I.

The Nature and Aims of Business Commerce

Business firms which are engaged in the buying and selling of goods and services are classified as those
The Philippine Economy falling under commerce. Also included are trading, merchandising and marketing. Examples of commerce as a
Although most Filipino dream of affluence, it seems to be one that is impossible attain. This is mostly kind of business are supermarkets, dry goods stores, peddlers, sari-sari stores, importers and many others.
so because the Philippine economy has always been saddled with difficulties which appeared to be
insurmountable. Low productivity in the workplace, graft and corruption in the government, the declining value Industry
of the peso, and an unfavourable balance of trade are only some of the more serious concerns affecting Philippine Industries are those mainly concerned with production. Goods produced are those which are may be
economic development. intended for ultimate consumption and which are called consumer’s goods, or those which are intended for use
Business success has always been associated with economic growth. Adequate capital, is a prerequisite of business and industry and which are called product’s goods.
to the existence of business firms. Since this is so, business success is highly dependent on the availability of
capital. Apart from availability however, its proper management is a key ingredient in the survival and growth Industry may be further classified into the following
of business. Genetic industries are businesses involved in agriculture, forestry and fish culture.
Studies made along the topic of managing the finance activities of business indicate that a major reason Extractive industries are businesses involved in the extraction of goods from natural resources which
for business failure is the businessman’s lack of sufficient skill in managing finance. include mining, lumbering, hunting and fishing.

The Role of business Manufacturing industries are those which convert raw materials into finished products. Examples of these are
Under the free enterprise system, the growth of the economy lies in the ability of the private individuals firms engaged in the manufacture of drugs, plastics, food, liquor, footwear, motor cars, tools, office supplies,
to achieve economic objectives. The quest for profit is usually undertaken by engagement in business activities. household appliances, and many more.
Business firms and government are oriented towards the provision of goods and services to the society. Regarding
this task, however, private business firms assume the major role. Under the system, firms are free to compete Construction industries consist of firms engaged in building infrastructures like airports, seaports, dams, and
with each other. This atmosphere makes possible the offering the new and improved products and services to the highways.
society. The standard of living is raised or lowered depending to a large extent on the performance of business
firms. Services - A service business is one which sells service to buyers. Service firms may be classified as: (1)
recreation, such as movie houses, televisions, and radio stations, theaters for drama and stage presentations, and
Business is largely responsible for bringing into the market a wide array of products and services which the like; (2) personal, such as restaurants, barber shops, transportations, hotels, tailoring shops, and the like: and
were not previously available. High technology items like the latest cellphone models, video equipment, portable (3) finance, such as banks, insurance companies, investment houses, financing institutions, credit unions, savings
computers, and many others find their way in the open market. This happens even a business continues to provide and loans associations, and the like.
mankind with basic necessities like food and shelter. Even movies of different kinds are made possible by
business firms. Such is the importance of the role attributed to business that even communist countries like China Objectives of business
and Vietnam have allowed, to a great extent, the operation of business entities as a means to develop their A business is established primarily for profit. At times, however, short-term and long-term profits are
economies. Profit-making has been adapted as a measure to motivate enterprising persons to engage in business. sacrificed in order to attain other goals such as”
1. political influence
Definition of business 2. family control of business; and
Business is any lawful economic activity concerned with the production and/or distribution of goods and 3. community involvement.
services for profit. Whether or not it actually makes profits is immaterial. An activity is still a business if its
objective is to make profit. To survive and grow, business firms must attain the following multiple objectives:
The amount of capital investment, the size of the organization, and the number of employees are also 1. the provision of products and services to the community;
immaterial in determining if an economic activity qualifies as business. 2. the satisfaction of personal objectives like:
a. profit for owners
Kinds of business b. adequate salaries and compensation for executives and employees
Business maybe classified in several ways. As to the nature of the principal activity performed, it consists of c. psychic income for all, including pride in work, security, recognition, and acceptance
three main divisions: 3. protection and enhancement of the human and physical resources of society, and
1. commerce; 4. economy and effectiveness of operation.
2. industry; and
3. services.
II. Organizing a Business Studies have shown that successful entrepreneurs are likely to be over-achievers, and likely to do well if they
The first stage in the life cycle of a business is organization. Much of what will happen to the firm in are also reasonable risk-takers, self-confident, hard workers, goal setters, accountable, and innovative. However,
the later stage depends on the first few steps in the organization process. Because of the magnitude of the capital even if there are successful entrepreneurs, statistics show that there is also a big number of failures. This indicates
required in establishing a corporation, the activities undertaken in the organization stage are more sophisticated that the task of the entrepreneur is not easy.
and may take a year or several years before actual operations begin. This does not mean, however, that small
businesses do not deserve careful thought and analysis before they start operating. Business prospecting
The importance of the organizational stage cannot be over-emphasized. Business failures have become When a determined individual has finally decided to go into business, it will not be wise for him to grab
common occurrences because of defects in planning at the organizational stage. Business failures happen to the first opportunity that comes along. First, he should carefully scan the environment for other possible openings.
companies regardless of industry classification and the amount of capital investment. He should prepare a list of alternative business opportunities and he should make his choice from that list.
The most common reasons for business failures include the following:
1. bad or improper management practices, including poor cost controls and poor hiring practices; The Search for Business Opportunities
2. poorly focused and executed marketing or inadequate marketing; A person searching for a suitable business opportunity should learn the ways of a talent scout or a
3. poor location; salesman looking for a prospect.
4. failure to invest in new products and efficient technology; and The talent scout, aware of the requirements of the market-whether radio, television, recording, or the
5. lack of adequate financing. movies -goes around searching. He stays longer, however, in places where talents abound. The scout does not
forget that there are lots of good talents but only a few of them can be classified as commercial or one who can
Why people engage in business satisfy a big market.
Prospective investors would want to engage in a business venture for one reason or another. They hope The salesman, on the other hand, prepares a list of his prospects and from there makes his evaluation
to enjoy certain values, which are derived from such undertaking. These values include the following: and decides on who is worth seeing. The salesman should also not forget that there are prospects of better quality
1. provision of employment to people; than others.
2. profits; service to the community; Like a talent scout, the prospective businessman should have the skill to choose an opening that will be
3. personal satisfaction; commercial and will bring him enough revenues. Also, like a salesman, the prospective investor should have the
4. means to earn a living; skill to pick the right business opportunity from his list and which is of better quality than the others indicated in
5. achievement of power; and the same list.
6. protection of one’s self and family.
Business opportunities come in several forms. They could be a result of any of the following:
It is well-known that entrepreneurs venture into business for economic reason as a primary motive. Some 1. increasing demand for basic commodities due to an increase in population;
do it to utilize skill and previous work experience. The last two reasons are not far-fetched. A skilled person 2. rising prices (or costs) of existing products like construction materials;
who cannot get employment would be forced to engage in business just to maintain his skill, hoping that 3. relaxation of government policies like the lifting of import restrictions;
someday, it would be more useful. In the same light, some individuals think that the experience they have 4. the development of new service concept like the issuance and delivery of passports through courier
are much too valuable to be ignored, so they try to use it by operating a business. service;
Sometimes, situational conditions pave the way for persons to engage in business. A fine example is a 5. the development of a new product concept like the engine that runs on water;
disabled individual who decided to go into business because he cannot get employment anywhere. 6. the increasing demand for specialized services like manpower export services, health and fitness
services, management consultancy, and skills training;
Entrepreneurship 7. the increasing requirements of the wholesale and retail industry; and
To engage in business, a person or group of persons has two options: (1) to buy an existing business, or 8. many others.
(2) create a business that he will operate. The person who chooses option two will be referred to as an
entrepreneur. He owns his business but his functions vastly different from those of another type of business Business promotion
owner, the stockholder if a corporation. Business promotion refers to the discovery and exploration of a business opportunity with the purpose
The entrepreneurs’ functions are: of converting it into a going concern.
1. to supply the capital of the firm;
2. to organize production by buying and combining inputs; The three steps involved in business promotion are the following:
3. to decide on the rate of output in the light of his expectations about demand; and 1. discovering the idea for a new business;
4. to bear the risk involved in these activities. 2. determining the feasibility of the idea; and
3. assembling the needed resources to start the business.
Discovery Fixed assets may be acquired through purchase or lease depending on the nature and requirements of the firm.
The identification of an idea for a new business is the first step in business promotion. Fixed assets refer to business assets, which are acquired for continued use in the production of goods or services.
The new business idea may spring from various opportunities. A seasoned CD salesman may organize Examples are land, machinery, buildings, furniture, fixtures, and equipment.
his own recording company. A college professor may open his own school. A retired military officer may set up A reserve fund is required to take of difficulties encountered due to insufficient income generated by the
a security agency. firm. Failure to provide for this possibility may jeopardize the firm’s operation.
The business promoter may also be induced to consider certain product ideas because of the availability
of materials. For instance, suppliers of marble products are attracted by Romblon and GApan (in Nueva Ecija) Sources of initial capital. A new business project may initially be financed by using any or a
where marble abounds. Bagong and patis factories are established in areas near the coastlines of Malabon (Metro combination of various sources. The management of the firm about to start operations will have to use
Manila), Lingayen (Pangasinan), and Balayan (Batangas). time and expertise to avail of credit facilities offered by suppliers and financing institutions.
A new firm may be financed by one or a combination of the two main sources of capital: (1)
Determination of Feasibility owners; and (2) the creditors. In single proprietorships and partnerships, the owners may use their
Once a choice has been made on the business idea to adapt, its feasibility should be determined. savings or sell some of their properties to provide the initial capital. The initial fund requirements for
Oftentimes, a feasibility study is required. If the idea is not found to be feasible, it should be discarded and a new the new corporation are raised through the sale of common stock to the founder of the firm and a small
one considered for determination of feasibility. group of intimates. Creditors consist of friends and relatives, the government, financing institutions, and
The feasibility study is a detailed investigation and analysis of a proposed business venture to determine suppliers.
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; The promoter and its liabilities
2. Marketing study; The promoter is the person responsible to the formation of a company. He sees the opportunity for a
3. Production facilities and the product; new business; interests other people in it; makes the business blueprint; arranges for the initial funds, labor, and
4. Taxation and legal aspects; skills required; and sets the business going.
5. Financing aspects,
6. Profitability; and The promoter is motivated by any or a combination of the following;
7. Social desirability. 1. Promoter’s fee;
2. Shares of stocks or bond in the new business project;
Assembling the needed requirements 3. A management position in the new business project’
Once the feasibility of a proposed business project is determined by experts, the proponent may proceed 4. A new customer for his products or services; and
to assemble the needed resources. This is made prior to the start of business operations. The resources needed 5. The desire to contribute to the economic growth of the local community.
may comprise of the following: (1) initial capital required; (2) the essential properties; (3) processes; and (4)
personnel. Promoters may be classified as follows:
1. Professional promoters - they are those whose main occupation is business promotion;
Initial capital requirements. A new business project requires initial capital to take care of the following; 2. Side-line promoters - they are persons who perform promotion activities occasionally;
a. Cost of organization 3. Banking promoters - they are banking institutions which provide business promotion services to their
b. Working capital clients;
c. Acquisition of fixed assets 4. Financial promoters - they consist of investment house engaged in the promotion of certain business
d. Reserves ventures through the sale of securities; and
The cost of organizing a business includes payments made for business permits and licenses, incorporation taxes, 5. Subdivision promoters - they are those engaged in the development of new subdivisions.
business name and the like. Also included are lawyer’s fees for initial legal requirements like the preparation of
building or office contracts, articles of incorporation, architect’s fees for construction plans of building, and Liability of promoters. The promoter undertakes to pursue his job with the capacity of a temporary
management consultancy fees. Whenever applicable, the following may also be included: promoter’s fee and the trustee. He cannot legally bind the firm into contracts and deeds unless approved by the owners or board of
cost of obtaining franchises for patents on required inventions and licenses for copyrights on required literary or directors. This is legally tenable because the promoter cannot act as the agent of a corporation still to be
artistic works. formed, hence, he does not have a principal to represent.
Working capital is required to finance inventories and supplies, salaries and wages, power, water, rent, insurance, The nature of the job of the promoter provides him with an opportunity to make excessive gains at the
transportation, advertising and sales promotion. Maturing obligations of the firm and the financing of credit sales expense of the owners. Professional ethics, however, require that he can only make profits up to the amount
will also require sufficient amount of working capital. previously agreed upon. A secret profit made at the expense of the firm is a ground for the cancellation of
the promoter’s contract. In other countries, he may even be sued for the recovery of profits he may have or
obtained as compensation or for any losses he may have caused.
III. Fundamental Concepts and Tools of Business Finance Maximizing profitability
When a firm decides on obtaining a higher rate of return on its investment, it is said to be maximizing
Basic Concepts profitability.
Definition of finance
Finance may be defined as the study of the acquisition and investment of cash for the purpose of Maximizing profit subject to cash constraint
enhancing value and wealth. In the quest for profit maximization, undue emphasis is sometimes placed on cash balance. Maintaining
too large a cash balance reduces the chance of a favorable rate of return, while running out of cash when needed
Categories of finance. Finance in general, is divided into categories according to the type of entity or organization is disastrous. The ideal set-up is to maximize profits, while at the same time maintaining a cash balance that can
served. take care of cash requirements anytime. This condition is especially critical in the operation of banks.
1. public finance. Public finance is that category of general finance, which deals with the revenue and
expenditure patterns of the government and their various effects on the economy. Maximizing net present worth
2. private finance. This category deals with the area of general finance not classified under public Under the net present value concept, the objective of the firm is to maximize the current value of the
finance. It is subdivided into the following: company to its owners. The net present worth of the firm is equal to the value now of the firm plus values arising
2.1 personal finance in the future. The present worth of values arising in the future are computed and added to the present worth of
2.2 the finance of non-profit organizations; and’ the other values of the firm. Present values may be better understood by way of knowing the concept of the time
2.3 business finance value of money
Time value of money. This concept indicates that the money increases in value with the passing of
Definition of business finance time. A peso today worth more than the peso that would be received in the future. Thus, to be able to find out
The term business finance refers to the provision of money for commercial use. Business finance, the present worth of a peso that would be received in the future, the corresponding interest (or discount) should
however, is more than just the provision of money. It is also concerned with the effective use of funds. As such, be deducted from the future peso.
it covers the financial management of private profit-seeking concerns in the business of service, trade, Calculation of present worth. The present worth of a value to be received in the future is illustrated as
manufacturing, mining, public utilities, and financing. With the foregoing requirements, business finance may follows:
be defined as the procurement and administration of funds with the view of achieving the objectives of the Question: What is the value today of Php100,000 to be received next year assuming that the
business. prevailing rate of interest is ten percent (10%) per annum?
Specifically, however, business finance may be concerned with three aspects:
1. small business finance; Solution:
2. corporation finance; and Value today of next year’s Php100,000 = amount_____ = Php100,000
3. multinational business finance. 1 + rate of interest 1.10
= Php90,909.09
Goals of business finance
Private business is established primarily for profit. This is, however, can be achieved by the effective Seeking an optimum position along a risk-return frontier
management of the various business functions. One of these is the finance function. Like the other functions, it A firm set a goal of achieving the best possible combination of risk and return. A little more risk may
has its own goals. The goals of business finance are variously expressed as follows: be accepted, for instance, for an expected additional rate of return.
1. maximizing profit; Definition of return on investment or net worth. The net income generated by the use of investments or the
2. maximizing profitability; worth of a firm is referred to as return on investment. When it is expressed in percentage, it is called the rate of
3. maximizing profit subject to cash constraint; return.
4. maximizing net present worth; and seeking an optimum position along a risk-return frontier. Definition of risk. Uncertainty as to loss is called risk. When used in finance, the term applies to the potential
incurrence of loss of money or its equivalent.
Maximizing profit Calculation of expected value using risk and return factors. The optimum position of risk and return may be
Maximizing profit means realizing the highest possible peso or dollar income. A firm, for instance, may determined by calculating the expected value of alternative decisions. The expected value of a return on invest
seek to double its peso of dollar income for the current year. This framework, however, is not very useful in is equal to the return times the percentage of probability that it will happen (called the risk factor)
making sound financial decisions. The amount of profit earned by the firm is not adequate to evaluate its
performance. For instance, the net income earned by ABC Company for a certain year in the amount of Php480 The Financial Statement
million does not provide much useful information for the investor or financial manager. This is true even if the Financial statements are those that present financial information to various interested parties. Inasmuch
same amount represents an increase from previous year’s profit of the firm. as the finance manager is responsible for managing the financial activities of the firm, he is naturally one of the
most concerned about getting relevant information through the use of financial statements. There are various Expenses. This refers to the monetary values of the goods and services used in the production and delivery
types of financial statements, but only two of them are important from the point of view of business finance. process in order to obtain revenues. Expenses consist of three items: (1) the cost of goods manufactured and sold;
These are (1) the balance sheet; and (2) the profit and loss statement. (2) operating expenses: and (3) other expenses.

Balance Sheet. The balance sheet is the statement produced periodically, normally at the end of a financial year, Other Income. This item refers to non-operating income such as interest income and purchase discounts.
showing an organization’s assets, liabilities, and the interest of the owners. Net Profit or Loss. Net profit or net income refers to the difference between revenues less period expenses and
Assets. The assets section of the balance sheet shows everything that the firm owns and which has monetary product costs. When expenses and costs are greater than the revenues, the result is a net loss.
value. Assets are classified into four items and are presented in the balance sheet in order of how quick they can
be converted into cash. The classifications are as follows: The budget- Concerning the finance function of the manager, one of the useful tools he could use is the budget.
1. Current assets. These are composed of cash, bank deposits, and other items readily
convertible into cash like accounts receivable, stocks and work-in process, and marketable The budget is defined as an estimate of income and expenditures for a future period. The budget is
securities; contrasted with the income statement, which is a summary of the performance of the firm for a past period, and
2. Trade investments. These are composed of investments in subsidiary or associated with the balance sheet which presents the financial condition of the firm at a given date, past or present. The
companies; budget completes the financial picture by referring to the future.
3. Fixed assets. these items show the firm’s ownership of property like land, buildings, plant Budgets are essential elements in the planning and control of the financial affairs of the business. Large
and machinery, equipment, vehicles, furniture and fixtures, all valued at cost less corporations place so much emphasis in the annual budget which is normally broken down into monthly and
depreciation; and weekly periods, and which may take several months to prepare.
4. Intangible assets. These items present goodwill, patents, copyright which are attributed to In preparing the budget, an estimate of sales and income for the period is made, followed by estimates
the firm. of expenditures in purchasing, administration, production, distribution, and research. Detailed budgets of cash
flow and capital expenditures are also included.
Liabilities. The liabilities section of the balance sheet shows the profile of the debts of the company. They are
classified into several items and are presented first and referred to as a current liabilities. Long-term liabilities Significance of financial statements and budgets
are those which are payable after one year. The following are common liability items: There are five distinct groups interested in knowing the financial standing of the firm. These are (1) the
1. accounts payable owners; (2) the management; (3) the creditors; (4) the government; and (5) prospective investors. In some cases,
2. loans and notes payable customers and employees require financial data about the firm. Financial statements and budgets provide most
3. advances from customers of the information required by interested parties.
4. accrued expenses The owners are primarily concerned with receiving information on the anticipated financial benefits that
5. mortgage payable will be generated by the firm. They also need to know whether it is wise of not to continue their relationship with
6. bonds payable the firm as owners. These information requirements are provided by the financial statements.
The management is concerned with the effective planning and control of activities of the firm. As
Net worth. The net worth section of the balance sheet shows the interest of the owner or owners in the company. various financial information is provided by the financial statements and budgets, they are particularly useful to
management.
The Income Statement. The Income Statement represents the revenues realized from the sale of commodities Creditors will be interested to know if the firm is credit worthy. The use of the firm’s financial statements
and services produced by the company, as well as the costs and expenses incurred in connection with the will help them find out the answer.
realization of said revenues. The income statement is also referred to as profit and loss statement, as two Financial statements are required by the government for tax and regulatory purposes.
possibilities are presented i.e., net income or net loss. Unlike the balance sheet which shows the financial Financial statements are also especially important to prospective investors. They are mainly interested
condition of the firm on a given date, the income statement presents a summary of the transactions for a given in the protection of their investments and the earnings they are require over a period of years. The balance sheet
period. and the income statement will be very useful in this regard.
The Income Statement is characterized by four distinct items (1) revenues; (2) expenses; (3) other Budgets are especially important to management because they are able to do the following:
income; and (4) net profit or loss. 1. anticipate asset needs;
2. plan for necessary financing; and
Revenues. This term refers to the gross income from the production and sale of a firm’s product or service. 3. establish standards by which to test current operating performance.
Revenues include cash collections and receivables or unpaid sale. This item does not include trade discounts Customers who would want to consider long-term relationship with firm would be particularly interested
allowed to distributors of other middleman. To obtain net income or net sales, returns and allowance are deducted to know how stable the firm is. Financial statements could provide them with initial information.
from the gross revenues. Employees who would want to consider long-term employment with the firm would also want to know
the long-term prospects of the firm. Financial statements would be useful in this regard.