LESSON 2 bf.pptx

LESSON 2
The Nature, Aims,
and Organizing A
Business

TOPIC 1: The Philippine Economy and
the Role of Business
Although most Filipinos dream of affluence, it seems to be
one that is impossible to attain. This is mostly so because the
Philippine economy has always been saddled with difficulties
which appeared to be insurmountable. Low productivity in
the workplace, graft and corruption in the government, the
declining value of the peso, and an unfavorable balance of
trade are only some of the more serious concerns affecting
Philippine economy development.
In spite of the great obstacles hampering economic growth,
the Philippine economy continues to grow, albeit very slowly.
Moreover, the Philippine economy does not fare well in
comparison with other countries situated in the Far East.

Business success has always been associated with
economic growth. Adequate capital, is a prerequisite of
the existence of business firms. Since this is so,
business success is highly dependent on the availability
of capital. Apart from availability, however, its proper
management is a key ingredient in the survival and
growth of business.
Studies made along the topic of managing the finance
activities of business indicate that a major reason for
business failure is the businessman’s lack of sufficient
skills in managing finance. This alone provides us with
enough reason to study business finance.

THE ROLE OF BUSINESS
Under the free enterprise system, the growth of the
economy lies in the ability of private individuals to achieve
economic objectives. The quest for profit is usually
undertaken by engagement in business activities. Business
firms and government are oriented towards the provision
of goods and services to the society. Regarding this task,
however, private business firms assume the major role.
Under the system, firms are free to compete with each
other. This atmosphere makes possible the offering of new
or improved products and services to the society. The
standard of living is raised or lowered depending to a large
extent on the performance of business firms.

Business is largely responsible for bringing into the market a
wide array of products and services which were not previously
available. High technology items like the latest cellphone
models, video equipment, portable computers, and many
others find their way in the open market. This happens even
as business continues to provide mankind with basic
necessities like food and shelter. Even movies of different
kinds are made possible by business firms. Such is the
importance of the role attributed to business that even
communist countries like China and Vietnam have allowed, to
a great extent, the operation of business entities as a means
to develop their economies. Profit-making has been adapted
as a measure to motivate enterprising persons to engage in
business.

TOPIC 2: Business Defined, Kinds and
Objectives of Business
BUSINESS DEFINED
Business is any lawful economic activity concerned with the production
and/or distribution of goods and services for profits. Whether or not it
actually makes profits is immaterial. An entity is still a business if its
objective is to make profits.
KINDS OF BUSINESS
Business may be classified in several ways. As to the nature of the
principal activity performed, it consists of three main divisions:
1. Commerce;
2. Industry; and
3. Services.

Commerce
Business firms which are engaged in the buying
and selling of goods and services are classified
as those falling under commerce. Also
included are trading, merchandising, and
marketing (see Figure 1). Examples of
commerce as a kind of business are
supermarkets, dry goods store, peddlers, sari-
sari stores, importers, and many others.

Industry
Industries are those which are mainly concerned with production. Goods produced are those which
may be intended for ultimate consumption and which are called consumer’s goods, or those which
are intended for use of business and industry and which are called producer’s goods. Industry may be
further classified into the following: (1) genetic; (2) extractive; (3) manufacturing; and (4)
construction.
Genetic industries are business involved in agriculture, forestry, and fish culture.
Extractive industries are business involved in the extraction of goods from natural resources which
include mining, lumbering, hunting and fishing.
Manufacturing industries are those which convert raw materials into finished
products. Examples of these are firms engaged in the manufacture of drugs, plastics, food, liquor,
footwear, motor cars, tools, office supplies, household appliances, and many others.
Construction industries consist of firms engaged in building infrastructures like
airports, seaport, dams, and highways. Those involved in the construction of dwelling
houses are included.

Services
A service business is one which sells services to buyers.
Service firms may be classified as: (1) recreation, such as
movie houses, television and radio stations, theaters for
drama and stage presentations, and the like; (2) personal,
such as restaurants, barber shops, transportations, hotels,
tailoring shops, and the like; and (3) finance, such as
banks, insurance companies, investment houses,
financing institutions, credit unions, savings and loans
associations, and the like.

OBJECTIVES OF BUSINESS
A business firm is established primarily for
profit. At times, however, short-term and long-
term profits are sacrificed in order to attain
other goal such as:
1.Political influence;
2. Family control of the business; and
3. Community involvement.

TOPIC 3: Reasons for Engaging in
Business
The first stage in life cycle of a business is organization. Much of what
will help happen to the firm in the later stages depends on the first few
steps in the organization process. Because of the magnitude of the
capital required in establishing a corporation, the activities undertaken
in the organization stage are more sophisticated and many take a year
or several years before actual operations begin. This does not mean,
however, that small business do not deserve careful thought and
analysis before they start operating. The importance of the
organizational stage cannot be over emphasized. Business failures have
become common occurrences because of defects in planning at the
organizational stage. Business failures happen to companies regardless
of industry classification and the amount of capital investment.

The most common reasons for business failures
include the following:
1. Bad or improper management practices,
including poor cost controls and poor hiring
practices;
2. Poorly focused and executed marketing or
inadequate marketing;
3. Poor location;
4. Failure to invest in new products and efficient
technology; and
5. Lack of adequate financing

WHY PERSONS ENGAGE IN BUSINESS
Prospective investors would want to engage in a business
venture for one reason or another. They hope to enjoy certain
values, which are derived from such undertaking.
These values include the following:
1. Provision of employment to people;
2. Profits;
3. Service to the community;
4. Personal satisfaction;
5. Means to earn a living;
6. Achievement of power; and
7. Protection of one’s self and family.

It is well-known that entrepreneurs venture into business
for economic reason as a primary motive. Some do it to
utilize skill and previous work experience. The last two
reasons are not far-fetched. A skilled person who cannot
get employment would be forced to engage in business just
to maintain his skill, hoping that someday, it would be more
useful. In the same light, some individuals think that the
experience they have are much too valuable to be ignored,
so they try to use it by operating a business. Sometimes,
situational conditions pave the way to persons to engage in
business. A fine example is a disabled individual who
decided to go into business because he cannot get
employment anywhere.

ENTREPRENEURSHIP
To engage in business, a person or group of persons has two options:
(1) to buy an existing business, or (2) to create a business that he will
operate. The person who
chooses option two will be referred to as an entrepreneur. He owns his
business but his functions are vastly different from those of another
type of business owner, the
stockholder of a corporation.
The entrepreneurs’ functions are:
1. To supply the capital of the firm;
2. To organize production by buying and combining inputs;
3. To decide on the rate of output in the light of his expectations about
demand; and
4. To bear the risk involved in these activities

Studies have shown that successful
entrepreneurs are likely to be over-achievers,
and likely to do well if they are also reasonable
risk-takers, self-confident, hard workers, goal
setters, accountable, and innovative. However,
even if there are successful entrepreneurs,
statistics show that there is also a big number
of failures. This indicates that the task of the
entrepreneur is not easy.

TOPIC 4: Business Prospecting and
Promotion
BUSINESS PROSPECTING
When a determined individual has finally decided to go
into business, it will not be wise for him to grab the first
opportunity that comes along. First, he should carefully
scan the environment for other possible openings. He
should prepare a list of alternative business
opportunities and he should make his choice from that
list.

The Search for Business Opportunities
A person searching for a suitable business
opportunity should learn the ways of a talent scout
or a salesman looking for a prospect. The talent
scout, aware of the requirements of the market –
whether radio, television, recording, or the movies
– goes around searching. He stays longer, however,
in places where talents abound. The scout does not
forget that there are lots of good talents but only a
few of them can be classified as commercial or one
who can satisfy a big market.

The salesman, on the other hand, prepares a list of his
prospects and from there makes his evaluation and
decides on who is worth seeing. The salesman should
also not forget that there are prospects of better quality
than others. Like a talent scout, the prospective
businessman should have the skill to choose an opening
that will be commercial and will bring him enough
revenues. Also, like a salesman, the prospective investor
should have the skill to pick the right business
opportunity from his list and which is of better quality
than the others indicated in the same list.

Business opportunities come in several forms. They could be a result of any of
the following:
1. Increasing demand for basic commodities due to an increase in population;
2. Rising prices (or cost) of existing products like construction materials;
3. Relaxation of government policies like the lifting of import restrictions;
4. The development of new service concept like the issuance and delivery of
passports through courier services;
5. The development of a new product concept like the engine that runs on
water;
6. The increasing demand for the specialized services like manpower export
services, health and fitness services, management consultancy, and skills
training;
7. The increasing requirements of the wholesale and retail industry; and
8. Many others.

BUSINESS PROMOTION
Business promotion refers to discovery and
exploration of a business opportunity with the
purpose of converting it into a going concern.
The three steps involved in business promotion are
the following:
1. Discovering the idea for a new business;
2. Determining the feasibility of the idea; and
3. Assembling the needed resources to start the
business.

Discovery
The identification of an idea for a new business is the first step in business promotion.
The new business idea may spring from various opportunities. A seasoned CD
salesman may organize his own recording company. A college professor may open his
own school. A retired military officer may set up a security agency. The business
promoter may also be induce to consider certain product ideas because of the
availability of materials. For instance, suppliers of marble products are attracted by
Romblon and Gapan (in Neuva Ecija) where marble abounds. Bagoong and patis
factories are established in areas near the coastlines of Malabon (Metro Manila),
Lingayen, (Pangasinan), and Balayan (Batangas). Authors of books and composers of
music may seek the commercial exploitation of their work. The inventor of the new
process or formulation of a new product may also seek prospective investors to exploit
or use his invention. Filipinos are currently building inroads into the development of
drugs extracted from local herbs. A particular gadgets has already been introduced
that help reduce gas consumption of vehicles.

Determination of Feasibility
Once a choice has been made on the business idea to adapt, its feasibility should be
determined. Oftentimes, a feasibility study is required. If the idea is found not to be
feasible, it should be discarded and a new one considered for determination of
feasibility.
The feasibility study is a detailed investigation and analysis of a proposed business
venture to determine its vitality. According to the need, the study must contain some
or all of the following aspects:
1. Management study including proponents, personnel, and organization;
2. Marketing study;
3. Production facilities and the product;
4. Taxation and legal aspects;
5. Financing aspects;
6. Profitability; and
7. Social desirability.

Management Study. It is in this particular portion of the feasibility study
where the following aspects are determined:
1. The appropriate form of organization;
2. The internal structure of the organization;
3. The owners; and
4. The staffing pattern of the organization.
Marketing Study. This portion should provide the following information:
1. The future total demand for the product;
2. The competitive situation of the product in the industry;
3. An estimated annual sales volume;
4. Future selling prices; and
5. The marketing program.

Technical Study. In this particular aspect of the
feasibility study, the following requirements should
be determined:
1. The manufacturing process selected, if
applicable;
2. The rated capacity of the plant;
3. The design of the machinery;
4. The location and lay-out of the plant;
5. The specifications of the structures; and
6. The requirements for operation.

Taxation Study. The tax burden applicable to the project should be
shown in this portion of feasibility study. An important factor that must
be considered is that the design of the project must be such that the
tax burden is legally minimized.
Financing Study. The source of financing for the project is discuss in
this portion. Particular attention is given to selecting the most
attractive financing scheme using factors of cost and availability.
Profitability. The rate of return using various approaches is shown in
this particular aspect of the feasibility study.
Social Desirability. This particular aspect is optional. When it is
included, however, it should provide a description of the social returns
applicable to the project. It should present the benefits that will be
afforded by the project of the community. Examples are reduction of
prices and provision of employment.

Assembling the Needed Resources
Once the feasibility of a proposed business project is determined by the
experts, the proponent may proceed to assemble the needed resources. This
is made prior to the
start of business operations. The sources needed may comprise of the
following: (1) initial capital required; (2) the essential properties; (3) process;
(4) personnel.
Initial Capital Requirements. A new business project requires initial capital to
take
care of the following:
1. Cost of organization;
2. Working capital;
3. Acquisition of fixed assets; and
4. Reserves.

The cost of organizing a business includes payments made for business permits and
license, incorporation taxes, business name, and the like. Also included are lawyer’s
fees for initial legal requirements like the preparation of building or office contracts,
articles of incorporation, architect’s fee for construction plans of buildings, and
management consultancy fees. Whenever applicable, the following may also be
included: promoter’s fee and the cost of obtaining franchise, license for patents on
required inventions, and license for copyrights on required literary or artistic works.
Working capital is required to finance inventories and supplies, salaries and wages,
power, water, rent, insurance, transportation, advertising and sales promotion.
Manufacturing obligations of the firm and the financing of credit sales will also require
sufficient amount of working capital. Fixed assets may be acquired through purchase
or lease depending on the nature and requirements of the firm. Fixed assets refer to
business assets, which are acquired for continued use in the production of goods or
services. Examples are land, machinery, buildings, furniture, fixtures, and equipment.

A reserve fund is required to take care of difficulties encountered due
to insufficient income generated by the firm. Failure to provide for this
possibility may jeopardize the firm’s operation.
Sources of Initial Capital. A new business project may initially be
financed by using any or a combination of various sources. The
management of the firm about to start operations will have to use
time and expertise to avail of credit facilities offered by suppliers and
financing institutions.A new firm may be financed by one or a
combination of the two main sources of capital: (1) the owners; and
(2) the creditors. In single proprietorships and partnerships, the
owners may use their savings or sell some of their properties to
provide the initial capital. The initial fund requirements for the new
corporation are raised through the sale of common stock to the
founder of the firm and a small group of intimates. Creditors consist of
friends and relatives, the government, financing institutions, and
suppliers.

Retention of Control. There is possibility that at the promotion stage, outsiders
may deprive the promoter and the founders of control over the new business
idea. It is, therefore, important that certain control measures be instituted to
protect the interests of the promoter and the founders. These can be attained by
using any or a combination of the following: (1) leases; (2) options and contracts;
(3) franchises and concessions; and (4) patents and copyrights.
A lease involves an agreement over the use of real property for a period of time.
Leases are used to obtain initial control of the land and buildings required. The
conditions imposed in lease agreements vary. Some leases requires a fixed rental,
while some require other considerations. A common practice is one undertaken
by some banks. The agreements requires that the bank construct a building within
the lot agreed upon; the bank uses the building and the lot free of rental or any
fee from the owner within a stipulated period, after which the ownership of the
building is passed on to landowner. An option is an agreement whereby one
person grants another the right to buy a certain property at an agreed price, at or
within a stated future time. Certain sums of money are required for options,
which may or may not be credited as part of the purchase price.

The retention of required skills and properties can be achieved with the use of
contracts. The fulfillment of such contracts, however, may be jeopardized by some
events like the death of the person possessing the required skill, the destruction
of the property stipulated in the contract, and adverse effects of legal claims to
the title of the property by other parties. These risk can be partly taken care of by
life insurance, title insurance, accident insurance, and property insurance. After
the option or the contract has been signed, there is the possibility that the owner
of the subject property or the promoter may perform acts inimical to the interest
of the investors. This can be avoided by drawing options and contracts with
enough safeguards to protect the investors. A franchise is an exclusive right
granted by the franchisee to the franchisor for the operation of a public utility
service, or the selling or distribution of a product in a specified area. Public utility
franchises are those who granted by the government, like those for electricity and
water services. The other type of franchise is the business format franchise which
involves the exploitation of goods and services, identified by a trademark or a
tradename. It includes the preparation of the blue print of a successful way of
carrying on a business in all aspects. McDonald’s, Jollibee, Shakey’s, Handyman,
and others have become hallmarks of the development of the business format
franchising in the Philippines.

A concession is the right granted by the government
to a concessionaire for the exploitation of natural
resources placed at his disposal for a sum consisting
of a minimal periodic payment plus a percentage of
the income from sales. A patent gives the holder the
sole right to make, use, or sell his invention during
the period the patent remains in force. Patent rights
can be obtain for new products, a new substitute for
existing products, as well as new production or
marketing techniques. The patent holder may license
others to make use of his invention in return for
payment of royalties.

A copyright gives the holder the monopoly on the exploitation of a literary or
artistic work for a certain period subject to renewal. A variety of rights are
protected by a copyright. For instance, copyright in relation to a musical
composition gives the holder the exclusive right to:
1. Print, reprint, publish, copy, distribute, and sell a work;
2. Make any translation or other version or extracts or arrangements or
adaptations of work;
3. Dramatize a work if it be a non-dramatic work; to convert a work into a non
dramatic work if it be a drama;
4. Publicly perform or represent a work in any manner or by any method
whatever for profit of otherwise;
5. Produce or reproduce a work in any manner or by any method whatever for
profit or otherwise. If not reproduced in copies for sale, to sell manuscripts or
any records whatever of a work; and
6. Make any other use or disposition of the work consistent with the laws of the
land.

A copyright holder may license others to make use of his rights in return for payment of royalties.
Copyright laws protect the holder for a certain period. The term of protection for copyright in a
musical work, for instance, shall be the lifetime of the creator and fifty (50) years after his death.
Royal payments for patents and copyrights are no longer required when they have expired and
have been reverted to public domain. Valuation. The correct valuation of the property and
services to be acquired by the new business project is a very important step in the assembly of
needed resources. In some cases, stocks are issued as payment for the required property and
services. Unless a conservative valuation is used, stocks may be issued whose nominal value may
be higher than the amount representing the real assets of the business project. Promoting a
business may not succeed due to any of the following:
1. Overvaluation of property and services;
2. Inadequate sampling or overestimation of the potential market;
3. Underestimation of the expenses of establishing a business;
4. Inability to raise sufficient capital;
5. Managerial and personnel difficulties; and
6. Unforeseen changes in the state of the entire economy

The Promoter
The promoter is the person responsible for the formation of a
company. He sees for the opportunity for a new business; interests
other people in it; makes the business’ blue print; arranges for the
initial funds, labor, and skills required; and sets the business going.
The promoter is motivated by any or a combination of the
following:
1. The promoter’s fee;
2. Shares of stock or bond in the new business project;
3. A management position in the new business project;
4. A new customer for his products or services; and
5.The desire to contribute to the economic growth of the local
community.

Promoters may be classified as follows:
1. Professional promoters – they are those whose main
occupation is business promotion;
2. Side-line promoters – they are persons who perform
promotion activities occasionally;
3. Banking promoters – they are banking institutions which
provide business promotion services to their clients;
4. Financial promoters – they consist of investment houses
engaged in the promotion of certain business ventures
through the sale of securities; and
5. Subdivision promoters – they are those engaged in the
development of new subdivisions

Liability of Promoters. The promoter undertakes to pursue his job with
the capacity of a temporary trustee. He cannot legally bind the firm
into contracts and deeds unless approved by the owners or the board
of directors. This is legally tenable because the promoter cannot act as
the agent of acorporation still to be formed, hence, he does not have a
principal to present. The nature of the job of the promoter provides
him with an opportunity to make excessive gains at the expense of the
owners. Professional ethics, however, require that he can only make
profits up to the amount previously agreed upon. A secret profit made
at the expense of the firm is a ground for the cancellation of the
promoter’s contract. In other countries, he may even be sued for the
recovery of profits he may have made or obtained as compensation or
for any losses he may have caused.

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