Entrepreneurship

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 Module 4: Product Development,
Operations, and Financial Plan

At the end of this module, I can:

1. Understand the fundamentals of product development.
a. Develop a product or service description.
b. Create a prototype of the product or service.
c. Test the product prototype.
d. Validate the service description of the product with potential customers to
determine its market acceptability.
2. Describe the 4M’s (method, manpower, machine, materials) of operations in
relation to the business opportunity.
a. Select/pinpoint potential suppliers of raw materials as well as
technology/machine requirements and other inputs necessary for the
production of the product or service.
b. Discuss the value/supply chain in relation to the business enterprise.
c. Recruit qualified people for one’s business enterprise.
3. Develop the business model.
4. Forecast the revenues of the business.
5. Forecast the costs to be incurred.
6. Compute for profits.
7. Create the company’s five-year projected financial statements.
The business plan will not be complete if the operations and financial plan are not
included. These two play a crucial role in ensuring that the business is operationally
feasible and financially viable. Even if the marketing plan looks promising, the
business will not be successful without a detailed operations and financial plan.
These two will tell if the big idea generated through the product development process
is realistic.
This module will introduce you to the fundamentals of product development and the
operational requirements of a business represented by the 4Ms – manpower, method,
machine, and materials. You should learn the methods before commercializing a
product or service. You will understand how to identify and comply with the business
requirements before running an enterprise. You will also know the importance of
crafting a business model as a blueprint of the business operations. Last, you will be
taught on how to account actual and future performance of a business enterprise
through preparation and analysis of financial statements.

Fundamentals of Product Development

Before commercializing a new product or service, the entrepreneur must focus
first on refining the product or service and validate its market acceptability. This new
product does not have to be a totally new product. It can be a new product line from
the existing business of the entrepreneur, a product line extension, an enhancement,
or a repositioning of an existing product. Product development is the process of

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 developing, testing, and commercializing a product or service with
the ultimate objective of solving the problem of the primary target market. It is
composed of four sequential steps: (1) developing a product or service description, (2)
creating a prototype, (3) testing the prototype, and (4) validating the market.

Product or Service Description

The product or service description simply describes how a product or service
works and how it benefits the customers. A clear product or service description is
important because this will serve as the blueprint of all business operations.
Therefore, the entrepreneur has to take note of the following regarding the product or
service description:
1. It should directly address the primary target market in a personal manner using
everyday language. The entrepreneur should put himself or herself in the customer’s
shoes, where the product description will be addresses to.
2. It should highlight the features that will cater to the customer’s needs or address
the customer’s problems.
3. Realistic superlatives should be used for the product description. Motherhood
statements such as “world-class service or product excellence” may not matter to the
customers at all.

Creating a Prototype of the Product or Service

After defining the product or service, you may now proceed with one of the most
exciting but also very challenging parts of product or service development: the
creation of a prototype. A prototype is a preliminary model or sample of a new
product or service that is created to test a product concept or service process. This is
an exciting process for the entrepreneur because he or she will be able to see that his
or her ideas will soon become a tangible reality. The entrepreneur’s creativity and
ingenuity will be used in creating the prototype.
According to Entrepreneur (www.entrepreneur.com), creating a prototype lessens
implementation/commercializing risks and provides the entrepreneur a bunch of
advantages as follows:
1. Creating a prototype enables the entrepreneur to engage in trial-and-error,
provides room for improvements, and refines the functionality of the product design
or service process. It is very expensive and risk-intensive to commercialize a product
without creating a prototype.
2. Creating a prototype provides the entrepreneur a window to test the performance
and specifications of various materials and service processes. Every detail of the
product or service should be scrutinized carefully, and all flaws be addressed right
away before commercialization.
3. A prototype helps the entrepreneur effectively describe the product or service to
the product team. Members of the product team include marketing, operations,
engineers, suppliers, business partners, and legal and human resources. It provides
the product team the information needed to create the right product or service as
planned.

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 4. Creating a prototype elicits respect from key stakeholders
and customers. At the same time, a prototype gives credibility to the entrepreneur.
Some entrepreneurs only present vague and big ideas but no details as to its
feasibility and implementation.
Creating a prototype is the stage where the entrepreneur can experiment, develop,
and make some improvements in the potential product or service. The objective of the
entrepreneur at this stage is to verify if the product or service concept will work at the
simplest, fastest, and cheapest way.
One technique for creating the best prototype is by studying the competitor’s
product or service. The entrepreneur will try to scrutinize the parts and functions as
well as the design and other attributes of that product, in hopes that he or she will be
able to address some problems in the competitor’s products and come up with the
most efficient and effective prototype. As for the services, the entrepreneur may try
availing the competitor’s services and will take note of their operations, such as
service delivery, location, facilities, and ambiance. He or she will then take note of the
pros and cons of the service to create the prototype, simulate the service by trying it
with his or her friends or relatives, and then get their feedback.
Some entrepreneurs create a video presentation or a miniature prototype, so they
will be able to explain the details, if the product is to be viewed by a panel of
specialists (e.g., engineers, developers, scientists). The scope should be related to the
entrepreneur’s budget. After creating the prototype, he or she should be ready to test
it.

Testing the Prototype

All the efforts exerted in the creation of a prototype will be put to waste if the
prototype will not be tested. Testing the prototype is a vital process before an actual
product or service is launched to the market. Testing the prototype will uncover the
final loopholes that need to be fixed before commercialization. It gives the
entrepreneur a leeway to examine and scrutinize the prototype and provide feedback
as to what can be improved before the launch. These improvements and changes
must be completed first before moving forward to the next step. For a prototype that
has already been refined, testing it for the last time after the changes have been made
will validate its readiness for commercialization. The following testing methods are
applied by the entrepreneur:
1. Focus group discussion – The participants will provide relevant insights about
the new product or service. The objective of the FGD is to identify errors, deficiencies,
and issues that may impede the success of the product. Participants also need to
provide suggestions and practical solutions on how to improve these deficiencies.
2. Legality and ethical test – Prior to launching, the entrepreneur must ensure
that the product or service complies with all relevant laws and regulations and has a
necessary license or permit to operate a particular business. For example, food
products must be cleared first with the Bureau of Food and Drugs (BFAD) before they
are offered to the public. The entrepreneur must also make sure that the
manufacturing/production of goods or offering of the service does not generate
ethical issues such as being threats to health, safety, and environment.
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 3. Safety test – The entrepreneur must ensure that the product
is safe to use, safe to be consumed (food and beverages), and safe to be applied
(cosmetic products). The product should not in any way harm the customer or put
the customer in peculiar situations. In service, the entrepreneur must ensure that
the processes to be performed by the service provider must not be detrimental to the
safety and health of the customer.
4. Product costing test – The entrepreneur must examine every stage of the
manufacturing process or every process of the service blueprint to evaluate and
finalize the costs involved. This is the time when the entrepreneur can match the
expected costs versus his or her budget. Modification in the manufacturing process
or service blueprint can still be made at this point to align with the cost objective of
the entrepreneur.
5. Component test – Each component of the product or service must be tested
independently to identify component failures for goods or service failures for services.
Any failure identified must be redesigned and tested again until it becomes fully
operational and functional.
6. Competitor’s product / service test – The entrepreneur must test a similar line
of products or the competitors’ product or service itself to compare and get the best
practices to be applied to the new product or service.
Testing the product prototype is mandatory to ensure that the product or service will
not fail the customers and will deliver its definitive purpose. This will elicit customer
satisfaction and, eventually, customer loyalty and retention. This is the time to prove
that the concept formulated by the entrepreneur will work and is feasible in real life.
All the mistakes accounted for and the improvements to be fixed should be performed
first prior to commercialization of the product or service.

Validation of Market Acceptability

Validation of market acceptability is the process of finding out if the intended primary
target market will be buying the product or availing the service. Market acceptability is a
critical factor that the entrepreneur must validate before launching the product or
service, because this can strongly suggest if the business will be successful or not. It
either validates or disconfirms the perception of the entrepreneur about the suitability of
the chosen primary target market. It also tests whether the value proposition and unique
selling proposition are appropriate or there’s a need to improve on them. This is also the
time to deeply understand the value that the product or service brings to the customer
and their prospective purchase behavior, because it helps the entrepreneur build a more
relevant and meaningful product or service. This process is the last step before the
product or service can be introduced to the market. The following objective questions are
more likely to be answered in the whole process of market acceptability validation:
1. Will the primary target market like the product or service?
2. Will the primary target market buy the product or service when it is already in
the market?

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 These questions can easily be
answered if the entrepreneur will perform the
following activities:
1. Use the most strategic marketing research tool (FGD, survey, observation,
interview, online survey, e-mail, or a combination of these research tools),
wherein the entrepreneur can get the most relevant answers in the cheapest way
possible.
2. Prepare relevant open-ended questions that answer the objectives above. Do not
go around the bush and be straight to the point. Keep the questions to a
minimum because the target market might get bored and not finish the whole
questionnaire.
3. Find market experts who also target the same market but are not directly
competing with the entrepreneur. For instance, a market experts sells cars to a
specific market segment and it so happens that an entrepreneur sells real estate.
The entrepreneur can leverage on the knowledge of the market expert regarding
that market segment because they almost have the same demographic data
requirements. The entrepreneur can use these data to improve the product or
service.
4. Collect all the data, analyze them, and prepare a summative report that answers
the objective questions that were mentioned earlier.

The 4Ms of Operations

The operations plan is an important part of the business plan because it simply states
the details in operating the business. Operations management, on the other hand,
controls the implementation of the business plan. A strong operations plan should have
the four operational aspects – called the 4Ms of operations: the methods, or the process
to be followed in effectively manufacturing or delivering a product or service; the
manpower, or the right human resources who will handle certain business operations;
the machines, or the technology used in efficiently operating the business, and the
materials to be used in creating a product or performing a service, which include supply
chain management.

Methods
The methods aspect represent the day-to-day operations of a business. It describes how
an entrepreneur will run the business from all facets of the business such as the
manufacturing of goods, service delivery process, distribution of goods and services,
logistics for delivery of goods, and inventory management, to name a few. The
entrepreneur has to be very detailed in formulating these processes and must ensure
that the customer experience will be pleasant and seamless. Internally, the processes

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 must also abide with the industry standards and policies where the
business belongs (e.g., ISO certification).
The entrepreneur must also set standard operating procedures (SOPs) both in
manufacturing goods and rendering of services. These SOPs must be monitored to
validate compliance. The entrepreneur must also critically consider the effects of these
processes to the environment and to the public.
Manufacturing of Goods (Schaper and Volery, 2004)
The entrepreneur who will engage in producing his or her own products will have to
consider the basic guidelines and principles in manufacturing. Manufacturing is the
process of translating raw materials into finished goods that are acceptable to the
customer’s standards. It consists of three elements:
● Inputs – the materials or ingredients to be used in creating the product.
● Process – the transformation phase where inputs are processed by manpower and
machines to come up with the final product
● Output – the final product of the process stage, which is limited to be sold to
target customers
The entrepreneur must also consider the most efficient manufacturing site in which the
manufacturing process will take place. Depending on the entrepreneur’s objective and
financial capacity, he or she can opt to have any of the following manufacturing sites:
● Home-based – Most startups do not have financial capacity to establish a
manufacturing site. Thus, their only option is to manufacture goods at home. This
option is the cheapest and highly flexible. The entrepreneur can start with
products that are usually manageable to be processed at home such as food
products and customized clothes.
● Commercial space for rent – This is advisable if the business really requires a
commercial space for the processing of goods and if the home option is not viable
anymore. A commercial space gives the entrepreneur a more specialized and
suited manufacturing site than manufacturing at home. However, this is more
expensive than manufacturing at home and requires long-term commitment
because the entrepreneur will need to go sign a lease agreement.
● Commercial space purchase – This option requires the biggest amount of capital
expenditure, but it also provides the entrepreneur substantial freedom and
flexibility to design and run the commercial space. Compared with renting,
purchasing a commercial space is considered more of an investment than an
expense.
Once the entrepreneur has chosen a manufacturing site, he or she should consider
location, where the delivery of raw materials and finished goods will be conducted. The
transportation routes from or to the manufacturing site should be efficient, so that the
delivery of raw materials and finished goods will be seamless. The location should also be
accessible to major types of transport vehicles. Last, the location must operate in an
environment-friendly manner so as not to contribute to various types of pollution in the
environment.
The internal layout or the floor plan of the manufacturing site must also be critically
done by the entrepreneur because it affects the efficiency of the business operation. Each

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 space should be maximized to save on manufacturing costs (specifically
overhead costs). An efficient floor plan illustrates how raw materials and finished goods
can efficiently be transferred, processed, and released from one processing unit to
another. There are two options for the floor plan: (1) the product-based layout, where the
facilities are prearranged according to the flow of the manufacturing operations, and (2)
the process-based layout, where the facilities are grouped according to their function.
Last, the entrepreneur must prepare a manufacturing process flow, which serves as a
step-by-step guide of the employees and the manufacturing equipment. The objective of
the process flow is to ensure that the right inputs are properly used in production, that
the process is performed according to the set standards, and that acceptable outputs are
produced. Not having a process flow will result in inconsistencies in the process, high
expenses, and disagreements among employees.
The entrepreneur’s ultimate objective for all the operational processes is to ensure
that maximum efficiency are met – from the requisition of materials to processing them
into finished goods up to the distribution to the customers.

Service Delivery Process

The entrepreneur who will engage in a service business must be more meticulous when it
comes to the service delivery process. This is because services are intangible, and the
only way the customer can appreciate the service is by remembering how pleasant his or
her experience was. Moreover, a seamless service saves the entrepreneur a huge chunk
in operational costs.
Service entrepreneurs must prepare a detailed flowchart of the service business, which is
also called a service blueprint. Every process in the blueprint must be relevant to the
service business to minimize wastage. The service bottlenecks must be addressed
immediately to avoid customer complaints. Bottleneck is a part of the process where
there is an apparent inefficiency and where the customer waits longer. The service
entrepreneur must develop scripts that the service provider will follow to serve the
customers better and to establish standard processes.
In terms of the floor plan, the service entrepreneur must design it according to the most
efficient way in performing the service, which can be based on the internal structure of
the service business, service delivery requirements, or customer requirements. For
example, a barber shop should place the receptionist in front so that the customers can
easily inquire of the service that they will avail.

Distribution Method
One of the basic processes to be considered thoroughly is the distribution process.
Distribution is the process of bringing the products or services to customers. In selling
physical goods, the entrepreneur must plan the location, the processes, and the
distribution of the products to the customers. The entrepreneur may also buy the
finished goods from the manufacturers and plan how to distribute them efficiently to
target distribution centers or the customers. Distribution is not a straight process from
the entrepreneurs to the customers; thus, the term supply chain or distribution channel
was coined. The manufacturer will deliver the products to the distributors, to the
wholesalers, to the retailers, and then finally to customers. Each member in the supply

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 chain will have fair share in the profits, which may be squeezed if the
supply chain grows longer. This is why there is a tendency to impose higher markups on
the product price. It is now up to the entrepreneur on what distribution channel
strategies he or she will employ depending on the product or service he or she will offer.
As mentioned, there are certain people involved in the supply chain. First is the
manufacturer. The manufacturer handles the invention, development, and production of
the product or service. Entrepreneurs can be manufacturers of a product or service.
Most often, budding entrepreneurs become manufacturers when they introduce a new
product. Most established products or services in the market are owned by top
corporations. The great thing about being a manufacturer is that entrepreneurs can
manage the entire supply chain. Manufacturers take charge of acquiring materials,
production and delivery schedules, product quality, and inventory or safety
management. Manufacturers also handle the product delivery, marketing, and selling.
Because of this, manufacturers often seek the help of distributors or agents for the
distribution of goods.
Distributors are entrepreneurs who often buy products or services to the manufacturers
and sell them at a markup price either wholesales or retailers. Distributors buy the
products in bulk for a discounted price. The bought products or services are now owned
by the distributors, so any damage, spoilage, or other liabilities to the product will be
their sole responsibility. Distributors become wholesalers when they sell the product to
another distributor.
Agents, on the other hand, don’t own the products or services because they do not buy
these from the manufacturer. Instead, they negotiate with buyers as to how much or how
many are to be sold, so the manufacturer will be able to deliver the goods directly to the
buyer. Agents get the commission for every product sold. Some agents do consignment,
wherein agents get the products in advance to demonstrate them live to the customers. If
unsold, agents just return the merchandise to the manufacturers. They are not held
liable for any damages or losses incurred.
Manufacturers turn to distributors when they have limited resources or they don’t have
people with expertise in selling the product. The distributor or agent can assist the
entrepreneur/manufacturer in the following: (1) sharing industry knowledge, behavior,
and activities of the primary target market, (2) pertinent rules and regulations imposed
by the government, (3) best practices in marketing and selling the product, (4) best
practices in operating the business, and (5) their respective sticky relationship with
business associates such as suppliers, financial institutions, or retailers, to name a few.

Payment Process
The entrepreneur must also establish a seamless payment process. Generally, there are
no problems if the customers pay in cash. But there are instances when they do not
want to pay in cash and are usually attracted by flexible and customer-friendly payment
terms such as credit cards, installment plans, or a simple accounts payable or pautang.
The entrepreneur must ensure that credit payments are seamless and that the
customers are aware of the terms and conditions of the credit.
Some entrepreneurs put point-of-side (POS) machines in their shops to accommodate
those who will pay through their credit or debit cards. For traditional ones, they put the

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 credit purchase in a ledger and indicate the due dates. Once the due
date arrives, the entrepreneur has to collect payments from the customers. The objective
for all entrepreneurs is to ensure efficient collection of accounts receivables and avoid
bad debts. He or she must conduct due diligence first before allowing a customer to
purchase via credit.

Manpower
At the beginning of the entrepreneur’s business, he or she usually maximizes himself or
herself, his or her partner, or his or her family members to handle all the aspects of the
business. But as it grows, the entrepreneur will need the expertise of qualified employees
that can handle operational functions, so that he or she will be free from daily activities
and can thus focus on the strategic and management functions of the business. The
entrepreneur needs to plot a table of organization based on his business objectives. Each
position has to be relevant. To verify if a position is really necessary, the entrepreneur
must devise a detailed job description and job qualifications of the future employee. This
will be his or her basis in deciding whether to hire an employee or not. The entrepreneur
must be very keen in selecting and hiring an employee. He or she must ensure that due
diligence is performed to check the background of the applicant. Manpower is one of the
highest costs of operating a business but is also the most instrumental to its success.
Having the right people encompasses a myriad of advantages.

Job Description
Job description enumerates the duties and responsibilities of the potential employee,
including the scope, limitations, and terms and conditions of employment. The heading
of a job description is the job title, which is the summary of what the employee will do.
The entrepreneur should devise a respectable and decent job title because the title
boosts the self-confidence of the employee.
After the job title is the compensations and benefit range, which details the potential
salary and benefits that the employee will get. Next are the duties, which clearly describe
the job that the employee will assume with the allowance for flexibility. Duties are
usually high-level descriptions only. Responsibilities and accountabilities follow next,
which must be communicated well to the employee so that he or she knows what to
expect with the job.
Work schedules, including work hours, must also be clearly indicated in the job
description. The specific days and working hours must be written so that the employee
will be able to align the work schedule with his or her personal schedule. Work
schedules are highly driven by business requirements (e.g., a security agency business
will need to indicate the work schedules of the security guards it will hire).

Employee Qualification
In hiring suitable employees for the job needed, entrepreneurs will have to look for the
following criteria:
1. Educational background – This gives the entrepreneur an idea on the degree of
the candidate’s knowledge of basic things. However, it is not the sole factor in
selecting a candidate.

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 2. Work experience – This will tell him or her what to expect from
the applicant and what he or she can potentially contribute to the business based
on his or her past positions and experiences. This will also establish the training
needs of the candidate.
3. Specific skill or knowledge – This one is important especially on technical jobs
that require high proficiency. It will be easy for entrepreneurs to place highly
skilled people into specialized jobs because they can help right away. This is also
less expensive because entrepreneurs don’t have to train them thoroughly to
acquire such skills. Examples of potential candidates that have specific skills or
knowledge are engineers, architects, scientists, accountants, and information
technology specialists.
4. Work attitude – This deals with the worker’s integrity and how he or she deals
with his or her coworkers, bosses, and customers. Entrepreneurs also need people
with relationship skills because communication is important in applying their
expertise. A good work attitude involves being punctual, having a good leadership
and communication skills, being a team player, making ethical decisions, obeying
superiors, and being passionate and dedicated to the company. Entrepreneurs,
however, will decide what they are looking for in selecting the best candidate.
Preparatory Selection of Job Application
Once the job description and employee qualifications are finalized by the entrepreneur,
he or she now preselects a set of candidates for the positions required. When the
business is already sizeable, entrepreneurs usually establish a human resource (HR)
department that will handle the selection and recruitment of candidates. The
entrepreneur can initially choose from his or her personal list of trustworthy people
whom he or she thinks can contribute to the business venture. If this list does not exist,
he or she can turn to employment agencies or manpower agencies that can do the job.
Headhunters help companies find a set of people suited for their requirements. They
usually charge a finder’s fee once the entrepreneur has decided to accept an applicant.
Manpower agencies, on the other hand, recruit temporary employees under a short
contract, usually on a six-month period. The entrepreneur can also opt to advertise job
vacancies via print such as general circulation newspapers or other publications if the
intention is to promptly get a candidate from the public. If the intention is to hire
candidates with specific knowledge or skills, the entrepreneur must turn to magazines or
publications of the specific industry where the prospect belongs (e.g., the magazine
BluPrint if the entrepreneur wants to hire architects).
One viable option is to consider recommendations and referrals from friends, relatives, or
business partners with an untainted reputation. Recommendations from those with
doubtful characters should of course not be considered by the entrepreneur. Another
move is to look for his or her business networks, or the people whom the entrepreneur
has worked with in the past. This is a better way of preselecting the employee than the
traditional way (interviews) because the entrepreneur already knows the work ethics and
qualifications of the potential employee.
Last, one of the revolutionary ways of preselecting potential employees is through digital
media. With the power of the Internet, an entrepreneur can easily post job vacancies
through his or her Web site, social media accounts, e-mails, online affiliates, search
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 engines, podcasts, or blogs. He or she can also choose to advertise via
mobile through either short message service (SMS) or mobile application, or simply
mobile apps.

Selection of Job Applicants

Once the potential candidates are pooled, the entrepreneur must now do the difficult
task of screening them and picking the most qualified and most suited for the job.
Preliminary screening can easily be done because the entrepreneur will just need to refer
to the required qualifications and eliminate those who did not qualify. The entrepreneur
or the HR department can now conduct a series of interviews for the shortlisted
candidates with the objective of getting the most qualified candidate for the job.
Some established businesses even conduct qualifying examinations in Math, English,
and Logic before they hire an employee. Some may give qualitative examinations or
psychology tests that require the candidates to answer in essay form or in multiple
choice. Here are some common questions being asked in an interview. However, it will be
up to the entrepreneur or the HR personnel to ask relevant questions to the interviewee.
1. What are your strengths that you can contribute to our organization?
2. What are your weaknesses that can prevent you from working effectively in our
organization?
3. What exactly did you do in your previous job(s)? How will these past experiences
contribute to our organization?
4. What were your significant milestones in your previous job(s), and why do you
consider them as such?
5. Can you discuss the things you know about our organization? Why are you
interested to join our organization?
6. What are your career plans for the next five years if given the chance to work with
our organization?
7. Can you describe your work ethic? How do you work with a team and with your
superior?
Depending on the business requirements, the entrepreneur or the HR personnel will ask
more specific questions related to traveling out of town or overseas, working at night or
at odd hours, working on holidays and weekends, willingness to do other functions, and
so on. Both the entrepreneur and the candidate must set realistic expectations for both
parties. In reality, the entrepreneur promotes the business to a candidate by stating how
good the company is and how great it is working for them. Conversely, the candidate also
sells himself or herself by citing his or her work experience or educational background.
Both parties should be aware of this in the interview process. Nevertheless, it will be up
to the entrepreneur or the hiring manager to decide based on the responses given by the
candidate and his or her credentials.

Job Offer
Once the entrepreneur or the hiring manager has been convinced already of the
credentials and the interview answers of the candidate, the job contract is now
prepared. A job contract generally summarizes the terms and conditions of the
candidate’s employment with the business. It usually includes the following details:

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 (1) rank or position of the candidate, (2) a list of responsibilities or
deliverables and its scope and limitations, (3) the salary and benefits including
vacation and sick leaves, (4) work schedule, (5) probationary period if any and
qualifications to become a regular employee, (6) the duration of the contract, and (7)
resignation procedure (e.g., 30-day notice or leave immediately).

Employee Development
Training people is one of the biggest investments of an entrepreneur or a
businessman. Therefore, he or she must devise strategies on how to keep employees
satisfied working in the company. Training starts with employee orientation.
Employee orientation is usually a one-to two-day session that summarizes the history
of the business, its vision and mission, policies and procedures, culture, and norms
of the business. This also includes introduction to the co-employees and superiors,
the tour of the work place, and the discussion of daily responsibilities and
accountabilities including key performance indicators (KPI) and key result areas
(KRA) of the employee. KPIs and KRAs are the bases of the entrepreneur for rating the
performance of the employee – if the employee is exceeding expectations, meeting
expectations, or seldom meeting expectations.
For startup entrepreneurs whose budgets are really tight, they usually conduct
on-the-job training (OJT) as the most practical tool in training the employee under a
supervision of a team leader or manager. This will spare the entrepreneur the cost of
further classroom training because the employee is already productive and exposed to
the real job and what he or she experiences from the on-the-job training will serve as
a learning investment. The manager’s role is to closely supervise, train, and monitor
the initial performance of the new employee and provide him or her constructive
feedback on how to efficiently and effectively deliver the job. There should be a check
and balance especially during the first few days of the OJT. Constructive feedback
should be given by the supervisor to the employee, and all errors committed should
be rectified immediately to prevent recurrence.
Other practical options that the entrepreneur can use as training tools are the
buddy system and mentor-mentee training programs. The buddy system is a training
program wherein an expert team member is assigned to assist a new employee in his
or her function. The objective of the expert employee is to train the new employee
until he or she masters the job. The mentor-mentee program, on the other hand, is a
training program for supervisors, wherein they will be mentored by a senior executive
or senior officer of the business. The objective is to train the supervisor to handle key
decisions and strategic tasks that will eventually become part of his or her job once
he or she climbs the organizational ladder. Entrepreneurs must prepare a succession
plan to ensure business operations still continue even in their absence or the absence
of key employees, or when they decide to resign or retire.
When the employee is already familiar with what he or she does on a daily basis
and the supervisor already noticed a substantial improvement in the employee’s
performance, the entrepreneur or the management should now take the employee to
the next level. The entrepreneur can send the employee for further training through

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 extensive leadership training, part-time or full-time bachelor’s or
master’s degree programs, or short-term technical/specialized courses.
One of the emerging and practical training development program these days is
enrolling in online learning programs or Webinars (seminar on the Web). A Webinar is
a practical way of learning because the entrepreneur or the employee does not need to
go abroad or out of town just to get necessary training. It is also very flexible because
the entrepreneur or employee can learn at his or her convenient time or place. The
employee can also expand his or her horizons and be rotated in different areas of the
business (e.g., from marketing to operations or vice versa).
The entrepreneur can also conduct internal training programs led by competent
subject matter experts to discuss the intricacies of each department to the newly
hired employees. To keep abreast with the external factors, the entrepreneur can send
himself or herself or the employees to attend international or local symposia,
workshops, conferences, and seminars. Internally, the entrepreneur must also
conduct annual strategic planning and include key employees to devise tactics and
strategies for the business in the next coming years.
Employee training and development is a major thrust of every entrepreneur
because employees are the best assets of a business enterprise. For one, this human
resource aspect helps the business reduce costs; remember that whenever employees
commit errors as a result of lack of training, the business incurs necessary costs. As
a result of the employee training, productivity also increases because as the employee
learns his or her job every day, he or she becomes more and more productive.
Moreover, the full potential of employees is optimized especially when their skills and
talents are recognized. These will result in the increase in value-added contribution of
the employees. Employees will also feel important and needed; therefore, they will
continue to be motivated and committed to the business. Indirectly, they also become
brand ambassadors of the business who promote their products or service to their
circles.
Another upside of training is that employees build camaraderie when put together
in one training session. This elicits smooth working relationships with one another,
especially if the role of one employee coincides with another employee. All of these
result in a positive bottom line (net income), because reduced costs and increase in
productivity mean increase in revenues.
The greatest challenge for all entrepreneurs is constantly motivating and keeping
high-performing employees. Because of their track record and achievements, they can
easily transfer to other competitors, which means all training investments to high-
performing employees will be gone, higher costs for training new employees, potential
decrease in productivity, and customers transferring to competitors as well.
Therefore, entrepreneurs and the HR department must devise an effective talent
management program to gain the employee’s loyalty. Here are several strategies for
talent management:
1. Providing employees with a very competitive salary package that includes
guaranteed bonuses, performance bonuses, commissions, and other monetary
incentives.

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 2. Nonmonetary benefits such as medical coverage, different types of
leaves (vacation leave, sick leave, emergency leave, birthday leave, maternity or
paternity leave, study leave), decent and notable job titles, flexibility in work
schedule, awards and recognition for excellent performance, inspirational leaders,
transparency and fairness in employee performance evaluation, and channels to
which employees can provide constructive feedback without the risk of being fired.
3. Additional (optional) benefits such as trips (international or local), work-from-
home opportunities, scholarships, transportation and communication allowances,
free meals and drinks, fitness program, sport programs, and other work-life
balance programs.
Entrepreneurs must be able to be objective when evaluating the performance of
employees. They must be focused on the business objectives and if the employees are
able to meet these objectives. They must do all possible strategies to save high-
performing employees because losing them outweighs the salaries and benefits that you
will spend on them. On the other hand, nonperforming employees must be motivated by
the entrepreneur to make them more productive, unless replacing them is necessary or
when these employees find better career options. Nonperforming employees are liability
to the company.

Machines
Most businesses would not be able to operate without the aid of machines. Machines can
be described as the “best friend” of manpower in producing goods and offering services.
They go hand in hand. Sometimes, machines can even replace employees. Machines have
become one of the 4Ms because they are very important aspect of goods and service
production, and they have changed the way entrepreneurs conduct business. Machines
are not only limited to physical equipment but can also pertain to new technologies that
help business operations become standardized and seamless. Without machines,
business operations will be cumbersome, costly, and with low quality.

Equipment and Other Facilities

Depending on the product that the entrepreneur produces or the service that he or she
offers, the facilities must be strategically placed in the manufacturing site or in the
service delivery area. The entrepreneur must prepare a facility plan that details most
economical way to manufacture the product or offer the service by placing the facilities
where they can be efficiently used.
The sizes and shapes of the facilities and equipment affect the operations process, so the
site must adapt to how big or small the pieces of equipment are. The site must also be
conductive, well-ventilated, and well-lit, so that the employees can manage the machines
efficiently. There should be fire exits and safety reminders on how to use the facilities to
ensure safety of the employees. The equipment to be used should all be compliant with
safety requirements to prevent accidents.
For pieces of manufacturing equipment that are complicated to operate (including
delivery vehicles), the entrepreneur must ensure that the employee went through
rigorous training or certification to operate them. The entrepreneur must also allocate
space for the storage of equipment, including the parking of delivery vehicles. He or she
15
 must also be aware of the power consumption of each of the equipment
to analyze the cost of producing the goods. Ultimately, the goal of the entrepreneur is to
maximize the pieces of equipment to their full capacity to minimize manufacturing or
service delivery costs.

Telecommunications and Information Technology

Regardless of any business the entrepreneur will venture into, telecommunications and
information technology equipment is mandatory. These pieces of equipment include
mobile phones or smartphones, tablet computers, phablets (phone and tablets in one),
landline phones, laptops or desktop computers, POS machines, software programs, and
business Web sites. These tools aid the entrepreneur in making business processes fast
and convenient. Here are the advantages of having telecommunications and information
technology equipment in a business:
● Landline phones – order-taking, telemarketing, and teleconferencing with
business partners and customers
● Mobile phones (smartphones, tablet computers, phablets) – mobile application
for order-taking, mobile application for payments, mobile marketing, social media
marketing, teleconferencing with business partners and customers, marketing
research, mobile banking, and Internet promotions.
● Laptop and desktop computers – order-taking, Internet marketing, making
conference calls with business partners and customers, marketing research,
online banking, preparing reports such as financial statements, business case,
inventory reports, and legal and compliance reports.
● POS machines – charging customers’ debit or credit card, tracking sales, storing
data, analyzing purchases
● Accounting and inventory software – accounting all business transactions and
profitability, monitoring sales and inventory
● Web site – order-taking, 24/7 marketing, having online conversations with
customers, tracking customer activities online, collecting customer information
The responsibility of the entrepreneur is to protect these pieces of equipment
physically and against fraudsters who will be using these information to malign or steal
from the business. These machines carry confidential information. Therefore, they
should be protected with strong passwords and used only by the authorized employees.
Employees must be trained to keep every piece of information confidential, including
passwords. Software programs must always be updated and checked against viruses and
hackers. POS machines must always be in working condition and must be referred to the
banks when not properly working.
There must be a business continuity plan (BCP) should machines not work properly.
The entrepreneur must select reliable suppliers for these machines so that when
contingencies arise, they may be able to provide immediate replacements or repair them
quickly. The entrepreneur can also negotiate with suppliers to provide discounted prices
for bulk purchases.
On the information technology side, the entrepreneur must appoint two or more
reliable information technology experts whom they can call whenever there are issues
encountered in the software and computers. Both physical and nonphysical equipment
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 should be covered in the event of loss of property due to fortuitous
events and accidents, machine breakdown, manual faults, or interruption of business.

Materials
Whether the entrepreneur will offer products or cater service, he or she has to pinpoint a
number of dependable suppliers of quality raw materials and supplies. The supplier
must have a consistent and sufficient amount of raw materials and supplies that can
accommodate the demand of the entrepreneur. In short, the selection of suppliers
depends largely on how the suppliers will no cause interruptions in the production of
goods or serving the customers. Form the onset, the entrepreneur should decide on what
route to choose when it comes to materials requisitioning. Options include the following:
(1) manufacturing own products or offer services; (2) outsourcing of manufacturing or
service activities to a third party; and (3) purchasing own product or service from present
suppliers.
In manufacturing the entrepreneur’s own products or offer services, a huge chunk of
capital must be prepared because all the expenses in manpower, machines, and
materials will be borne by the entrepreneur. The entrepreneur must have studied the
business feasibility thoroughly, as the risk is larger with this option. A set of competent
employees must be employed to handle the machines or service the customers. But these
challenges can be augmented because the entrepreneur can be very specific in the
details that he or she wants for the product or service. He or she can also closely monitor
the quality of the products or services, strategically design the production or service
blueprint, as well as its schedule, and be more flexible in deciding on the production
quantity. On the marketing side, the entrepreneur will also have the opportunity to build
his or her own identity. Most importantly, the profits will all go to the entrepreneur or the
manufacturer.
Outsourcing is the process of appointing a third party manufacturer to do the
manufacturing operations of the business. These third party companies already have an
expertise in handling and manufacturing these products, supplies, or inventories, and
because they manufacture, they produce goods in bulk. These drive the companies to
create products or services tailored to the entrepreneur’s needs at a lower cost. Some
outsource companies offer to provide the services for the entrepreneur.
Outsourcing provides the entrepreneur a chance to provide the operation details to the
third party. No changes in the brand name and identity will be implemented because the
entrepreneur still holds the rights to such. Outsourcing saves the entrepreneur from
buying expensive machines, renting locations, or hiring manpower, as the operational
aspect of the business will be transferred to the third party. This scenario, however,
poses risks, especially when the outsource party closes its business, when it runs out of
supplies, when it breaches the service-level agreement, when it produces substandard
products or services, or when the service stops. The profits are also shared with the third
party, which does not happen when the entrepreneur creates the product in his or her
own. Also, because it knows how the entrepreneur’s business works, the third party can
easily shift to other companies.
The entrepreneur, therefore, must protect its product through a trademark or a patent,
and a noncompeting agreement or nondisclosure agreement. A patent is the right to

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 protect the entrepreneur regarding the product or service. A trademark,
on the other hand, is a sign or symbol that helps distinguish the product form others. A
nondisclosure agreement (NDA) states that the third party will be given full access to any
confidential information provided that it should not be disclosed to anyone else.
One option that an entrepreneur has is to make use of multiple outsource parties.
Having multiple outsource parties can be an advantage because of the following: (1) it
helps continue the operation even if the one of the third party stops; (2) the entrepreneur
will have greater bargaining power on the price and scope of the product, and (3) the
entrepreneur may have a choice to switch to other parties if one of them does not
perform well.
Purchasing finished products from a manufacturer or offering the service of another
company is another viable option for the entrepreneur. In this setup, the entrepreneur
cannot own the brand name of the product or service. Moreover, the manufacturer of the
original service provider is allowed to sell to the entrepreneur’s competitors. In short, the
entrepreneur is just one of the many distribution hubs of the manufacturer or the
original service provider. This setup is prevalent in distribution businesses, retailers,
sari-sari stores, and franchises.
Same with outsourcing, buying finished products or offering services of another company
spares the entrepreneur of the costs of machines and full-time manpower. Therefore, the
entrepreneur can use his or her funds for other purposes. This setup also allows the
entrepreneur to buy and sell a broad range of finished products and established service.
Switching to another manufacturer or service provider will be easy if the sales of the
products or services are not good. However, the entrepreneur will have a hard time
establishing a unique selling proposition because all the competitors offer exactly the
same products or services. They usually compete on the indirect aspects of the business
such as customer experience or physical attributes of their business. Another
disadvantage is that the manufacturer or original service provider can just easily take
the entrepreneur off its list when it wants to. The manufacturer or service provider can
also change unreasonable prices to the entrepreneur or, worse, go directly to end
customers and give them lower prices to bypass its relationship with the entrepreneur.

Logistics
Entrepreneurs/manufacturers can also venture into distributing their products to their
own without the aid of a distributor or agent. This is where the entrepreneur must
understand and implement efficient logistics management. As discussed earlier, the
entrepreneur/manufacturer is responsible for manufacturing, warehousing,
transportation, inventory management, marketing, and selling the product or service.
Warehousing is storing the finished goods manufactured in a facility until they are
distributed to end users. Warehousing cost is usually substantial. Therefore, the
entrepreneur should think of ways on how to reduce the cost of warehousing by either
busying an economical warehouse or renting an inexpensive space.
Transportation will also be a major cost in logistics management. It is the process of
efficiently transferring the products to retailers or consumers. The
entrepreneur/manufacturer must purchase energy-efficient vehicles that can carry a
reasonable amount of merchandise to prevent inefficient trips. The

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 entrepreneur/manufacturer can also use the presence of distribution
hubs. The distribution hub is where the entrepreneur/manufacturer combines the goods
before delivery to retailers or end consumers. Consolidating different products in the
distribution hub elicits efficiency because, more often than not, a manufacturer carries
multiple products. Instead of delivering per product to retails outlets, the
entrepreneur/manufacturer can consolidate all the products needed by the retail outlet
and deliver just once.
Inventory should also be tracked religiously by the entrepreneur/manufacturer. Each of
the inventories in the warehouse, distribution hubs, and manufacturing sites should be
monitored. The law of supply and demand must always be taken into account. There
shouldn’t be a surplus of inventory especially if the entrepreneur is selling perishable
goods. The entrepreneur must be knowledgeable about the life span of the products that
will be sold. The entrepreneur/manufacturer must also ensure that there is enough
space to store and stock inventory, depending on storage requirements (e.g., product is
required to be stored in cold temperature). To protect the products from fortuitous
events, the entrepreneur must ensure them with a reliable insurance firm.
It can be surmised that the entrepreneur is not selling well if there are too many
products left after a long period of time in his or her inventory, or he or she is producing
more than what is demanded by the customers. The key with inventory management is
understanding the historical and current demand data as well as future trends to avoid
unnecessary costs in producing too many products. Bear in mind that making too many
products can incur manufacturing costs, storage costs, and costs of spoilage.

The Business Model

According to Don Deebelak in his article “Developing a Great Business Model” on the
Entrepreneur Web site, the entrepreneur must adapt the dynamics of traffic lights in
developing the business model. These are the three “green lights” or the positive signals
that can help entrepreneurs develop ideal business models and eventually succeed. On
the other end, there are three “red lights” or negative signals that entrepreneurs should
be wary of.
The Green Lights
1. Target high-value customers. These customers are often misinterpreted as
affluent or high-end customer, but this is not always the case. A high-value
customer is (1) someone who is easy to find, (2) someone who is willing to pay a
price that will reasonably profit the entrepreneur, (3) someone who is easy to
persuade with the least promotional effort, and (4) someone who can join the
bandwagon of customers that, when consolidated, can generate a substantial
amount of revenues aligned with the profit objectives of the entrepreneur.
Customers do not rely only mean end customers or retail customers; they can also
be partner retailers, distributors, or corporate customers. The entrepreneur’s
objective is to find these customers. If unable to do so, he or she can choose to tie
up with the strategic patterns who fit the profile of a high-value customer.
2. Offer products or services with great value. As discussed in Module 3, the value
proposition and unique value proposition should always kick in as compelling
reasons for customers to choose your product or your service. Without these, the
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 entrepreneur cannot develop a successful business model. The
entrepreneur must position the unique attribute(s) of his or her product or service.
He or she must also device an efficient distribution system where the flow of goods
or service delivery is convenient, fast, and available when needed. He or she can
also collaborate and synergize with relevant partners to offer excellent customer
experience to customers. The entrepreneur should also offer products or services
with great value coupled with attractive and reasonable prices as a result of lean
manufacturing. Aside from the core product or service, he or she can also provide
customers with other related products or services being offered. With the influx of
technological advantages such as the Internet, third party outsourcing, and
synergies between businesses, the arena of the entrepreneurs around the world
has become ultracompetitive. Therefore, the entrepreneur must always be in the
lookout on whether his or her product or service still provides value or is already
outpaced by the competition.
3. Offer products or services with reasonable profits. There are two ways of
achieving reasonable profits: (1) increasing markup and (2) decreasing operational
costs. The most practical way to achieve reasonable profits though is to decrease
operational costs. This is because increasing the markup, as compared with the
prices of competitors, will decrease the attractiveness and competitiveness of the
product or service. Therefore, profitability cannot be maximized. Decreasing the
operational cost is a controllable strategy in increasing profits of the business as
lower cost means a higher profit margin. As discussed in the 4Ms of operations,
the entrepreneur should (1) devise an efficient distribution system, (2) lessen
unnecessary manpower efforts as much as possible, (3) apply lean manufacturing
processes, and (4) add support products or auxiliary services that can increase
revenue without adding substantial cost.
The Red Lights
1. Satisfying the customer becomes too costly and irrational. The entrepreneur
must calculate the cost and profit associated with serving the customer before
pursuing the business. There are times when entrepreneurs are blinded by how
big the profit margin can be for a sale of a particular product or service. But little
do they know that there are numerous associated after sales costs that can even
exceed the profit margin derived from the actual sale. In marketing, the term
lifetime value of a customer was coined to understand the potential value that a
customer can bring to the business in the long run. But there are obvious red
flags, which are collectively called customer satisfaction costs that can impede the
success of an entrepreneur. These are as follows:
A. Warranty – Because some products are not as sturdy as they should be,
the business will incur unnecessary warranty costs that can even
surpass the cost and profit margin of the product.
B. After sales costs – Some products or services require extensive technical
support, installation, and customer service. These after sales costs
might even surpass the actual sales price of the product or service.
Once the costs are identified, the entrepreneur will rectify the situation by
transferring the cost to another party or through outsourcing to lessen the cost of
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 servicing the customers. He can also instruct his sales team to
just focus on business aspects that do not require too much customer
satisfaction.
2. Being a market leader is difficult to sustain. One of the characteristics of an
ideal business model is capitalizing on the business’ stature as a market leader
through improving the features and benefits of its existing products or services,
adding new product lines or service, or expanding by tapping new customers.
However, there are signs that it will be difficult to sustain being a market leader if
the following condition exist: (1) if there are major customers purchasing the
entrepreneur’s product or services, (2) if there are major players in the industry
that control the majority of distribution network, (3) if technology has changed the
way the entrepreneur operates the business, compelling him or her to invest on
rigorous product research and development, (4) if technology replaces the need for
the entrepreneur’s product or service, and (5) if the competitors can easily tap the
market of the entrepreneur. Maintaining the market position has a large
dependency on the overall condition of the market.
3. Return on investment (ROI) takes too long and too small. Entrepreneurs did
venture in a business enterprise because they want to earn profits for the purpose
of sustainability. ROI is very important to the entrepreneur because it validates
that the business is doing well and that money is flowing in as expected during
the planning stage. An ideal business model is characterized by a reasonable ROI
earned at the right time and with the right amount. However, if reports say that
ROI is less than approximately 25% in the first three years of business operations,
it is a sign that the entrepreneur is not operating an ideal business model.
Another sign is that production of additional products or service requires an
ample amount of additional capital. Moreover, only less than 50% of the capital
required will be allocated to revenue-generating activities such as selling and
manufacturing. It is also a red flag if the present capacity is also not capable to
produce or handle new commitments; therefore, additional investments must be
made again to accommodate the new demands. The last sign is the uncontrollable
industry factor where generally everyone in the industry always has unacceptable
ROIs.

The Financial Plan

One of the most difficult parts of the business plan is the financial plan.
Not all entrepreneurs are adept with accounting procedures, rules, and reporting
policies. However, there is no choice for the entrepreneur but to be familiar with
numbers. The sustainability of a business depends on a meticulous monitoring
of finances. This is the portion of the business plan that speaks of the product or
service performance. It also provides the entrepreneur financial data such as
liquidity, cashflow, and financial standing of the business. The financial plan
also gives the entrepreneur bases for his or her decisions on financial matters
such as offering credits terms to customers, applying for a bank loan, expand, or
sell the business. Without proper accounting of business activities and

21
 transactions, the entrepreneur will be at a loss on where his or
her business is leading him or her.
Financial management begin when the entrepreneur starts to raise capital
for the business venture. Capital is the money that will be allocated by the
entrepreneur to establish. It shouldn’t be mixed with the personal money of the
entrepreneur. A business is a separate entity and should not be mixed with the
personal finances of the entrepreneur.
A number of entrepreneurs produce capital out of their personal savings.
This money came from a disciplined habit of consistently saving when the
entrepreneur used to be an employee. Some of the budding entrepreneurs borrow
money from families or friends, whereas some look for interested investors or
stakeholders. The entrepreneurs can also turn to banks or financial instituitions
for capital, but they usually require collaterals and base their credit decisions on
the business performance (i.e., the net income of the business). Some startups
may find it difficult to secure a loan from banks because of the performance
angle as one of the qualifications.
Collateral refers to a high value asset that is submitted by the business to
the bank when applying for a loan and will be subject for repossession if the
business defaults. Regardless of where was sourced, putting this capital at risk
is one of the major reasons that most entrepreneurs are afraid to engage in a
business venture. But those who take the risks also gain the experience and use
this experience to succeed. Not all entrepreneurs became successful the first
time they ventured into business. All of them experienced failures and use these
failures to their advantage.

Factors Affecting Estimation of Revenue

A business opportunity can only be considered a real one when the

entrepreneur recognizes that the opportunity may bring him/her revenue.
Revenue is the output of sale wherein the sale price exceeds the cost to produce
the product or render the service. Revenue is considered earned when the
product is already sold or service has been rendered regardless if the business is
paid in cash or credit. Revenue is considered deferred when the product or
service has not yet been delivered or sold but the customer has already paid in
advance.

After establishing that the business opportunity will really bring revenue,
the next step is to estimate how big the revenue is on an annual basis. This will
give the entrepreneur an inkling on where his or her hard-earned money will go.
It is not easy to estimate potential revenue, as it requires a thorough analysis of
external and internal factors that can affect the business. All of these external
and internal factors must be incorporated in the projection computation so that
it will appear realistic and will not mislead the entrepreneur.

1. The economy and the external primary target market. Similar to finding
business opportunities, estimating revenue is greatly affected by the entire
22
 economy and the behavior of the primary target market.
The entrepreneur must be able to incorporate the overall health of the
economy in its estimation of projected revenue. He or she needs to know if
the economy is either booming, stable, or slowing down. However, there
will be times when the overall economy is not a reflection of what the
entrepreneur’s primary target market is experiencing. Therefore, the
entrepreneur must also do separate revenue estimation for the primary
target market as to whether it is booming, stable or slowing down. For
example, the overall Philippine economy is growing, but the target of
entrepreneur A is the class D, and the economic condition of the members
of this socioeconomic class is still worsening. He or she must be able to
reconcile these and come up with realistic estimates.

2. The external competitors. The entrepreneur must devise a comprehensive

competitive profile matrix – a chart that details the relevant data of both
direct and indirect competitors and how these factors affect profitability.
Direct competitors are those that offer exactly the same product/product
lines or services as the entrepreneur. Indirect competitors are those that do
not offer exactly the same products or services but influence or affect the
entrepreneur’s market share (e.g., if the entrepreneur sells soft drinks, his
or her market share will be affected by those who sell other beverage
products such as mineral water, iced tea, juices, or alcoholic drinks.
The entrepreneur must plot the strengths of each competitor, its
financial data, and its respective market share. A thorough analysis must
be conducted to assess whether the entrepreneur will really earn from the
business opportunity.
When entering a market with weaker and smaller competitors, the
challenge is to compete with them directly. Unlike the first one, however,
there is a bigger chance here to succeed and take away the market share
of the competitors. The entrepreneur can also enter a market with no
competitors. This rarely happens though; these days, there are virtually no
unique products or services, or there are no only few entrepreneurs who
want to venture in an entirely different market that no one has tried yet.
An example of this is venturing in a war-stricken area where the risk is
very high but opportunity is also very high because the entrepreneur has
no competitors to share his or her market it. Also, entrepreneurs can
impose unreasonable prices, as the buyers have no bargaining power
because they have no choice. Aside from the basic financial data, the
entrepreneur must also be vigilant in reviewing and assessing the
business and marketing strategies of the competitors. Those that were
proven effective strategies of the competitors must be emulated and
altered a bit by the entrepreneur, and those that were certified as
ineffective must not be repeated to avoid unnecessary to neutralize it
effects to his or her business.

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 3. The internal business. The assess potential revenue, the
entrepreneur must also devise his or her own marketing strategies based
on external and internal scan and from the competitive profile matrix.
With these data, the entrepreneur can now craft effective strategies that
can outweigh those of the competitors. However, the entrepreneur must
always be on the lookout because competitors do not just sit and wait to
be beaten. They will always react to what their competitors are doing. They
can always resort to cut prices, improve features and benefits of their
product or service that can differentiate them from the rest, or implement
more strategic and effective marketing tactic. Each of the players in the
market is thinking ahead and monitors the moves of the others. To keep at
pace, the entrepreneur must always be alert and reactive to all kinds of
contingencies, or else the revenue will suffer.

Computation of Gross Revenue

Once all the influencers above are identifies, the entrepreneur can now
calculate and project the potential revenue numbers for five years.

Step 1: Compute for the market universe or total market.

The entrepreneur must derive the figure that represents the market
universe or the total market to understand how big the market is. This is
represented by the size of the potential customers and how often they will use or
consume the product or how often they will avail the service.
Example: Mr. Antonio Castro owns a big sari-sari store named Antonio
Castro Store in Barangay Bacani, San Miguel, Bulacan. He noticed a number of
his customers get their remittance, because he thinks he will have substantial
number of customers who will claim remittance through him. Moreover, he
thinks that the remittance center and the sari-sari store are complementary
business, because after claiming the remittance, the beneficiary will also buy
from his store. Mr. Castro wants to know the market size for the remittances.

Mr. Castro will have an easy time because the data are readily available from the
Bangko Sentral ng Pilipinas (BSP). BSP reports that remittances to the
Philippines reached $24.3 billion in 2014. That’s how big the market is in the
Philippines. He has to break it down though to Bulacan remittances so he can
determine the share of his province in the remittance pie in his town, and then
his barangay. From here, he can calculate the potential market share.

To illustrate the computation of market size, assume that Mr. Castro became
interested also in selling cellphone prepaid load, because 95% of the people in
his barangay have cellphones and most of them are on prepaid. Mr. Castro wants
to know the market size of the prepaid load business in barangay. He has the
following data:
● Cellphone owners in Barangay Bacani – 5 000
● Number of times the customers buy load per week – 2
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 ● Average amount of load customers buy – P100

Market size = total number of customers x number of times the customers

buy the product or avail the service per year x average amount per
purchase/service availment.

Market size = 5 000 x (2 time in a week x 4 weeks = 8 times per month x

12months =96) 96 x P100 per load purchase

Market size of cellphone prepaid load in Barangay Bacani = P48 000 000

Step 2: Compute the market share of the competitors.

According to the competitive scan Mr. Castro, there are five stores in his
barangay that dominate the prepaid load market. Their total combined market
share 80%. They are the same in terms of store size, and all of these stores are
wholesalers. Aside from these five, there are four retailer stores in the community
that haven’t ventured yet in the prepared load business. Therefore, Mr. Castro
still has 20% of the overall market size to tap, which is equivalent to P9 600 000
competing with the four retailers.

Step 3: Plan to capture remaining market share.

Mr. Castro must devise business strategies on how to tap the remaining
market and not let the new retailers overtake him. Some of the strategies that he
can employ is to provide marketing promos to customers (e.g., for every P30 load,
they can get free candy or a loyalty reward where customers can get P30 free load
when they load P100 for five minutes). This is an application of a differentiation
strategy. If competitors try to copy it, Mr. Castro must think of another strategy
to differentiate his service from them. He can focus on customer experience,
whereby customers, even without going to the store, can buy load using their
social media accounts. This saga of creating various differentiation strategies will
be an iterative process just to capture and maintain the remaining market share.
If the differentiation strategy is really compelling, Mr. Castro can even acquire
the market leaders. It is good to set targets, but these targets will be dependent
on the external and internal factors previously mentioned. Assume in this
example that Mr. Castro sets the target at 40% of the remaining market share,
which is P9 600 000. Assume in this example that Mr. Castro sets the target at
40% of the remaining market share, which is P9 600 000. The target annual
market share is P9 600 000 x 40% = P3 840 000.

Step 4: Prepare a realistic five-year projected annual revenue.

Mr. Castro must set a realistic and achievable five-year projection that
incorporates the contingencies and the external factors discussed. He must
monitor the growth or decline of both the market size and his market share. If
the movement in market size and market share is not proportional, then Mr.

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 Castro can already glean roughly what is happening. If the
market size is growing but the market share is not growing, then there is
something wrong with the strategies of Mr. Castro. If market size is not growing
but the market share is growing, then Mr. Castro must be doing a good job in
serving the customers; thus, he is eating the market share of the competitors.
Assuming Mr. Castro is optimistic that he will be able to differentiate and grow
the business, he is looking at a 5% growth in year 1 due to adjustments and
difficulties he will encounter, 15% growth in years 2 and 3, and 20% growth in
years 4-5.

Sample projected annual gross revenues for Mr. Castro

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
P4 032 000 P 4 636 800 P5 332 320 P6 398 784 P 7678 541

The numbers in the table are quite attractive to look at, especially on the
perspective of a retail entrepreneur. But Mr. Castro shouldn’t be overwhelmed by
these numbers, as these are just gross revenues and the values of the product
(load) as well as other expenses associated with the sale have not yet been
incorporated.

Income Statement
The real income or net revenue is only realized when all expenses have
been already deducted from the gross revenue. Therefore, the entrepreneur must
prepare an income statement, which is a financial statement that details the
computation of net revenue by deducting cost of sales, expenses, and taxes from
the gross revenues generated. In the example concerning Mr. Castro, despite the
attractiveness of the gross revenue figures in retail perspective, he still not sure if
he is earning from this venture. The sustainability of a business largely depends
on the net revenues because these increase the value of a business. These
increments are used to fund product research, development initiatives, and
business expansion. Financial institutions also base their credit decisions on the
bottom line (net income) and not on gross revenues of businesses.
Because the gross revenues have been already identified for the next 5
years, it is now time to account the costs and expenses associated with the sale
of prepaid load:
● Cost of prepaid load – 95% of the selling price
● Marketing cost, cost of mobile phone, and other administrative costs – 1%
of the selling price.
● Income tax is assumed to be 20% of gross profit.

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Sales 4 032 000. 00 4 636 800.00 5 332 320. 00 6 398 784. 00 7 678 541.00
Less: Cost
of sales 3 830 400.00 4 404 960.00 5 065 704.00 6 078 844.00 7 294 613.95

Gross profit 201 600. 00 231 840. 00 266 616.00 319 939.00 383 927.05

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 Less Operating 40 320.00 46 368.00 53 323.20 63 987. 84 76 785.41
expenses

Net income 161 280.00 185 472.00 213 292.80 255 951.36 307 141.64
before tax

Less: 32 256. 00 37 094.40 42 658.56 51 190.27 61 428.33

Income Tax

Net 129 024.00 148 377. 60 170 634.24 204 761.09 245 713.31
Revenue
after Tax

Mr. Castro’s business model is very simple; thus, the income statement is
not at all complicated too. In the manufacturing business, the cost of sales portion
is more complicated because there is a need to input balances for a raw materials
inventory, work-in-process inventory, and finished goods inventory. Moreover, the
cost of labor and factory overhead are also incorporated in the total manufacturing
cost. In services, instead of cost of sales, the entrepreneur needs to input cost of
services (labor or systems cost).
Before Mr. Castro became a fully dedicated sari-sari store, remittance, and
load center owner, he incurred business start up costs. Here are the common costs
associated with starting up a business:
1. Business registration fees to be paid to the municipality or city hall.
2. Business name registration with the Department of Trade and Industry
(DTI)
3. In some cases, accountant or lawyer fees to assist in establishing the
business
4. Cost of machines for manufacturing or delivery of services including
transportation vehicles.
5. Factory or building rental fee or acquisition cost of factory or building.
6. Overhaul cost of factory or building
7. Working capital that can last for a minimum of 3 months. This money
is allocated strictly for the business to avoid shortage of cash in the 3
months of operations. The business is expected to incur major costs at
the onset of the business and revenues will also be slow at this stage.
Cash is the most important asset of a business. The entrepreneur must
be an expert in handling cash. Thus, a statement of cash flow should
always be prepared and monitored.

All properties, plants and equipment (except for land) are subject to
depreciation. Depreciation refers to the value reduction of the noncurrent asset
primarily due to natural wear and tear and other value-reducing factors. The costs
of the property, manufacturing plant, and equipment is spread over their
anticipated life spans. Depreciation is recorded in the balance sheet as a
deduction to the fair market value of the property, plant, and equipment, the
result of which is their book value. Land, on the other hand, does not depreciate;
it actually appreciates in value.

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Balance sheet
The entrepreneur must also prepare a balance sheet to account for the
assets, liabilities, and capital of the business. A balance sheet is a core financial
statement that describes the financial position of the business. The entrepreneur
must separate his or her personal assets and liabilities and only account for
what assets are attributable to the business. The business should be a separate
and distinct personality.
A balance sheet is composed of three elements: (1) assets, (2) liabilities,
and (3) owner’s equity or capital. Assets represent the business that are expected
to have future economic value. Assets are divided into current assets, which are
mostly the liquid assets that can be exchanged to cash within one year, and
noncurrent assets, which are long term assets that can be converted to cash more
than one year. Liabilities are what the business owes to another person, a
financial institution, or any creditor. Owner’s equity or capital is the funds
allocated by the entrepreneur to run the business. The accounting equation
should always be balanced as represented by the formula below:

Assets = liabilities + owner’s equity

Going back to Antonio Castro Store, here is the balance sheet as of 31

December 2015 for the three business, i.e., sari-sari store, remita=tance center,
and load business.

Antonio Castro Store

Balance Sheet
As of 31 December 2015

Assets
Current Assets
Cash P1 000 000
Accounts receivable 200 000
Sari-sari store inventory 800 000
Load inventory 500 000
Short term investments 1 000 000
Prepaid expenses 200 000
Total Current Assets P3 700 000

Noncurrent assets
Land P2 000 000
Delivery van 700 000
Accumulated depreciation – delivery van (100 000)
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 Other long-term investments 300
000
Total Current Assets P2 900 000

Total assets P6 600 000

Liabilities
Accounts payable to suppliers P800 000
Notes payable 200 000
Business Loan 900 000
Total liabilities P1 900 000

Owner’s equity
Antonio Castro Store, capital P4 700 000
Total liabilities P4 700 000

Total liabilities and owner’s equity P6 600 000

It is deal to prepare a balance sheet every year so that the entrepreneur

can analyze the financial position of his or her business. These figures will
change every year, so the entrepreneur or his or her accountant must determine
the real balances of each account. The net revenue after tax computed in the five-
year projection should be added to the owner’s equity of Antonio Castro Store on
a per year basis. This means that net revenue increases the capital of the
business and thus makes the business sustainable.

Cash Flow Statement

Another very important financial statement is the statement of cash flow.
Because cash is the most important asset of a business, the entrepreneur must
be vigilant in monitoring its whereabouts. It may look as if the business has no
cash flow issues. One issue is that the business could have many pieces of
equipment but doesn’t have cash to pay its creditors on time. Another issue is
that the business can be selling on credit instead of cash; thus, it is not liquid
enough to pay its supplier.
The stable financial position indicated in the balance sheet and the
profitability reflected in the income statement will be in vain if cash flow is not
managed well. Creditors and suppliers will tag the business negatively and will
not be able to renew their loans or buy supplies or materials on credit. The
entrepreneur must allocate cash to pay suppliers and creditors as well as its
employees. If the business runs out of cash, the entrepreneur should have an
option to borrow from the bank or a reputable financial institution provided he or
she has a good track record in paying his or her obligations.
It is prudent to estimate projected cash flow on a monthly basis to ensure
that the cash balance is positive all the time. Sources of positive cash flows
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 include services or sales revenues, fees, interest, income, and
dividends from investments and loans. Sources of negative cash flows include
operational expenses, investments, machine purchases, and payments to
suppliers and creditors, to name a few.
Sample projected cash flow statement for Antonio Castro Store (in Philippine
peso)
Startup
Month Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
Starting
cash 10 000 2 000 5 200 8 400 11 600 14 800 18 000
balance
Add:
Positive 0 8 000 8 000 8 000 8 000 8 000 8 000
cash flows
Less:
Negative 8 000 5 000 5 000 5 000 5 000 5 000 5 000
cash flows
Add:
Depreciation 0 200 200 200 200 200 200
Ending cash
balance 2 000 5 200 8 400 11 600 14 800 18 000 21 200

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6

Starting
cash 21 200 24 400 27 600 30 800 34 800 37 200
balance
Add:
Positive cash 8 000 8 000 8 000 8 000 8 000 8 000
flows
Less:
Negative 5 000 5 000 5 000 5 000 5 000 5 000
cash flows
Add:
Depreciation 200 200 200 200 200 200
Ending cash
balance 24 400 27 600 30 800 34 800 37 200 40 400

Depreciation is added back to the cash balance because there is no cash

movement involved in depreciation. It is recorded in the income statement as
expense (depreciation expense) and in the balance sheet (accumulated
depreciation) because it reduces the value of a machine.

The income statement, balance sheet, and statement of cash flow are the basic
financial statements that should be religiously prepared, monitored, and analyze
by the entrepreneurs no matter what type of business they are in. These are tools
that help them direct their business decisions to be strategic and effective.

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 Entrepreneurs should not leave all of these tasks to their
accountant or a trusted officer. They have to know their numbers by heart.

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