Organizing a Business Chapter 2

Why Persons Engage in Business

• Investors hope to enjoy certain values, which are derived from such undertaking. These values include the following:1. Provision of employment to people2. Profits3. Service to the community4. Personal satisfaction5. Means to earn a living6. Achievement of power7. Protection of one’s self and family

Why Persons Engage 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• 2 Options to engage in business : (1) to buy an

existing business; (2) to create a business that he will operate.

• An entrepreneur is someone who owns and started his or her business.

• Functions of entrepreneurs:1. Supply the capital of the firm2. Organize production by buying and combining

inputs3. Decide on the rate of output in the light of his

expectations about demand4. Bear the risk involved in this activities

Business Prospecting

• Talent Scout Approach - One should be aware of the requirements of the market, then search for products or services which will 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 also prepare a list of prospects and from there make and evaluation and decide which one is worth seeing.

The Search for Business Opportunities

Business Prospecting

• 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 better quality than the others indicated in the same list.

The Search for Business Opportunities

Business Prospecting

• Business opportunities could be a result of any of the following:1. Increasing demand for basic commodities due to an increase in the

population;2. Rising prices (or costs) 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 service;5. The development of a new product concept like the engine that runs

on water;6. The increasing demand for 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

The Search for Business Opportunities

Business Promotion• Refers to discovery and exploration of a

business opportunity with the purpose of converting it into a going concern.

• 3 Steps:1. discovering the idea for a new business2. determining the feasibility of the idea3. assembling the needed resources to start the

business

Business Promotion

• Identification of an idea for a new business.• Could spring from various opportunities.

• 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 to determine its viability.

Discovery

Determination of Feasibility

Business Promotion

• The study must contain some or all of the following aspects:1. Management study including proponents,

personnel, and organization.2. Marketing study3. Production facilities and the product4. Taxation and legal aspects5. Financial aspects6. Profitability7. Social desirability

Determination of Feasibility

Business Promotion

• Management study – to determine the following aspects:1. The appropriate form of organization2. The internal structure of the organization3. The owners4. The staffing pattern of the organization

Determination of Feasibility

Business Promotion

• Marketing study1. The future total demand for the product2. The competitive situation of the product in the

industry3. An estimated annual sales volume4. Future selling price5. The marketing program

Determination of Feasibility

Business Promotion

• Technical study1. The manufacturing process selected, if applicable2. The rated capacity of the plant3. The design of the machinery4. The location and lay-out of the plant5. The specifications of the structures6. The requirements of the operations

Determination of Feasibility

Business Promotion

• Taxation study Tax burden is legally minimized

• Financing Study Source of financing Selection of the most attractive financing scheme

using factors of cost and availability

Determination of Feasibility

Business Promotion

• Profitability Rate of return

• Social Desirability Optional Provide a description of the social returns

applicable to the project. Benefits that will be afforded by the project to

the community.

Determination of Feasibility

Business Promotion• Initial Capital Requirements – to take care of the

following Cost of organization – payments made for business

permits and licenses, incorporation 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 fee and cost of obtaining franchises, licenses or patents on required inventions, and licenses for copyrights on required literary or artistic works.

Working capital Acquisition of fixed assets Reserves

Assembling Needed Resources

Business Promotion 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.

Assembling Needed Resources

Business Promotion

Reserves – fund which is required to take care of difficulties encountered due to insufficient income generated by the firm.

• 2 main sources of capital:1. Owners2. Creditors

Assembling Needed Resources

Sources of Initial Capital

Business Promotion

• To protect the interest of the promoter and the founders of the 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.

Retention of Control

Business Promotion 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.

Retention of Control

Business Promotion Patents and Copyrights – Patent gives the holder

the sole right to make, use, or sell his invention during the period the patent remains in force. Copyright gives the holder monopoly on the exploitation of literary or artistic work for a certain period subject to renewal.

• Correct valuation of the property and services for the assembly of needed resources.

Retention of Control

Valuation

Why Business Promotion Fails?

1. Overvaluation of property and services2. Inadequate sampling or overestimation of the

potential market3. Underestimation of the expenses of

establishing a business4. Inability to raise sufficient capital5. Managerial and personnel difficulties6. Unforeseen changes in the state of the entire

economy.

The Promoter• Promoter is the person responsible for the

formation of the company.• He is motivated by any or a combination of

the following:1. Promoter’s fee2. Shares of stock or bond in the new business

project3. A management position in the business project4. A new customer for his products or services5. The desire to contribute to the economic growth

of the local community

Classifications of Promoter1. Professional Promoters – persons whose main

occupation is business promotion2. Side-line promoters – persons who perform

promotion activities occasionally3. Banking promoters – banking institutions which

provide business promotion services to their clients.

4. Financial promoters – consist of investment houses engaged in promotion of certain business ventures through the sale of securities.

5. Subdivision promoters – those engaged in the development of new subdivisions.

Liability of Promoters• He only has the capacity of a temporary

trustee.• Cannot be legally bind the firm into 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

If not feasible

Next Meeting

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

Review on Chapter 1 & 2

Reporting

Quiz