Business Implementations, Forecasting and Ratio Analysis

• Business implementations drive activities to achieve business plan objectives.
• Entrepreneurs ensure team alignment with company goals through understanding and overseeing business implementations.
• A strategic plan ensures goal attainment and customer value.
• Effective business implementation gives companies a competitive advantage.

Forecasting and Ratio Analysis

• Entrepreneurs should assess expected revenue by forecasting daily, monthly, and annual income.
• Forecasting uses past and present data to predict future events and trends.
• Forecasting helps businesses identify risks and opportunities and allocate resources.
• Informed predictions from forecasting lead to well-informed decisions.

Factors to Consider in Sales Forecasting

• Both internal and external factors influence sales forecasts.
• Competitor performance impacts sales volume.
• Macroeconomic factors affect sales, solid economies are more accessible for sales.
• Events affecting the national or global economy have a positive or negative impact to some businesses.
• Regulations or legal requirements can impact your sales if your product or business structure is affected.
• Seasonal time of year impacts sales, ice cream shops have excellent projections for the summer while toy stores project big spikes around Christmas.
• Internal factors such as employees also affect sales forecasts.

How to Create a Sales Forecast

• Sales forecasts estimate the number of goods and services a business can sell over time.
• Sales forecasts also include production and sales costs, and estimated profits.
• Formulas:
  • Markup = Cost per unit x Desired Markup
  • Selling Price = Cost Per Unit x Markup Price
  • Projected Daily Revenue = Selling Price x Volume of Items Sold
  • Projected Items Sold Monthly = Items Sold Daily x 30 Days
  • Projected Monthly Revenue = Selling Price x Projected Items Sold Monthly
  • Projected Items Sold Annually = Items Sold Monthly x 365 Days
  • Projected Annual Revenue = Selling Price x Projected Items Sold Annually
• Example:
  • Ms. Mira Bella started “La Mirabella RTW Shop” in January 2022.
  • The shop specializes in fashionable ready-to-wear clothes.
  • Average daily sales were 20 summer dresses and 16 ripped jeans.
  • Summer dresses cost 83 pesos.
  • Jeans cost 215 pesos per piece.
  • A 50% markup covers business expenses and ensures profitability.

Adjusted Monthly Revenue Sales Forecast Based on Assumed Factors

• February to May sees 5% increase from previous revenue due to peak season
• June is a 10% increase from previous revenue due to the start of school season
• July to August is a 2% decrease in revenue from the previous month
• September to October is a 9% decrease in revenue from the previous month
• November is 6.5% increase in revenue from the previous month due to Christmas season
• December is a 14.7% increase in revenue from the previous month due to Christmas season

Ratio Analysis

• A financial ratio compares two company financial statement numbers to show their relationship.
• Standard Ratios are used to evaluate a company's financial health.

Profitability Ratio

• A financial metric assesses a company's profitability.
• Also it's ability to generate shareholder returns by comparing net income to revenue, assets, or equity.
  • Return on Investments (ROI). Is also called return on equity (ROE).
  • (ROI/ROE) compares income or profit after taxes to total stockholder's equity, specifically average stockholder's equity.
  • Average asset is calculated by adding the beginning and ending balances of total assets and dividing by two.
    • Formula: Return on Investment = Net Income / (Average Assets / 2)
    • Example:
      • Beginning total asset is P100,000.
      • Ending total asset is P25,000.
      • Net income of P30,000.
      • ROI = P30,000 / ((P100,000 + P25,000) / 2)
      • ROI = P30,000 / P62,500
      • ROI = 0.48
  • Operating Income Ratio (OIR).
    • Ratio shows the percentage of profit a company can generate from each peso of its investment.
    • Creditors prefer a higher ratio.
    • A desirable interest coverage ratio is 4:1 or higher. If this ratio decreases, the company's credit rating drops.
      • Formula: Operating Income Ratio = (Operating Expenses + Cost of goods sold) / Net Sales
      • Example: Apple reported total revenue or net sales of $59.68 billion for the period.
      • Total cost of sales (or cost of goods sold) was $37.00 billion, while total operating expenses were $9.59 billion.
      • OIR = ($37.00 billion + $9.59 billion) / $59.68 billion
      • OIR = 0.78
  • Return on Assets (ROA).
    • Measures how well a company has used its assets.
    • Calculated by dividing the operating income by the average total assets.
    • Using operating income instead of income after tax is important to focus on asset utilization related to operations.
      • Formula: Return on Assets = Operating Income / Average Total Assets
      • Example:
        • Net Income, $500,000
        • Total Assets, $2,500,000.
        • ROA = $500,000 / $2,500,000
        • ROA = 0.2

Financial Health Ratio

• Financial metric determines the company's capacity to pay its short-term and long-term obligations as they become due.
  • Stockholder's Ratio.
    • Stockholders' claims show the firm's long-term financial stability.
      • Formula: Stockholder's Ratio = Total Equity / Total Assets
      • A company has 1,000,000 total assets and stockholders hold 800,000 equity shares.
      • Stockholder Ratio = 800,000 / 1,000,000
      • Stockholder Ratio= 0.8
  • Debt Ratio.
    • Compares a company's total debt to its assets, to understand how much debt a company uses.
    • Companies with lower ratios use less debt and have a stronger financial position. On the other hand, higher ratios indicate a higher risk.
      • Formula: Debt Ratio = Total Liabilities / Total Assets
      • Company XYZ has total debt of $500,000 and total assets of $1,000,000.
      • Debt ratio = $500,000 / $1,000,000
      • Debt ratio = 0.5
  • Debt-to-Equity Ratio.
    • Shows how much of a company's balance sheet is financed by suppliers, lenders, creditors, and obligors compared to what shareholders have invested.
    • A lower percentage indicates less leverage and a stronger equity position.
      • Formula: Debt-to-Equity Ratio = Total Liabilities / Total Shareholder's Equity
      • Company ABC has a total debt of $1,500,000 and a total equity of $2,500,000.
      • Debt-Equity Ratio = $1,500,000 / $2,500,000
      • Debt-Equity Ratio = 0.6

Liquidity Ratio

• Refers to a company's ability to pay its short-term obligations or liabilities.

Quick Ratio (Acid-Test Ratio)

• Measures a company's short-term liquidity and ability to meet obligations with liquid assets.
• A ratio below one (1) doesn't imply bankruptcy but could depend on inventory or other assets.
• A higher ratio indicates better liquidity, but too high may mean excessive cash reserves.
• It may also mean that the company has a high accounts receivable, indicating that it may be having problems collecting its account receivables.
  • Formula: Quick Ratio = Quick Assets / Current Liabilities
  • Company XYZ has the following financial information:
    • Cash: $50,000, Accounts Receivable: $30,000
    • Inventory: $20,000
    • Short-term investments: $10,000
    • Current liabilities: $40,000
  • Quick assets = $50,000 + $30,000 + $10,000 / $40,000
  • Quick ratio = $90,000 / $40,000
  • Quick ratio = 2.25

Current Ratio

• Shows a company's ability to pay short-term bills and debts, comparing current assets to current liabilities.
• A ratio of 2:1 means that the company has P2 worth of current assets for every peso of current liability. A higher current ratio indicates better solvency and liquidity.
  • Formula: Current Ratio = Current Assets / Current Liabilities
  • A company has the following financial information:
    • Current assets of $100,000
    • Current liabilities of $50,000
  • Current Ratio = $100,000 / $50,000
  • Current Ratio = 2

Value Chain Analysis (VCA) Model

• The value chain represents a firm's internal activities when transforming inputs into outputs.
• Value Chain Analysis (VCA) involves identifying the primary and support activities of a particular organization or industry.
• It capitalizes on these activities to reduce costs or increase differentiation.
• The VCA model is applicable for both product and service types of business.

Primary Activities

• Inbound logistics.
  • Involves raw materials handling and warehousing.
• Operations.
  • Involves machining, assembling, and testing.
• Outbound logistics.
  • Involves warehousing and distribution of finished products.
• Marketing and sales.
  • Involves advertising, promotion, and pricing channel relations.
• Service.
  • Involves installation, repair, and parts.

Secondary Activities

• Firm infrastructure.
  • Involves general management, accounting, finance, and strategic planning.
• Human resource management.
  • Involves recruiting, training, and development.
• Technology development.
  • Involves research and development and product or process improvement.
• Procurement.
  • Involves purchasing raw materials, machines, and supplies.

Managing Human Resource

• The People Strategy
  • It is designed to inspire and achieve company-wide alignment on goals that concern the people.
  • An organization's prioritized people plan that enables a business to be successful.
  • Achieved by attracting, developing, retaining, and inspiring the workforce.
• The Eight (8) Rs of HR (Morato, 2016)
  • Recruiting –
    • Process of finding and attracting potential resources for filling up vacant positions in an organization.
    • Sources candidates with the abilities and attitudes required for achieving the organization's objectives.
  • Routing
    • When people are hired, their potential must be assessed regarding their ability to contribute in various functions and responsibilities several years later.
    • The more versatile a recruit is, the more opportunity the person has to assume multiple organizational roles.
  • Retaining –
    • Holding on to people.
    • Provided that a company wants to keep them in the first place.
    • May involve giving just wages that would satisfy the minimum basic needs of employees.
    • Beyond the minimum basic needs, people in the workplace also aspire to work-life balance.
  • Resonating –
    • Emphasizes that employees must embrace and internalize the company's goals to achieve these goals efficiently.
    • People's productivity tends to improve when the employee's personal goals are realized while they are in the company.
  • Reviewing -
    • Measuring and evaluating employee performance with the organizational goals.
    • Employees' potential can be measured through existing job requirements or prospective job promotions.
  • Rewarding –
    • Concerned with compensating, giving incentives, and recognizing employees for their work, loyalty, and accomplishment, which can be monetary or non-monetary.
  • Retooling –
    • Re-orienting employees to the new directions of the enterprise.
    • This includes giving updates about the performance of an organization in a quarter or a year.
    • Includes changing attitudes and behavior that do not help the organization's progress.
    • Creating a healthier corporate culture, and adopting more responsive approaches to superb customer service.
  • Recycling –
    • This allows employees to change jobs or even careers.
    • Allows workers to reinvent themselves to choose whether to seek job alternatives inside or outside the organization.

Business Model Canvas (BMC)

• A plan that outlines financial goals.
• A business model canvas explains who the customer base is, how a business provides value to them, and the specifics of financing that go along with it.
• It lets businesses define these parts on a single page.
• Provides information about a company's target market, the market need, and the role the market offerings will play in satisfying those needs.
• The business model canvas consists of nine (9) components, which are:
  • Customer Segment –
    • The various groups of people or organizations that an enterprise aims to reach and serve.
    • Business model is centered on customers.
    • No business can last long without (profitable) customers.
  • Customer Relationship –
    • Relationships can be personal or automated, transactional or long-term, and the goal can be to get new customers, keep existing ones, or increase sales.
    • The overall customer experience is significantly influenced by the customer relationships you establish.
  • Channels
    • Ways a company reaches out to specific customer groups.
    • Channels are situated in BMC between Customer Segments and Value Propositions.
    • Businesses can tailor a particular value to a particular customer segment through the appropriate channel with this layout.
  • Revenue Streams –
    • Crucial and should align with the business model's cost structure.
    • The profit or loss of the business is the difference between the cost and the revenue streams.
    • Where a business can verify the business model's profitability.
  • Key Activities –
    • A business must take these most crucial actions to run smoothly.
    • They are needed to reach markets, maintain customer relationships, create a value proposition, and generate revenue.
  • Key Resources
    • Necessary for each business model.
    • A company can reach markets, maintain relationships with customer segments, and generate revenue
    • Distinct Key Resources are needed.
  • Key Partners
    • Relationships a business has with other people or organizations that make the business model work, such as suppliers, manufacturers, or advisors.
    • These partnerships are necessary in areas where the company alone would be inefficient.
  • Cost Structure
    • The idea of a cost structure is to help figure out how to focus on innovation and developing a value proposition.
    • Businesses can aim to cut costs and get the most out of every cost the business incurs by comprehending cost structures.
  • Value Proposition
    • Customers choose a business over others because of its value proposition, which meets their needs or solves the customers' problems.
    • Each Value Proposition is a set of products and services designed to meet the needs of a particular customer segment.

Business Permits and Licenses

• Launching a business may seem like the next step, but opening a business in the Philippines requires obtaining several business permits and licenses.
• Business owners must identify the type of business they have to determine their requirements.
• List of permits according to Tycoon PH:
  • Bureau of Internal Revenue(BIR) Tax Identification Number:
    • To acquire all the necessary permits and licenses for your business, you must have a tax identification (TIN) number issued by the Bureau of Internal Revenue.
    • At the end of each fiscal year, business owners must submit a tax statement using their TIN.
  • Barangay Clearance:
    • Certifies that your business complies with the requirements of the barangay where it is situated.
    • Must submit a community tax certificate or cedula, a duly accomplished form, and a valid government-issued ID.
  • Department of Trade and Industry (DTI) Business Name Registration Certificate:
    • Required to obtain a registration certificate from DTI, which will be valid for five years.
    • Enables one to use a trading name for any business-related operation.
    • It Also protects the business name from being used by others.
    • Applicants must be Filipino citizens and should be at least 18 years old.
    • Certain businesses like dental clinics, hospitals, brokers, and services may need additional requirements.
    • Fees will depend on the scope of your business.
  • Mayor's Permit/ Business Permit:
    • Business permit from the mayor's office ensures your business is safe under your city or town's ordinance.
    • Must register previously the business first with DTI for self-employed individuals and the Securities and Exchange Commission (SEC) for corporations and partnerships.
    • Business permits in the Philippines must be renewed annually.
  • Securities & Exchange Commission (SEC) Registration Certificate:
    • Required if your business falls under the corporation or partnership categories.
    • Ensure to bring a name verification slip, articles of incorporation and by-laws, and a joint affidavit of two incorporators to change the corporate name.
    • Non-stock corporations must submit a list of members certified by the corporate secretary, the list of the names of contributors or donors, as well as the amounts contributed or donated certified by the treasurer.
  • Businesses with employees must secure government-mandated permits from the following:
    • Social Security System (SSS).
      • SSS Employer's Registration will ensure employees are covered with insurance benefits like sickness, disability, maternity, and death per Republic Act No. 8282.
    • Philippine Health Insurance Corporation (PhilHealth).
      • PhilHealth Employer's Registration will cover their employees' health insurance.
    • Pagtutulungan sa Kinabukasan: Ikaw, Bangko, Industriya at Gobyerno (Pag-IBIG).
      • Pag-IBIG Employer's Registration will benefit employees who intend to apply for housing loans.