattern.

Growth
It is often best to start with the question: “has the company grown? If the answer is “NO” or “NOT a lot”, then,
the conclusion must be that there is some kind of problem, unless you know that the company has a policy of no growth.
The simplest way to measure growth is to compare the volume sold in the first year with the volume sold in the second
year.
Volume is often very difficult to obtain in any sensible form; only if the item being compare is exactly the same
form one year to another year is the comparison valid.

Profitability ratio
As an entrepreneur, you would certainly like to know if the business is earning enough, given the total amount
of money invested in it. Remember that to make profit is one of the major objectives of an entrepreneur.

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Budgeting
Planning is one of the more important roles an entrepreneur does. When an entrepreneur plans, he works out the
objective of the business, as well as the ways to achieve them. You should always plan for the different phases of your
business operations. This involves allocating resources to each of them. Understandably, this role fall within the financial
aspects of the business. Financial managers use a tool for this purpose – the budget.
A budget is a business plan expressed in terms of money and units for a definite period of time in the future. The
budget, therefore, includes the expected performance of a given period (objective of the firm) and the allocation of
resources to the different activities (production, marketing, and administration)in order to attain the said objectives. The
budget serves as the guide in the conduct of operations during the period. The budget sets the standard performance. This
is then compared with what actually happened. More often than not, the comparison shows deviation. It is in the analysis
that the management exercises supervision and monitors the activities towards the given objectives or goals.
How budget is prepared? The preparation of budget follows the sequence shown below:
1. Set the objectives of the business. A business objective may take any of the following forms:
 A target profit as a reward for the owner’s investment;
 A target sale of a number of units; or
 A share of the market;
2. Forecast the volume of sales that the business will achieve for a given period.
3. Assess the costs that will be incurred in producing and selling the planned volume sales, including the cost of
providing the administrative support.
4. Determine the budget period.
5. Compare costs and sales income.
Establish whether the objective can be attained. If not, then:
 Investigate whether you can increase sales income.
 Investigate if costs could be reduced.
 As a last option, accept a lower output than what was originally set.
Cash Management
To keep the business going, it must have sufficient cash readily available for its immediate needs. Therefore, you need to
keep a close watch over your cash. This practice is called “Cash Management”.

There are two primary objectives in cash management, namely;

 Provide adequate cash to meet the needs of the business; and
 Safeguard cash from loss due to theft, fraud, other criminal manipulations, and carelessness.
Provision of adequate cash requirements of the business, you have to determine the expected cash to be received and the
expected cash to be paid out for a particular period. In doing so, you can anticipate shortages or excesses. This process of
planning cash receipts and cash disbursements to determine cash managements and cash surpluses is termed as cash
budgeting. The use of this tool enables one to be in a better position to:
 Provide funds for seasonal needs;
 Provide funds for expansion;
 Develop a sound borrowing program;
 Take advantage of money-saving opportunities such as discounts, economic order quantities; and
 Plan for investing excess cash.

Planning cash requirements

First, make a sales forecast or estimate of your future sales

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 Your sales forecast may be done on a daily, weekly, monthly or yearly basis. It is easier for you to make
estimates daily, then, forecast your salaries from day to day. Let us say, that you have decided to go into the business of
“selling cold fruit juice” in the town plaza. Let us say that you feel you can dispose of one big plastic container of juice
daily, which will fill 50 glasses at P5.00 per glass. Your sale forecast would be:
Daily Sales Forecast
Mon Tue Wed Thu Fri Sat Sun Total
Unit 50 50 50 50 50 50 50 350
(glasses)
amount 250 250 250 250 250 250 250 1750

Weekly Sales Forecast

1st Week 2nd Week 3rd Week 4th Week Total
Unit (glasses) 350 350 350 350 1400
Amount 1750 1750 1750 1750 70000

Your monthly sales forecast would then be an accumulation of the weekly forecast. Sales forecast may also be
based on several factors, such as weather, major activities, or events, such as town fiestas, school openings, Christmas
and other holidays, religious celebrations, harvest season, or opportunities to be maximized by carrying other products.

Cash Budget
Below are the steps in the preparation of the cash budget:
1. Estimate Cash inflows
First, estimate the sources of cash inflows and estimated amounts in receipts. In estimating the expected receipts
for the future period, the policy of the business or company regarding terms of sales should be considered.
2. Estimate cash outflows
The following are the anticipated disbursements to be considered in estimated cash outflows:
 Cash purchases
 Payment of credit purchases
 Salaries and wages
 Administrative, selling, and overhead expenses
 Pre-payments like rentals, insurance, and the like
 Loans and interest
 Taxes
 Dividends or personal drawings of owners
3. Compare cash inflows vs. outflows
A detailed month-by-month comparison would determine the future surpluses and shortages of cash. This
provides information as to when to put in additional cash, and when to use excess for other profitable uses.
4. Preparing the daily cash report
Another tool to provide information on current cash position, and in turn, ensure that there is enough cash to
meet the needs of the business, is the daily cash report. This is a summary of the cash balance at the beginning
of the day and receipts, disbursements and cash balance at the end of the day.

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Dealing with cash shortages
If cash budget shows certain shortages, it is time to look for sources of additional cash, first, from internal
sources and, if this is not sufficient from outside sources, like banks, and other financial institutions.
Cash may be obtained internally by:
 Restricting credit and speeding up collection;
 Reducing inventories to a minimum, including finished goods, work-in-process, and raw materials;
 Tightening up on trade relationships; and
 Selling what you can do without, like equipment, buildings and real estate, securities.

Dealing with excess cash

If the cash budget shows heavy surplus at a certain period, this surplus must be invested in money or the stock
market. In this way, money is kept, but is used to earn additional returns.

Monitoring and Controlling cash budget

Monitoring is also another aspect of cash management. It is important to monitor activities that ultimately result
in cash transaction. Unless you watch over your credit sales, purchasing goods for stock, and pricing, you may run short
of cash even if you have an excellent internal control over your cash. After setting up your cash budget, your next task
will be to see to it that your company lives within the budget. At the same time, you must make sure that the budget
estimates are as accurate and as realistic as possible so that cash will be available at the right time. There should be
reasonable explanation for any difference between actual and budgeted expenses.

Safeguarding cash from loss

To safeguard the company’s assets, an internal control system employs an automatic check-and-balance by
requiring that the work of one person is reviewed and examined by another.
The following are some of commonly adopted internal control practices:
 Separating business funds from the owner’s personal funds;
 Immediate recording of all cash receipts;
 Depositing of all cash receipts on a daily basis;
 Using a petty cash fund entrusted to a petty cashier for all payments other than checks;
 Monthly reconciliation of bank accounts;
 Approval of disbursements, signing of checks and bad debt write-offs by authorized person;
 Treatment of tax money as liability;
 Annual auditing by an independent certified public accountant;
 Conducting unannounced cash count; and
 Careful selection of employees.

Why companies do broke?

At one level, a company either ceases to trade because the bank or other creditors stop it, or voluntarily ceases to trade
and calls in the receivers or the administration. In either case, action is taken because the firm is unable to pay its debts –
or likely to be unable to pay in the near future. Why do firm get into this situations? The accounts of a company do not
cause it to go broke. Rather, accounting information reveals what has gone wrong and there are two levels of cause:
 The accounting manifestation; and
 The root problem
Accounting manifestation of failure:

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  too much working capital
 insufficient working capital
 too high interest charges
 too much debt
 over-high dividends
 no cash
 making a trading loss
 no growth
 selling of the firm at a loss
 very poor profit margins
 marginal profitability
None of this on its own is a cause of collapse, but when several appear together, the danger signs are there. Even so,
they all have root causes and these can be summarized as:
 not selling enough
 not selling at the right prices
 not modernizing
 no product development or research
 buying useless assets
 failure to control costs
 failure to control working capital
 reckless borrowing
 having a cavalier (arrogant) dividend policy

Perhaps to these should be added to failure to invest in people.

These thing do not happen all at the same time, but if the trends are observed over two or three years, then, it is
often easy to identify trouble brewing, unless management does something drastic and takes corrective action.

What makes a successful firm?

In contrast to failure, successful firms do all the opposite things to the nine deadly business sins just described.
‘Good firm’ sell enough of the right things, at sensible prices, and at the right margin to be able to utilize their assets
effectively. They control costs and working capital. They plough lots of profit back. Their borrowing is appropriate to
their risk-exposure. We can see these virtuous features by looking at their key ratios over time and by the way the
competition views them.

Completing the picture

Arguable, the most important single measure of business success is the return on equity capital ratio. This
measures how effectively management has used the owners/shareholders’ money, and over time indicates whether the
firm is making any kind of progress. At this level, the return is the profit available to the owners/shareholders – to take
out of the business as a divided or plough back to finance growth. The higher the return, the greater the wealth creation –
either directly to the owners, or indirectly, by adding to the net worth of the firm.

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Entrep 221 Entrepreneurship