ILOCOS SUR POLYTECHNIC STATE COLLEGE

Santa Maria Campus

MODULE 1

LESSON 2: ORGANIZING A BUSINESS

This module focus on organizational business. The first stage in the life cycle of a
business is organization. Much of what will 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 may take a year or several years before actual operations begin. This does not
mean, however, that small businesses do not deserve careful thought and analysis before they
start operating.
The importance of the organizational stage cannot be overemphasized. 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.

Intended Learning Outcomes

At the end of the lesson, the learners will be able to:
1. Explain why a person engages in business
2. Defined Entrepreneurship
3. Understand the Prospecting on the search for business Opportunities
4. Determined the business promotion
5. Classify the business promoter

Course Code: ABM 5 Units: 3 Units

Descriptive Title: BUSINESS FINANCE
Instructor:
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Santa Maria Campus

MODULE 1
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 reasons as a primary
motive. Some do it to utilize skills 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 is much too valuable to be ignored, so they try to
use it by operating a business.

Sometimes, situational conditions pave the way for 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.

Course Code: ABM 5 Units: 3 Units

Descriptive Title: BUSINESS FINANCE
Instructor:
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Santa Maria Campus

MODULE 1
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

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 the 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.

Course Code: ABM 5 Units: 3 Units

Descriptive Title: BUSINESS FINANCE
Instructor:
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Santa Maria Campus

MODULE 1
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 his list enough and revenues. Also, like a
salesman, the prospective investor should have the skill to pick up 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 construction prices materials;(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 concepts 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; and
8. many others.

BUSINESS PROMOTION

Business promotion refers to the discovery and exploration of a business opportunity with
the purpose of converting it into a going concern.

The three steps involved in the business promotion are the following:

Course Code: ABM 5 Units: 3 Units

Descriptive Title: BUSINESS FINANCE
Instructor:
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Santa Maria Campus

MODULE 1
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 CD may open his own school. a
retired military officer.
The business promoter may also be included to consider certain product ideas because of
the availability of materials. For instance, suppliers of marble products are attracted by Romblon
and Gapan (in Nueva Ecija) where marble abounds. Bagoong and patis factories are established
in areas near coastlines of Malabon (Metro Manila), Lingayen (Pangasinan), and Babayan
(Batangas).
Authors of books and composers of music may seek the commercial exploitation of their
work. may also the inventor of a 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 gadget has already been
introduced that helps reduces the 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 viability. According to the need, the study must contain some or all of
the following aspects:

Course Code: ABM 5 Units: 3 Units

Descriptive Title: BUSINESS FINANCE
Instructor:
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Santa Maria Campus

MODULE 1

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;

Course Code: ABM 5 Units: 3 Units

Descriptive Title: BUSINESS FINANCE
Instructor:
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Santa Maria Campus

MODULE 1
4. the location and layout 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 the 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 discussed 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 to 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 experts, the

proponent may proceed to assemble the needed resources. This is made prior to the start of
business operations. The resources needed may comprise of the following: (1) initial capital
required; (2) the essential properties; (3) processes; and (4) personnel.

Initial Capital Requirements. A new business project requires initial capital to take care
of the following:
1. cost of the organization;

Course Code: ABM 5 Units: 3 Units

Descriptive Title: BUSINESS FINANCE
Instructor:
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Santa Maria Campus

MODULE 1
2. working capital;
3. acquisition of fixed assets; and
4. reserves.

The cost of organizing a business includes payments made for business permits and
licenses, incorporation taxes, business names, 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 fees 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 franchises, licenses for patents on required inventions, and licenses 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. Maturing
obligations of the firm and the financing of credit sales will also require a 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
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.

Course Code: ABM 5 Units: 3 Units

Descriptive Title: BUSINESS FINANCE
Instructor:
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Santa Maria Campus

MODULE 1

A new firm may be financed by one or a combination of 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 a 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 the real property for some time. Leases are
used to obtain initial control of the land and buildings required. The conditions imposed in lease
agreements vary. Some leases require a fixed rental, while some require other considerations. A
common practice is one undertaken by some banks. The agreement requires that the bank
construct a building within the lot agreed upon; the bank uses the building and the lot free of the
rental or any fee from the owner within a stipulated period, after which the ownership of the
building is passed on to the 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,

Course Code: ABM 5 Units: 3 Units

Descriptive Title: BUSINESS FINANCE
Instructor:
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Santa Maria Campus

MODULE 1
and adverse effects of legal claims to the title of the property by other parties. These risks 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 a possibility that the owner of
the subject property or the promoter may perform acts inimical to the interests 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 franchises 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 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 blueprint of a successful way of carrying on a business in all its 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 a right granted by the government to a concessionaire for the exploitation

of natural resources placed at his disposal for a sum consisting of a minimum 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 obtained 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 literary or artistic work
for a certain period subject to renewal. A variety of rights are protected by copyright. For
instance, copyright in relation to a musical composition gives the holder the exclusive right to:

Course Code: ABM 5 Units: 3 Units

Descriptive Title: BUSINESS FINANCE
Instructor:
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Santa Maria Campus

MODULE 1
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 is a non-dramatic work; to convert work into a non-

dramatic work if it is a drama;
4. Publicly perform or represent a work in any manner or by any method whatever
for profit or otherwise
5. Produce or reproduce a work in any manner or by any method whether for profit
or otherwise. If no reproduced in copies for sale, to sell manuscripts or any
records whatever of 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 right in return for payment of
royalties. Copyright laws protect the hold 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 years after
his death. Royalty payments for patents and copyrights are no longer required when they have
expired and have been reverted to the public domain.

Valuation. The correct valuation of the property and service to be acquired by the new
business project is a very important step in the assembly of needed resources. In some cases,
stocks are an issue 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;

Course Code: ABM 5 Units: 3 Units

Descriptive Title: BUSINESS FINANCE
Instructor:
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Santa Maria Campus

MODULE 1
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 the
opportunity for a new business; interests other people in it; makes the business' blueprint;
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

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 that 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

Course Code: ABM 5 Units: 3 Units

Descriptive Title: BUSINESS FINANCE
Instructor:
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Santa Maria Campus

MODULE 1
the owners or the board of directors. This is legally tenable because the promoter cannot act as
the agent of a corporation still to be formed hence, he does not have a principal to represent.

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.

Course Code: ABM 5 Units: 3 Units

Descriptive Title: BUSINESS FINANCE
Instructor:
ILOCOS SUR POLYTECHNIC STATE COLLEGE
Santa Maria Campus

MODULE 1
EXERCISES

1. Discuss life cycle the of an important business. of the organizationalstagein

2. What makes a person decide to engage in business?
3. What is meant by entrepreneurship? Who are considered entrepreneurs?
4. What steps must be undertaken before a business starts?
5. What is meant by business promotion? What steps are involved in business promotion?
6. In organizing a business, there are two main sources of capital. What are they?
7. What control measures may be instituted to protect the interests of the promoter and the
founders of a new business idea?
8. What is meant by the following
a) franchise;
b) concession;
c) patent; and
d) d. copyright?
9. What is the function of the promoter? What are the kinds of promoters?
10. Is the promoter exempted from any liability arising out of his actions?

Course Code: ABM 5 Units: 3 Units

Descriptive Title: BUSINESS FINANCE
Instructor: