7 LESSON author of Essentials of Management).

From the economist

MANAGING THE ENTERPRISE point of view, management is one of the factors of
production, together with land, labor and capital. From a
sociologist view, management is a class and status
Without efficient and effective management, a system which requires an elite of intelligence and education.
business organization cannot survive. Peter Drucker, a
world class management consultant, said that the first Management is the process of coordinating the
function of a business enterprise is economic performance resources of the organization in order to achieve its primary
which is measured in terms of profit. Such economic goals, according to Robert Hughes author of Business. It is
success means development and growth for the enterprise. also the job of the entrepreneur. Organizations depend on
Without profit a business organization cannot sustain its four kinds of resources such as material, human, financial,
existence. and informational.

Management as an Art and a Science

Learning Objectives
At the end of the lesson, you are expected to: Management is both an art and a science. It is an art
1. Define management from the point of view because management requires skills or techniques in
of the economist, sociologist, businessman. dealing with people in order to get things done or to achieve
2. Determine if management as an art or a organizational goals. It is a science because it uses an
science. organized, clear and pertinent knowledge. Management is
3. Identify the resources used in production. systematic and uses scientific methods of solving business
4. Explain the role of management and its basic problems.
functions..
5. Enumerate the characteristics of successful
managers. Production Resources
6. Discuss and explain the theories of
Material resources. These refer to tangible, physical
resources which are used for production. Examples are
Management Defined steel, cement, books, chairs, etc.
Financial resources. These refer to the funds of the
Management is a process by which a cooperative enterprise which are needed for various purposes.
group directs actions towards common goals (Joseph Massie
 Human resources. These refer to the people who Characteristics of Successful Managers
plan and implement business activities and considered as
the most important resources. Efficient and effective managers possess skills that
Informational resources. Correct and complete are vital in performing their functions. However, such skills
information is vital to the success of any business are only productive if these are used properly. Here are the
organization. key management skills:

1. Technical skills. Lower-level managers are better

The Role of Management managers if they know the technical aspects of the
job. Even top-level managers need technical skills.
The role of business management is not only to
maximize profits for its stockholders, but also to help the 2. Conceptual skills. The person who can conceptualize
jobless. Such very precious human resources constitute an the future of the business is in better position to
enormous economic waste if they are not used in the introduce innovation for business success. In fact
production of goods and services. It is the social business opportunities are products of ideas or
responsibility of the management to employ such resources dreams.
for the good of the economy and society.
3. Interpersonal skills. The ability to relate well with
people is important in business. An entrepreneur who
Basic Functions of Management establish goals
and develop
understands the needs and motives of individuals, and
plans
shows compassion and sincerity is more likely to
The management’s role is succeed. People are the most important assets of a
very important and crucial in the maintain
organize
people and
business. They must be treated with dignity.
sufficient MANAGEM
attainment of business success or control system ENT other
resources

undertakings. The figure presented 4. Diagnostic skills. An entrepreneur or manager must

shows the basic functions of the lead and
be able to identify or evaluate the problems of the
management. motivate
people enterprise. Such skills are needed to correct or
prevent situations from getting worse. A manager
that can prevent problems from taking place is much
The Basic Functions of Management
better than a manager who can solve problems,
 5. Analytic skills. Analyses are essential in all aspects planned. Taylor claimed that most people work only
of the business operations. Such skills are also to earn money. This paved the way for the
needed in formulating goals and strategies, problem emergence of the piece-rate system. Because of his
solving, and decision-making. contribution to management, Taylor became the
“Father of Scientific Management”.

Theories of Management
Frederick Winslow
[Link] by Objectives (MBO). Taylor
This is based on team work and team
results according to Peter Drucker. All 3. The Hawthorne Studies of Elton Mayo. This
members of the organization focus their theory asserts that human factors are as important as
efforts towards the attainment of a pay rat es as far as motivation
common goal of the organization. Each is concerned. It further
subordinate manager formulates his own asserts, that employees who
objective in relation to the objective of top are happy and satisfied in
management. Since all managers are all participants
Peter Ferdinand Drucker their work can be motivated
they feel more receptive in to perform better. Thus,
implementing the objective. management should provide
a favorable environment to
2. Scientific Management of Taylor. Taylor (1800) is maximize satisfaction of
interested in improving efficiency of workers based on workers or employees.
his bitter personal experiences as an employee of
manufacturing plants. He suggested that each job
should be broken down into separate tasks. Then George Elton
management should determine the best way to Mayo
perform such tasks, and the job output to expect.
Next, management should get the best person for 4. Theory X and Theory Y of Mc
each job and train him to do the job properly. Finally, Gregor. Theory X assumes that
management should cooperate with workers to make workers dislike work, thus, managers
sure that jobs are done as should force them to attain the goals
of the enterprise. The managers
 make all the decisions while the workers just take
orders. In the case of Theory Y, it assumes that work
is an important part of the lives of people that people
are responsible and therefore committed to the goals
of the enterprise if these provide them personal The Hierarchy of Needs by Maslow
rewards; and that enterprises do not, in general, fully
use their human resources. Mc Gregor claimed that
most managers act in accordance with Theory X. he 6. Theory of Herzberg. Herzberg discovered that the
recommended Theory Y as the more effective guide factors most frequently associated with satisfaction
for managers. are achievement, recognition, responsibility,
advancement and growth, together with work itself.
5. Hierarchy of needs of Maslow. Maslow assumed These factors are generally called motivation actors.
that people seek to fulfill various needs Their absence, however, do not necessarily result to
based on their sequence of importance. dissatisfaction of employees. Factors that caused
dissatisfaction are supervision, working conditions,
The aforementioned hierarchy of needs interpersonal relationship, pay, job security, and
provides a good knowledge and guide company policies and administration.
for management on how to motivate its
employees to work more efficiently. By This clearly shows that there are specific factors which
are responsible for satisfaction and dissatisfaction. It
their very nature, people work hard to can be basis for management in their decisions and
satisfy their various needs. policy-making.
Abraham Harold Maslow

self-actualization
(fulfillment)

esteem
(respect, recognition
and honor)

social
(love, affection and belongingness)

safety
(job secuirty, health insurance, pension plans)

physical/physiological
(food, clothing and shelter)
 Risk Management
Herzberg’s Theory
Risk is the possibility that a loss or injury will take
place. In business, there is always risk, such as wrong
7. Theory Z. This is a contemporary theory of decisions, poor management, or negative business
management authored by Prof. William Ouchi of the environment. However, if these risks cannot be avoided,
University of California, Los Angeles in 1970s. he they can be minimized by the following:
maintains that the best features of the Japanese and
American firms should be fused. It appears that the 1. Employee safety program
essence of Theory Z is the high level participation of 2. Proper safety equipment
employees in decision-making. 3. Burglar alarms, security guards and guard dogs
4. Fire alarms, sprinkler system and similar safety
measures
5. Accurate accounting and financial controls

The common types of non-criminal business risks are:

1. Fire. This is the first fear o any business and

can eliminate their risks through fire
Prof. William Ouchi insurance. However, there are those that are
not covered by the fire insurance like lost
Theory Z customers, records and other valuable assets.
A much better risk protection program is
prevention measures.
Japanese American
Theory Z
Corporations Corporations
2. Natural calamities. These can ruin
lifetime employment short-term employment longtime employment business. Flood, typhoons, earthquakes are
collective decision making individual decision-making collective decion making
not included in the insurance coverage.
collective responsibility individual responsibility individual responsibility
slow promotion rapid promotion slow promotion
These risks can be minimized by proper
holistic concern for explicit control informal control choice of business location.
employees mechanism moderately specialized
implied control specialized career paths career paths
mechanism segmented concern for holistic concern for
nonspecialized career employees employees
paths
3. Personal liabilities. These are business Other business risks are as follows:
connected risk s. For example, a customer is
injured inside the store. A customer got sick in These are business risks which are criminal in nature.
eating the product of the enterprise. Such 1. Burglary. There is a need to protect
incidents may result to law suits. Such risks can inventories, supplies, equipment, etc.
be prevented or minimize by proper facilities or by providing safety facilities. Others
quality control program. use dogs, guards and alarm systems.

4. Economic problems. Recessions, depressions, 2. Robbery. Installation of proper alarm

inflation, and massive unemployment can devices, lighting facilities and other
reduce sales of goods and services which will preventive measures can eliminate robbery.
lead to sharp fail in demand or purchasing
power of consumers. the ability to adjust to 3. Shoplifting. Aside from professional
such changing economic conditions is a plus shoplifters, other consumers are possible
factor. Adequate financial resources during bad threats. Store lay-out, mirrors and CCTV can
times for business can be a good protection help eliminate this risk.
from business losses.
5. Business interruptions. Strikes of 4. Employee theft. Avoid temptations of employers,
employee s and suppliers pose a great such as open storage rooms. Desks, cash registers
business risk. Awareness of such problems and others. There should be strict
can help the entrepreneur prepare for the hiring policy for personnel involved in
unexpected. The entrepreneur must have the handling of money and
good bookkeeping strategy. However, a products.
strong financial position greatly helps the
enterprise survive during such business
interruptions.

6. Loss of key personnel. The resignation

of important employees is a big blow to
the business enterprise.
How far have you learned?
1. What is common in the definition of management
as viewed by the economist, sociologist, and
businessman?
2. Is management a science or an art? Expound.
3. What are the basic functions of management?
4. What are the characteristics that successful
managers manifest?
5. What are the theories of management? Explain
two theories.
6. In your own opinion, define risks.

Learning Activities
1. Interview a business manager. Find out what
management theories he professed. Why he chose
LESSON 8
that particular management theory? FINANCIAL MANAGEMENT
2. Read the success story of Socorro Ramos the owner
of the National Bookstore. Identify the risks that her
business faced and how she coped up. Financial resources are the lifeblood of a business
enterprise. It is needed to start up a business and finance
business operations, expansions and many others. Small
entrepreneurs basically have inadequate capital, hence,
they should be able to identify possible sources of funds.
But most importantly, management of funds is needed to
ensure that financial resources are planned and controlled.
In the absence of efficient financial management, new
business will simply fail.

Learning Objectives
At the end of the lesson, you are expected to:
1. Define financial management.
2. Identify sources of funds where
entrepreneurs may borrow.
3. Describe the nature of a good financial
management.
4. Outline the steps involved in financial
 they become prosperous. Example, HENRY SY started as
door-to-door salesman of shoes. Afterwards, he put up a
shoe store in Rizal Avenue. He is now the owner of SM, a
chain of department stores. Evidently, he knows how to use
his financial resources.

Sources of Funds
1. Usurers or those granting 5-6
2. Cooperatives
Usually charge 1% interest plus a nominal
service charge
Ex. Of successful cooperatives
Farmer’s coop in Tarlac organized by Ka
Dante Buscayno
San Dionisio Credit Cooperative in
Paranaque
Financial Management Defined -it started with 28 members and
P380 capital. Today, it is the biggest
Financial Management refers to activities that are cooperative in the country with 15000 members
concerned with securing money and using it properly. The and 75M assets. Even PLDT, CB, SMC have
entrepreneur as financial manager must determine the best credit cooperatives.
ways to raise money and how to use it effectively in
realizing the goals of the enterprise. 3. PNB, DBP, LBP – have own programs for small and
medium-scale enterprises
Basically, finance is the art and science of managing 4. NGOs like Meralco Foundation, Philippine Business
money. This means it include both individual skills and for Social Progress
methods of getting and using financial resources. Some 5. Equity fund – use of own capital
people have plenty of money, but they did not know how to
use it. So they become poor. On the other hand, others Other Sources of Fund
have no money, but they know how to get and use it. So 1. Short-term financing (one year or less)
 a. Trade credit – goods on consignment basis Mortgage bonds – secured by the assets of the
b. Promissory notes – is a written pledge by a issuing corporation
borrower to pay a certain sum of money to a lender Convertible bonds – can be exchanged with shares
at a specified future date which entails INTEREST of common stock
c. Unsecured bank loans – granted by commercial
banks based on customers credit ratings.
The Nature of a Good Financial Management
d. Commercial paper – is a short term promissory
note issued by big corporations. Commercial paper Next to people, money is the most important resource
is secured only by the reputation of the issuing of any business organization. Without money, there is no
corporation. There is no collateral involved. business at all. Money is needed to sustain activities like
production and marketing.
2. Long-term financing (more than 1 year)
a. Loans – from banks and other financial institutions, Good financial management can ensure the following:
require collaterals, and terms of payment are 1. Financing priorities are established in accordance with
indicated in loan agreement organizational objectives;
2. Spending is planned and controlled in line with
b. Stock – this is certificate of ownership established priorities;
Common stocks – the owner can elect directors 3. Adequate funding is available when it is needed, now
and can decide major corporate actions and in the future; and
Preferred stocks– owners have no voting rights 4. Funds are obtained and used efficiently.
but have priority in claiming for profits and
assets of the corporation
c. Bond - this is certificate of indebtedness. It Steps Involved in Financial Planning
pledges to repay a specified amount of money with
interest, indicated its maturity date. Financial plan is a course of action for obtaining and
using the money that is needed to implement the goals of
Classifications of bonds: the business organization. Budget is an estimated or
Debenture bonds – supported only by the projected program of expenses and incomes over a
reputation of the issuing corp. specified future period. The following steps are suggested
in financial planning:
 goals, or will a conservative portfolio be a better
Step 1: Establish the Goal / Relationship option for you?
The purpose of establishing the goal or relationship is to form
the foundation or purpose of planning itself. Financial planners do 3. Also, how far along are you in your goals?
this by asking open-ended questions, which are questions that
cannot be answered by a simple yes or no. 4. Do you have any money saved yet?
Here some examples of open-ended questions you can use
in your own planning: 5. Do you have life insurance?
1. Do-it-yourselfers can fulfill this step by simply getting to know
themselves a bit better with open-ended questions, like these: 6. Do you have a will?
What are your feelings about investing?
2. Why do you think you feel that way? 7. Do you have children? If so, what are their ages?
3. What are some of your earliest memories and resulting
experiences of financial planning (i.e., first savings account, Step 3: Analyze the Data
first checking account, and first credit card)?
4. What are your financial strengths? You've gathered the relevant data, now can analyze
5. What are your financial weaknesses? it! Continuing the retirement planning example in Step 2,
6. How do you plan to save enough for retirement? the data you've gathered can help you arrive at some basic
Step 2: Gather the Relevant Data assumptions. Let's assume you have 30 years until
retirement, you've already saved P50,000, you expect an
8.00% return on your investments, and you can save P2500
The relevant data you gather is required to make
per month going forward.
recommendations for the appropriate strategies and
financial products to reach your goals.
Step 4: Develop the Plan
1. For example, what is your time horizon? Do you want
to accomplish this goal in five years, 10 years, 20 Let's say you need P1 million to reach your goal. The
years, or 30 years? previous assumptions (in Step 3) made you about P100,000
short of your goal. If you can handle taking more market
2. What is your risk tolerance? Are you willing to accept risk, you could increase your exposure to stocks in
a high relative market risk to achieve your investment an aggressive portfolio of mutual funds and assume a 9.00%
rate of return.
 If all other assumptions remain the same, and by rates, inflation, stock market fluctuations, and economic
increasing your expected return by 1.00%, your 30-year recessions.
time horizon, and savings rates would bring you to a nest
egg worth nearly P1.2 million! But what if you want to keep An additional step: Step 7. Updating the Plan.
the rate of return at 8.00%? You could increase your savings
rate to P300 per month and still come close to your goal Some financial planners consider this to be part of
with P990,000. monitoring but it's helpful to remember that plans often
require updating.
Step 5: Implement the Plan

Implementing the plan means you are putting your Evaluating Financial Performance
plan to work! But as simple as this sounds, many people find
that implementation is the most difficult step in financial The entrepreneur as a financial manager should adopt
planning. Although you have the plan developed, it takes ways of monitoring and evaluating financial performance.
discipline and desire to put it into action. You may begin to Interim budgets (weekly or monthly) maybe prepared and
wonder what may happen if you fail. This is where inaction compared with interim reports of sales and expenses. Such
can grow into procrastination. comparison can pinpoint areas which need additional or
revised planning.
Step 6: Monitor the Plan

It's called "financial planning" for a reason: Plans The Income Statement
evolve and change just like life. Once the plan is created,
it's essentially a piece of history. This is why the plan needs It compares the sales revenues and operating
to be monitored and tweaked from time to time. Think of expenses in a given period, usually one year. If revenues
what can change in your life, such as marriage, the birth of are greater than expenses, it means profits.
children, career changes and more.

These life events may require new perspectives or XYZ COMPANY

changes to your financial plans. Now think events or PRO-FORMA INCOME STATEMENT
changes beyond your control, such as tax laws, interest For the year-ended, December 2019

Revenues:
Service fees
4,278.00
Membership fees 110.00
Interest income 21,284.87
-------------
TOTAL
25,672.87
 cash within one year. Fixed assets are properties like land,
building, equipment, machine, vehicle and the like.
Liabilities are debts of the enterprise such as taxes, loans
and other payables. Capital or net worth represents the
contribution of the owners to the enterprise, examples are
retained earnings and invested capital.

XYZ COMPANY
PRO-FORMA BALANCE SHEET
As of December 31, 2019

ASSETS

Current Assets:
Cash P 14,291.11
Loans Receivable P134,500.08
---------------
TOTAL ASSET P148,792.09
The Balance Sheet vvvvvvvvvvvv

It is composed of three basic parts: assets, liabilities L I A B I L I T I E S & MEMBER’S EQUITY

and capital. It shows what the enterprise owns, what it Member’s Equity
owes, what the owner has invested, and the accrued profits Share capital
or losses. Entries in the balance sheet are based on the P120,426.35
conventional accounting equation: Retained earnings Dec. 31, 2010 P
28,365.74
Assets = liabilities + capital Basic Financial Ratios ----------------
TOTAL LIABILITIES & MEMBER’S EQUITY P148, 792.09
Assets are classified as CURRENT and FIXED assets. vvvvvvvvvvvv
Financial ratios are relationships determined from a
Current assets are cash and those that are convertible into company’s financial information and used for comparison
purposes. Examples include such often referred to highly conservative business approach. On the other hand,
measures as Return on Investment (ROI), return on assets a high ROI can mean that management is doing a good job,
(ROA), and Debt to Equity Ratio. These ratios are the result or that firm is undercapitalized.
of dividing one account balance or financial measurement
with another. Usually these measurements or account Return on Assets. Net Income/Total Assets –
balances are found on one of the company’s financial indicates how well the company is deploying its assets. A
statements – balance sheet, income statement, and cash very low return on asset, or ROA, usually indicates
flow. inefficient management, and vice versa. However, this ratio
can be distorted by depreciation or any unusual expenses.
Financial ratios can be an important tool for small
business owners and managers to measure their progress Debt to equity ratio. Debt/Owner’s Equity –
toward reaching company goals, as well as toward indicates relative mix of the company’s investor-supplied
competing with larger companies. Ratio analysis, when capital. A company is generally considered safer if it has a
performed regularly over time, can also help small business low debt to equity ratio – that is, a higher proportion of
recognize and adapt to trends affecting their operations. owner-supplied capital – though a very low ratio can indicate
Yet another reason small business owners need to excessive caution. In general, debt should be between 50
understand financial ratios is that they provide one of the and 80 percent of equity.
main measures of a company’s success from the
perspective of bankers, investors, and business analysts. Features of a Good Accounting System
Often, a small business’s ability to obtain debt or equity An accounting system is something that is:
financing will depend on the company’s financial ratios. 1. Simple to understand
2. Flexible and adaptable to changing needs
Return on Investment. Net Income/Owner’s Equity 3. Inexpensive to operate
– indicates how well the company is utilizing its equity 4. Little time to operate
investment. Due to leverage, this measure will generally be 5. Handy and convenient to use
higher than ROA. The ROI is considered to be one of the
best indicators of profitability. It is also a good figure to Basic Books to Keep
compare against competitors or an industry average. Any business whether small or big, newly start-up or
Experts suggest that companies usually need at least 10-14 established should need to maintain various books of
percent ROI in order to fund future growth. If this ratio is accounts, such as:
too low, it can indicate poor management performance or a
1. Purchase journal – for credit purposes Write your insights on a page paper. Limit your
2. Sales journal – for credit sales answer in 500 words.
3. Cash disbursement journal – payments on cash basis
4. Cash receipt journal – all cash sales and payments
from credit customers

How far have you learned?

1. In your own words, define financial management.

2. What are the sources of funds for short-term

financing? For long-term financing?

3. Is there a need for financial management? Why?

4. How financial managers evaluate financial

performance? Differentiate balance sheet from
income statement.

5. When can we say that an accounting system is

good?

6. Enumerate the basic books to keep in business.

Describe each.

Learning Activity
1. Read the success story of Jack Simplot and Daniel
Ludwig. How they raised funds needed to start up
their business? Which way is better? Why?