Chapter 2

Organizing a Business

Why Persons Engage in Business

Investors hope to enjoy certain values, which are derived from such undertaking. These values include the following:
1. 2. 3. 4. 5. 6. 7. Provision of employment to people Profits Service to the community Personal satisfaction Means to earn a living Achievement of power Protection of ones 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 firm 2. Organize production by buying and combining inputs 3. Decide on the rate of output in the light of his expectations about demand 4. Bear the risk involved in this activities

Business Prospecting
The Search for Business Opportunities
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.

Business Prospecting
The Search for Business Opportunities

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.

Business Prospecting
The Search for Business Opportunities
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

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 business 2. determining the feasibility of the idea 3. assembling the needed resources to start the business

Business Promotion
Discovery Identification of an idea for a new business. Could spring from various opportunities.

Determination of Feasibility 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.

Business Promotion
Determination of Feasibility

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. Financial aspects 6. Profitability 7. Social desirability

Business Promotion
Determination of Feasibility

Management study to determine the following aspects:

1. 2. 3. 4. The appropriate form of organization The internal structure of the organization The owners The staffing pattern of the organization

Business Promotion
Determination of Feasibility

Marketing study
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 price 5. The marketing program

Business Promotion
Determination of Feasibility

Technical study
1. 2. 3. 4. 5. 6. The manufacturing process selected, if applicable The rated capacity of the plant The design of the machinery The location and lay-out of the plant The specifications of the structures The requirements of the operations

Business Promotion
Determination of Feasibility

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

Business Promotion
Determination of Feasibility

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.

Business Promotion
Assembling Needed Resources
Initial Capital Requirements to take care of the following
Cost of organization payments made for business permits and licenses, incorporation taxes, business name, lawyers fees for preparation of building or office contracts, articles of incorporation, architects fees for construction plans of buildings, and management consultancy fees. Could also include promoters 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

Business Promotion
Assembling Needed Resources
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 Resources
Reserves fund which is required to take care of difficulties encountered due to insufficient income 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 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.

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, 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.

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

Why Business Promotion Fails?

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 6. 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. Promoters fee 2. Shares of stock or bond in the new business project 3. A management position in the business project 4. A new customer for his products or services 5. The desire to contribute to the economic growth of the local community

Classifications of Promoter
1. Professional Promoters persons whose main occupation is business promotion 2. Side-line promoters persons who perform promotion activities occasionally 3. 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

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

If not feasible

Assemble needed resources

Next 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