Chapter 5

Part II: Business physical operations

Part III: Marketing in Business enterprises

Part IV: Financing and accounting in business

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 5.1 Business physical operations
o Introduction
o Physical operations

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 Introduction

o Business operations are those activities involved in

the running of a business for the purpose of

producing value for the stakeholder.

o Business operations include three fundamental

management imperatives that collectively aim to
maximize value harvested from business assets:
•Generate recurring income
•Increase the value of the business assets
•Secure the income and value of the business
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 Introduction….

 Generally business operations lay their foundation

on management functions. The most important

management functions are:

o Planning & decision making

o Organizing & Staffing

o Directing/leading

o Controlling

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 Business physical operations
o Business operations include the location of your
business and the processes, resources, and other tools

you will need to transform inputs (raw materials, labor,

and capital) into outputs (goods or services).

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 phys. operations….
Location and Facility

o Should I lease or buy my physical facility?

o Should I build a new facility or buy an existing one?
Where should I locate my business to reach the
greatest number of customers and to provide efficient
access to employees and vendors?

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 phys. operations….

Operational / Production Equipment and

Maintenance
o Which is more cost effective – buying or leasing?

o What are the advantages and disadvantages of each?

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 phys. operations….
o Employees
• If I need employees, how many and in what job
functions?
• Should I hire the employees full-time, part-time, or on
an ―as needed basis?
o Professional Assistance
o Business Regulations and Guidelines

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 Part III: Marketing in Business
Enterprises
o The Marketing Perspective

o Marketing- 4p‟s

o Marketing segmentation

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 The Marketing Perspective
Definition of Market:
 Market is a group of potential customers having
needs to satisfy, ability to buy & willingness to pay
in order to satisfy these needs.
OR
 A social & managerial process by which individuals
& groups obtain what they need & want through
creating & exchanging products & value with others.

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 The main concepts of marketing

o Marketing activities are integrated

o Organizations are market oriented

o Marketing focuses on selected markets

o Customer satisfaction is the core of marketing

o Marketing is greater than selling

o Marketing starts early before production &

continues after selling…T/F…why?

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 The Marketing Mix /Basics/Classical
The Marketing Mix

oA marketing organization has to concentrate on four important

aspects known as the 4P’s of marketing.

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 4 p’s
[Link] product mix: Includes:
3. Place mix (Physical
 Product planning and development
distribution mix):
 Branding Packaging Labeling
 Channels of distribution
[Link] price mix: Includes  Transportation
Price polices  Warehousing
 Skimming pricing (Pricing above the
market) 4. Promotion mix: Includes
 Penetration pricing (Pricing below the  Advertising
market)  Personal selling
 Premium pricing (Pricing with the  Sales promotion
market)
 Publicity
Discounts
 Quantity discount Seasonal discount
 Trade discount Cash discount
Credits
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 Extended Marketing Mix

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 Cost Plus

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MARKET SEGMENTATION

 Market segment is a group of individuals or organizations within a

market that share one or more common characteristics.

 The process of dividing a market in to segments is called market

segmentation. Qn. Why segmentation?

Bases for market segmentation

[Link] segmentation:- Region Urban, Suburban, Rural, Market density,
Climate,Terrain (land, topography), City size, Country size, State size

[Link] segmentation:- Age, Gender, Race, Ethnicity, Income, Education,

Occupation, Family size, Family life cycle, Religion, Social class

[Link] graphic segmentation:- Personality, Attributes, Motives, Lifestyles

[Link] segmentation:-Volume usage, End use, Benefit, Expectations,

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Brand loyalty, Price sensitivity
 Part IV: Financing and accounting in business

o Financial requirement

o Sources of finance,

o Control of financial resource

o Financial analysis and accounting

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 Developing Financial Plan

o Project implementation requires bringing

together the inputs of land, labor, machinery,
staff etc.

o Finance is required to assemble these inputs.

o Proper financing of business is essential for

success in both small and large enterprises.

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 o Financial planning is the process of formulating
policies and strategies relating to the
procurement, investment and administration of
funds for an enterprise.
 How much money is needed?
 Where the money comes from?
 When should the money be available?

o These three questions are concerned respectively

with the estimation of financial needs, sources of
finance, and the time of raising funds.

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 Estimation of Financial needs

o This leads us to know our investment cost and

operation cost.

o The following technique helps us to understand

the different types of costs and procedure how

to calculate the costs.

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 Estimation of Financial needs…

 Production and Marketing Cost Items

A. Factory Costs
Material inputs (usually direct variable costs), in
particular raw materials and factory supplies.
Human resource costs (wages, salaries, mostly direct
costs, either fixed or variable, depending on type).
Products rejected or returned
Effluent and waste treatment, environmental protection
costs.

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 Estimation of Financial needs…

B. Factory overheads (direct and indirect fixed costs of

production)
Services (supervision, quality control, indoor climate control,
internal transport, consulting engineers etc.)
Royalties (fixed and variable costs).
Rents, leasing fees for production buildings, machinery and
equipment (fixed variable costs).
Research and development costs
Product storage costs (direct and indirect costs).

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 Estimation of Financial needs…

C. Administrative overheads (usually indirect, basically fixed

costs)
Salaries, wages (management, administrative staff etc.)
Office supplies, materials
Rents, leasing fees for office buildings and equipment
Services (communications, transports etc.)
D. Operating Costs (A+B+C)
E. Depreciation Costs (usually indirect fixed costs)
F. Cost of financing
G. Production costs (D+E+F)

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 Estimation of Financial needs…

H. Marketing costs
Direct marketing costs Packaging, storage
Costs of sales (sales force, commissions, discounts,
returned products, royalties etc.)
Promotional costs (advertisements, samples etc.)
Distribution costs (transport, interim storage, insurance etc.)
Indirect marketing costs
Overhead costs of the marketing department
(personnel, communications, materials and services,
marketing research, general promotional activities etc.)

I. Total costs of products sold (G+H)

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 Business/Investment Appraisal Techniques

o After knowing the costs it is necessary to check

feasibility/profitability by using investment
appraisal criteria, like:
• Net Present Value (NPV)
• Return on Investment (ROI)
• payback
• Break-Even-Analysis

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 1. Operating Return on Investment

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 Business/Investment Appraisal Techniques…

2. Break-even Analysis
o It is a tool to determine the level of production / sale at
which the business will cover both fixed and variable
costs.
o It indicates the minimum amount of revenue that a
business must earn in order to cover the total cost
incurred so that it does not incur any loss, i.e.
o TOTAL SALES ARE AT LEAST EQUAL TO TOTAL
COST
o The point of equality of total revenue and total costs is
a point of zero profits and zero losses.
o The break-even analysis principally determines the
viability of the business.
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 Graphical representation of the breakeven analysis

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 Business/Investment Appraisal Techniques…
Break-even Analysis …cont’d

Examples:
1) A local fertilizer producer utilizes compost waste to develop
an organic fertilizer product. The fertilizer is prepared for
retail sale in 100 quintals. The retail sales price is birr 200 per
quintal. The average variable cost per quintal is birr 150 and
average annual fixed costs are birr 100,000. Depending on this
assumption:
i. calculate the number of quintals that must be sold in
order to break even as well as the total birr of sales
needed to break-even
ii. calculate the profit
iii. Develop the breakeven chart depending on „i‟

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 Business/Investment Appraisal Techniques…
Break-even Analysis …cont’d

2) An XYZ manufacturing company manufactured a brand item that

has a variable cost of birr 75 per unit and a selling price of birr 125
per unit. Fixed costs are birr 1,200,000. Current volume is
5,000,000 units. The company can substantially improve the product
quality by adding a new piece of equipment at an additional fixed
cost of birr 500,000. Variable cost would increase to birr 100, but
their volume should increase to 7,000,000 units due to the higher
quality product.
i. Should the company buy the new equipment?
ii. What are the break-even points (birr and units) for the two
processes?
iii. Develop a break-even chart.
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 Business/Investment Appraisal Techniques…
Break-even Analysis …cont’d

3. International Printer Machines (IPM) builds three computer printer models: Inkjet,
Laser, and Color Laser. Information for these three products is as follows:
Inkjet Laser Color Laser Total

Selling price per unit $250 $400 $1,600

Variable cost per unit $100 $150 $ 800
Expected unit sales
12,000 6,000 2,000 20,000
(annual)
Sales mix 60 percent 30 percent 10 percent 100 percent

Total annual fixed costs are $5,000,000. Assume the sales mix remains the
same at all levels of sales.
i. How many printers in total must be sold to break even?
ii. How many units of each printer must be sold to break even?
iii. How many printers in total must be sold to earn an annual profit of
$1,000,000?
iv. How many units of each printer must be sold to earn an annual profit
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of $1,000,000?
 Business/Investment Appraisal Techniques…

3. Payback period
oIt Considers the length of time required to payback
(recapture) the original investment from the annual
cash inflow produced.
oPayback is usually measured in years.
oDecision rule: Take the project with the shortest
payback period.
1st method: Payback period = Expected annual net cash inflow
Example: Amount Invested =15,000 Birr & Expected
Net Annual Cash Inflow=4500 Birr.
Payback period= 3.33years

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 Business/Investment Appraisal Techniques…
payback …cont‟d

2nd method: trial & error: it is better than the 1st one
N.B: Net Cash is found from investment cash flow
statement.

At the end of 3rd year,12000 birr will

have been paid. The additional 3000
birr can be paid before 4th year, when
6000 is expected. Thus it will take
3+(3000/6000)=3.5 years to pay the
original investment.

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 Business/Investment Appraisal Techniques…

4. Present Value
oIt is the difference between the Present Value of a
project and its Initial Cost
NPV= Total Present value - Initial Cost
 Project the costs and sales/revenue/benefits
over time, e.g. 3, 5, 6,… years
 Calculate Net Present Value for all future
costs/benefits
• determines future costs/benefits
of the project in terms of
today's dollar values
• A dollar earned today is worth more than a
potential dollar earned next year
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 Business/Investment Appraisal Techniques…
Present value…

E.g. Assume a company invest $ 9000 in a project

today and the project is expected to have a life of 4
years. The expected cash inflows at the end of
each of the next four years are
$2000,$3000,$3000 and $4000.
Cash Flow Diagram

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 Business/Investment Appraisal Techniques…
Present value…

PV formula:
Determine the
NPV

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 Business/Investment Appraisal Techniques…
Present value…
Conclusion

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 Source Of Finance

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 Bank lending decision

 Most bankers refer to the five Cs of credit in making lending

decision. The five Cs are:
*capital
*capacity/cash flow
*collateral
*character
*condition

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  Capital: a small business must have a stable capital base before a bank will
grant a loan.
 Capacity(cash flow):The bank must be convinced of the firm’s ability to
meet its regular financial obligations and to repay the bank loan.
 Collateral : collateral includes any assets the owner pledges/guarantee to
the bank as security for repayment of the loan.
 Character (owner’s character): honesty, competence, polish
determine, willingness to negotiate with the bank and give a position response
for bank enquiry
 Conditions: Banks consider factors relating to the business operation such
as potential growth in the market, competition, location, of ownership, and
loan purpose.

 The higher a small business scores on these five Cs, the

greater its chance will be of receiving a loan. The wise
entrepreneur keeps this in mind when preparing a
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business plan and presentation.
 Accounting For Small Business

o Proper financial and accounting records make it possible

for the owner to exercise effective control of funds
and overall performance of his/her business.

o Such records also make it possible to know whether the

firm is earning profits or loss.

o Accounts also help to know the financial position of the

business at any time and at the end of the fiscal year.

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 o Expansion of the equation to give recognition to the two

basic types of equities yields the following, which is

known as the accounting equation:
• Assets = equities
• Assets = creditor’s equities + owner’s equity
• Assets = liabilities +capital

o It is customary to place “liabilities“ before “owner‟s

equity” in the accounting equation because creditors

have preferential rights to the assets.

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 There are 3 financial statements:
1. Income statement
2. Cash flow statement
3. Balance sheet

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 [Link] Statement

o Income(Profit/Loss) Statement– Moving picture.

Compares the firm‟s expenses against its revenue over
a period of time to show its profit or loss:

Net Income = Sales Revenue - Expenses

o The income statement represents the

profitability of a business over a period of time.

Prepared by Fantahun G.(MSc.) 44

Copyright 2008 Prentice Hall Publishing
 Income Statement Projection 1st 6 Months($)
1 2 3 4 5 6
Sales 8030 9130 10030 13030 13530 14530

Cost Of Goods Sold 5120 5824 5400 7020 7290 7830

Gross Profit 2910 3306 4630 6010 6240 6700

Operating Expenses
Equipment Lease 100 100 100 100 100 100
Selling Expenses 1000 1000 1000 2000 2000 2000
Salaries 850 850 850 850 850 850
Advertising 200 200 300 600 600 600
Office Supplies 100 100 100 100 100 100
Rent 750 750 750 750 750 750
Utilities 75 75 75 75 75 75
Insurance 50 50 50 50 50 50
Total Operating Expenses 3125 3125 3225 4525 4525 4525
Operating Income (215) 181 1405 1485 1715 2175

Interest Expense 30 30 30 30 30 30

Earning Before Tax (245) 151 1375 1455 1685 2145

Income Tax 80 80 80 80 80 80
Net Income (325) 71 1295 1375 1605 2065

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 [Link] Flow Statement
It is the most important from all financial statements. It describes
the cash into & out of business

N.B: you can‟t pay your expenses with profits. You can only pay them
with cash. Hence a business can‟t survive without a positive cash
flow. So it is the working tool for the entrepreneur.

♣Shows the change in the firm's working capital over a period of

time by listing the sources of funds and the uses of these funds.

♣The cash-flow statement exhibits sources and uses of cash over a

given period of time.

♣The focus is on generating income and honoring obligations (e.g.,

loans and debts).
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 Cash Flow Statement Projection 1st 6months($)
1 2 3 4 5 6
Cash receipts(Cash 7500 8600 9500 12500 13000 14000
inflow)

Disbursements
(Cash outflow)
Cost of goods sold 4875 5590 5130 6750 7020 7560

Equipment lease 100 100 100 100 100 100

Selling payments 1000 1000 1000 2000 2000 2000

Salaries 850 850 850 850 850 850
Advertising 200 200 300 600 600 600
Office supplies 100 100 100 100 100 100
Rent 750 750 750 750 750 750
Utilities 75 100 100 100 100 100
Insurance 50 50 50 50 50 50
Taxes 80 80 80 80 80 80
Total Disbursements 8080 8820 8460 11380 11650 12190
(Cash outflows)
NET CASH FLOW -580 -220 1040 1120 1350 1810

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 [Link] Sheet

♠The balance sheet is a snapshot of a business at a

particular point in time.
♠It reveals financial resources the company total
assets), debts it owes to the others (liabilities) & net
worth of the owner
♠Built on the accounting equation:
Assets = Liabilities + Owner‟s Equity

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 Balance sheet for company ‘x’ on December 31,2017($)
Assets
Current Assets:
 cash 45000
 Accounts receivable 75000
 inventories 180000
Total current assets 300000
Fixed assets:
 Gross plant and equipment 790000
 Accumulated depreciation 360000
Net plant and equipment 430000
 land 70000
Total fixed assets 500000
TOTAL ASSETS 800000
Debt(liabilities) and equity
Current liabilities:
 Accounts payable 15000
 Short term notes 60000
Total current liabilities 75000
Long term liabilities:
 Long term notes 150000
Total liabilities 225000
Common stock 300000
Retained earning 275000
Total stockholders’ equity 575000 49
TOTAL DEBT AND EQUITY 800000
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