Chapter 2
Organizing a Business
Why Persons Persons Engag Engage e in Business •
Investors hope to enjoy certain values, which are derived from such undertaking. These values include the following: 1. Pr Prov ovis isio ion n of em empl ploy oyme men nt to to peo peopl ple e 2. Profits 3. Se Serv rvic ice e to the co comm mmun unit ity y 4. Per erso sona nall sa sati tissfac acttio ion n 5. Mean anss to ear arn n a living 6. Achievement of of power one’s self and family 7. Protection of one’s
Why Persons Persons Engag Engage e in Business •
Entrepreneurs venture into business for economic reason as a primary motive. For some they do it to utilize skill and previous work experience.
Entrepreneurship •
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2 Options to engage in business : (1) to buy an existing exis ting business; (2) to create a business that he will operate. An entrepreneur is someone who owns and started starte d his or her business. Functions of entrepreneurs: 1. Supp Supply ly th the e cap capit ital al of th the e fi firm rm 2. Or Org ganiz anize e prod produc ucti tion on by by buyi buying ng and and com combi bini ning ng inputs 3. De Deci cide de on on the the rat rate e of ou outp tput ut in in the the ligh lightt of hi hiss expectations about demand 4. Be Bear ar th the e ris risk k in invo volv lved ed in th this is ac acti tivit vitie iess
Business Prospecting The Search for Business Opportunities •
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Talent Scout Approach - One should be aware of the requirements requiremen ts of the mark market, et, then search for products or services which will satisfy satisfy these needs. – -There should be a demand for your products or services - Products and services should be classified as “commercial” Salesman Approach - One can can also prepare a list list of prospects and from there make and evaluation and decide which one is worth seeing.
Business Prospecting The Search for Business Opportunities •
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Like a talent scout, the prospective businessman should have the skill to choose an opening that will be commercial and will bring him revenues. Like a salesman, the prospective investor should have the skill to pick the right business opportunity from his list and which is of bett better er quality than the others indicated indicat ed in the same list.
Business Prospecting The Search for Business Opportunities •
Business opportunities could be a result of any of the following: 1. Inc Incre reasi asing ng dem demand and fo forr basi basicc comm commodi oditie tiess due to an inc incre rease ase in the population; 2. Ris Rising ing pri prices ces (or (or cost costs) s) of exis existin ting g produ products cts lik like e const construc ructio tion n mate materia rials; ls; 3. Rel Relax axat ation ion of go gover vernme nment nt pol polici icies es lik like e the the lif liftin ting g of of impo import rt restrictions; 4. Th The e deve develo lopm pmen entt of new new ser servi vice ce con conce cept pt lik like e the the issu issuan ance ce and and delivery of passports through courier service; 5. The dev develo elopme pment nt of a new pr produ oduct ct co conce ncept pt lik like e the the engin engine e that that run runss on water; 6. The inc incre reasi asing ng dem demand and fo forr speci speciali alize zed d serv service icess like like man manpow power er ex expor portt services, health and fitness services, management consultancy and skills traini training; ng; 7. The inc incre reasi asing ng re requi quire remen ments ts of the who wholes lesale ale and re reta tail il ind indus ustry try
Business Promotion •
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Refers to discovery and exploration of a business opportunity with the purpose of converting conv erting it into a going concern. 3 Steps: 1. di disc scov over erin ing g the the idea idea for for a ne new w bus busin ines esss 2. de detterm ermin inin ing g the the feas easib ibili ility ty of th the e ide idea a 3. assemb assembli ling ng the the nee neede ded d res resou ourc rces es to to sta start rt the the business
Business Promotion Discovery •
Identification Identifica tion of an idea for a new business.
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Could spring from various opportunities.
Determination Determ ination of Feasibility •
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Done after the choice has been made on the business idea to adapt. Feasibility study is a detailed investigation and analysis of a proposed business venture venture to determine its viability.
Business Promotion Determination Determ ination of Feasibility •
The study must contain contain some or all of the following aspects: 1. Manag Managem emen entt stu study dy in incl clud udin ing g pro propo ponen nents ts,, personnel, and organization. 2. Marketing study 3. Pr Prod oduc ucti tion on fa facil cilit itie iess and and th the e pro produ duct ct 4. Tax axat atio ion n and and le leg gal as aspe pect ctss 5. Financial aspects 6. Profitability 7. Socia iall desirab abiility
Business Promotion Determination Determ ination of Feasibility •
Management study – to determine the following aspects: 1. Th The e app appro ropr pria iatte for form m of of org organ aniz izat ation ion
2. The in inte tern rnal al stru structu cture re of the or orga ganiz nizat ation ion 3. The owners 4. Th The e sta staffi ffing ng pat patte tern rn of of the the org organ aniz izat atio ion n
Business Promotion Determination Determ ination of Feasibility •
Marketing study 1. Th The e fut futur ure e tot total al de deman mand d for for th the e pro produ duct ct 2. The The comp compet etit itiv ive e situa situati tion on of of the the prod produc uctt in the the industry 3. An es esti tima matted an annu nual al sa sale less vol volum ume e 4. Fu Futture sel ellling price 5. Th The e ma mark rke eti ting ng pr prog ogrram
Business Promotion Determination Determ ination of Feasibility •
Technical study 1. Th The e manuf manufac actu turin ring g proce process ss sele select cted ed,, if applic applicabl able e 2. Th The e rat rated ed ca capa paci city ty of th the e pla plan nt 3. Th The e des desig ign n of of the the ma mach chin iner ery y 4. Th The e loc locat atio ion n and and la layy-ou outt of th the e plan plantt 5. Th The e sp spec ecifi ifica cati tions ons of th the e str truct uctur ures es 6. Th The e req requi uirrem emen ents ts of of the the oper operat atio ions ns
Business Promotion Determination Determ ination of Feasibility •
Taxation study
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Tax burden is legally minimized
Financing Study
Source of financing
Selection of the most attractive attractive financing scheme schem e using factors of cost and availability
Business Promotion Determination Determ ination of Feasibility •
Profitability
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Rate of return
Social Desirability
Optional
Provide a description of the social so cial returns applicable to the project.
Benefits that will be afforded by the project to the community.
Business Promotion Assembling Needed Resour Resources ces •
Initial Capital Requiremen Requirements ts – to take care of the following
Cost of organization – payments made for business permits and licenses, incorporation taxes, taxes, business name, lawyer’s fees for preparation of building or office contracts, articles of incorporation, architect’s fees for construction plans of buildings, and management consultancy fees. Could also include promoter’s promoter’s fee and cost of obtaining franchises, licenses or paten patents ts on required inventions, and licenses for copyrights on required literary or artistic works. Working capital Acquisition of fixed assets Reserves
Business Promotion Assembling Needed Resour Resources ces
Working capital- used to finance inventories and supplies, salaries and wages, power, water, rent, insurance, transportation, advertising and sales promotion. Also used for maturing obligations of the firm and the financing of credit sales.
Acquisition of fixed assets – may be acquired through purchase or lease depending on the nature and the requirements of the firm. Refers to business assets which are acquired for continued use in the production of goods and services. i.e. land, machinery, buildings, furnitures, fictures, and equipment.
Business Promotion Assembling Needed Resour Resources ces
Reserves – fund which is required to take care of difficulties encountered due to insufficient income generated generated by the firm.
Sources of Initial Capital •
2 main sources of capital: 1. Owners 2. Creditors
Business Promotion Retention of Control •
To protect the interest of the promoter and the founders founders of the t he new business.
Lease – agreement over the use of a real property for a period of time.
Options and contracts – 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. Contracts are used to retain required skills and properties.
Business Promotion Retention of Control
Franchises and Concessions – 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 that are granted by the government.
Business format franchise involves the exploitation of goods and services, identified by a trademark or a tradename.
Concession is the right granted by the government to a concessionaire for the exploitation of natural resources.
Business Promotion Retention of Control
Patents and Copyrights – Patent gives the holder the sole right to make, m ake, use, or sell his invention during the period the patent remains in force. force. Copyright gives the holder monopoly on the exploitation of literary or artistic work for a certain period subject to renewal.
Valuation Correct valuation valuation of the property and services for the assembly of needed resour resources. ces.
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Why Business Promotion Fails? 1. Ov Over erv valu aluat atio ion n of prop proper erty ty and and servi service cess 2. Inadeq Inadequa uate te sam sampli pling ng or ov over eres estim timati ation on of of the the potential market 3. Unde Underres esti tima mati tion on of of the the exp expen ense sess of establishing a business 4. In Inab abili ility ty to to rai raise se suff suffic icie ient nt cap capit ital al 5. Ma Mana nage geri rial al and and perso personn nnel el diff difficu icult lties ies 6. Unfo Unfore resee seen n chang changes es in in the sta state te of the the entir entire e economy.
The Promot Promoter er •
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Promoter is the person responsible for for the formation of the company com pany..
He is motivated by any or a combination of the following: 1. Promoter’s fee 2. Sh Shar ares es of of sto stock ck or or bon bond d in th the e new new bus busin ines esss project 3. A mana manage geme ment nt pos posit ition ion in the the bus busin ines esss pro proje ject ct 4. A new new cus custo tome merr for for his pr prod oduct uctss or se servi rvice cess 5. The The desi desire re to to cont contri ribu bute te to to the the econ economi omicc growt growth h of the local community
Classifications of Promoter 1. Prof Profes essi sio ona nall Pr Prom omot oter erss – persons whose main occupation is business promo promotion tion 2. Si Sid dee-li line ne pr pro omoter erss – persons who perform promotion prom otion activities occasionally 3. Bankin ing g pro promoters – banking institutions which provide business promotion services to their clients. 4. Fin ina anc ncia iall pr promoter erss – consist of investment houses engaged in promo promotion tion of certain business ventures ventur es through the sale of securities. 5. Su Subd bdiv ivis isio ion n pr prom omot oter erss – those engaged in the development of new subdivisions.
Liability of Promoters •
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He only has the capacity of a temporary temporary trustee. Cannot be legally bind the firm into contracts contracts and deeds unless approved by the owners or the board of directors as he cannot as the agent of a corporation still to be formed, hence he does not have a principal to represent. He can only make profits up to the amounts agreed upon.
Procedure in Organizing a Business The decision to engage in business is made. Form a new business
Buy an existing business
Prepare a list of opportunities
Analyze opportunities
Make a choice
Determine feasibility
If feasible
Assemble needed resources
If not feasible
Next Ne xt Meeting Meeting Reporting Group 1 will report Chapter 3 on July 10 Group 2 will report on Chapter 4 on July 13 Business Finance, Second Edition by Roberto G. Medina
Quiz Review on Chapter 1 & 2
