Chapter 2

Organizing a Business

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Prepared by: Glarce, Franc Lawrence G.
Valmores, Devin-J E.
 Organizing a Business
Why Persons Engage in Business
Entrepreneurship
Business Prospecting
The Search for Business Opportunities
Business Promotion
Discovery
Determination of Feasibility
Assembling the Needed Resources
The Promoter
Liability of Promoters

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Organizing a Business
 Organizing a Business
The first stage in the life cycle of a business is
organization. Much of what will happen to the firm in the
later stages depends on the first few steps in the
organization process.

The importance of the organizational stage cannot

be over-emphasized. Business failures have become
common occurrences because of defects in planning at
the organizational stage. Business failures happen to
companies regardless of industry classification and the
amount of capital investment.
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Organizing a Business
 Organizing a Business
The most common reasons for business failures
include the following:

1. Bad or improper management practices, including

poor cost controls and poor hiring practices;
2. Poorly focused and executed marketing or
inadequate marketing;
3. Poor location;
4. Failure to invest in new products and efficient
technology; and
5. Lack of adequate financing.
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Organizing a Business
 Why Persons Engage in Business
1. provision of employment to people;
2. profits;
3. service to the community;
4. personal satisfaction;
5. means to earn a living;
6. achievement of power; and
7. protection of ones self and family.

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Organizing a Business
 Entrepreneurship
two options:
1. to buy an existing business; or
2. to create a business that he will operate.
The entrepreneurs functions are:

1. to supply the capital of the firm;

2. to organize production by buying and combining inputs;
3. to decide on the rate of output in the light of his expectation
about demand; and
4. to bear the risk involved in these activities.
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Organizing a Business
 Business Prospecting
The Research for Business Opportunities
Business opportunities come in several forms. They could be a result of any of
the following

1. increasing demand for basic commodities due to an increase in population;

2. rising prices (or costs) of existing products like construction materials;
3. relaxation of government policies like the lifting of import restrictions;
4. the development of new service concept like the issuance and delivery of
passports through courier service;

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Organizing a Business
 Business Prospecting
The Research for Business Opportunities

5. the development of a new product concept like the engine that runs on
water;
6. the increasing demand for specialized services like manpower export
services, health and fitness services, management consultancy, and skills
training;
7. the increasing requirement of the wholesale and retail industry; and
8. many others

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Organizing a Business
 Business Promotion
refers to discovery and exploration of a business
opportunity with the purpose of converting it into a
going concern.

The three steps involved in business promotion are the following:

1. discovering the idea for a new business;

2. determining the feasibility of the idea; and
3. assembling the needed resources to start the business.

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Organizing a Business
 Business Promotion
Discovery
Determination of Feasibility
The feasibility study is a defined investigation and analysis of a proposed
business venture to determine its viability. According to the need, the
study must contain some or all of the following aspects:
1. Management study including proponents, personnel, and organization;
2. Marketing study;
3. Production facilities and products;
4. Taxation and legal aspects;
5. Financing;
6. Profitability; and
7. Social desirability.
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 Business Promotion
Determination of Feasibility

Management Study. It is in this particular portion of the feasibility study where the
following aspects are determined:

1. the appropriate form of organization;

2. the internal structure of the organization;
3. the owners; and
4. the staffing pattern of the organization.

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 Business Promotion
Determination of Feasibility

Marketing Study. This portion should provide the following information:

1. the future total demand for the products;

2. the competitive situation of the product in the industry;
3. an estimated annual sales volume;
4. future selling prices; and
5. the marketing program.

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Organizing a Business
 Business Promotion
Determination of Feasibility

Technical Study. In this particular aspect o the feasibility study, the following
requirements should be determined:

1. the manufacturing process selected, if applicable;

2. the rated capacity of the plant;
3. the design of the machinery;
4. the location and lay-out of the plant;
5. the specifications of the structures; and
6. the requirements for operation.

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Organizing a Business
 Business Promotion
Determination of Feasibility

Taxation Study. The tax burden applicable to the project should be shown in this
portion of the feasibility study. An important factor that must be
considered is that the design of the project must be such that the tax
burden is legally minimized.

Financing Study. The source of financing for the project is discussed in this portion.
Particular attention is given to selecting the most attractive financing
scheme using factors of cost and availability.

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Organizing a Business
 Business Promotion
Determination of Feasibility

Profitability. The rate of return using various approaches is shown in this

particular aspects of the feasibility study.

Social Desirability. This particular aspect is optional.When it is included, however,

it should provide a description of the social returns applicable to the
project. It should present the benefits that will be afforded by the project to the
community. Examples are the of prices and provision of employment.

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Organizing a Business
 Business Promotion
Assembling the Needed Resources
Once the feasibility of a proposed business project is determined by
experts, the proponent may proceed to assemble the needed resources.

This is made prior to the start of business operations. The resources

needed may comprise of the following:

1. initial capital required;

2. the essential properties;
3. processes; and
4. personnel.

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 Business Promotion
Assembling the Needed Resources
Initial Capital Requirements. A new business project requires initial capital
to take care of the following:

a. cost of organization;
b. working capital;
c. acquisition of fixed assets; and
d. reserves.

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 Business Promotion
Assembling the Needed Resources
Sources of Initial Capital. A new business project may initially be financed by
using any or a combination of various sources. The management of the
firm about to start operations will have to use time and expertise to
avail of credit facilities offered by suppliers and financing institutions.

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 Business Promotion
Assembling the Needed Resources
Retention of Control. There is a possibility that at the promotion stage,
outsiders may deprive the promoter and the founders of control
over the new business idea. It is, therefore, important that certain
control measures be instituted to protect the interests of the promoter
and the founders.

These can be attained by using any or a combination of the following:

a. leases;
b. options an contracts;
c. franchises and concessions; and
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Organizing a Business
 Business Promotion
Assembling the Needed Resources
Valuation. The correct valuation of the property and services to be acquired
by the new business project is a very important step in the assembly
of needed resources. In some cases, stocks are issued as payment for
the required property and services. Unless a conservative valuation is
used, stocks may be issued whose nominal value may be higher than
the amount representing the real assets of the business project.

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 Business Promotion
Assembling the Needed Resources
Promoting a business may not succeed due to any of the following:

1. Overvaluation o property and services;

2. Inadequate sampling or overestimation of the potential market;
3. Underestimation of the expenses of establishing a business;
4. Managerial ad personnel difficulties; and
5. Unforeseen changes in the state of the entire economy.

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 The Promoter
is the person responsible for the formation of a company.

The promoter is motivated by any or a combination of the following:

1. the promoters fee;

2. shares of stock or bond in the new business project;
3. a management position in the new business project;
4. a new customer for his products or services; and
5. the desire to contribute to the economic growth of the local
community.

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 23 of 25

Organizing a Business Procedure in organizing a business

 The Promoter
Promoter may be classified as follows:

1. professional promoters they are those whose main occupation

is business promotion;
2. side-line promoters they are persons who perform promotion
activities occasionally;
3. banking promoters they are banking institutions which provide
business promotion services to their clients;
4. financial promoters they consist of investment houses engaged
in the promotion of certain business ventures through the sale of
securities; and
5. subdivision promoters they are those engaged in the
development of new subdivisions. 24 of 25

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 The Promoter
Liability of Promoters. The promoter undertakes to pursue his job with
the capacity of a temporary trustee.

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