LESSON 2: INTRODUCTION TO ENTREPRENEURSHIP

ENTREPRENEUR REVIEWER
What is Entrepreneurship?

 Entrepreneurship is the process of creating something new of value by devoting (giving)

the necessary time and effort.
 By accepting and acknowledging the
necessary financial, psychological, and social risks, and
 Finally receiving the resulting rewards be it monetary and personal satisfaction and
freedom to do what you want.
-Robert D.Hisrich, M. Peters & D.A Shepherd
 Process of creating something new and assuming the risks and rewards.
-Robert D.Hisrich, M.P.Peters & D.A.Shepherd

WHAT IS AN ENTREPRENEUR?
Someone who creates and runs a business is called an entrepreneur.

 Most of us earn a living by working in a business

 A business is an organization that provides products or services, usually to make money.
 A person who works in a business owned by someone else is an employee.
 When an entrepreneur starts a new business, risk is involved. Risk is the chance of losing
something.
 Because employees work for someone else and entrepreneurs work for themselves,
entrepreneurs risk more than employees.

WHY BE AN ENTREPRENEUR?
The biggest reward of becoming an entrepreneur is the personal satisfaction that comes
from having the freedom to make your own business decisions and then act on them.

 Making Your Own Rules. When you own a business, you get to be your own boss.
 Doing Work You Enjoy. Since the majority of most peoples' lives is spent working, why
not spend that time doing something you enjoy?
 Creating Greater Wealth. There's no limit to what an entrepreneur can make.
 Helping Your Community. Being an entrepreneur lets you make your community and
world a better place.
 RISKS OF BEING AN ENTREPRENEUR

 Potential Business Failure. Being fully responsible means the success or failure of your
business rests on you.
 Unexpected Obstacles. Problems can happen that you don't expect.
 Financial Insecurity. Many new businesses don't make much money in the beginning, so
you may not always be able to pay yourself.
 Long Hours and Hard Work. It's not unusual for entrepreneurs to work a lot of extra
hours to make their businesses successful. This is especially true during the initial start-
up process.

Entrepreneurship in History
Here are some well-known entrepreneurs who changed the world. For what is each
entrepreneur most famous?
 Thomas Edison  Bill Gates
 Madam C. J Walker  Stephen Wozniak and Steve Jobs
 Wlliam Harley & Arthur Davidson  Russell Simmons
 Warren Buffett  Debbi Fields
 P.T. Barnum
 CHARACTERISTICS OF SUCCESSFUL ENTREPRENEUR
Self-assessment-evaluating your strengths and weaknesses- is an important part of becoming
an entrepreneur.

 An aptitude is a natural ability to do a particular type of work or activity well.

 An attitude is a way of viewing or thinking about something that affects how you feel
about it. Entrepreneurs tend to be people with positive attitudes.

CHARACTERISTICS OF SUCCESSFUL ENTREPRENEUR

Personal Characteristics Skills

 Courage A skill is an ability that's learned
 Creativity through training and practice.
 Determination  Business Skill
 Curiosity  Communication Skill
 Discipline  Computer Skill
 Empathy  Decision-Making and
 Enthusiasm  Problem-Solving Skills
 Flexibility Honesty  Mathematical Skill
 Patience  Organizational Skill
 Responsibility  People Skills

Increase your business and entrepreneurial potential by focusing on six specific areas.

 Business Knowledge. Reading magazine and newspaper articles, search the Internet,
and talk to business owners.
 Financial Skills. Strengthen your math skills.
 Career Exploration. Evaluate your strengths and weaknesses, explore careers interest
you.
 Community Awareness. Look for volunteering opportunities and find out if any
companies in your area provide internship programs.
 Education. Obtaining a good education benefits you personally and open doors to more
career opportunities.
 Relationships. Spend time with people who believe in you and inspire you.
 WHY STUDY ENTREPRENEURSHIP?
There are two primary reasons why studying entrepreneurship makes sense: you learn to think
like an entrepreneur and you develop a vision for your life.

Think like an entrepreneur when you are  Think. Don't complain

an employee: about a problem-
 Observe. Seek out opportunities analyze it and suggest possible
to learn new skills and accept solutions.
new responsibilities. Learning about entrepreneurship
 Listen. Pay attention to what often inspires people to develop a
others have to say. vision for their life.

LESSON 3: CONCEPT OF ENTREPRENEURSHIP

Entrepreneur is derived from the word “entreprendre" meaning to undertake.
Invention implies creating something new not merely any new product but new technological
processes, new designs, new technical knowledge, etc. for example, Edison's invention of bulb
illustrates the point.
Innovation, is the mean by which the entrepreneur either creates new wealth - producing
resources or endows existing resources or endows existing resources with enhanced potential
for creating wealth.

Invention is conceiving new ideas while innovation means to put these ideas into action.

An Integrated Definition
 Entrepreneurship
 A dynamic process of vision, change, and creation.
 Requires an application of energy and passion towards the creation and
implementation of new ideas and creative solutions.
 Essential ingredients include:
 The willingness to take calculated risks-in terms of time, equity, or career.
 The ability to formulate an effective venture team; the creative skill to
marshal needed resources.
 The fundamental skills of building a solid business plan.
 The vision to recognize opportunity where others see chaos, contradiction,
and confusion.
The Myths of Entrepreneurship

Myth 1: Entrepreneurs Are Doers, Not Thinkers

Myth 2: Entrepreneurs Are Born, Not Made
Myth 3: Entrepreneurs Are Always Inventors
Myth 4: Entrepreneurs Are Academic and Social Misfits
Myth 5: Entrepreneurs Must Fit the "Profile"
Myth 6: All Entrepreneurs Need Is Money
Myth 7: All Entrepreneurs Need Is Luck
Myth 8: Ignorance Is Bliss For Entrepreneurs
Myth 9: Entrepreneurs Seek Success But Experience High Failure Rates
Myth 10: Entrepreneurs Are Extreme Risk Takers (Gamblers)
 Macro View: External Locus of Control

 The Environmental School of Thought

 Considers the external factors that affect a potential entrepreneur's lifestyle.
 The Financial/Capital School of Thought
 Based on the capital-seeking process-the search for seed and growth capital.
 The Displacement School of Thought
 Alienation drives entrepreneurial pursuits
• Political displacement (laws, policies, and regulations)
• Cultural displacement (preclusion of social groups)
• Economic displacement (economic variations)
FINANCIAL ANALYSIS EMPHASIS

VENTURE STAGE FINANCIAL CONSIDERATION DECISION

Start-up or acquisition Seed capital Proceed or abandon

Venture capital sources

Ongoing Cash management Investments Maintain, increase, or reduce size

Financial analysis and evaluation

Decline or succession Profit question Sell, retire, or dissolve operations

Corporate buyout
Succession question

Micro View: Internal Locus of Control

 The Entrepreneurial Trait School of Thought

 Focuses on identifying traits common to successful entrepreneurs.
 Achievement, creativity, determination, and technical knowledge
 The Venture Opportunity School of Thought
 Focuses on the opportunity aspect of venture development-the search for idea
sources, the development of concepts, and the implementation of venture
opportunities.
 Corridor principle: New pathways or opportunities will arise that lead
entrepreneurs in different directions.
 DEFINITIONS AND CRITERIA OF ONE APPROACH TO THE MICRO VIEW

ENTREPRENEURIAL MODEL DEFINITION MEASURES QUESTIONS

"Great Person" "Extraordinary Achievers" Personal principles What principles do you have?
Personal histories What are your achievements?
Experiences

Psychological Characteristics Founder Control over the Locus of control Tolerance What are your values?
means of production of ambiguity
Need for achievement

People who make Decision making What are the opportunities?

Classical
innovations bearing risk
Ability to see opportunities What is your vision?
and uncertainty
Creativity How do you respond?
"Creative destruction"

ENTREPRENEURIAL MODEL DEFINITION MEASURES QUESTIONS

Management Creating value through the Expertise What are your plans?
recognition of business Technical knowledge What are your capabilities?
opportunity. The Technical plans What are your credentials?
management of risk
taking... through the
communicative and
management skills to
mobilize...

ENTREPRENEURIAL MODEL DEFINITION MEASURES QUESTIONS

Attitudes, styles How do you manage
Leadership "Social architect"
Promotion and protection of values Management of people people?

Those who pull together to How do you change

Intrapreneurship promote innovation Decision making and adapt?
 PROCESS APPROACHES TO ENTREPRENEURSHIP
Integrative Approach
 Built around the concepts of input to the entrepreneurial process and outcomes
from the entrepreneurial process.
 Focuses on the entrepreneurial process itself and identifies five key elements that
contribute to the process.
 Provides a comprehensive picture regarding the nature of entrepreneurship that
can be applied at different levels.
Entrepreneurial Assessment Approach
 Stresses making assessments qualitatively, quantitatively, strategically, and ethically in
regard to the entrepreneur, the venture, and the environment
Multidimensional Approach
 Views entrepreneurship as a complex, multidimensional framework that emphasizes the
individual, the environment, the organization, and the venture process.
INTEGRATIVE MODEL OF ENTREPRENEURIAL INPUTS AND OUTCOMES
 Intrapreneurship Entrepreneurship

 Entrepreneurship  A process of innovation and

that takes place new-venture creation through
within an four major dimensions-
organization individual, organizational,
environmental, process-that is
aided by collaborative networks
in government, education, and
institutions.
Intrapreneuring (corporate entrepreneurship) Entrepreneur

 To create or develop the entrepreneurial  A catalyst for economic change

spirit within corporate boundaries, who uses purposeful searching,
thereby allowing an atmosphere of careful planning, and sound
innovation to prosper. judgment when carrying out the
entrepreneurial process.
 LESSON 4: THE CONCEPT OF ENTREPRENEUR 2
Module 3: Concept of Entrepreneurship
Difference Between Entrepreneur and Manager
The main difference between Entrepreneur and Manager is their role in the organization. An
entrepreneur is the owner of the company whereas a Manager is the employee of the
company. Entrepreneur is a risk taker, they take financial risk for their enterprise. The
entrepreneur has a vision and focuses on achievements and profit.
Entrepreneurs vs Managers
Who is an Entrepreneur?
Very basically speaking, an entrepreneur is a one-man show that runs entrepreneurship.
However, such a person usually has some unique attributes that allow him to be successful in
his endeavors. He is essentially an initiator and a leader. He brings business ideas to start his
venture.
A successful entrepreneur is usually a responsible person. He is accountable for the success or
the failure of his venture, and he takes this responsibility very seriously. And since he is the only
person-in-charge he is automatically the leader. Leadership qualities are one of the main
aspects of an entrepreneur.
Who is a Manager?
A manager, on the other hand, is not an owner of an enterprise. Instead, he is the one that is
responsible for the management and administration of a group of people or a department of
the organization. His day to day job is to manage his employees and ensure the organization
runs smoothly.
Characteristics of Manager In Solving Problems
One of a manager’s most important responsibilities is to solve problems. Finding the answers to
difficult questions that are sometimes a source of great distress for the organization often fails
to an organization’s leaders. Managers who have the ability to systematically think through the
facts, diagnose the situation, and find an accurate and workable solution will help the business
prosper.
Fortunately, all managers can learn to solve problems more effectively by using the 4 step
process:
1. Identify and Define the Problem- once managers see a potential issue, they think through
whether this a problem they can solve and whether it will make a critical impact on the team or
organization.
2. Analyze the Problem – managers are able to define the root cause of the issue so that once
it’s been resolved, it’s unlikely to recur.
3. Develop Solutions – instead, managers use techniques like brainstorming ideas, and assess
the situation and design a long-term solution.
4. Plan and Act – once the best solution has been identified, a good manager develops a solid
implementation plan. This plan should include steps that will be taken to move forward, as well
as contingency plans that will help the manager handle potential solutions.
An Innovator Entrepreneur in Solving Problems
While identifying problems, is a necessary part of the origin of the entrepreneurial process,
managing problems is an entirely different aspect once a venture is off the ground and running.
An entrepreneur does not have the luxury of avoiding problems and is often responsible for all
problem solving in a start-up or other form of business.
Skills that Entrepreneurs possess that make them particularly good problem solvers:
a. Critical thinking – the entrepreneur analyses the layers of a problem to find the core of an
issue facing a business.
b. Communication skills – entrepreneurs skills use to pool resources for the purpose of
investigating solutions leading to innovative problem solving and competitive advantage.
c. Decisiveness – Entrepreneurs must be productive even in the face of risk. They ask what
problem needs to be solved, think about solutions, and then consider the means necessary to
implement an idea.
d. Ability to analyze Data – entrepreneur involves understanding what has happened and what
is happening.
THE STARTING POINT TO ENTREPRENEURIAL SUCCESS
1. Start to be on your own
2. Explore the business environment
3. Be in control
4. Have a good accountant or a trusted financial adviser
5. Seek the advice of professionals
Module 4: Economic Development Of Entrepreneurship And It’s Competencies
Entrepreneurial skills and entrepreneurial competencies
Entrepreneurial skills refer to the activities or know-how that can establish and operate an
enterprise successfully (Liñán and Chen, 2009). On the other hand, entrepreneurial
competencies are considered a specific set of quality characteristics that represent the
capability of an entrepreneur to perform a job (Man et al., 2002; Mitchelmore and Rowley,
2013). In this study, skills refer to the possibility of learning and adopting exclusive
characteristics that are essential for performing entrepreneurial tasks that involve interactions
within a social and material environment (Pyysiäinen et al., 2006). Theoretically, RBV was
applied to explain the benefits of entrepreneurial competencies on entrepreneurial skills as
practices and know-how instigate unique capabilities in the organization, thus gaining
competitive advantage from non-replicable and inimitable resources (Barney, 1991; Grant,
1991).

MANAGERIAL SKILLS THAT MAKES A SUCCESSFUL ENTREPRENEUR

Being hardworking and industrious is no guarantee in the making of business activities while
they play an important role in the success of the enterprise. While many successful
entrepreneurs have not gone to business schools to acquire managerial theories in the
management of the enterprise, they have developed managerial skills through share
observation, or an inherent leadership ability and intelligence.
1. The ability to plan and conceptualize.
Conceptualization and planning go together. Good concepts need to be put in the planning
table to avoid the risk factor. The entrepreneur can forecast the future by seeing to it that risk
involved are properly controlled.
He must be able to visualize the direction of the business towards successful takeoff, He must
see that the products or service, the pricing strategies, the investment. The take- off point of
any business is the generation of profit based on plans and programs.
2. The ability to organize the resources of the enterprise.
A good business organization is based on people and resources. An entrepreneur works with
others and needs people with the same values and working ability. Efficiency and effectiveness
in the work arena are the workings of people with dedication and talent to do the job properly.
The material and physical resources must be put in place. Waste time and money have no place
in good organization. The entrepreneur must be able to give specific direction and work
activities that will redound to the efficient delivery of the necessary services to customers and
clients.
3. The ability to direct and motivate people in his organization
People are like machines that need an oil that will make them work smoothly and efficiently
and effectively. Machines will bug down if no oil is put into its chamber while in operation. The
same principles work with people. They need proper compensation and motivation for them to
deliver the necessary output.
Compensation and benefits are no guarantee for effective performance while it may serve as
important ingredients. The entrepreneur must be able to communicate ideas and plans to his
subordinates with a sense of humility. Good communication and human relations will drive
people to be motivated to perform their task with pride.
4. The ability to control
Controlling the whole operation is a difficult task for the entrepreneur. Safeguards and control
mechanisms could put in place with carefully crafted policies and procedures. Such policies and
procedures must be carefully disseminated and understood by all who will implement them.
In the implementation stage, check valves through monitoring and feedback mechanism must
be worked out through reports and at times conference with key people. The progress of
operation and other activities related to finance and marketing must generate the necessary
reports as bases for more plans and actions. Controlling cost and none essential expenses will
save important profits that could be invested in profitable operations.
5. The ability to manage time
Time management is a very essential ingredient in the success of an entrepreneur. Because of
the numerous activities to attend to the entrepreneur must be able to log onto his schedule so
that important activities could be attended on time.
6. The ability to adapt to the changing environment of business.
Business today is fast changing with the advent of technology and innovation. The new
entrepreneur must be able to adapt to these changes in the business landscape for him to go
with the time of progress and expansion.
CHARACTERISTICS OF AN ENTREPRENEUR
1. Leadership and management abilities
Managerial Leadership is the ability to plan, organize, direct, and control the organization
towards the goals and objectives of the organization. It requires conceptual skills in defining the
direction of the business and the development of plans and programs that will work effectively.
The mission and vision of the organization must be set up based on his investments and
interest.
2. Positive risk-takers
The entrepreneur as a positive risk take enjoys the challenges of putting his money and time
into a test. He calculates the various alternatives open to him and careful in the choice. The
entrepreneur gathers complete data and makes careful analysis before making decisions.
3. Self – confidence and positive outlook
The entrepreneur has a strong belief in his capacity to make a difference in their chosen field.
They believe that achievements are guiding principles in man’s success as faith drives them to
do better. The entrepreneur believes in the Lord Almighty and that his talents and God-given
gift that he must use for the wellbeing of mankind. His faith in God drives him to work great
enthusiasm and perseverance to teach his target goals.
4. Innovativeness and forward-looking
The blazing path to entrepreneur success is the courage to make innovations in products and
services. The entrepreneur refuses to stop at his achievements. He looks forward to creating
new things, something different from others. He thinks of new technology that will create new
and better things for the customers. He introduces innovations that will satisfy human needs
and wants. He satisfies new market demand for new and better products.
5. Natural intelligence and decision making skills
The entrepreneur’s natural intelligence is an important requirement in making effective
decisions. The entrepreneur has to make decisions as he cannot make things happen without
making a wise choice of alternatives. Creativity and innovativeness carry with it the power to
make decisions as he needs to satisfy customer needs for new and better products and
services.
THE DECISION-MAKING PROCESS:
1. Identify the problem
The risk involved in the management of the business has to be identified and analysed before
solutions could be made. Relevant data and information must be organized. The core objective
is to minimize the risk factor involved as the wrong choice of alternative would result in
production or operation losses.
2. Gather the data that brought the problem
A good and intelligent entrepreneur must be able to get the data that brought about the
problem. The solution to the problem is dependent on the data available at hand. Correct
information would give better solutions. False and irrelevant data would not give the best
solutions.
3. Analyze the data
Not all information is relevant to the solution of the problem. Some data must be discarded.
The data must focus on the problem at hand. It must be timely gathered and the information is
based on actual situations prevailing in the business environment. The internal and external
sources must be analyzed to find out which are relevant in formulating alternatives solutions.
4. Formulating alternative solutions
The entrepreneur makes various alternatives solutions to the problem at hand. These solutions
are subject to a series of analysis and he may need outside opinion. He may subject the
alternatives to further study before making decisions until he finds the right alternative course
of action.
5. Selecting the best alternatives course of action.
After all the alternatives courses of action had been analyzed, the entrepreneur makes the
decision. The decision has to be implemented with fewer possible risks in terms of money,
time, and effort. It must take into account the available manpower and material resources,
supported by financial logistics.
6. Implementing the best alternative
The modern entrepreneur utilizes group efforts in solving business problems. Problems and
solutions have best arrived when people who will be implementing the decisions are properly
consulted and their opinions and ideas are taken into account before the final decision is
implemented. Group effort is required in planning effective strategies for implementation.

ORGANIZING THE BUSINESS ENTERPRISE

The prospective entrepreneurs before going into the intricate field of the business would first
go into deep analysis of their personal and social attitudes. It is not only material assets but
personal values and characteristics. Before venturing into the field of business. It is wise to
develop entrepreneurial studies that will help determine the feasibility of the project.
ENTREPRENEURIAL STUDIES
The entrepreneur must see for himself the kind of management control and how the business
will be able to generate his projected profitable investment. He sees the wide-open market of
opportunities and the possible problems before he plunges into the intricate operation of the
enterprise. Wise investment through a careful analysis of the business environment would
minimize business failures.
 Lesson 5: Business Organization
Business organizations can be legal entities through which investors and entrepreneurs provide
goods and services and collaborate with one another to achieve commercial goals.

1.1 What is a Business Organization?

A business organization is a collection of people working together to achieve a common
purpose related to their organization’s mission, vision, goals and objectives, and sharing a
common organizational culture.
Types of Business
1. Service Business - a service type of business offer professional skills, expertise, advice, and
other similar products.
Ex. of service businesses are: salons, repair shops, schools, banks, accounting firms and law
firms.
2. Merchandising Business – this type of business buys products at wholesale price and sells
the same at retail price. They are known as “buy and sell” businesses. A merchandising business
sells a product without changing it’s for.
Ex: grocery stores, convenience stores, distributors and other reseller.
3. Manufacturing Business- this type of business buys products with the intention of using
them as materials in making a new product.
4. Hybrid Business - are companies that may be classified in more than one type of business.

FORMS OF BUSINESS ORGANIZATION

A. Sole Proprietorship - these firms are owned by one person, usually the individually who has
day-to-day responsibility for running the business.
B Partnership - in a partnership, two or more people share ownership of a single business who
bind themselves to contribute: Money, property or industry.
C. Corporations - these firms has a life of its on and does not dissolve when ownership changes.
D. Cooperative - is a legal entity owned and controlled by its members.
Types of Venture
An entrepreneur has several ways to start a new venture. 3 forms available:
a. Start up
- is a company that recently formed
- It is a process where the entrepreneur creates a completely new business starting from
scratch.
Adv:
- Freedom of making own decision
- Ability to make changes to business
- Will not affect the reputation of the business as it is a new venture
Dis.
- Time consuming and costly
- No ready customers
- Difficulty of obtaining loans from financial institutions
B. Buying an existing business
- Buying or acquiring either the shares or all of the assets of an existing company or businesses
- It is the safest and most effective way for entrepreneurs to go into business
Adv:
- Immediate operations
- Easier financing
- Existing customer
Dis.
- Costly to buy
- Obsolete goods
- Problem of the business
C. Franchising
- An agreement in which the owner of a trademark, trade name or copyright has licensed others
to use and sell its goods or services.
Adv.
- Brand name appeal
- Proven track record
- Training and guidance provided

Dis.
- Franchise fees

Lesson 6: Business Plan

The entrepreneurs are not discouraged with the constraints along the causes of our economic
malady. It should be turned into positive note and new solutions must be made to make them
different from other individuals. There are lots of opportunities entrepreneurs who are
hardworking, creative and resourceful. Business opportunities are wide open for people who
would like to invest their money into gainful business activities. They need to find out this new
venture that interests them and how they can harness their technical knowledge of the trade.

Before venturing into the field of business, the new entrepreneur should look into the
following factors:
1. Know your product or service
2. Analyze the market potential
3. Determine the marketing strategy
4. Know the competitors
5. Do not set on you laurels

ENVIRONMENTAL SCANNING
The environment of business is vast the opportunities and the entrepreneur must have a
greater look into this potential as well as the conditions prevailing in the community. The
entrepreneur’s ultimate objective in the community. The entrepreneur’s ultimate objective in
diving into the business world is to make profit. Investment in money and effort should
generate financial gain for the entrepreneur .To generate income for his product or service he
must be able to deliver customer satisfaction.

The following factors are contributory to the development of customer satisfaction.

1. Business Location for Small Entrepreneurs

A retail outlet would need a site that is convenient to prospective customers in terms of parking
space or availability of transportation. A restaurant or an entertainment center would need
ample parking areas where customers would not worry about where to leave their cars while
enjoying their stay. The same could be true with grocery stores.
In choosing the location, the following factors must be looked into by the entrepreneur.

a) Rent and Space

b) Terms of Lease Agreement
c) Type of Goods or Merchandise
d) Income level of Prospective Customer
e) Prospective Sales Volume
f) Municipal or City Ordinances including taxes and fees
g) Location of the Areas

2. Location for Small Industrial Plant or Manufacturing Facilities

Environmental Factors in locating a manufacturing plant location is a great factor in the
investment of funds and its profitability in the long run. The industrial facility must be suitable
to the kind of operation. It must comply with government zoning regulations related to
pollution and environmental laws.

The following are important factors to consider:

a) Land Area
The contour of the land, its size, and shape must be suitable to the plant site. It must be free
from floods, or other environmental hazards that will disturb operation. The assessed value of
the property must be reasonable as expenses to start-up of operation requires a lot of money.
The assessed value is also a factor in the payment of taxes.

b) Facilities for Expansion

The land area must have ample space for plant expansion and provisions for parking facilities
for customers and employees. Anticipation of growth and expansion in plant facilities should be
considered as additional site in the future may create a problem.

c) Power and Utilities

Availability of power supply and the cost of electricity involve in the operation are great factors
in the production of goods. Continuous power supply is needed to keep the plant in operation
for its target production. Water supply is also needed and the proper disposal of waste must be
put in place to comply with environmental laws.

d) Building and other Utilities

The building must be within the restrictions code of the municipality or city. The utilities like
canteens and other employee’s facilities must be put in place in compliance with the labor
code. Sidewalks and gutters are important component in employee’s safety while in the plant
site. Fire safety and hazards signs are mandatory requirements.
e) Plant site accessibility
The plant site must be accessible to public or service transport for its employees and valued
customers. It must be near highways or expressways to provide ease in travel time and reduce
costs in the transport of raw materials and finished products. Delays in the transport system are
added costs that must be avoided.

STRENGTHS, WEAKNESSES, OPPORTUNITIES, AND THREATS (SWOT)

SWOT ANALYSIS is an entrepreneurial tool for determining the profitability of the business
operation. Opportunities carry with it some risk involved and this should be looked into
carefully. The strengths and weaknesses are internal factors to the entrepreneur must look at
how strong he is to combat the weaknesses on his side and this needs strong determination to
succeed with caution. He may need long working hours and advanced thinking to overcome the
possible threats. Planning and environmental analysis is needed to keep opportunities moving
to his side of profitability. Investment in money and effort should turn the tide of profit to the
side of the entrepreneur and this needs careful study and analysis.
The product must be evaluated in the following areas:
1. Product strength in the market must have the following:
a. Available Technology in Product Processing
b. The Source of Raw Materials must be Abundant and at Lower Price
c. Skilled Workers must be Available
d. Capital Investment in Machinery and Operating Expenditures
e. Expertise and Technical Skills of the Management Team

2. Characteristics of Weak Products and Weak Management

a. Poor Quality and High Price
b. Product Design and Appeal
c. Production Cost
d. Supply and Demand
e. Weak Product Management
3. Sustainable Product Opportunities in the Market:
a. Product Demand
b. Presence of Poor Quality in the Market
c. Government Policies and Support
d. Liberal Credit Terms and Interest Rates

4. Treats to Product Profitability and Market Expansion

a. Entrance of Competition
b. The Supply of raw materials will be limited as other competitors will be getting the same
suppliers.
c. The Emergence of Leftwing Labour Unions
d. The Presence of Double Taxation
e. Peace and Order in the Area of Business Operation
f. The Cost of Power Supply

The Entrepreneur should look deeper into the following areas:

1. The management Team
2. The Production Process
3. The Marketing Program
4. The Financial Management

THE IDENTIFICATION OF BUSINESS OPPORTUNITY

1. The Starting Point of Conceiving the Idea of the Type of Business

2. The Technical Feasibility and Time Frame
TIPS IN CHOOSING THE BUSINESS NAME
1. Easy to recall or remember
2. Pleasant meaning creates pleasant feeling
3. Easy to pronounce
4. Easy to spell
5. Related to the product
ORGANIZING THE BUSINESS ENTERPRISE
The prospective entrepreneurs before going into the intricate field or the business world should
first go into deep analysis of their personal and social attitudes. It is not enough that you have
the capital and resources to go into business as it involves not only material assets but personal
values and characteristics. Before venturing into the field of business it is wise to develop
entrepreneurial studies that will help determine the feasibility of the project.
THE EVENT FORMATION PROCESS FOR ENTREPRENEURS
1. The Change in Life Path
2. The Desirability of the Business Concept
3. The Feasibility of Implementation
4. Forming the Business Enterprise
5. Stability of Business Income and Profit
BASIC PHASES OF BUSINESS PLAN
1. Management Structure and Component
2. Marketing and Distribution System
3. Production and Technology
4. Financial Management
Why Create a Business Plan?
• Saves time and money.
• Key to raising capital.
• Serves as an operations guide.
• Helps you organize your thoughts before starting.
Business Plan Components
1. Cover page
2. Table of contents
3. Executive summary
4. Mission, vision, and culture
5. Company description
6. Opportunity analysis
7. Marketing strategy and plan
8. Management and operations
9. Financial analysis and projections
10. Funding request
11. Exit strategy
12. Appendices
Business Plan Suggestions
1. Write for your audience.
2. Show that you have “skin in the game.”
3. Be clear and concise.
4. Use current industry data and reports.
5. Select a “voice” and stick with it.
6. Use a consistent, easy-to-read format.
7. Number and label items throughout the plan.
8. Present the plan professionally.
 Lesson 7-8: Target Market

The objective of this part is to determine which part of the total potential market will be served
by the firm. Considering that the market must be defined in terms of size, demographics,
growth prospects, trends and sales potential market and the total aggregate sales of the
competitors must be presented.

What is Target Market?

IDENTIFICATION OF TARGET MARKET

ACCORDING TO PHILIP KOTLER, A TARGET MARKET IS A WELL- DEFINES SET OF CUSTOMERS,

WHOSE NEEDS THE ORGANIZATION PLANS TO SATISFY. IT DESCRIBES THE POTENTIAL
CUSTOMERS AS WELL AS WHERE, HOW, AND WHY THEY ARE LIKELY TO BE FOUND.E WORLD
A target market is a group of consumers or organizations most likely to buy a company’s
products or services. Because those buyers are likely to want or need a company’s offerings, it
makes the most sense for the company to focus its marketing efforts on reaching them.
Marketing to these buyers is the most effective and efficient approach. The alternative –
marketing to everyone - is inefficient and expensive.

Your market will depend on the particular consumer needs your product addresses.
THE THREE KEY ASPECTS OF A TARGET MARKET INCLUDE:
• DEMOGRAPHICS: AGE, GENDER, INCOME, EDUCATION OR EMPLOYMENT STATUS.
• GEOGRAPHICS: PRIMARY LOCATION OF YOUR MARKET.
• PERSONALITY TRAITS: WHAT THEY LIKE AND DISLIKE, AS WELL AS WHERE THEY SHOP AND
THEIR FAVORITE BRANDS.
Business-to-business markets include:
1 TARGET MARKET
2 FREQUENCY OF PRODUCT PURCHASE
3 TENDENCY FOR REPLACEMENT NEEDS VS. EXPANSION PURCHASING PROCESS
4 ESTIMATES OF MARKET SIZE, INITIAL TARGETED GEOGRAPHIC AREA, ENTERPRISE'S TARGETED
MARKET SHARE
5 DEMOGRAPHIC FACTORS, SUCH AS INCOME LEVEL, AGE RANGE, GENDER, EDUCATIONAL
LEVEL, ETHNICITY OF THE TARGET MARKET
6 PSYCHOGRAPHIC OF THE TARGET MARKET
7 BEHAVIORAL FACTORS SUCH AS FREQUENCY OF PRODUCT PURCHASE AND
SHOPPINGBEHAVIOR OF THE TARGET MARKET
Categories of Consumer
PRICE SHOPPERS
This group is interested in the best deal for a product. They are commonly called as
PRACTICAL and price conscious.
BRAND-LOYAL CUSTOMERS
This group believes that their present brands are superior to others and are willing to pay fair
prices for products just to acquire it.
STATUS SEEKERS
People who are interested in prestigious or called (signature) brands or known product
categories and willing to pay at any price.
SERVICE OR FEATURE SHOPPERS
This group seeks a high value on customer service and product features and will pay for them.
CONVENIENCE SHOPPERS
People who value nearby locations, long store hours and are willing to pay for easier
shopping.
Why have a Target Market?
For your business to thrive, you need to know who your customer is. Knowing your customers
will help you to target customers who are willing to pay for your product or service. This is a
much more effective and affordable way to reach your customers and generate business. You’ll
be wasting resources if you aim too broadly, or find out too late that there aren’t enough
customers for your product or service.
By understanding your market you can promote your product or service more effectively to the
right customer group.
1. Research your Market
To define your target market effectively you’ll need to do some research. Gathering statistics
and other market research data helps you to understand your potential customers and their
needs and make better marketing decisions.
2. Segment your Market
Work out if your market is large enough and accessible. Then segment the market into groups
of buyers with similar preferences and buying habits. For example, the athletic shoe industry is
broken up into several segmented groups – first by gender, then by the activity or sport. Once
you’ve identified your market segments, you can define your ideal customer for each segment.
3. Define your target Market
Then target your marketing efforts to explain how your product and service will fit into their
lifestyle and how it best meets their needs.
What Factors Are Important In Selecting A Target Market?
Selection of the target market is a crucial process. That's because a business is required to
consider a lot of factors in order to decide what segments of the market it should focus on
making maximum profit. Here's a list of the top factors that are considered:
• Segment size
The very first factor that affects the selection of the target market is "segment size" in terms of
unit and revenue sales.
• Competitors
Every business gets its share of competition. Even if you start a business that's one of its kind, if
it's a hit, you risk a competitor entering the same marketplace to try to make the most from the
lucrative market.
• Demographics
Next comes the data regarding the age, gender, location, preferences and other such elements
related to your target audience. Figuring out who requires your product or service and who
would be interested in buying them is crucial when deciding your target market.
• Substitute products
Knowing what products your target customers would use in the absence of your product. These
products or substitutes could threaten the profitability of your business, especially if they are
sold at a lower price.
• Distribution channels
Lastly, figure out how easy it would be to gain access to the appropriate distribution channels.
IDENTIFY THE MARKET PROBLEM
In building product, entrepreneurs can meet customer’s needs. In identifying market problem ,
the following can be considered.
1. Existing customers are the people who have already purchased the product you are selling
2. Target market users are the people in your market who are not currently looking for a
solution
3. Prospects are the people who have not yet purchased your product but have an intention to
buy
Tips in Identify the Market Problem
FOCUSING ONLY ON INNOVATION AND THE COMPETITION
FOCUSING ONLY ON CUSTOMERS
FOCUSING ONLY ON REVENUE

HOW TO EVALUATE MARKET PROBLEMS?

1. Consider if the market problem is urgent, if yes, consider necessary actions by identifying
alternative courses of action (ACA) then enumerating their advantages and disadvantages.
2. Evaluate if the market problem is pervasive or easily diffused, if yes think for a temporary
solution.
3. Determine if the buyers will pay to have this problem solved.
PROBLEM IDENTIFICATION RESEARCH
By conducting new market research projects, the learner can discover problems or
opportunities. One could discover any of the following factors through problem identification
research.
1. Brand image. Is the impression in the consumers’ minds of a brand’s total personality. It
developed over time through advertising campaigns with consistent ideas. This is authenticated
through the consumers’ direct experience.
2. Market characteristics – describes attributes of the buyers in making decisions related in
purchasing a certain product.
3. Market potential – is the estimated maximum total sales revenue of all suppliers of a product
in a market during a certain period.
4. Market share – is a percentage of total sales volume in a market captured by a brand,
product or company.

PROBLEM SOLVING RESEARCH

1. Distribution Research - It determines on how to transfer the product from the manufacturer
to ultimate user.
2. Market Segmentation- They are group customers by similar characteristics or similar
purchase behaviours.
3. Pricing Research – It determines the ideal price for the product. Setting the price for the
product is one of the most important marketing steps.
4. Product Research – It tests the new or revised products or completing test marketing.
5. Promotional Research – It determines the best research in the area of disseminating
Information.

MARKET NEED ANALYSIS

Define the Market Need for the New Business
In analyzing the market need, the following questions should be asked?
1. Who will get interested in my product?
2. What does the market need or want?
3. Who is buying the product? What and how much? How, and why are they buying those
goods or services?
MARKET ANALYSIS
A market analysis is a quantitative and qualitative assessment of a market’s ability to respond
positively. It looks into the size of the market both in volume and in value, the various customer
segments and buying patterns, the competition, end of the economic environment in terms of
barriers to entry and regulation in the industry.
HOW TO DO A MARKET ANALYSIS?
This is to show the investors that the company knows its target market. It is large enough to
build a sustainable business.
The following activity can be recommended.
1. Demographics and Segmentation
Demographic is the statistical characteristics of human population (as age or income) used
especially to identify markets; a market or segment of the population identified by
demographic.
Segmentation is the process of dividing into segments with similar characteristics. Markets are
needed to slice it into different segments. This is especially relevant if competitors focus only
on certain segments. It can be segmented through its size (number of potential customers) and
the value of the market. Estimating the market value is often more difficult than assessing the
number of potential customers.
2. Target Market
This is the type of customers that are focused within the market. It is focused on the more
qualitative side of the market analysis by looking at what drives the demand.
3. Market Need
Investors must determine the needs of the market through analysis based from research
conducted focusing on their needs. Identify what the customer wants to classify their needs.
4. Competition
Determining the competitor’s positioning and describe their strengths and weaknesses. Analyze
competitors angle to the market in order to find a weakness that company will be able to use in
its own market positioning. One way to carry the analysis is to benchmark the competitor
against each of the key drivers of demand for the market (price, quality, add-on-services etc.)
BARRIERS TO ENTRY
These are the hindrances or something material that block or intend to block passage. It is a
natural formation or structure that prevents or hinders movement or action or even separates
the new businesses.
How are few examples of barrier to entry.
1. Investment
2. Technology
3. Brand
4. Regulation
5. Access to resources
6. Access to distribution channels
7. Location

Lesson 10: Branding Strategies

BRAND NAME
A brand name or mark that is intended to identify the seller’s product and differentiate it from
the product of the competitors. A brand name consists of letters, words or numbers that can be
read or verbalized. A brand mark is the part of the brand that appears in the form of symbols in
distinctive lettering or colours.

A brand mark is recognized by sight but cannot be expressed. A trade mark is a brand that have
been adopted by the seller and given protection. The trade mark is protected by operation of
law under DTI Branding protects the company from imitations and fake products.
PRODUCT BRANDING
A brand is a name or mark that is intended to identify the seller’s product and differentiate it
from the product of the competitors. A brand name consists of letters, words or numbers that
can be read or verbalized. A brand mark is the part of the brand that appears in the form of
symbols in distinctive lettering or colours.

Advantages of Branding
1. Brands make it easy to identify the product or service.
2. It assures the buyer that they get the same quality of products.
3. It reduces price comparison.
4. It adds prestige to the product of the seller.
5. It provides legal protective for the seller.
6. It helps in product market segmentation.

Selecting a Good Brand Name

1. It should suggest about the product or service.
2. It must be easy to pronounce and remember.
3. It must be simple and short.
4. It must be distinct or different from others.
5. It must be adaptable to new company product that may be added.
6. It must be capable of registration and legal protection.

BRANDING STRATEGIES
1. Producer’s Strategy
2. Middlemen’s Strategy

Advantages of Co- Branding

1. It creates broader customer appeal
2. It develops greater brand equity.
3. It expands the middlemen brand in the market

Disadvantages of Co-Branding
1. Coordination is often times difficult with the producer and the middlemen
2. It entails legal contract which can be complex and difficult
3. Licensing agreement is necessary.
4. It requires mutual trust between the two parties

BRANDING STRATEGIES FOR PRODUCERS AND MIDDLEMAN

The producers and middlemen are partners in the distribution of the products to their target
consumers. Their partnership is a long-life process of mutual concern and cooperation for the
development of customer satisfaction.
THE DIFFERENT STRATEGIES USED TO SELL MORE PRODUCTS.
1. Branding within a Product Mix
a. Separate Name for Each Product.
b. The Company Name Combined with the Product Name.
c. The Company Name Alone.

2. Branding for Market Saturation

a. Introduction of Line Extension
b. Introduction of Brand Extension
c. Introduction of New Brand Name

REASONS FOR THE EXISTENCE OF BRANDS

1. Identification
2. Protection
3. Positioning

CRITERIA FOR CHOOSING A BRAND NAME

1. Distinctive- Is the brand closely associated with another product?
2. Word Association- Does it have a pleasant meaning?
3. Legal Requirements- Can it be registered?
4. Memorability- Can your name be remembered easily?
5. Pronounceability- Can it be pronounced easily?
6. Limitations- Is the brand name too limiting to be used for expansion?

Lesson 11: Marketing Mix

Marketing mix is the combination of controllable elements or variables needed to develop
strategy to attain satisfaction in the market, particularly both in customers and consumers. It is
also a business tool used in the organization particularly the marketers doing the job. The
company needed marketing mix to determine a product or brand’s offer with the following:
product, price, place, promotion, product, positioning, packaging and people.

Marketing Strategy are the tactical activities that combine all or its marketing goals into one
comprehensive plan. It should be drown from market research through survey using
questionnaire, conducting, interview and personal observation. The organization should focus
on the right product mix in order achieve the goals and objectives. This is the bases in
formulating a marketing plan. It also allows the organization to use pathways and footholds
that helps in the usefulness of the limited marketing budget to be more effective and achieve a
sustainable of the limited marketing budget to be more effective and achieve a sustainable
competitive advantage.

PRODUCT
A product is anything that can be offered for satisfaction. It may be an idea a physical entity (a
good), a service, or any combination of the three. Product is that bundle of satisfaction which
the buyer receives as the result of a lease or purchase. It includes the physical good or service
itself (its form, taste, the warranty, the manufacturer’s and retailer’s services.

LEVELS OF PRODUCT
Tangible products are the basic physical appearance which can be a service or idea having
precise specifications and is offered under a given/ specified description or model number.

Generic product emphasis the impact of the product to the consumer, not the seller. This will
signify the purpose if its existence and the primary objective in creating the product.

TYPES OF PRODUCT
1. Goods are sale of the physical products from the manufacturer to the consumer or final and
ultimate user. These are tangible products that can measure the satisfaction with result or
evidences as manifested through physical development
a) Durable goods
b) Non –durable goods

2. Preferences.
a) Rented good services
b) Owned good services
c) Non good services

CHARACTERISTICS OF SERVICES
1. Intangibility is the services that cannot be displayed, transported, stored, packaged or
inspected before buying
2. The credibility of the service provided most of the time counts.
3. Inseparability is the service provider and services that cannot be separated.
4. Variability is when the service is difficult to standardize because it varies upon the
performance of the provider.

CONSUMER PRODUCTS
These are goods and services destined. Produced for the final consumer for the personal family
or household use. The use of the goods or services designates it as a consumer product.

1. Convenience Products
a. Staples
b. Impulse products
2. Shopping products
3. Specialty products
4. Industrial product

Market Research is the process or sets of multiple activities that link the marketing organization
with its customers through information gathering and analysis. It specifies information required
to address various issues designed to collect the needed information and is made as
springboard for careful analysis and interpretation of marketing data which will help generate
conclusions in the solution of marketing problems.

Example:
Marketing Research
Sloven’s Formula
The proponents use Sloven’s formula to determine the possible sample of the respondents
needed for the study. The total population of Brgy Tagapo,Sta Rosa City Laguna is 10,804.
Where in:
N= the number
n=number of the needed respondents (sample)
e+ margin of error (5%)

Survey Questionnaire:
The proponents distributed 386 questionnaires in the area of Brgy Tagapo meeting the criteria
of the proponent’s target market. The results are interpreted and tabulated below.

PRICE
Price determines the value of good or service in the buyers even to the sellers. It is the amount
of money needed in order to acquire a product or service and its accompanying service. It is the
amount of money charged for a product or service or the sum of the values that consumers
exchange for the benefits of having or using the product or service.

PRICING STRATEGY
1. Cost plus pricing- This method covers all costs, variable and fixed plus an extra increment to
deliver profit.
2. Demand pricing – This is a method of pricing where the firm sets prices based on buyer
desires.
3. Competitive pricing – This method of pricing calls for the price-setting on the basis of prices
charged by competitors.
4. Market pricing – This is a form of cost-oriented pricing in which the price sets prices by
adding per unit merchandise costs, operating expenses and desired profit.
PLACE/ DISTRIBUTION
Channel of distribution is made of people or organization involved in the distribution process. It
is any activity of firms or individuals who take part in the flow of goods and services from
manufacturer to final consumer or business user.

Basic types of Channel Distribution

1. Direct Channel distribution
2. Indirect Channel of distribution

Physical Distribution
Physical distribution covers the broad range of activities in connection with the efficient
delivery of raw materials, parts, semi- finished items , and finished products to designated
places and designated times and in proper conditions.
1. Transportation
2. Inventory management
3. Warehousing
4. Retailing
5. Scrambled merchandising
6. Wholesaling

Promotion
Promotion is any form of communication which is used to inform, persuade and remind people
about and organization’s or individual’s goods, services, image, ideas, community involvement
or impact on the society.

Promotional Mix is a combination of the strategies to accomplish an organization’s promotional

objectives.

1. Advertising
2. Publicity
3. Personal Selling
4. Sales Promotion

Positioning refers to how firm differentiates their product or service from those of the
competitors and serving a niche. It is one where the firm identifies a target segment and
develops a strategy mix to address the desires of that segment. The objective of positioning is
to establish the firm’s product or service identify in the mind of the buyer.
 Lesson 12: Management Requirements
MANAGEMENT REQUIREMENT
Management, personnel or laborer should be listed accordingly, from the managerial position,
supervisory position to the staff or workforce needed in the operation of the business. In the
selection process, it is best to identify applicants having the necessary knowledge, skills,
abilities and other characteristics that will help the organization achieve its goals. Both aptitude
and attitude level of the applicant should be considered in the hiring process.

Qualification Standards
Three kinds of qualification standards
1. Manpower – This refers to the personality required to a worker’s traits, manners, values, the
way he talks, appearance and his overall physical attributes in relation to the job criteria.
2. Experience – This refers to the length of working experience in relation to the job criteria
that a worker applies for.
3. Academics – This refers to the worker’s academic qualifications or the educational
attainment required to perform the job better.

MACHINE
After the plant size was determined, the machinery and equipment required can be identified.
Detailed specification including the function should be prepared for each type including the
number of units required. The determination of the equipment size should be closely
coordinated with the manufacturer or suppliers to consider the economical size of the
equipment. The origin of the machine whether local or imported and the country of origin
should be known. The availability of after sales service and spare parts should be clarified with
the suppliers. The delivery schedule, terms of payment and other arrangements.

METHOD
Manufacturing is the conversion of raw material into finished product. The sequence of
operations should be clearly defined to ensure proper execution thus assuring the consistency
of the quality of the product.

The plant size and production schedule are determined based on the projected demand. The
demand is calculated using the applicable forecasting method and adjustment considering the
other factor of production.

The number and capacity of the machine and equipment are determined after considering the
forecasted production and schedule. The manufacturer should be consulted in the preparation
of the detailed specifications of the machine and the origin, whether from local or foreign
supplier known as this will affect the production schedule.

The plant location has a long term consequence in business and should be considered at least
15-20 years continuous operation .Among others, the source of raw materials and manpower
and utilities should be taken into consideration.
A good plant layout will result to a lower production cost. Depending on the size of the
company, related areas are either grouped in a single area or separately in medium or large
enterprises. In a manufacturing concern, while the latter is for batched or continuous
production operations.

The design and construction of buildings and other infrastructure facilities follow after the
layout is finalized. It should be taken into consideration the applicable code and standards as
well as the necessary permits required permits by the authority.

MATERIALS
The materials include both direct and indirect or consumable products. The specifications,
quantity needed, and the schedule of delivery should be clearly stated. Reliability of the
supplies should be assured and single source be avoided.

RECRUITMENT
It is the process of convincing or encouraging a prospective applicant to fill in a vacant position.
Steps in Recruitment
1. Study the different company jobs and write its description and specifications.
Job Description – It defines the duties and responsibilities of a particular position. It is an
essential part of hiring and managing your employees. These written summaries ensure your
applicants and employee understand their roles and what they need to do held accountable.

Job specification- It gives the specific qualifications required for the position such as type of
experience needed for the job, special training, skills and physical demands, special abilities,
aptitude, age physical qualifications and other requirement.

SELECTION
It is the process through which organization identify and make decisions about the applicant/s.
who will be allowed to join the company. Organization should create a selection process to
support of its job description and should be able to identify applicants that have the necessary
knowledge, abilities, skills, and other characteristics required in the job.

TRAINING/RETRAINING
New employees are required to undergo training to help him perform his job efficiency.
For the growth of employees and the company, training is carried out continuously in many
organizations according to the needs of the employees and or company. Retraining is required
to those who need enhancement new knowledge on the present job, need promotion and
transfer to other department.

COMPENSATION
This part contains the compensation of the personnel based on their qualifications. After
determining the needed number of manpower and their qualifications, the next step is to
express it in monetary form. The usual standard in determining wage rates is matching them
with the industry standards.
 Lesson 13: Understanding Start-Up a Business
The Cost of Operating a Business

▪ Litmus test for profitability is economics of one unit.

▪ Start-up costs include:
▪ Start-up purchases.
▪ Fixed and variable costs.
▪ Cash reserves.

Start-Up Investment
▪ Seed capital is the one-time expense of starting a business.
▪ Brainstorm every cost to avoid surprises.
▪ Consult advisors and research industry business plan models.
▪ Include a cash reserve for emergencies.

Predict the Payback Period

Start-up investment
Net cash flow per mo.
This estimate tells investors how long it will take your business to bring in enough cash to
cover the start-up investment.
Estimate Net Present Value
▪ NPV—technique used to determine the current value of a proposed investment.
▪ Information used to calculate NPV:
▪ Initial investment.
▪ Required rate of return (%).
▪ Annual net cash flows.
▪ If NPV is a positive value, the investment will have a positive return.
Variable Costs
▪ Change based on sales and production.
▪ Cost of goods sold (COGS) or Cost of services sold (COSS).
▪ Cost of materials.
▪ Cost of labor.
▪ Other variable costs
▪ Sales commissions.
▪ Shipping and handling.
Finding the Contribution Margin
Average Contribution Margin
A business selling a variety of products can use an average COGS to determine an average
contribution margin.

Fixed Operating Costs

▪ Do not change based on sales/production.
▪ USAIDIR (common fixed operating costs).
▪ Utilities (gas, electric, telephone, Internet)
▪ Salaries (indirect labor)
▪ Advertising
▪ Insurance
▪ Depreciation
▪ Interest
▪ Rent
Depreciation Makes Records More Accurate
▪ If you buy a computer that will last four years, spread the expense out over four years.
▪ Subtract 25% of the computer’s cost from gross profit each year, instead of subtracting 100%
of the cost from gross profit the first year.
Fixed Operating Costs Can be Dangerous to a Business
▪ Fixed costs must be paid whether or not your business has a gross profit.
▪ Be careful about taking on additional fixed costs.
▪ Change fixed costs to variable costs wherever possible.
▪ Keep a cash reserve as a cushion of protection in case of emergencies.
Depreciation Makes Records More Accurate
▪ If you buy a computer that will last four years, spread the expense out over four years.
▪ Subtract 25% of the computer’s cost from gross profit each year, instead of subtracting 100%
of the cost from gross profit the first year.
Fixed Operating Costs Can be Dangerous to a Business
▪ Fixed costs must be paid whether or not your business has a gross profit.
▪ Be careful about taking on additional fixed costs.
▪ Change fixed costs to variable costs wherever possible.
▪ Keep a cash reserve as a cushion of protection in case of emergencies.
Keeping Good Records
▪ Accounting—tracking the inflows and outflows of your business.
▪ Good records enable you to...
▪ Show how to make the business more profitable.
▪ Document profitability and cash position.
▪ Prove that payments have been made.
▪ Take advantage of tax deductions.
Good Accounting Practices
▪ Use computerized accounting software.
▪ Get a receipt for every purchase.
▪ Create an invoice for every sale.
▪ Backup computer records regularly.
Cash Versus Accrual Methods
▪ Cash accounting—transactions are recorded when cash is paid or received.
▪ Accrual accounting—transactions are recorded at the time they occur, regardless of the
payment date.
Categories of Accounting Data
▪ Variable costs—any costs that change based on the number of units sold.
▪ Fixed costs—business expenses that must be paid whether or not any sales are made.
▪ Capital equipment—money spent on equipment expected to last a year or more.
▪ Investment—money invested in exchange for part ownership (equity).
▪ Loans—funds borrowed to start or operate the business.
▪ Revenue—money received from sales.
▪ Inventory—items purchased for resale, including suppliers’ shipping costs.
▪ Other costs—anything that does not fit into the other expense categories.brading