a ‘Section 10. EXEMPTION. Upon application with and as determined by the Board, the following may be exempt from the applicability of this Wage Order, subject to applicable ‘ules and regulations issued by the Commission * Retail and service establishments employing not more than ten (10) workers atthe time of the publication of this Wage Order; * Distressed Establishments, as defined in the NWPC Guidelines No. 02, Series of 2007; * Garment Exporting firms, including indirect exporters, with at least fty-percent (60%) export sales and with forward contracts with their foreign buyers/principals éntered into on or twelve (12) months before the effectively of this Wage Order and without escalation clauses with respect tothe contract prices thereof, may ‘be exempt during the itetime of the said contract but ‘ot to exceed twelve (12) months from effectively of ‘this Wage Order, ‘TOPIC 10: FINANCE ASPECT DESCRIPTION Before plunging into setting up an enterprise, the would-be entrepreneur must find out how much money he has to put up (his own, borrowed, or donated) and how much he needs to keep the enterprise going at least forthe next twelve months ofits ite, OBJECTIVES This topic will enable the students to: Identify the role of money in a business ‘ostimate the amount needed to start a business ifferentate the various types of costs Use the proper ways to keep track of money in the business ‘and account for gains o losses inthe enterprise Discussion Point 1: ‘The role of money in business startup \When the entrepreneur dreams of setting up a business, hehas to ‘think of the money he will ned in making this dream come true. ‘Money represents the value of the exchange of goods or services ‘rom the seller to te consumer. Money is what the entrepreneur Needs to raise capital for establishing the enterprise; for purchasing tools, equipment, and raw materials to manufacture the products; and for paying the salaries of personnel, the rentals, Utes, and other aspects ofthe business, How can the entrepreneur find the right amount of money to set. ‘up the business? There are many sources that the entrepreneur 96 WNODWS TO ENTREPRENEURSHIP: a TEACHING GUIDE can tap, among wich are the folowing: 1. Own savings, The entrepreneur can use his own savings to start the business. Personal assets can be sold to raise ‘needed capital. The money that has been raised from one's savings and from selling one's own assets is owner's capital oF ovmer's equity of the business, 2. Friends and relatives. The entrepreneur can find out from {riends and relatives if they can lend money forthe business, For this, however, the entrepreneur must have proper and ‘egal documentation because this might become a thorny issue later on, 3. Commercial bank loans. The entrepreneur can borrow money from the bank provided he can meet all loan Fequirements, There may be need for collateral but with ‘Some commercial banks, the collateral may be waived. 4. Government assistance. The entrepreneur can apply for loans and other assistance programs from government agencies, 5. Private agencies. host of private assistance programs can ‘be availed of by the entrepreneur throughout the country, Questions conceming borrowing \What kind of loan will the start-up entrepreneur need? When borrowing one has to determine what kind of loan is needed. A business uses four basic types of money in its operations. The purpose of borrowing will determine the type. It is important ‘that students recognize the difference between the four types of ‘money. it is important for start-up entrepreneurs to keep in mind ‘that money borrowed for a temporary purpose should be used in the profit producing areas ofthe business as the loan willbe ‘repaid out ofthat operation. Equity funds are those that remain in ‘the business and increase the net worth for the owner, 1. Trade credit. This type of money is not borrowed; itis ‘money the entrepreneur owes suppliers who permit him ‘ carry inventory on open account. A good credit record is ‘vidence ofthe entrepreneur's ability to meet obligations, 2 Short-term credit. Banks and other lenders provide this ‘ype of money to make purchases of inventory for special ‘asons, such as buying inventory for the next seling season. Such loans are sel-iquidating because they generate money from sales. Short-term credit is repaid in less than one year 3. Long-term credit. Loans for more than a year are used for the expansion or modemization ofa business. They are ‘epaid out of accumulated profits. Usually a loan of this type {sa mortgage or a promissory note, 4. Equity funds. This type of money is never repaid. An investor ives cash to the business in return fora share of ownership in the business,19s ise les ita 8, and my oan vith for vent can ben aa The tant sof sind ‘sed ibe ‘nin its him dis ) this cial ting idin e pare ‘ype ship Discussion Point 2: Estimating the start-up capital How much capital will one need to start his dream business? ‘When going into business one wil nge to have sufficient capital to pay for business-related expenses even before the profits roll in. For example, at the onset one will need money to acquire ‘everything the business needs to getit stated; pay employees’ salaries; pay utlty companies; pay rent; and buy materials and supplies. Start-up capital varias from one business to another. Some centrepreneurs will need more capital than others. Normally, a business that will use a lot of machinery and equipment in its ‘operations will require more capital than a business thats labor- Intensive Its important for an entrepreneur to estimate how much capital he will require at the onset. Generally, he will need enough ‘money to fund the folowing expenses: pre-operating expenses, ‘fixed capital investment requirements, intial working capital requirements, and any unexpected expenses (contingency). The sum of these components is the star-up capital requirement, also known as the total project cost. Thus, the equation to remember i: Start-up capital requirement = pre-operating expenses. + fixed capital investment + initial working capital + contingency Pre-operaling expenses refer to cash expenses thatthe business incurs prior to the actual start of operations. These include various fees for permits, licenses, clearances, and registration fees paid to a local government unit, BIR, SEC, DTI, SSS, Phihetth, Pag: ig; legal fees; incorporation expenses; inital marketing, advertising and promotional expenses; costs of personnel recruitment and training; intial franchise cost; one-time deposit ‘ees with utility companies; research and technical stuies (e.9 economic, marketing, industry, financial and profitability stuies) and consultancy fs. Fixed capital investments, onthe other hand, are the assets needed By the business for it to operate and do business. The ‘xed capital component represents an entrepreneur's investment in thed assets (e.g, land, bulngs, building improvements, fumiture and fixtures, vehicles, tools, machinery and equipment, ete). Fixed capital Investments cost a lot of money and are thus regarded as major expenses. But one need not purchase al his fived asset requirements. There are availabe alteratves 0 “acquiring” fixed assets. For instance, one can lease or rent a building or lease ofice equipment fit turns out to be cheaper or anivenien, of owing the fixed assets (0.9. fice space, maracturin plan snot practically possible.) Lastly, one needs working capital to keep the business going for the first few cycles of operation. Working capita will enable ‘one to pay for raw materials, salaries, supplies, rent, ullities, Inventories, receivables, and other business-related expenses even before regular streams of revenue start to come in Activity 1 Lead the students in calculating thir start-up capita. Start-up capital isthe amount of money students will need to pay fo their pre-operating expenses, fixed capital investment, and working ‘capital Examples are the following: ‘PRE-OPERATING EXPENSES Type Quantity Estimated Costs Legal fees Registration Business name registration Perits/connectons for water Permits/connections for electricity Permits/connections for telephone Publicity and advertisements Others: (MODULE HLENTERPAISELANMING 137FIXED CAPITAL INVESTMENT Hem Quantity Estimated Costs Land’ ‘Workshop or factory Machinery Equipment ‘Tools Office furniture Others: INITIAL WORKING CAPITAL Payments when the new business starts to operate until revenue from sales flows back into the business Initial processing ofthe product or initial start of services Inventory of finished goods Delivery to wholesalers or delivery to retailers Delivery o customers Others: : Discussion Point 3: Costs: DIRECT AND INDIRECT COSTS ‘The entrepreneur must be able to study and estimate the costs that his business will incur. Every business incurs costs even if there are no activities going on in production, service, or trade. ‘To understand ths, its essential to know that there are direct costs and indirect costs. Direct costs are those costs that depend directly on the number of products, services, or goods produced. Direct costs. are ‘composed of two cost sub-groups: 198 WIDOWS TO EUTFEFRENEURSHP,A TEACHING GUE Foap comely Direct material costs: Direct labor costs: Expenditures for all tems ‘that become part ofa product or are used to produce a service or are bought for Tasale enter into the category cof drect material costs. Costs linked to the acquisition of raw materials such as ‘transport from the supplier to the enterprise are included ‘All wages for workers and helpers that are directly livolved in the production or the delivery of services. This also includes benefits like social security, Staff ‘wages forthe retailer ‘and wholesaler are not considered as direct cost, as direct costs,Indirect costs are all other costs generated from business activities that are not direct costs, These costs cannot directly be attributed to a specific product or service. Examples of indirect costs include rent for the office premises, salary forthe bookkeeper, interest charges on a bank loan, telephone costs, fire and car insurance, cleaning supplias, et. In a wholesale or retall business, all staff costs are indirect costs, To calculate the manufacturing costs of one single product or ‘one single service, the entrepreneur has to calculate the indirect costs proportionally If the business produces a single product or service, or if the products are quite similar, for example chairs, beds, and tables, ‘the indirect costs are divided by the numberof products and this proportion is added tothe direct costs to calculate the total cost Per unt of an item. Ina service business, the indirect costs are generally calculated ‘on the basis of working hours and added to the time spent in ‘delivering the service. Indirect costs are also called overhead costs. ‘Tomake the distinction between direct casts and indirect costs is ‘ot always ea, for example the glue used in fumiture making, The quantty used for one chai is so small that represents only very smal portion of the price ofthe gue. The costo can of ‘eis thereto considered as an indirect cost. Aso fa helper serves several workers, his salary cannot be atibuted to one single product. The salary ofthe helper wil therefore be counted as an indirect cost. To get the total cost of a product or service, one adds all the direct material costs, the direct labor costs, an the proportion of indirect costs calculated for making the product or delivering the service. The formula is: ‘Sum of direct material costs + Sum of direct labor costs + Proportion of indirect costs = Total cost per product or service ‘etivity 1 Let the students practice identtying direct costs and indirect costs. Let them put a “D for direct costs and an “" for indirect costs for each item listed below. tom Type of Gost ‘Owner's salary Office suppies Maintenance fora truck Consultants fes for market study Interest payments ‘Advertsing forthe shop Gas fora taxi business Repair of machines aw materials Leather fora footwear factory Butions for talo’s shop Rent of business premises Shampoo used ina hairdressers shop Insurance against fire Health insurance fr office staff ‘Sales promotion for one product Worker's salary Nails for furniture production Purchase of finished goods Reduction of machine value Replacement of stock of goods Car insurance ‘Spare parts ina car repair business: Electrical appliances in a Construction business Purchase of hand tools ectiity bil “Taiing handbooks in a training course Water bills Drinks in a restaurant or bar MODULE HLENTERPAISE PLANS 130,CLASSIFICATION OF COSTS BY CATEGORIES Entrepreneurs also have to know the total amount of costs ‘her business generates during a month and during the entre Year. This information is of Importance because it shows the Cost structure ofthe enterprise and gives an indication of when Particular costs are unnecessarily high, With this information, an entrepreneur can try to reduce costs and become more Competitive. A business starter has to forecast the total costs of his business fr atleast one yearn order to find out whether the Planned sales cover the costs or not. All costs that occur in a business can be categorized as staff costs, material costs, other costs, or capital casts 1. Staff costs. An entrepreneur who employs staff becomes an employer and he will have legal and social responsiblity ‘or his employees, ‘This responsibilty means that he has to full a number of ‘equirements that are imposed by laws and regulations, or by colective bargaining agreements. These include payment of minimum wages, overtime, leave benefits, social security, ‘and Pag-ibig and Philheatth contributions, Staff costs are not ited to salaries or wages. The additional ‘casts that come on top of the salaries are often calculated a8 @ percentage ofthe salary. This can vary from country to country from a relatively small percentage up to as much as ‘40% in, for example, highly industrialized countries with a very sophisticated social security net 2 Material costs. Al materials used for manufacturing a Product or used to prove a service fal under the category Called “materials,” ‘Tho entrepreneur must count under material cost those materials that are not used fora product but are necessary {or the functioning of the business, for example, office ‘Supplies or cleaning materials fr the factory tabies Materials are classified into the following Faw materials: for example, plywood, metal bars, metal heels, leather, weol, woven fabrics, plasis, flour butter, etc, Standard materials: for example nals, screws, bolts, nuts, {iting electrical appliances, spare pars, buttons, zippers, atc Auxiliary ‘materials: for example glue, paint, welding clectrodes, welding gas, saw blades, grinding paper, yam, threads, ete, In a wholesale and retail business, the costs for acquiring finished goods for reseling are classified as merchandise costs, "40 WINDOWS T ENTREPRENEURSHIP: TEACHING GUIDE a ‘3. Other costs ll expencitures for items and services that do ‘ot fll under the above-mentioned categories are put into ‘the category “other costs’ These costs are mainly for electicty, water, telephone, Intemet, insurance, rent, publicity, administrative fees, ete, 4. Capital costs. A businessperson who contracts @ loan has ‘0 bay Interest forthe duration ofthe loan. Interest is also clue for an overdraft ofthe entrepreneur's curent account. ‘These payments are called capital costs, HOW IS DEPRECIATION CALCULATED? Depreciation is avery spectic kind of capital cost. When stating 2 Production, an entrepreneur buys new machines from the Capital of the company. if he wants io sell a machine after Several years—because he needs a machine that works faster, oF the machine lost its precision, or it often breaks down and ‘needs repait—he will get much less money than was paid for when it was new. ‘This loss of value of machines, equipment, or cars that are operating in an enterprise is called depreciation, This loss of valuo is a process that can lst several years, The uration ofthis process depends onthe type of machine. At the nd ofthis process the machine, truck, or vehicle needs to be ‘placed. Therefore, the annual loss i considered a part of Production cost that allows the money that was paid forthe new ‘machine to be recuperated in order to replace it, (Guite simpy, to compute for depreciation, the price of the newly bought machine, cr, or asset (except land) is alvided by the expected lifespan of the asset. Let's take for example a new period. Must be compared against industry if | stot Gots Sod averages Alow mover imps poor Inventory Turnover ‘Average Inventory. ‘sales and, therefore, excess inventory. A high rato implies ether strong sales or 4 ineffective buying. High inventory levels are unbeathy because they represent an investment witha zero rat of return, The average number of days it fakes fo et Gada ‘sell the average inventory during the Year. Must be compared withthe industry + average and company's historical ratio, | The numberof times por year that he accounts receivables are converted to. cash. A high rato implies ether that company operates ona cash bass or that its extension of credit and collection Accounts Receivable Turnover ‘Average Accounts Recelvable a aarte eabak AEA or ratio implies the need to re-assess oreit policies in order to ensure the timely ! collection of imparted credit that is not _ ____| earning interest forthe fir, | ‘The average number of days It takes to 65 days collect the average amount of accounts AIR Turnover: receivables during the year. Must be ‘compared withthe industry average and the company’s historical ratio, Net Sales ‘Measures a firm’ efficiency at using its Asset Turnover “Total Assets assets in generating sales or revenue. The higher the number, the better. Days Sales in Inventory Inventory Turnover y Days Sales in Accounts Receivables i Debt or Leverage Analysis | Financial Ratio Formula What t Means ‘Shows what proportion of debt a company has relative to its assets. The ratio gives ps. Debt Ratio ee ‘an idea to the leverage ofthe company a ‘along with the potential risks it faves in fe | fers ofits det. ES | Ingicates what proportion of equty and | debt the company Is using to nance its | Total Liaitios assets. high debl/equity rato generally fF Debt-to-Equity Ratio ‘Stockholders’ Equity ‘means that @ company as been a ‘aggressive in financing growth with debt. ay This can result in volatile earnings because of the adtonal interest expense, a Shows how easly @ company can eB pay interest on outstanding debt. The | Interest Expone lower the ratio, the more the company Interest Coverage Ratio ee-s is burton bry debt expense. When a Where: EBIT = Eamings Before interest and | Company's inerest coverage ratio is Totes 1.5 or lower, its ability to meet intorast expenses may be questionable, MOULE ENTERPRISE PLANNING 189,