inst-3-CHAPTER-1-2.docx

**CHAPTER 1:** **BUSINESS IN GENERAL** **WHAT IS BUSINESS?** There is money in business. This is what most people say. In fact, you need not to finish a college education. A high school diploma is enough. But it does not necessarily mean that college is a waste of time. College Education is still...

**CHAPTER 1:** **BUSINESS IN GENERAL** **WHAT IS BUSINESS?** There is money in business. This is what most people say. In fact, you need not to finish a college education. A high school diploma is enough. But it does not necessarily mean that college is a waste of time. College Education is still important because nobody could ever know how long a certain business will exist. Business has always what we call [risk]. It is the same as gambling that one could easily win or lose. In business, the risk-taker (businessman) could easily have a [Gain] or [Loss]. In reality, not a few very successful business tycoons are even high school graduates. Leonardo Sarao of the jeepney industry only finished elementary education. Another one is the founder and owner of National Book Store who only finished high school. Their entrepreneurial qualities -- risk-taking, perseverance and good human relations -- made them successful. The word business has different meanings when we talk of books and management experts. Some could say, it refers to production and selling of goods and services. Others may say, it refers to assembly of resources to produce goods and satisfy customers. All of these definitions are correct, but they only revolve in one point. In general, business includes *all profit seeking activities*. **Types of Organizations** 1. **Government or Private** 2. **Business or Nonbusiness** 3. **Profit or Nonprofit** **Business Organization** Organization means *group of people working together to achieve a goal*. If business is a profit seeking activity, therefore the goal of business organization is none other than to gain [profit]. **What is the Business Life Cycle?** The business life cycle is the progression of a business in phases over time and is most commonly divided into five stages: launch, growth, shake-out, maturity, and decline. The cycle is shown on a graph with the horizontal axis as time and the vertical axis as dollars or various financial metrics. In this article, we will use three financial metrics to describe the status of each business life cycle phase, including sales, profit, and cash flow. Graph of the Business Life Cycle Stages **[Phase One: Launch]** Each company begins its operations as a business and usually by launching new products or services. During the launch phase, sales are low but slowly (and hopefully steadily) increasing. Businesses focus on marketing to their target consumer segments by advertising their comparative advantages and value propositions. However, as revenue is low and initial startup costs are high, businesses are prone to incur losses in this phase. In fact, throughout the entire business life cycle, the profit cycle lags behind the sales cycle and creates a time delay between sales growth and profit growth. This lag is important as it relates to the funding life cycle, which is explained in the latter part of this article. Finally, the cash flow during the launch phase is also negative but dips even lower than the profit. This is due to the capitalization of initial startup costs that may not be reflected in the business' profit but that are certainly reflected in its cash flow. **[Phase Two: Growth]** In the growth phase, companies experience rapid sales growth. As sales increase rapidly, businesses start seeing profit once they pass the break-even point. However, as the profit cycle still lags behind the sales cycle, the profit level is not as high as sales. Finally, the cash flow during the growth phase becomes positive, representing an excess cash inflow. **[Phase Three: Shake-out]** During the shake-out phase, sales continue to increase, but at a slower rate, usually due to either approaching market saturation or the entry of new competitors in the market. Sales peak during the shake-out phase. Although sales continue to increase, profit starts to decrease in the shake-out phase. This growth in sales and decline in profit represents a significant increase in costs. Lastly, cash flow increases and exceeds profit. **[Phase Four: Maturity]** When the business matures, sales begin to decrease slowly. Profit margins get thinner, while cash flow stays relatively stagnant. As firms approach maturity, major capital spending is largely behind the business, and therefore cash generation is higher than the profit on the income statement. However, it's important to note that many businesses extend their business life cycle during this phase by reinventing themselves and investing in new technologies and emerging markets. This allows companies to reposition themselves in their dynamic industries and refresh their growth in the marketplace. **Phase Five: Decline** In the final stage of the business life cycle, sales, profit, and cash flow all decline. During this phase, companies accept their failure to extend their business life cycle by adapting to the changing business environment. Firms lose their competitive advantage and finally exit the market. **ECONOMICS AND BUSINESS** Why do you think economics is important when we are talking about business? Economics refers to the allocation of scarce resources, according to some economics books. But to make it simple, it simply means *study of goods and services*. The said definition is in general. Goods and services talks about a lot of things like price, production, cost, resources, etc. **Economic Resources** 1. **Land (Natural Resources)** 2. **Labor (Human Resources)** 3. **Capital (Financial Resources)** 4. **Entrepreneurship (Entrepreneurial Activity, Commercial creative effort)** **Economic Systems** Economic system refers to system used in a country relating to economics, the economy, and business activities. The basic objective of an economic system is to satisfy the economic needs of the people. Here are some economic systems. 1. **Capitalism** -- The factors of production and distribution are owned and managed by private individuals. Here are its features: - Private Property - Economic Freedom - Free Competition - Less Government Regulations 2. **Communism** -- This is the exact opposite of capitalism. The factors of production and distribution are owned and managed by the State. It is a command economy. Here are its features: - State Ownership - Social and Economic Equality - No Free Competition - Central Planning 3. **Socialism** -- This is a mixture of capitalism and communism. **ENTREPRENEURSHIP AND BUSINESS** *The central point of Entrepreneurship is innovation; therefore, an entrepreneur is an innovator.* When we talk of entrepreneurship, it is more on [creating new ideas and modifying the existing ones]. These ideas refer to the goods and services that bought by the consumers. The term entrepreneurship describes strategic thinking and risk-taking behavior that results in the creation of new opportunities. A common image of an entrepreneur is as the founder of a new business or enterprise. As mentioned earlier, to become an entrepreneur doesn't mean having a bachelor's degree. Meaning there is no age prerequisite to become one, although there are some important characteristics to become a successful one. Here are some: 1. **Internal Locus of Control** -- Entrepreneurs believe that they are in control of their own destiny 2. **High Energy Level** -- Entrepreneurs are persistent, hardworking, and willing to exert extraordinary efforts to succeed. 3. **High Need for Achievement** -- Entrepreneurs are motivated to accomplish challenging goals. 4. **Tolerance for Ambiguity** -- Entrepreneurs are risk takers; they tolerate situations with high degrees of uncertainty. 5. **Self-confidence** -- Entrepreneurs feel competent, believe in themselves, and are willing to make decisions. 6. **Passion and Action Orientation** -- Entrepreneur try to act ahead of problems; they want to get thing done and not waste valuable time. 7. **Self**-**reliance and Desire for Independence** -- They want to be their own bosses, not work for others. 8. **Flexibility** -- Entrepreneurs are willing to admit problems and errors, and are willing to change a course of action when plans aren't working. **Entrepreneur vs. Manager** *"All entrepreneurs can be managers, but not all managers can be entrepreneurs".* If we reflect on this phrase, it is very true that entrepreneurs can be managers because entrepreneurs also handle people and the business as the managers do. The main reason why not all managers are entrepreneurs because entrepreneurs are *founders of a certain business*, while most of the managers are only hired. Entrepreneurs can have no college degree because they are the ones who will build the business while *most of the managers are well educated* because they can't be hired as managers if they do not have sufficient educational background and experiences. **BUSINESS OWNERSHIP FORMS** There are several forms of business organizations from the simple to the complex. The choice to form a business organization depends on one's resources, objectives and perceptions. If one has limited funds and has no interest in big business, a single proprietorship is good enough. But for those with huge capital and are financially ambitious, a corporation is most suitable for them. But there are business organizations that started small until they become giants. There are three most common forms of business organizations in a capitalist economy, but there also other forms as well. Here are their respective definitions, together with their respective advantages and disadvantages. **Sole/Single Proprietorship** This is a business entity which is owned and usually managed by one person. It is the oldest and simplest form of business organization. Most of the business we locally know are sole proprietorship. A typical example in the Philippines is the *sari-sari* *store*. Advantages: 1. **Ease and Cost of Formation** -- It means easy to form with less cost. 2. **Secrecy** -- The owner has the advantage in keeping his intentions secret. 3. **Distribution And Use of Profits** -- The owner is the sole beneficiary of all profits. The decision is given to the owner if where he/she will spend his/her earnings. 4. **Control of the Business** -- The owner won't have to consult anyone about his decisions. 5. **Government Regulation** -- It has less government regulations. The only time the sole proprietor deals with the government is when he pays his license, permit, and tax. 6. **Taxation** -- The owner only pays personal income tax. 7. **Closing/Dissolving the Business** -- The business can be dissolved by the owner at will. 1. **Owner's Lack of Ability and Experience** -- The business will depend largely on the skills and wisdom of the owner. 2. **Difficulty In Attracting Good Employees** -- Sole proprietorships are known to live short periods. 3. **Difficulty In Raising Capital** -- The capital will depend solely on the personal resources of the owner. 4. **Limited Life** -- The existence of the business depends on the physical well-being of the owner. 5. **Unlimited Liability** -- The liabilities incurred by the owner extends up to his personal assets. **Partnership** This is an association of two or more persons who will become co-owners of the business. Each partner contributes money, property, or service to the business. Profit and loss ratio will be agreed by the partners. This ratio will determine their consecutive shares in profits and losses. Partnerships can be registered or not to the Security and Exchange Commission (SEC). Types of Partners: 1. **General Partner** -- It is a partner that pays its liabilities beyond his capital contribution. 2. **Limited Partner** -- It is a partner that pays its liabilities up to the extent of his/her equity only. 3. **Capitalist Partner** -- It is a partner that invests cash only. 4. **Industrial Partner** -- It is a partner that invests his services only. 5. **Nominal Partner** -- this partner does not have capital contribution and not active in the partnership. He/she only uses the name of the partnership for consideration -- *saling pusa.* 6. **Silent Partner** -- It is a general partner but not active in the management. 7. **Secret Partner** -- It is a partner who is not known as a partner but active in the management. 1. **Ease of Formation** -- it is easy to form because the only requirement of a partnership before it becomes a partnership is when partners *[agree]* to each other. 2. **Pooling of Knowledge and Skills** -- "two heads are better than one". 3. **More Funds Available** -- combined resources of the partners provides bigger funds. 4. **Ability to Attract and Retain Employees** -- the owners can offer a "partner status" to valuable employees. 5. **Tax Advantage** -- The partners' income are not taxed separately. 1. **Unlimited Liability** -- the partners' liabilities also extends up to their personal resources, *except for limited partners.* 2. **Limited Life** -- When a partner dies or withdraws from the business, the partnership is terminated. 3. **Potential Conflict Between Partners** -- There are occasions when partners disagree on certain things like: *adding new lines, hiring employees, credit extensions, granting employee benefits, etc.* 4. **Difficulty in Dissolving the Business** -- Partnerships' assets may not be easy to divide. **Corporation** It is an artificial being created by operation of law, having the right of succession, and the powers, attributes and properties expressly authorized by law or incident to its existence. The shares of certificates of ownership of a corporation are called *stocks*. The owners of stocks are called *stockholders* or *shareholders*. There are two types of corporations: *private or closed* and *open corporations*. Private corporations are owned by few individuals, usually relatives and friends. Open corporations are owned by any individual who buys shares of stocks which are openly traded in the stock markets. The founders of corporations are called *incorporators* which are said to be 5-15 members. These incorporators are also stockholders. Their profit is called *dividend* which is based to whether they are *Ordinary Stockholders* or *Preference Stockholders* and their [share of ownership percentage]. Advantages: 1. **Limited Liability** -- The liability of stockholders is limited to the amount of their share of ownership. 2. **Ease of Expansion** -- Corporations can easily accumulate large amount of funds for extension. 3. **Ease of Transferring Ownership** -- a stockholder may donate or sell his/her shares if he/she losses interest in the corporation. Shares are also easy to transfer in case of death of the shareholder. 4. **Long Life** -- A corporations' contract lasts up to 50 years, and renewable for another 50 years. 5. **Greater Ability to Hire Specialized Management -- Employees who has high degree of education usually choose to work in corporations because it has enough funds to develop its human resources.** 1. **More Expensive and Complicated To Organize** -- Corporations sometimes require services from a lawyer and an accountant to prepare the legal forms and financial documents. Upon registering to SEC, there are many documents that are required and of them is the minimum capital which is worth millions of pesos. Depending on the products of corporations, it has to get approval in some government agencies like Bangko Sentral ng Pilipinas, Food and Drug Administration, etc. 2. **Double Taxation** -- The Company's income is taxed as well as the individual income. 3. **More Extensive Government Restriction and Reporting -- Corporations have to comply with government laws, policies and regulations. They have to submit their financial reports every year to concerned government agencies. Also, dividends are not distributed without the permission of the SEC.** 4. **Employees Lack Personal Identification and Commitment** -- Employees don't feel deep attachment to the corporation. It is because a corporation has several layers of management. One of them is the Board of Directors (BOD) who are seldom or do not associate with the workers or clerks. ***Other Forms*** **Cooperatives** A cooperative is a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits. Types of Cooperatives: 1. **Credit Cooperative** - Promotes thrift among its members and create funds in order to grant loans for productive purposes. 2. **Consumers Cooperative** -- Procures and distributes commodities to its members and non-members. 3. **Producers Cooperative** -- Undertake Joint production in agriculture and industry. 4. **Marketing Cooperative** -- Engages in supply of production inputs to members and markets their products. 5. **Service Cooperative** -- Undertakes medical and dental care, hospitalization, transportation, insurance, housing, labor, electric light and power, communication and other services. 6. **Multipurpose Cooperative** -- Combines two or more of the business activities of the types of cooperative.