Business Plan: Organizing and Planning a New Venture - PDF

save this data, do nothing CHAPTER 6 THE BUSINESS PLAN BANO, IRISH JANE C. CAPUYAN, LANCE ADAM SIACOR, JOSHUA M. INTRODUCTION: Venturing into a new business organization demands or necessitates a plan. A business plan that is well - researched and well - done is by itself an insurance against...

save this data, do nothing CHAPTER 6 THE BUSINESS PLAN BANO, IRISH JANE C. CAPUYAN, LANCE ADAM SIACOR, JOSHUA M. INTRODUCTION: Venturing into a new business organization demands or necessitates a plan. A business plan that is well - researched and well - done is by itself an insurance against the illusive success that every entrepreneur is looking forward to. Preparing a business plan is not easy. It is well-written, honest-to-goodness document prepared by the entrepreneur that will convince resources and should be recognized. It Is the direction and guide of the entrepreneur as to what is to be done and how to do it. It details out what is to be achieved over a certain period of time. Planning and organizing enterprise demands, proper evaluation of the resources, skills, interests and attitudes together with the needs of community and degree of competition. Objectives: Identify the importance of business planning and its advantages, as well as the step by step procedure in preparing a business plan Enumerate the factors and other necessities on how to manage and start a business successfully. ORGANIZING THE ENTERPRISE, PLANNING THE ENTERPRISE CONCEPT OF A BUSINESS PLAN “A well written business plan is one that contains all information necessary for the financing source to make a decision even without taking the entrepreneur.” - Anonymous Authors Hisrich and Peters' definition of a Business Plan It is a written document prepared by the entrepreneur that describes all the relevant external and internal elements involved in starting a new venture. It is an integration of functional plans such as marketing, finance, manufacturing, and human resources. It also addresses both short-term and long- term decision-making for the first three years of operation. The business plan also takes care of the concerns of the potential investors in the business project, the suppliers, the funding requirements, and all required to commence the business and hopefully make it as a successful business venture. David E. Gumpert's concept and definition of a Business Plan A business plan is a document that convincingly demonstrates the ability of a business to sell its products or services to make satisfactory profit and be attractive to potential backers. A better definition: A business plan is a selling document that conveys the excitement and promise of your business to any potential backers or stakeholders. Other definition of a Business Plan from the books of Entrepreneurship It is thinking ahead of objectives, strategies, financing, production, marketing, profit prospects, and growth possibilities. However, business planning should be realistic. This means planning is based on the available resources and is responsive to the needs of the community. It is also: What to do How to do it When to do it What to expect in the future Business planning involves the attainment of goals and the ways to accomplish such goals. Principles of Planning Here are some principles of planning which have general application, particularly for micro and small business: 1. Planning must be realistic. It must be based on the available resources: human, financial, and physical resources. 2. Planning must be based on felt needs. The objectives of an entrepreneur should fit the needs of the people in a community. It can be known through observation, personal interviews, and questionnaires. 3. Planning must be flexible. Resource needs and economic conditions change. Planning should be adjusted to such changes to be effective and relevant. 4. Planning must start with simple projects. STAGES OF BUSINESS PLANNING (by PROFESSOR PHILIP KOTLER) 1. Unplanned stage. At the start of the business, the owner- manager is busy looking for funds, customers, materials, and equipments. He has no time for planning. His entire attention is devoted to the daily operations of his business in his intense desire to survive. 2. Budgeting system stage. Eventually, the owner-manager realizes the need to develop and use a budgeting system. Estimated income is made to facilitate the orderly function of the growing enterprise. 3. Annual Planning stage. The owner-manager drafts an annual plan. He can use either the top-down planning or bottom-up planning. In a top-down approach, he provides the goal and let the employee comply with it. While in a bottom-up approach, he encourages his employees to participate in planning the goals and strategies. 4. Strategic Planning stage. As the business enterprise becomes bigger, a long-range planning is needed. CRITERIA OF EFFECTIVE PLANNING 1. The plan should state clearly its objectives. Such clear statement is necessary so that those who will be involved in the execution of the plan will understand, accept, and support it. 2. The plan should provide measures for a satisfactory accomplishment of the objectives in terms of quantity, quality, time, and cost. 3. The plan should state the policies, which should guide people in attaining the objectives. 4. The plan should indicate what department or unit would be involved in accomplishing the objectives. It may or may not spell out the procedures for performing the required work. 5. The plan should indicate the time, which should be allowed for each activity. It may be necessary to establish a target data for completing the activity. 6. The plan should specify the required resources and their corresponding costs. 7. The plan should designate the officers who will be held accountable for the accomplishments of the objectives. COMPONENTS OF BUSINESS PLANNING 1. SWOT. The chances of a product or service can be evaluated through the SWOT analysis. Every product or service has its own strength, weakness, opportunity, and threat. Planning should include the improvement of the product/service in order to survive competition. 2. Objectives. These should be specific and realistic. Such objectives can be daily, weekly, monthly, and yearly. 3. Strategies. These are ways of accomplishing the objectives. Such ways are stated in the financial, production, marketing, and organizational plans of the enterprise. 4. Time Frame. In business, time is gold. For this reason, an entrepreneur must be efficient in time management. Characteristics of a Sound Business Plan 1. Objective 2. Clear 3. Logical and simple 4. Flexible 5. Stable 6. Complete and integrated WHY DO WE NEED A BUSINESS PLAN? There are several reasons why a written business plan is necessary: 1. to project general picture of the business project; 2. to serve as a guide in implementing the business or project; 3. to serve as a major input to investment decisions or major expenditures; 4. to serve as reference or guide to policy formulation and development; 5. to serve as guide for operational matters; 6. to serve as a reference for a bank loan or financing purposes; 7. to determine/estimate the detailed technical and financial requirements; and 8. to serve as an overall guide for the proponent or entrepreneur. David Gumpert believed that business plan is a selling point. With a business plan, you sell the entire company as a package. He cited the following reasons for doing a business plan as follows: 1. to sell yourself as a business; 2. to obtain a bank financing; 3. to obtain investment funds; 4. to arrange strategic alliance; 5. to obtain large contracts; 6. to attract key employees; 7. to complete mergers and acquisition; and 8. to motivate and focus your management team. Obtaining the facts for a business plan Here are questionnaires to get necessary data: 1. What is unique about my product/service? 2. Who are my competitors? 3. How will my customers buy? 4. What is my share in the market? 5. What is the market potential? 6. Who are my customers and where are they located? 7. Where will I put my business? 8. How big should be my plant or place of business? 9. What equipment will I need and what size? 10. How will I treat customers? 11. What personnel do I need? 12. How will I organize my enterprise? 13. What kind of records do I need? 14. How much capital do I need? 15. How profitable will the business be? 16. How financially healthy will I be? 17. What is my break-even point? OUTLINE OF A BUSINESS PLAN There are many books and literature about the format in doing a business plan. Anyone of them can be used as a guide in full or in part depending on the context and scale of the business proposition. As a general rule, however, the business plan format should have at least four major components, namely: the marketing plan, technical plan, financial plan, and the organizational plan. Sample Format From Hisrich and Peters I. Introductory Page A. Name and address of business B. Names and addresses of the principals C. Nature of Business D. Statement of Financing needed E. Statement of confidentiality report II. Executive Summary III. Industry Analysis A. Future outlook and trends B. Analysis of Competitors C. Market segmentation D. Industry Forecasts IV. Description of Venture A. Product(s) B. Service(s) C. Size of Business D. Office equipment and personnel E. Background of entrepreneurs V. Production Plan A. Manufacturing Process (amount subcontracted) B. Physical Plant C. Machinery and Equipment D. Names of suppliers of raw materials VI. Marketing Plan A. Pricing B. Distribution C. Promotion D. Product of Forecast E. Controls VII. Organizational Plan A. Form of Ownership B. Identification of partners or principal shareholders C. Authority of principals D. Management-team background E. Roles and responsibilities of members of organization VIII. Assessment of Risk A. Evaluate weakness of business B. New technologies C. Contingency plan IX. Financial Plan A. Pro forms income statement B. Cash flow projections C. Pro forma balance sheet D. Break even analysis E. Sources and applications of funds X. Appendix (contains back-up material) A. Letters B. Market research data C. Leases or contracts D. Price list from suppliers Outline of a Business Plan From other books of entrepreneurship: Cover sheet: Name of business, name of principals, addresses, and phone numbers Business Goals Strategies Table of Contents Section 1 The Business A. Description of Business B. Product/Service C. Market D. Location of Business F. Management G. Personnel H Application and Expected Effect of Loan (if needed) I. Summary Section 2: Financial Data A. Sources and Application of funding B. Capital equipment list C. Balance Sheet D. Break-Even Analysis E Income Projections (profit and loss statements) a. Five-year summary b. Detail by month for first year c. Detail by quarter for second, third, fourth, and fifth years d. Notes of Explanation F. Cash Flow Projection a. Detail by month for first year b. Detail by quarter for second, third, fourth, and fifth years c. Notes of explanation G. Deviation Analysis H. Historical financial reports for existing business a. Balance sheet for past five years b. Income statement for past five years c. Tax returns Section 3: Supporting Documents Personal resumes, personal balance sheets, cost of living budget, credit reports, letters of reference, job descriptions, letters of intent, copies of leases, contracts, legal documents, and anything else relevant to the plan. STEPS IN BUSINESS PLANNING 1. Evaluate your personal resources and interests, and the resources of the community. - Do you have the necessary funds - Do you have a skills or management experience? - Does the government provide financial and technical assistance? - Are raw materials available - Are you interested in such business? - Do you have good human relations? 2. Analyze your market. - Is there a good demand for your product? - How many competitors are there in the market? - What is your estimated share in the market? - Who are your customers? - Are they interested in existing products or services? - Is it possible for you to offer better quality or a lower price? Is there a reasonable profit? 3. Choose a proper business location. - Is it near your perspective customers? - Are there facilities like electricity, water, transportation, and communications? - Is the place clean, decent, and peaceful? - Do you have a good alternative in case the best location is expensive? - Is it accessible to raw materials and other suppliers? 4. Prepare a financial plan. - What are your objectives? - How much money do you need? - How will you spend the money? - Where will you get the money? - What are your expenses? - How soon can you recover your money or Investments? 5. Prepare a production plan. - Is it economical to rent or buy production equipment - Can you ensure or improve the product design or quality? - Can your production facilities meet demand? - Do you have inventory control? - Do you have proper scheduling of production? 6. Prepare an organizational plan. - What type of business organization is most suitable? - Do you know the corresponding laws, policies, and requirements of your business organization? - Who will be the officers and employees of your enterprise? - What are their duties and responsibilities? 7. Prepare a management plan. - What are your goals and objectives? - What are your strategies? - Do you have business policies for your customers? - Do you have human resources development for you employees? - What is your program for social responsibility? Importance of Business Planning 1. Planning can eliminate business risk. 2. Planning can minimize cost of production. 3. Planning can detect the weaknesses of the business operations SOME RULES TO OBSERVE 1. Make it neat. Appearance is important and it can reflect the personality of the maker 2. Make it grammatically correct. Be sure to have a final version of the write up corrected or edited by professional or qualified editors 3. Make it honest: Do not exaggerate or le: Tell or write exactly av it is 4. Write in layman's language. Communicate in simple language and not in technical jargon, unless it is really called for. 5. Do not over emphasize your product or your business, Product or service is just part of the business itself, and it requires a lot of other resources that are dependent on one another. MUSTS FOR BUSINESS PLAN AND FEASIBILITY STUDY 1. It must be arranged appropriately, with an executive summary, table of contents, and its chapters or major topics in the right order or sequence. 2. It must be of right length and have the right appearance-not too long and not to short, not to fancy and not to plain. 3. It must give a sense of what the founders and the company expect to accomplish in the immediate (3 to 7 years) and into the future. 4. It must explain in quantitative and qualitative terms the benefits to the user. 5. The company's product or service and the business as a whole. 6. It must present hard evidence of the marketability of the product or service. 7. It must justify financially the means chosen to sell the product or service. 8. It must explain and justify the level of product development that has been achieved and describe inappropriate detail the manufacturing process and associated costs. 9. It must portray management as a team of experienced people with the complementary business skills. 10. It must contain believable and verifiable market as well as financial projections, with the key data explained and documented under assumptions. 11. It must be easily and concisely explainable in a well-orchestrated oral presentation. PLANNING AND ORGANIZING THE ENTERPRISE Why Prepare a Plan? Minimize, if not eliminate, the risk of losing money on a poor business idea.  Save on costly mistakes. Determine your financial requirements. Program your activities in advance. Evaluate actual performance against set targets, especially in terms of sales, costs, and profits. Approach a financial institution for loans, in which a business plan is a common pre-requisite. The Intricacies of Enterprise Planning Planning is a mental process that requires you to consider all the factors or elements that can affect what you are planning for - in this case, the enterprise. However, it has to be done; otherwise, you can miss out on details that could endanger the survival of your firm. Let us now look at each step and what it requires. Step 1: Idea generation and opportunity identification However, it is important to point out that you should open your mine to all the opportunities that you see so that you will be able to explore all possibilities. The method used in this process is brainstorming. A good exercise for brainstorming is to ask the question: What products or services does a baby, a teenager, a woman, or an old mar need? In answering this question, you should focus on one individual at a time for example, a baby then, list down all the products and services you can think of that a baby needs. All ideas should be considered regardless of how silly they are. If you do this process with some friends, you can generate at least 50 ideas in 30 minutes. Step 2: Informal screening After generating so many ideas and possible opportunities to be pursued, you should now select about 10 project ideas (from the 50 ideas you generated), which interests you most. In the informal screening you do not have to study each idea in-depth. Instead, consider obvious criteria, like your personal interests, your own experiences in relation to the proposed project, and the amount of money you are willing invest. If you now have ten ideas, continue the screening process until you are down to three- the best three, that is. This time, choose the best ideas based on the following criteria: Marketability of the product Availability of raw materials Availability of technology for making the product Availability of skilled workers Investment requirement Perceived profitability  Government priority or support Environmental considerations To facilitate selection of the top three ideas, you can prepare a with 10 table like the one below and give points to each criterion points as the highest and 1 as the lowest. The point system is based on the general perception of the situation by the person or group who is involved in choosing the priority project. The table is just an example. You can add more criteria to the ones written there. You can even make it more sophisticated by putting corresponding weights for each criterion. This process is informal, that is why there are no hard facts or data. Nevertheless, it facilitates the selection process. Table 1 Screening Criteria PRODUCTS a 10 b 10 c 10 d 10 e 10 f 10 g 10 h 10 80 T-shirt printing 5 9 9 7 5 6 7 9 55 Mango fruit juice 8 5 7 9 5 6 8 9 57 Longganisa 7 8 8 9 8 8 8 9 65 Beauty parlor 8 9 9 5 6 6 4 9 56 From the above table, you can see that meat processing (longganisa) obtained the highest number of points, followed by fruit-juice making. If we accept the results of our screening example, then, longganisa- processing should be given the first priority in business planning. In other words, if a detailed feasibility or business plan will be prepared, it should be on the longganisa-making venture. As you have noted, the screening process has narrowed down the choice to one. At this point, you should be ready to develop your idea of how the business should be operated. Do you wish to know how you Step 3: Analysis of the situation There are three sub-areas to be analyzed: the resource of the entrepreneur and the firm, the environment, and the entrepreneur's values represented by the aspirations, goals, vision, and mission of the firm. Resource analysis. This simply requires the would-be entrepreneur to evaluate what knowledge, skills, and material resources she has available to use in the business. These resources are known as the 7 "Ms": Money, Materials, Manpower, Machines, Methods, Management, and Moment (time). You either have these resources, have them in limited amounts, or have none of them at all. Having them represents your strengths. Having little or none at all represents your weaknesses. For example, if, as a would-be entrepreneur, you have enough money to invest in the business, that is a resource or a strength. If you have gone through a training program in meat processing, including longganisa-making, that is another resources or strength. On the other hand, if you do not have the machinery and manpower to contribute to the business, you lack resources, and therefore you are weak in this sense. Recognizing your strengths and weaknesses, as a prospective entrepreneur, will facilitate in preparing action plans to make use of the strengths and minimize the weaknesses. Environmental analysis. There are many factors or conditions in the environment, which can affect the business that you are planning to set up. There are factors which have a positive effect in your business and you may consider them as opportunities. On the other hand, you may take note of conditions, which will affect your business negatively; these are otherwise known as threats. There are many things in the environment, which may either be opportune or threatening to your prospective business. These include:  The economic situation. Income levels of the population affect purchasing ability, and in turn, affect your potential sales revenue.  The socio-cultural environment will indicate the preference of the prospective customers (for example, pork longganisa will not sell in a Muslim market, and so you can try chicken or beef longganisa instead).  The technological environment, if good, will enable one to make products cheaper, faster, of better quality. or packaged more attractively, hygienically, or sturdily.  The political environment, which could affect the business climate in the locality. A stable and supportive political environmental will attract more business in the area; one that is perceived to be unstable and indifferent will drive Investors away.  The peace and order situation.  The physical climate, inasmuch as foul weather conditions (like the ones prevailing in Batanes and some parts of the Bicol region) are not conducive to agricultural and industrial operations.  The availability of infrastructure facilities like roads, ports, and harbors, and communication, transportation, and bariking facilities will influence the cost and efficiency of doing business in a certain locality.  Population trends where an increase or decrease will have implications on the prospective market or buyers for the business.  Others Let me illustrate environmental analysis, using the longganisa example. Let us say that the environmental analysis shows a growing population in Caloocan City, where the longganisa business will be located. Will this trend be an opportunity or a threat? It can be either, depending on the way you look at it. If you see more people going into the longganisa business, and therefore, competing with you, then, a growing population is threatening your own survival in business. Values Analysis. Doing this requires the would-be entrepreneur to examine his aspirations or vision and mission about the business. It also represents the kind of service he wishes to provide his customers. Resource analysis will tell us what the company is capable of doing at the start of the business; in other words, it indicates what a firm can do; environmental analysis will tell us what the firm may do; and value analysis will tell us what the firm wants to do. Matching the entrepreneur with the project. What the firm can do and what it wants to do, given the opportunities and threats facing it, do not always match. Therefore, a matching process is required. This matching process is done by preparing a detailed plan of all the functional areas of business, namely: marketing, production, organization, and finance. In addition, a social cost-benefit and environmental study is sometimes also prepared to ensure the sustainability of the project or business. Market Plan In preparing the market plan, the person first has to study the existing situation in the market, what the competitors are doing in terms of product or service lines, their pramotional activities, the middlemen who are handling their products, and their pricing schemes. After knowing what the competitors are doing, the next step is to make estimates of the supply and demand, literally counting the volume produced by the different suppliers as against the volume needed by buyers. If the volume produced by all the known suppliers is more than the volume needed by buyers, then, it is logical not to enter this type of business; on the other hand, if the volume supplied is less than what is needed by the buyers, then, the business offers good market opportunity. Once the prospective entrepreneur sees good opportunities to go into the business he has in mind, then, he should now prepare a detailed marketing plan. This plan will show the target market or the specific group of customers the firm wishes to serve. Knowing the type of customers and the situation in the environment, the proponent will now describe the product features, the promotional activities, the channels of distribution and the pricing. Production Plan 1. Product specification 2. Production Process (From the flow chart, you can see the step-by step). 3. Production machinery and equipment Now that you have a list of equipment, you can go ahead by making a simtar table for raw materials and other supplies. ftere, you need to discuss the supply situation of these materials, where and when they are available (some materials are sexsonal, while others are not) 5. Next, describe the utilities, such as water and light, the location and layout, and waste disposal method. For the location and layout, you will need to make drawings 6. After describing all the items needed for making Angganisa, you may now prepare a production schedule. With the help of the process flow chart, find out how long each step takes (in minutes or hours), after which, you can draw up a production schedule for a day. In our example, the grinder can process 20 kitos of meat in five hours Since there are other steps involved in making the longganisa, the remainder of the day will be devoted to these other steps. But for now, we see that with a daily production of 20 kilos of longpanisa, your weekly volume will be 100 kilos. 7. Given the production schedule, you also determine your manpower requirements including the skills required. A table of manpower requirements will also be useful 8. You will also need a schedule of the inventory you would like to keep for the raw materials and other supplies. As well as the finished products. Organization Plan- Plan the organization plan follows the marketing plan and the production In writing the organization plan, the first thing to do is to describe the form of ownership of your firm. In other words, say if your business will be a sole proprietorship, partnership, corporation, or cooperative. Next, prepare the organization structure. Usually, this is done through an organization chart usually organized according to the four functional areas: marketing, production, finance, and administration. The organizational chart is a useful tool to indicate the hierarchy or the levels of authority, that is, who is responsible for whom and who reports to whom. At the same time, the chart visually presents how the different tasks are grouped or divided among the various personnel. The organization plan also requires you to describe the duties and responsibilities of all those involved in the enterprise, the required qualifications for the tasks, the corresponding salaries and benefits, and the number of personnel required. Finally, you are also to present the pre-operating activities through a Gantt chart. A listing of pre- operating activities with the corresponding timetable of accomplishment is a useful exercise so that you will know what these activities are, as well as their cost implications. What are these pre-operating activities? Well, these should include: the registration of the business, the preparation of the business plan, the negotiation for financing, the construction of the building, or preparation of the production location, hiring of personnel, and so forth. Financial Plan The financial plan translates into monetary terms the various plans you have for the business. From the marketing plan, you get information on sales; from the production and organization plans, you get information on expenses. From these varied data, you can compute whether your business can make money or not. Among the financial schedules you are to present is the Total Project Cost, which is made up of the following items: total fixed assets, the working capital, and the pre-operating expenses. Examples of fixed asset include building, land, and equipment used in the business. Working capital refers to amount of funds you need to pay for expenses, such as materials and supplies, labor, and utilities needed for production within a relatively short period (say two weeks or one month) after which the products can be sold; thus, generating funds for use by the business. (Please refer to Chapter 16 on "Understanding the Basics of Accounting and Finance" for more details on fixed assets, working capital, and other financing concepts and term.) Examples of pre-operating expenses are registration fees and fees paid to a consultant or researcher who prepared the feasibility study. Source of financing. This section of the financial plan will simply indicate where the funds for the business will come from. This presupposes, of course, that the proponent has determined the total project cost. The funds may come from him and other co-owners, if any, in which case they are known as equity contribution. It may come from borrowing money from relatives, friends, banks, and other sources. These sources of borrowed funds are known as creditors. Financial statements The financial plan usually includes the following financial statements: Profit and Loss Statement (P&L) presents details regarding sales and expenses incurred or will be incurred by the business as of a given date. Balance Sheet presents detalls of what the business owns (assets) and its value. It presents the equity contributions of owners and liabilities to the creditors. Cash Flow Statement presents in detail the projected cash expenses and disbursement for a given period (Please refer to Chapter 16). In a financial plan, all the statements prepared are projections or expectations of what the enterprise intends to sell or to spend, how much will the assets be worth, and how much will be put into the business in terms of owner's equity and loans from creditors. Financial analysis basically consists of computations of profitability, liquidity, and marketability (if applicable) of the enterprise based on the information from the profit and loss statement and the balance sheet. In this sense, the enterprise is like a human person. A health-conscious person regularly goes through a physical examination - taking several tests to analyze the fitness of her heart, lungs, blood pressures, eyes, cholesterol level, and others. If the tests show that something is wrong, medication, diet, or some form of physical therapy is prescribed. You, as owner-manager, should similarly be conscious of the "health" of your business. Profitability, liquidity, and marketability are indicators of how "fit" or "sickly" an enterprise is. For example, if you find your business continually incurring losses, or always out of cash, then, you should start worrying. It is a symptom that your business is "ailing". You may need to examine this symptom to find what is causing the problem. Only then can you prescribe "medication" or "solutions." Social-Cost Benefit Analysis Social-cost benefit analysis requires you to look at the benefits and the costs that will accrue to society in general if your prospective business is established. Examples of benefits include employment generated (you will be providing jobs to the unemployed) and taxes paid (you will be contributing to government revenues which can in turn be used in building roads and other facilities for the benefit of the general public). These benefits are quantified in your business plan. Organizing the Enterprise When one thinks of a business enterprise, what comes to your mind? Factories? Stores? Markets? Machines? Processed Products? Services? Surely, a business enterprise is all of these. But most important of all, a business is all about people. It is made up of "warm bodies" without which business will not run and will not even be conceived. Who are these "warm bodies?" Who are these people? Well, the owner (or proprietor) is one; in fact, he is the most important person in the business. Also important are the managers and supervisors. And last, but certainly not the least, are workers, or those who are known collectively as the rank and file. They are, so to speak, the backbone of the organization. These workers are the ones that man the production lines and keep your administrative and marketing operations going. Together, these "warm bodies" are known as your organization. Have you heard of the expression "Machines work but it is people who think." Remember this when you are choosing people to work with you. Remember this when you start managing, motivating, and controlling them. However, it is not enough to recruit your people. You have to organize them in a formal way; it is up to you to choose the form that your organization should take. Then, you have to take steps to make the government and the general public recognize your business organization. Small Business Enterprise is Manageable According to Stanley and Morse, a small enterprise is sometimes defined as "a manufacturing or service enterprise wherein the owner-manager is not actively involved in production but performs the varied range of tasks involved in guidance and leadership without the help of specialized staff." Implied in this definition is the pivotal or central role of the owner-manager in the business. Indeed, many small enterprises begin with the owner-manager taking up most of the management functions. In other words, the owner-manager starts by being his own production, marketing, finance, and personnel manager. What about you? Would you also like to be "all things" to your business? Well, it is not surprising for a small entrepreneur to want to be on top and all around his business. What then is a small business? There are two kinds of small business. The small business, where the owner is the principal worker and he employs one or more assistant, which is also called the Micro business, while the other one is the bigger small business, where the owner mainly directs the work of the employees. These are not the only definition of small business. There are many others. However, these are the common characteristics of a small business: 1. it is privately-owned; 2. it has few or no layers of management; and 3. generally, it has insufficient resources to dominate its field of business. The Magna Carta for Small Enterprise (R.A. 6977) defines small and medium enterprise as any business activity or enterprise engaged in industry, agribusiness, and/or services, whether single proprietorship, cooperative, partnership, or corporation whose total assets are inclusive of those arising from loan, but exclusive of the land on which the particular business entity's office, plant, and equipment are situated, must have value feeling under the following categories. Micro: less than - Php 50,000 Cottage: Php 50,001 - Php 500,000 Small: Php 500,001 - Php 5,000,000 Medium: Php 5,000,001 - Php 20,000,000 Features of a Small Business Enterprise 1. It is low in capital, but high in labor intensity, and has insufficient financial resources. They cannot purchase big machines or modern equipment. These are usually in retailing services. 2. It is efficient in specialized skill and service. It can produce goods or services designed to particular needs of clients like repair works on cars and appliances. Also, tailors, bakers, real state agents, and other specialized knowledge for specific needs. 3. They succeed in small isolated or overlooked markets in rural communities with few residents. Small business is viable like sari-sari stores, tailoring, and small restaurants. Corporations cannot survive in a community where demand is limited. 4. Feasibility study may not be required. They can easily respond to changing economic condition without suffering from huge losses. 5. They conduct their operation right inside the market place, closer to the buyer with first hand information about their taste and preferences. They respond quickly to the needs of the customer to satisfy their demands. 6. Generally, in a small enterprise, the owner-manager employs his wife and children. If business grows, the owner hires more employees, usually relatives and townmates. 7. Capital is usually financed by the family through its own savings and/or loans. If ever business is fund by a small group, it comes from relative and close friends. 8. The area of operation is small. It is community-based. The owner and employees live in the community where the enterprise is located. 9. The size of enterprise is small in relation to the industry. Example the shoe industry is large one. Clearly, one shoe store cannot dominate the market for shoe. Choosing Your Own Role in the Business In choosing your own responsibilities and tasks in your business organization, consider the following factors: 1. Your education and training. Entrepreneurs with engineering and technical education naturally want to be on top of their production operations. Those who took up accounting, banking, and other related courses will see themselves as effective financial managers. 2. Your experience. The author knows of an entrepreneur who worked for many years as a wood-worker, and later, as an installation foreman in a large wood-tile manufacturing company. When he decided to go on his own, he established a small wood-tile production business. Quite naturally, he installed himself not only as general manager, but also as production manager. Similarly, you should consider your own experiences. Which of these experiences might have prepared you to do certain management and technical responsibilities? Were you a skilled worker or production supervisor? Then handle production. Did you do well in sales some years ago? Then, manage marketing. If you are an accountant or had some experience handling books and accounts, then, by all means, be your own comptroller or financial manager. 3. Your interest and aptitude. You may have neither the experience nor the training for a certain management job, but you might have the interest and aptitude for it. For example, if you are outgoing and cheerful, if you are naturally persuasive and persistent, and if you genuinely like people, you will do well in sales, even if you had neither formal experience nor training in it. If you have a knack for tinkering around, doing your own carpentry, or making your own gadgets, you just might be a "natural" as a production manager. 4. Your time. Do you think you will have the time to devote to all the management responsibilities you want to take? Remember that there are only 24 hours in a day. Remember, too, that you have other roles to play in life. You are not just an entrepreneur, but also a parent, a spouse, a daughter or son, and a member of the community. So, if you fancy being "all things" - production manager, marketing manager, financial officer - to your business, think again. Think of the toll it may take on your health, well-being, and family relationships, Nevertheless, if you think you can, then, go for it. After all, it has been done by others before you. 5. The advantage of having a broad view. On the other hand, entrepreneurs who choose to concentrate on only one or a few management functions face the risk of being "nearsighted." Nearsighted people see only the things that are close to them. They usually "see the trees for the forest." What does this mean? Well, here is an example. Suppose you put most of your time and attention on production. As you concentrate on producing better, faster, and cheaper products, you neglect sales and you might wake up one day with huge inventories of products that your customers no longer want. In other words, you see production (the trees) as the whole business (the forest); while in fact the whole business is production, marketing, finance, and people combined. Neglect one and you neglect the rest. Choosing People to Work With You Initially, you may recruit your workers from among members of your immediate family, relatives, friends, neighbors, or acquaintances. Whoever they are, be sure that they can do the job that you hired them to do. Before taking them in, lay down the ground rules. Why? So that they are clear about what you expect from them in terms of performance, attendance, punctuality, and others. Conversely, they also need to know what they can expect from you in terms of compensation, benefits, work hours, and conditions. If they are relatives or friends, you must make them realize that, in coming in as employees, they are now relating to you in business and professional terms, rather than on the basis of kinship or friendship. It is now a relationship based on performance. How do you determine your employee requirements? The following guidelines may be useful: 1. First of all, list down the different tasks that have to be done in the business. Some preliminary questions to ask are: Marketing Who will sell the products? Who will deliver the products to the buyers? To the distributors? Who will handle promotion and advertising? Who will take care of the customers after the products have been sold? Production Who will make the products or deliver the service? Who will operate the equipment? Who will maintain them? Who will take charge of inspection and quality control? Who will keep track of raw material stocks and finished product inventory? Finance Who will keep the records? Who will do the accounts? Who will prepare the weekly payroll? Who will collect the receivables and settle the payables? Who will hold the petty cash? Administration - Who will take care of ordering supplies, preparing sales contracts, and renewing business permits? Who will handle personnel records? Who will handle business communications, inquiries, and other administrative matters? In business planning, the financial analysis will determine if the project will be implemented or not. 2. From this list of tasks, cross out the tasks that you are taking for yourself. The tasks that remain in the list are those for which you will hire other people. Translate the tasks into job designations or titles. Then, determine how many employees you will need for each job title. Remember that some of the tasks may be combined and assigned to only one position. For example, your bookkeeper may also be your secretary/administrative assistant, your driver may also be your messenger, and so on. Below is a sample list of positions with number of people required. Sales manager 1 Sales assistant 2 Cutter/designer 1 Sewers 4 Inspector/stock clerk 1 Bookkeeper/secretary 1 Driver/messenger 1 As mentioned above, it is assumed that the entrepreneur will be the general manager, production manager, finance manager, and personnel manager. 3. Next, for every position, list all the qualifications required in terms of skills, education and training, experiences, and personal characteristics. Include age, gender, and other requirements, which you feel important for a certain job to be performed well. For example, for a bookkeeper-secretary, the requirements might be: Female, single, 18-30 years old; Commerce/business administration graduate; Must know how to use fax machine, photocopying machine, and Microsoft Office computer software (Excel and Word); Must know how to compose business letters; Preferably with six months experience in bookkeeping and/or secretarial work; and With pleasant personality 4. It is also advisable at this point to determine salaries and wages to be paid for every position you have. Applicants need to know how much you are willing to pay them. Determining your employees' compensation rates is a critical decision to make because: On one hand, labor costs affect the profits of a business (thus, theoretically, you can reduce labor costs by paying low wages). On the other hand, the wages you will pay will be one of the most important factors that will motivate your employees to stay long in your company (thus, it is possible that low-paid employees may not work as hard and as long as highly-paid workers do). 5. Once you have done Nos. 1 to 4 above, you can begin the process of recruiting, screening, and selecting the people to work with you in your new business. CHOOSING THE LEGAL FORM OF YOUR BUSINESS Sole proprietorship A sole proprietorship is a business owned by only one person. It is the simplest organization to form. Most business, including large ones, started as a sole proprietorship. In a sole proprietorship, you and your business are one. Your income and the business income are one. In other words, your business income is taxed as personal income. Decision-making is centered on the owner or proprietor who assumes total responsibility for all decision. If the business succeeds, he reaps all the profits. If it fails, he suffers all the losses, including the obligation to pay the debts. When the sole proprietor dies, the life of the business also ends. Partnership A partnership is formed when two or more partners come together to be joint owners of a business. A partnership allows the pooling of resources (money and other business assets) and talents (skills, experience, management know-how). All the partners share profits equally, unless otherwise stated in the Partnership Agreement. Corporation A corporation or a company involves five or more persons owning the business. A corporation is a "legal person" in the eyes of the law. It is called a natural personecause the law allows it to do most business acts that no breathes, Sovation do. Of course, it is different from a naitress person who breathes, walks, and talks, like you and me. But as legal person, the corporation: has legal rights and responsibilities; can sue and be sued in court; can own and dispose of property; and can enter into contracts. The ownership of a corporation is divided into units known as "shares of stocks." The buyers of these stocks, called stockholders, also become part-owners of the business. Management of a corporation is vested on a board of directors elected by the stockholders on a regular basis. A corporation runs its affairs on the basis of terms and prescription specified in its By-Laws and Articles of Incorporation. Unlike the first two legal forms, the life of a corporation does not end with the death of a stockholder or by the stockholder's disposal of his stocks. Cooperative A cooperative is a group enterprise. It is made up of a number of producers, traders, or consumers who want to produce or trade as a group so that they may avail themselves of economies of scale, which individually, they will not be able to obtain. Among the very first cooperatives are the consumers' cooperatives. These were formed by individuals or families who want to supply themselves with goods or services at cheaper costs than if they had bought these from a retailer or a middle man. Cooperatives then were established not primarily for the purpose of making a profit. However, any surplus that results from the operation of the cooperative is shared among the members. Today, there are other types of cooperative that have emerged and prospered including farmers, producers, and credit cooperatives. Many producers' cooperatives engage in common marketing, common procurement of raw materials, common use of production facilities, and group borrowing of capital. A successful shoe manufacturers' cooperative In Marikina has close to 300 members and a capital share of P5 million. It has credit facilities that it extends to its members. Cooperatives are registered with the Cooperative Development Authority (CDA). Cooperatives may apply for tax-exemption, however, It’s members, to whom the profits of the cooperative ultimately go, have to pay income taxes. A cooperative is led by a set of officers collectively known as the board cooperative is ledddition, several working committees are set,e.g. election committee, membership recruitment committee, credit committee, and others which is headed by a chairman. However, a number of people who will run the co-op office on a day-to-day basis usually have to be hired. These include a manager and a bookkeeper. Like a corporation, the life of a cooperative is neither affected by the death of any of its members nor by a member's discount of share of his capital stock. However, it can be dissolved by a majority vote of the board of directors and a resolution signed by at least two-thirds of the general membership. The Pros and Cons of Each Legal Form Do you think you can now decide what legal form your business organization will take? Well, if you are still undecided, do not despair. The table below will present to you the advantages and disadvantages of each form of business organization and allow you to compare all four. The Option Not to Register With all these discussions about the various legal forms of business, the author is assuming that you want to register your business. But actually, do you? This question implies that you have an option to register or not to register your business. You may have heard of the so-called "underground economy." The underground economy is composed of business, which are "informal" or unregistered. Some informal business stay informal; others eventually "Surface" and become formal. There are advantages to staying "underground." An unregistered business does not pay taxes. It can also pay salaries that are less than those prescribed by law. Further, an informal business is not required to grant sick and vacation leaves and other fringe benefits, nor is it required to remit SSS contributions. In a sense, an informal businessman may be considered free from government intervention and control. In another sense, however, he is more open to harassment by law enforcers. A common example are sidewalk vendors who play "hide and seek" with policemen. Another example is unlicensed stores and shops who pay "protection money" to government people who may otherwise harass them or clamp down on their operations. Another point to consider when deciding whether to register or not is that businesses need the protection of the government in order to survive and grow. You need to be registered in order to enter into business contracts and go into export. If a customer or a supplier violates an agreement with you, you need to be registered in order to sue for breach of contract. When selling to institutional buyers, you need to issue official invoices and receipts. Lastly, you need to be registered in order to avail of most incentives and assistance programs offered by the government. How to Register Your Business Where to register your business depends on the legal form you have chosen for your business. If you are to go into sole proprietorship, you are required to: Register your business name with the Bureau of Domestic Trade and the Department of Trade and Industry (BDT-DTI). Obtain a business clearance from the Barangay Captain of your place of business. Obtain a permit to do business from the local government unit (your city or municipal government's business licensing office).  Get a Tax Identification Number (TIN) from the Bureau of Internal Revenue (the branch nearest you). Register your business and employees with the Social Security System for social benefits. Register with the Department of Labor and Employment (DOLE) office nearest you, if you have five or more employees. If you will go into partnership or corporation, you are required to register first with the Securities and Exchange Corporation (SEC), after which you have to go through all the registration described above for a sole proprietorship. If you have formed a cooperative, you are required to: Register with the Cooperative Development Authority (CDA) office nearest you. Register the name of your cooperative with the Department of Trade and Industry (DTI) office nearest you. Obtain a permit to operate the cooperative from the local government unit. Get a Tax Identification Number (TIN) from the Bureau of Internal Revenue. You may also register the employees of your cooperative with the Social Security System and the Department of Labor and Employment. The following are general guidelines and requirements in registering with the DTI, the local government unit, the BIR, and the SSS. Registering with the DTI Register your business name with the DTI Office in the city or province where your business is located. You will be asked to fill up an application form in five copies. A registration fee is charged. Be prepared with at least three alternative business names; it is possible that some of your choices have already been taken by previous registrants. The following are the requirements in registering with DTI: Registering with the Mayor's Office (Local Government Unit) The office of the city or municipal mayor is where you go to in order to get a permit or license to go into business. The section to approach is the business licensing section or unit. Prior to this, however, be sure you have secured a clearance from your local barangay. The barangay office charges a small fee (Fifty Pesos, 1997 rates) for this clearance, which you have to present to the Mayor's Office. Be sure to bring some cash when you register with the local government unit. Aside from the mayor's permit fee, you will be charged other fees, including sanitary, garbage, building inspection, electrical inspection, plumbing inspection, mechanical inspection, fire inspection, and working permit fees. Altogether, these fees may amount to around One Thousand Pesos (1997 rates). You need a number of documents to obtain a license or permit from the Mayor’s Office. These are: Registering with the BIR You need to go the Bureau of Internal Revenue (BIR) to get a Tax Identification Number (TIN), for taxation purposes. A BIR registration is also a pre-requisite for you to get official receipt and invoices printed. Your book of accounts also need to be stamped by the BIR. It is useful to have your official receipt and invoices printed by a BIR-accredited printing press, which will take care of having these form officially stamped. The BIR also charges a fee from VAT-covered enterprises (P1,000, 1997 rates). VAT-exempted businesses, however, are not charged any fee. Registering with the SSS You are required to get additional registration with the Social Security System (SSS), especially if you have employees. If you have none, you may still register as a self-employed individual. The SSS provides sickness, retirement, loan, and other social services to employees of private businesses. The funds for such benefit come from contribution from the government (SSS) and from you, the employer. Registering with the SEC (only for corporations and partnerships) When your business grows and you want to organize a corporation or partnership, or partnership in place of the single proprietorship you originally set up, you need to go to the Securities and Exchange Commission (SEC). Of course, you may want to start as a corporation right away. The decision is up to you. The requirements for SEC registration are: Verification of the proposed name of your firm. If it has been registered by any other name, you have to change your proposed name and repeat the process. Six copies of the following (for stock corporations):  Articles of incorporation  By-Laws  Undertaking to change corporate name  Treasurer's affidavit  Bank certificate of deposit  Authority to verify bank accounts  Registration data sheet/subscribes information sheet  Statement of assets and liabilities, if subscription is paid in property Needless to say, you must be ready to pay filing and miscellaneous fees. If you want to speed up the process of registering your corporation, SEC has express forms available at its offices. A separate set of forms is also available for partnerships. Other Registering Agencies What we have discussed so far are the basic registration procedures that business enterprises need to go through in order to make their operations legal or formal. In addition, some specific types of business need to register with specialized agencies of government. These agencies generally exercise regulatory and control functions over industry sectors under their jurisdiction. Some of these agencies extend incentives and assistance to the firms. Here is a partial list of these specialized agencies: Food and Drug Administration, for firms manufacturing drugs, cosmetics, and food products Fiber Development Authority, for businesses engaged in processing and trading of fiber and fiber products National Food Authority, for traders and processors of rice, corn, and flour Land Transport Franchise and Regulatory Board, for land transport services (jeepney lines, taxicab, and bus operation) Maritime Industry Authority, for sea transport services Philippines Overseas Employment Administration, for firms engaged in recruitment of workers for employment abroad Department of Education, Culture, and Sport, for owners of schools, universities, and other educational institutions Department of Tourism, for hotels and other lodging facilities for tourists Philippine Contractors Accreditation Board, for construction contractors Bangko Sentral ng Pilipinas, for exporters in general Bureau of Food and Drugs, for exporters of drugs, cosmetics, and food products Philippine Coconut Authority, for exporters of coconut and coconut by-products Garments Trade Export Board, for exporters of garments and textile Bureau of Fisheries and Aquatic Resources, for exporters of fish and fish products Bureau of Animal Industry, for exporters of animals and animal product and by-products Bureau of Plant Industry, for exporters of plants and plant products Bureau of Forest Development, for exporters of forest product