Entrepreneurship

MODULE

Module No. 5 : Week 5 : 1 Quarter

Screen the Proposed Solution/s based on Viability, Profitability and

Customer Requirements

Learning Competencies (Mga kasanayang pagkatuto)

Code: CS_EP11/12ENTREP-Ob-c-5

Objectives:
1. The learner screen proposed solution based on Viability
2. The learner screen proposed solution based on Profitability
3. The learner screen proposed solution based on Customer Requirements

Let’s Recall (Balikan natin)

An entrepreneur is affected by his personal aspects, abilities and skills. According to

Morato, “In screening opportunities, the entrepreneur first has to consider his or her
preferences and capabilities by asking three basic questions: Do I have the drive to pursue
this business opportunity to the end? Will I spend all my time, effort, and money to make the
business opportunity work? Will I sacrifice my existing lifestyle, endure emotional hardship,
and forego my usual comforts to succeed in this business opportunity?” (Morato 2016). This
is true in the initial screening of proposed solutions since an entrepreneur should have a
strong will to succeed.

Let’s Understand (Pag-aralan natin)

To have a better understanding, let's define viability, and profitability from
known dictionaries on the internet.

Viability

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 “The ability as intended or to succeed; the degree of
chance that something will succeed” (Cambridge University
Press 2020)
Please check which among the levels of risk and return
matrix the proposed solution based on viability of products
and services will be categorized. This will help in the decision making of the entrepreneur.

Risk Low Risk Medium Risk High Risk

Return

High Return BEST GOOD FAIR

Medium Return GOOD FAIR BAD

Low Return FAIR BAD WORST

Morato 2016
To interpret the table above from Morato (Morato 2016), returns are categorized by
having high return, medium return and low return and its connection to risk as identified on
the right side of the table as Low risk, medium risk and high risk. Having high return with
low risk is the best solution in business. On the next column, having high return with medium
risk is still a good solution for business. The last column under the high return category is
high risk and is a fair solution. The medium return category with low risk is still a good
solution in business and medium return with medium risk is a fair solution but medium return
with high risk is a bad solution. The lowest part of the table is low return with low risk is a
fair solution but having low return with medium risk is considered as a bad solution. The
undesirable part is low return with high risk and it is the worst solution for any business.

Profitability
“The state or condition of yielding a financial
profit or gain. It is often measured by price to earnings
ratio”. (WebFinance Inc. 2020)
Price will be discussed in detail on the marketing
aspect for week 7 - 9 as we go along the discussions, we will tackle further earnings or
financial ratios for profitability.
According to Ramos' blog, viability, profitability and customer’s requirements are
very important to the success of the entrepreneur “These days, the customer is king. They are
much more informed, much more assertive, much more discerning, and their tastes and
demands change like the seasons. Gone are they days where companies largely dictated how
market more and what consumers want” (Ramos n.d). That is why entrepreneurs need to
readjust to customers' requirements.

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 In screening for profitability of business and entrepreneur should be knowledgeable
with the four financial statements, (1) Income statement; (2)Statement in changes in equity
(3)balance sheet and (4) cash flow statement but that will be discussed further in Financial
Forecasting on Quarter 2 week 1-4 but let's describe it brief for better understanding
Financial Forecast and Determination of Financial Feasibility

Income Statement

This is a financial statement that is affected by the enterprise revenue and expense in a
certain period. It is best described in the formula below

REVENUES - EXPENSES = INCOME PROFIT (LOSS)

Income Statement
As you can see in Table 1 Sample income statement(Celender 2020), on the third
column, the income of 15,500 has been deducted by
expenses (4200) having a result of 11,300 or what we
call net profit. The open and closed parenthesis that
enclosed 4200 shows a negative or a deduction in
accounting. In some cases, there is a net loss if the
result is negative or with an open close parenthesis.

Statement of Changes in Equity

In Table 2 sample statement of changes in equity, (Celender 2020) you can see that
equity is also called capital. To get the balance at the
end of the period, you should add the capital of
15000 and profit of 11300 then deduct the (500)
from drawings to have the result of 25800
Balance sheet

The balance sheet is an important aspect of business transactions and one has to look
at three different things; assets, liabilities, and equities. (Morato 2016)

Assets - Owned property by a person or company and examples are all the
investments in the enterprise like cash, account receivables, inventories, land building and
equipment
Liabilities - Responsibilities and obligations of a person or company like bank debts,
accounts payable lending investors including debt to suppliers if the enterprise a
merchandising business. The balance sheet accounting equation is described below.
Equity is also called capital or the amount invested by the entrepreneur to start his
business

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 ASSETS = LIABILITIES + EQUITY
The equation shows that all of the assets of the
enterprise is equals all liabilities and equity. They
should always be balanced or equal to each other.
Otherwise, there is a problem in the accounting process
that causes the inequality on the balance sheet. You can
see the example of balance sheet for George’s Catering
(Celender 2020)
As you can see in Table 3 Balance sheet of
George’s Catering on the 31st of May 2010, Total assets
of 26,800 is directly equal to or the same with the Total
equity and liabilities amounted to 26800 also.
As you can see in Table 4 example of cash flow
statement the different activities from operation, investment and financing and how it affects
either increase or decrease in cash of the enterprise as you
can see in the lower part of the table.
After having an overview on different financial
statement, entrepreneurs should include the know-how on
financial ratio as taken from the textbook author
Morato(Morato 2016) for the formula on payback period,
cash payback period, return on sales, return on assets and
return on investment and applying the data from
“George’s Catering” (Celender 2020) can be computed as
follows:
TOTAL
INVESTMENT
PAYBACK PERIOD = ANNUAL NET
INCOME AFTER TAXES
To compute for the income payback period based on George’s Catering Balance sheet
on table 4, which specifies investments of $25,800 divided by net income after taxes of
$22,600 a year on table 1 , we can conclude that it would take around 1.14 years for the
enterprise to recover the investment.
(George’s Catering) 25,800
PAYBACK PERIOD = 22,600 = 1.14 YEARS
There is also the return sales (ROS) ratio where the entrepreneur calculates how
much profits the enterprise is earning for each peso sold. The formula is as follows:
NET PROFIT AFTER TAXES
RETURN ON SALES = SALES/INCOME
Substituting the variable into George’s Catering estimated figures on table 1 15500 x
2 = 31,000 income for a year:
22600
RETURN ON SALES = 31,000 =.71 or 71%
Return on assets (ROA) or return on investments (ROI) formula

ROA or ROI = NET PROFIT AFTER TAXES

TOTAL ASSETS / INVESTMENTS

Again, substituting the variables using George’s Catering estimated figures on table 1,

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net income after taxes of $22,600 a year and dividing it to total assets of 26800 on table 4
having a return on assets of 84%.
22600
RETURN ON ASSETS = 26800 = .84 or 84%
Consumer Requirements - According to Morato (Morato 2016). “Consumer
preferences refer to the tastier of particular groups of people. Some examples are the clothes
people wear the food they eat the music they listen to and the movies they watch”. This is
true for millennials because they are inclined with the technology; they usually are the first in
the house to patronize online shopping, movies and other trends. “The consumer’s age,
culture, and status affect their preferences“ (Morato 2016) A new normal culture being
created by the Covid 19 pandemic for quarantine in many areas in the world which limits
people to face interactions and mostly staying home have made people increase their
purchases online. Different delivery modes and services immersed to satisfy the demands of
the customers. These changes made entrepreneurs innovate to satisfy growing needs and
demands.

Let’s Apply (Pagyamanin)

Gawain 1
1. What is the payback period of Juan’s bakery if he invested P80,000 and a net income
of P50,000 a year?
A. 1.5 years B. 1.6 years C. 1.7 years D. 1.8 years
2. Pedro has a capital of P50,000 in his Electronics service business and earning P40,000
a year less expenses. What is his payback period?
A. 1. 25 years B. 1.35 years C. 1.4 years D. 1.5 years
3. What is the return on sales of Michael if he has a net income of P80,000 per year with
sales of P45,000 in every 6 month period?
A 80.9% B. 85.9% C. 88.9% D. 90.9%
4. What is the return on assets of Joe if he has a net income of P60,000 per year with a
total asset of P95,000?
A 60% B. 63% C. 65% D. 70%
Let’s Analyze - Subukin natin
Situation analysis
Tom wants to start his own bakery and pastries business in Evacom Paranaque where
he lives and most of his friends. He has the skills acquired from school and the strong will to
have his own shop. He has an initial investment earned from his previous job worth P40,000
so he plans to lessen the cost or expenses in renting a place and have its baking or production
area in their house instead. They also have a bicycle worth P5000 ready for a delivery for
nearby orders. The baking equipment he bought for his business is P30,000. He projected a
net income of P5,000 per month deducting the
cell phone load of 500 and a salary for his friend
in every delivery P800. Mostly, less cost of
operation because he is doing it online. To
increase his operation, he borrowed P5,000 to his
brother but will be returned to him without
interest in a year.

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 References
Cambridge University Press. (2020) “ Cambridge advance learners dictionary and thesaurus”.
Retrieved from https://dictionary.cambridge.org/us/dictionary/english/viability
Cambridge University Press. (2020). “Cambridge business english dictionary “. Retrieved from
https://dictionary.cambridge.org/us/dictionary/english/viability
WebFinance Inc. (2020). What is profitability? definition and meaning-BuinessDictionary.com.
Retrieved from http://www.businessdictionary.com/definition/profitability.html
Ramos,Timothy. (n.d.) Runrun.it.blog. Profitability analysis, why so important. Retrieved from:
https://blog.runrun.it/en/profitability-analysis/)
Artphotovideo. Royalty-free stock illustration. (2020) Digital illustration business viability. Image. Retrieved from
https://www.shutterstock.com/image-illustration/digital-illustration-business-viability-graphic-1741184534
Tashatuvango. Bigstockphoto (2020). Profit growth-image and photo. Image. Retrieved from
https://www.bigstockphoto.com/image-177192133/stock-photo-profit-growth-increase-concept-with-doodle-icons-around-on-
the-white-wall-background-profit-growth-inscription-on-modern-illustation-with-green-arrow-and-doodle-design-icons-around-
3d
Celender, Michael (2020). Income statement - example, format and explanation. Retrieved from
http://www.accounting-basics-for-students.com/income-statement-example.html#gallery[pageGallery]/1/
Celender, Michael. (2020) Accounting basics for students. Balance sheet and format (Vertical).
Retrieved from
http://www.accounting-basics-for-students.com/balance-sheet-example.html
Celender, Michael (2020). Four types of financial statements: Definitions, examples, objectives.
Retrieved from
http://www.accounting-basics-for-students.com/financial-statements.html
Morato Jr., Eduardo A., (2016). Entrepreneurship for K-12 Education. Rex Bookstore

Let’s Try (Evaluation)

Multiple Choice: Choose the best answer for the questions provided below

1. According to Morato, “In screening opportunities, the entrepreneur first has to

consider his or her preferences and ___________….”
A. Profitability B. Capabilities C. Viability D. Customer requirement
2. It is the ability as intended or to succeed; The degree of chance that something will
succeed
A. Profitability B. Capabilities C. Viability D. Customer requirement
3. The state or condition of yielding a financial profit or gain. It is often measured by
price to earnings ratio
A. Profitability B. Capabilities C. Viability D. Customer requirement
4. It is a customer preference
A. Profitability B. Capabilities C. Viability D. Customer requirement
5. Are all the investments in the enterprise like cash, account receivables, inventories,
land building and equipment
A. Income B. Assets C. Liabilities D. Equity

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Signature of Parent over printed name