CHAPTER 9 Managing the Operations Function

INTRODUCTION

From the perspective of an entrepreneur the main objective of establishing a business is to

earn profit. But to attain this goal, the enterprise has to produce goods and services which
are sold to its clientele. With revenues earned from sales, profit is realized after deducting
the cost of producing the goods and services. Thus, the process of production together with
its allied activities is considered the core of many business enterprises. The administration of
the production process and its related activities is referred to as operations management of a
business enterprise.

In this chapter, the discussion will focus on the management of the production process
although there are other components of managing the operations of an enterprise. As
discussed in the initial chapters of this b the production of a good or service is the realization
of an entrepreneurial intent. From there the intent evolved into an idea and recognized as a
business opportunity. After careful assessment of an opportunity and a positive evaluation, a
prototype is produced. After a series of testing and positive results, the product is ready for
large-scale production.

Managing the operations of an enterprise is a major component in the implementation of the

business plan. This chapter will cover various themes including the concept of operations
management, the bases for evaluating the performance of a firm, various approaches in
analyzing the operations of firm, and alternative indicators of a firm's performance.

CONCEPT OF OPERATIONS MANAGEMENT

Operations management is a component of management that deals with planning,

implementing, and monitoring of the process of producing goods and services. The task of
an operations manager is to oversee the resources available to the enterprise for production
activities. An operations manager plans the structure of production by identifying the output
to be produced, the resources needed, and the procedures on how these resources are
mixed to produce a good or service. In implementing the production plan, the manager
supervises the process of combining materials together with other inputs according to the
technology utilized to produce the identified output. In monitoring the production output, the
manager assesses the performance of production in terms of effectiveness, efficiency,
quality, timeliness, dependability, flexibility, cost, and other criteria.

Although the production process constitutes a significant portion of operations management,

there are other equally important business activities attached to operations management.
These related activities include, among others warehousing, maintenance, inventory, and
quality control. Before the product is produced, materials must be secured and stored within
the firm. In warehousing, the company can buy materials in bulk and secure the stability of
the next production round. Likewise, the firm's physical plant and equipment must be
properly cared for. Thus, maintenance is an important operations activity since it ensures the
continuous productivity of the firm's capital equipment Inventory management is also crucial
in narrowing the gap between the proximate future demand and the next production round.
As a consequence not all outputs produced currently are sold immediately to the customers
a portion is kept by the firm as reserves or inventories. Furthermore, quality control
mechanisms are instituted to assure customers of the firm that its products are consistent
and reliable. Thus the firm does not produce for productions sake; it also has to maintain the
quality of its product to sustain the continued patronage of customers.

ASSESSING THE PERFORMANCE OF A BUSINESS ENTERPRISE

Since a significant component of operations management of a business enterprise involves
the process of production, the success of a firm is assessed based on its performance.
There are two levels in evaluating the performance of a business performance effectiveness
and performance efficiency

Performance effectiveness. Effectiveness indicates how the output of the firm was able to
achieve the objectives set by the business enterprise. A business firm is considered effective
if it is able to produce the goods and services that it has planned to produce. For example,
the performance evaluation can be set in terms of the amount of production (maximum
production). Aside from the volume, the performance can also be scaled in terms of the
quality of production. As mentioned in the previous chapters the production of a good or
service is meant to answer a need of the customers. This process of evaluation must be
taken in the light of how the product or service evolved from an idea to its final production.

Aside from the intent of the entrepreneur, another way of undertaking performance
effectiveness is to relate it with the needs of the customers. For example, if the objective is
to introduce a totally different product or service in the market, is the new commodity
differentiated in terms of its physical attributes (size, color, texture, and others)?

A more interesting assessment of performance effectiveness is the use of Roberto's MADI

questions. If the reason for introducing a product is the missing component in existing
products, was the new product able to fill the gap which is missing in the current products
and services? If the current products and services are annoying, is the new product able to
mitigate, if not remove, the annoyance experienced by the customers with the current
product? If existing products are disappointing and irritating, was the disappointment and
irritation removed or reduced with the introduction of your new product or service?

Meanwhile, performance effectiveness can also be assessed in terms of quality, speed,

dependability, and flexibility. In terms of quality, the product has fulfilled the minimum
requirements set by the market and regulatory bodies. Speed, on the other hand, refers to
the punctual delivery of the product to its customers. Dependability is the consistency and
reliability of the product over several production runs. Flexibility is the adaptability of the
operations of the company to changing market environments.

Performance efficiency. The concept of efficiency denotes how the output of the firm was
realized through the use of resources. It is a relative concept since the production
performance is evaluated in terms of the costs incurred. If the objective of the company is to
maximize profit, it has to be efficient in the use of its resources. Thus, efficiency involves the
monetary outlay in the use of inputs to produce a good or service.

The good or service produced by the firm may be effective since it has addressed the intent
of the entrepreneur, the demand of the customers and other criteria of effectiveness.
Although effective, the firm's performance can be considered inefficient since its production
was very expensive in terms of the use of resources. Thus, not all products and services that
are assessed to be effective are also efficient.

Why is efficiency important in assessing a firm's performance? If the firm is inefficient, it can
threaten its profitability and survival in the market. There is a possibility that the demand for
products of inefficient firms may decline as a result of higher prices. In addition, inefficient
firms with low productivity can easily be threatened by more productive and more efficient
competitors.

Thus, performance evaluation based on effectiveness is inadequate since it only focuses on

attaining the objectives of the firm. But such objectives entail the use of resources which will
need funds to acquire them. Furthermore, there are opportunity costs or sacrifices in
achieving these objectives. In this light, a more appropriate assessment of performance
must be based on efficiency.

FRAMEWORK FOR ANALYZING THE OPERATIONS OF AN ENTERPRISE

In order to properly assess the performance of an enterprise it is necessary to understand

how the production is structured. There are two ways of understanding how the operations
proceeds in an enterprise the systems approach and the value chain approach.

SYSTEMS APPROACH: INPUT-PROCESS-OUTPUT (IPD) FRAMEWORK

Under the systems approach the structure of production is understood as an arrangement of

relationships between inputs and outputs. There are three major components in this
production relationship: inputs, process, and outputs. This production relationship is called
the Input-Process-Output (IPO) framework. The firm will need several inputs for its
operations. These inputs, in turn, have to be processed by technology and other
transforming inputs to produce a final output.

Resource Inputs (5Ms).

The first component of IPO framework is the resource inputs used in the production process.
In the operation of a business enterprise there are five major resource inputs. These are
known as the 5Ms representing materials, manpower, machinery, methods, and money.

Materials are semiprocessed goods that will be subjected to further transformation in the
production process. They are also called raw materials or intermediate inputs. For example,
in the process of producing pan de sal, we need several materials that serve as intermediate
inputs including flour, sugar, butter, eggs, salt, and other ingredients.

Manpower is the human resource input used in the production process. Manpower does not
only include labor or muscular power but also intellectual, creative abilities, and other
qualities of individuals that can contribute to production. In the production of pan de sal,
manpower resources include the baker and his assistants who will implement the recipe
using the available equipment and technology. The manager, sales clerks, and janitors are
also part of the manpower resources of the bakery.

Machinery represents all man-made physical capital used in the production process. Aside
from machines, the tools, durable equipment, and the physical plant are also. In our example
on the production of pan de sal, the machinery comprises the oven, baking utensils, and the
bakery itself.

Method denotes the process of combining raw materials and how these are going to be
transformed using the other factor inputs of production. This resource input is also called
technology or techniques of production since it prescribes the intensity in the use of factor
inputs. If labor is abundant and cheap in the locality, the firm may utilize more labor-intensive
techniques. This implies that it will use more labor relative to other factor inputs. If, on the
other hand, labor is expensive and capital is cheap, the firm may implement capital-intensive
technology. This means that the firm will use more capital relative to other factor inputs. In
the production of pan de sal, the mixing of ingredients will use manual labor intensively as
applied by many small bakeries. On the other hand, large bakeries in urban areas will use
modern baking equipment and utensils that are capital intensive.

Money is a financial resource used to purchase all the resources needed by the firm for its
operations. The owners of the company contribute seed money for the initial operations of
the firm. Money is also needed to purchase raw materials. It is also used to pay the salaries
of workers and managers. Durable equipment and technology are acquired using financial
assets as payments.

In the economic analysis of production, the resource inputs mentioned above are grouped
into two major categories-intermediate inputs and factor inputs.

● Intermediate inputs are semiprocessed materials that need further transformation to

produce a finished product. They are also called raw materials or materials as
classified in the IPO framework..
● Factor inputs are the transforming inputs that will process the intermediate inputs into
finished products. Because of their transforming properties these inputs are also
called productive inputs. Factor inputs include labor (manpower), capital (machinery),
land, and technology (method).

Although important, money is not considered as a factor input economic analysis. Since the
production process entails the physical production of goods and services, factor inputs such
as labor, capital, land, and technology are physically and actively used in transforming the
raw materials in the process of production. Money is not directly involved in the physical
production. Although money does not have a direct participation in the physical
transformation of the intermediate inputs, it is very crucial in the production process. As
mentioned earlier, you cannot have materials or intermediate inputs that will be processed if
you do not have money to purchase these. Similarly, wages and salaries paid to workers are
expressed in monetary terms. Capital equipment is purchased based on its monetary value.
It is the intermediate inputs and factors that relate with one another in production which were
all purchased using money.

Process

The second component of the IPO framework is the process involved in production. Process
refers to the various forms of transformation that factor inputs perform on the materials. The
process is determined by the type of commodity to be produced and the technology being
used in production. The various forms of transformation are as follows:

● Physical transformation occurs when the processing of raw materials convert them
into significantly altered new product. Grain production, aquaculture fishing, and
manufacturing of clothes are examples of commercial activities that perform physical
transformation in the production.
● Locational transformation arises when a product changes its location through various
means of transportation and communication. When mangoes from Guimaras are
transported to Manila, the mangoes are occasionally transformed because they are
now available in Metro Manila. When a letter is transmitted electronically or through
snail mail from one place to another it is likewise spatially transformed. Bus
companies, shipping lines, airlines, and other transportation and communications
firms are engaged in locational transformation.
● Information transformation happens when knowledge and specialized skills of
providers are transmitted to their customers. When lawyers provide legal services,
accountants conduct auditing services, professionals perform consultancy services,
and medical doctors prescribe medication, their clients are transformed when they
obtain these specialized skills and services. Social and professional service providers
are engaged in information transformation.
● Exchange transformation takes place when a commodity is transmitted from the
supplier to its buyer. When you buy a bar of soap from a sari sari store in your
neighborhood, there is exchange transformation because the soap was not produced
by the sari-sari store but by a multinational corporation specializing in toiletries.
Similarly, there is an exchange transformation when you buy an imported commodity
 like cheese from a supermarket. Those establishments in retail and wholesale trade
are engaged in exchange transformation. Extractive transformation happens when a
natural resource is out from its habitat. For example, when you dig gold, copper, and
other minerals from mining sites the harvest has undergone extractive
transformation. Similarly, the marine catch from deep sea underwent extractive
transformation. Mining, quarrying, forestry, and fishing are examples of economic
activities engaged in extractive transformation.

Output. The third component in the IPO framework is the output, which refers to the result of
the production process. It can be considered the most important component in the IPO
framework since the goal of production is the realization of an output. After treating the raw
materials with the transforming inputs the outcome is the output of production. The output
can be processed goods or services and are influenced by the process of transformation.
Based on the type of transformation, the following are examples of outputs of production.

● Outputs from physical transformation: Food grains, canned food, clothes, bread,
furniture, gasoline, construction materials, cars, electronic gadgets, and other
manufactured goods
● Outputs from locational transformation: taxi services, bus services, train services, sea
transport, air transport, postal services, telephone services, and other
telecommunication services
● Outputs from information transformation: educational services, health services, legal
services, consultancy services, auditing services, and other professional services
● Outputs from exchange transformation: retail services of sari-sari stores, groceries,
supermarkets and department stores, and wholesale services of large distribution
outlets
● Outputs from extractive transformation: gold ores, copper ores, timber, logs, sand,
seafood, and other products derived from natural resources

VALUE CHAIN APPROACH

Aside from the systems approach such as the IPO framework, the process of production can
also utilize the value chain approach. The value chain approach traces the value of a
commodity in terms on how factor inputs are adding value to the raw materials. Thus, the
value of a commodity is represented by the value of raw materials and the 'value-added from
factor inputs like labor, capital, land, and technology that were used to transform these raw
materials into the final output.

In physical transformation, the raw materials were already valued by firms producing the raw
materials and the value that is added is the cost of processing. The cost of processing, in
turn, consists of the various costs of transforming inputs. Thus, the value-added is the
summation of wages (cost of labor), interest (cost of capital), rent (cost of land), royalty (cost
of technology), and profit (return to entrepreneur). On the other hand, the value of production
is computed as the value of raw materials and the value-added by the factor inputs.
Figure 9.1. The Concept of Value-added
Source Tullao, TS, Elements of Economics

In the diagram, we trace the physical transformation of grain into a bibingka (rice cake).
When food grains are processed they are transformed into wheat. The cost of transforming
grain into wheat is the value-added in wheat production. In turn, wheat becomes a raw
material in the production of flour or galapong. The cost of transforming wheat into flour or
galapong is the value-added in flour production. Finally, the flour plus other ingredients
become raw materials in the production of bibingka. The cost of these factor inputs in
transforming flour into bibingka is the value-added in the production of bibingka.

Using the concept of value-added, we can understand why the price of mangoes from
Guimaras is more expensive in Manila. The cost of transporting mangoes (locational
transformation) from Guimaras to Manila adds value to Guimaras mangoes. In addition, the
cost of exchange transformation also adds another value to the Guimaras mangoes once it
is purchased by a buyer in Manila. For example, if mangoes costs PHP 25 per kilo in
Guimaras while the costs of transporting (locational transformation) to Manila is estimated to
be PHP 30 per kilo and the additional cost of wholesalers of PHP 10 per kilo and cost of
retailers (exchange transformation) is PHP 55 per kilo, the price of Guimaras mangoes in
Manila can reach up to PHP 120 per kilo.

As observed in the examples given, there is a series of transformation before a product

reaches its final consumer. In each stage, the firm may decide to pursue further
transformation or not. If the additional value is greater than the additional cost, then it may
be rational to pursue the activity Otherwise, if the marginal benefit is lower than marginal
cost, it may not be profitable to pursue the commercial activity.

For example, if mangoes are sold at PHP 60 per kilo in Guimaras, the additional cost of
locational transformation of PHP 30 per kilo and the additional cost of exchange
transformation (wholesale and retail) of PHP 65 per kilo will result in the sale of mangoes at
PHP 155 per kilo in Manila. At this price, Guimaras mangoes may not be competitive if sold
in Metro Manila Even if Guimaras mangoes are sweet, mangoes from Zambales and
Pangasinan are likewise sweet. Moreover, these mangoes from Luzon can be purchased at
PHP 100 per kilo in Manila. In this case, it may be difficult to sell Guimaras mangoes in
Manila because the price of the raw material (Guimaras mangoes) has gone up. As a result,
an entrepreneur may temper, if not cancel, his order of mangoes from Guimaras.

It is also possible that the competitiveness of the mangoes may be threatened by the change
in transformational cost. The Guimaras mangoes may still be priced at PHP 26 at source but
the cost of locational transformation may increase to PHP 40 per kilo because of an increase
in the cost of transport. The cost of wholesale exchange transformation remains at PHP 10
per kilo If these mangoes are going to be sold in supermarkets or malls, and the cost of retail
exchange transformation can reach up PHP 70 per kilo, the cost of mangoes can go up to
PHP 145 per kilo in supermarkets in Metro Manila, However, if these mangoes were sold in
public markets where the cost of retail exchange transformation is cheaper say PHP 40 per
kilo, the price of Guimaras mangoes can be sold at PHP 115 per kilo in Metro Manila public
markets. This may explain why it is cheaper to buy mangoes in a public market than in
supermarkets or malls because the costs of exchange transformation differ in alternative
outlets.

Given the differences in the costs of the value chain, entrepreneurs who are in the wholesale
distribution of mangoes may sell more to retailers in public markets where the price can be
lower and with a possible higher demand than in supermarkets where price is potentially
higher and demand may be lower

MEASURES OF PRODUCTIVITY

Earlier in this chapter, we discussed various ways of assessing the performance of the firm.
In terms of performance efficiency, one of the key indicators is the firm's productivity.
Productivity is a concept of measuring output relative to the value of inputs used in
production. Since output can be measured in terms of volume of output and its monetary
value and inputs can also be measured in physical units and monetary values, the firm's
productivity can be calculated. A firm that is considered productive can produce more output
per unit of input.

Since factor inputs have different measurements in physical units, we cannot have a
productivity measure for all inputs. For example, a unit of labor is measured in workdays or
man-hours or number of employed workers. These measurements cannot be combined with
a unit of capital or a unit of technology or a unit of land. For this reason we can only have a
measure of partial productivity. The following are some measures of partial productivity:

● Average productivity of labor: Value of total production per unit of labor input
● Average productivity of capital: Value of total production per unit of capital input
● Marginal productivity of labor: Additional output per additional unit of labor input
● Marginal productivity of capital: Additional output per additional unit of capital input

However, since all these inputs have their values expressed in prices they can be compared
and combined in monetary values. With this, we can calculate another indicator of
productivity measured as cost per unit. This indicator is related with the measurement of
productivity since average cost is the reciprocal of average productivity. Thus, a firm that
exhibits a low cost of production is also a firm with high productivity. Since the cost of
production per unit is lower, the firm can produce more output given its resources. Some
measures of cost are the following:

● Average cost: Total cost of production per unit of output

● Marginal cost: Additional cost of production per additional unit of production

When average cost per unit is compared with the prevailing market price of the product, the
unit profit can be computed. For example, if the market price of pan de sal is PHP 3 per unit
and the Masarap Bakery's unit cost is PHP 2.50 per pan de sal; Masarap Bakery can earn
PHP 0.50 per unit. If the bakery produces and sells 1,000 pan de sal in a day, the profit from
the sales of pan de sal is computed at PHP 500 per day.
If the marginal cost is compared with the prevailing market price of the product, it can show
what will happen to total profit. In addition, it can set the condition for the determination of
maximum profit. For example, if the owner of the bakery expands its production to 1010 units
and the marginal cost of the additional 10 units is PHP 2.80 per unit which is lower than the
market price (PHP 3) the marginal profit (additional profit) is computed at PHP 0.20 per unit.
This means that total profit may increase to PHP 502. This will encourage the firm to expand
its production because total profit can still be increased.

If the owner decides to further increase its production to 1020 units and the additional 10
units increases the marginal cost to PHP 3 equal to the market price, the marginal
(additional profit) becomes zero. This per means that the additional 10 units of pan de sal
will result in a total profit unit which is calculated at PHP 50g. This is the same level of profit
at 1010 production. This implies that the firm has reached the maximum level of profit when
marginal cost is equal to the market price.

If the owner decides to further increase its production to 1050 units of pan de sal and the
additional 10 units of pan de sal further increases its marginal cost to PHP 4 per unit. With a
marginal cost which is higher than the market price (PHP 3), the marginal (additional) profit
becomes negative computed at-PHP per unit. As a result, the total profit will decrease to
PHP 492 at 1030 production level. Thus, it is not sensible for the bakery to increase its
production to 1030 units. The optimal level of production that will give the bakery its
maximum profit is 1020 units of pan de sal.

WAYS OF IMPROVING FIRM'S PRODUCTIVITY

Since measures of productivity and costs are indicators of the efficiency performance of
firms, they conduct various initiatives to improve their productivity. Based on the indicator of
productivity, a firm can improve its productivity by increasing output per unit of input. This
can be done by employing factor inputs that are output enhancing. For example, hiring
skilled and educated laborers can improve labor productivity. In addition, the existing capital
stock of the firm becomes more productive as skilled and productive workers utilize it.
Similarly, the productivity of capital is enhanced when a firm invests in modern capital
equipment. With improved technology, workers become more when utilizing modern
equipment.

Another alternative in improving productivity is to reduce the cost of production. Firms should
be flexible in using production techniques that are sensitive to the price of factor inputs. For
example, if labor is cheap and capital is expensive, the firm may adopt labor-intensive
techniques to exploit the low cost of hiring labor services. In the same light, in developed
countries, where labor is expensive, firms utilize capital-intensive techniques to save on
production cost. Thus, productivity is enhanced and cost is reduced when prices of factor
inputs reflect their relative productivities. This implies proper allocation of resources.

Aside from employing productive factor inputs and reducing cost, can also be improved
through motivation. Managers and supervisors with excellent people skills can motivate their
workers to excel, enjoy their work, and contribute positively to the goals of the firm. With no
change in factor inputs and no change in production cost, production increases due to the
effects of the positive disposition of laborers in the workplace. This positive impact of
motivation on productivity has been examined in the literature as the contribution of
efficiency to the firm's productivity."

BALANCED SCORECARD-A WAY OF RECKONING EFFECTIVENESS

As mentioned in an earlier section of this chapter, a firm's performance effectiveness has

been indicated by its output and objectives the firm wants to achieve. However, Kaplan and
Norton proposed a balanced scorecard in assessing the performance of the firm. The
scorecard reflects not only the output of the firm but also the interests of its various
stakeholders. The balanced scorecard considers the variety of interests that the firm pursues
besides the production of an output to earn profit for the owners of the enterprise as
reflected in financial reports."

Because a business enterprise is a social unit, it has to interact with numerous stakeholders
affecting its operations, stability, and growth. These stakeholders, in turn, have varied
interests beyond production and profit for the firm. To understand the components of the
balanced scorecard, let us enumerate some of the stakeholders of a firm and their
corresponding interests.

● Shareholders. Aside from a reasonable rate of return to their investments in the firm,
owners of the enterprise are interested in the continuity, stability, and growth of the
firm.
● Managers. As administrators of the resources of the firm, operating officers,
managers, and supervisors may want control in decision making, flexibility in
managing risks affecting the business enterprise and adequate compensation.
● Workers. Adequate compensation, good working environment, and protection of
labor rights are the main concern of workers.
● Customers. Aside from value for money, customers are concerned about the
reliability, consistency, and quality of goods and services.
● Government. Aside from taxes, the government is interested on how the firm can
generate and provide employment to a growing labor force.
● General public. The general public may be interested in the responsibility of the firm
to its immediate neighborhood and the care for the environment.

Given the various stakeholders and their respective interests, Kaplan and Norton developed
a scorecard summarizing these into four perspectives of a firm. In looking at the firm in each
dimension, there is a need to develop measurements, gather information, and evaluate
these indicators with their corresponding perspective.

● Learning and growth perspective. To achieve the vision of the firm, how will it sustain
the firm's ability to change and improve? This requires constant training of the
workforce and the inculcation of organizational culture among managers and
employees.
● Business process perspective. This view points to the internal processes of the
company. Identification of business activities that the company can excel in and can
be considered as best practices that can satisfy shareholders and customers.
● Customer perspective. To achieve the company vision, how should the company
appear to its customers? Is there a focus on the customer in: the vision and mission
of the firm? Are the customers satisfied with the products and services produced by
the company? Has the company developed brand loyalty among the customers on
the products and services of the firm?
● Financial perspective. To succeed financially, how should the company appear to its
shareholders? Timely, accurate, and understandable financial data is not only crucial
to managers in making strategic decisions but also in assuring the shareholders on
the financial health of the company.

From these perspectives, performance effectiveness can be measured by identifying the

objectives to be pursued, devising indicators of effectiveness in each perspective, initiating
strategies and key activities to achieve these objectives, and assessing these initiatives on
how they answered the objectives of a specific perspective,
CHAPTER 10 Managing the Finance Function

INTRODUCTION

In the previous chapter, we discussed how resources are being managed for the production
activities of an enterprise, using the Input-Process-Output (IPO) framework. The company
utilizes various inputs and processes them into final product outputs. But these inputs,
whether raw materials or factor inputs, have their respective price tags; and the firm has to
spend money to secure these inputs. This is the reason why money is very crucial in the
operations of a business enterprise. The firm will need money to buy raw materials. In the
same light, the firm will need money to pay for the compensation of its employees and
managers, and for the capital equipment and other physical assets of the firm. Even rent for
land, royalties for technology, and extractive fees on natural resources have to be paid. It is
in this light that this chapter focuses on the finance function of an enterprise.

There are two major reasons for managing the financial resources of a company. First, as
mentioned earlier, the firm will need funds to finance the acquisition of inputs of production
as well as the other dimensions of a firm Second, if the company has excess funds there is a
need to put these funds in income generating financial instruments. In both cases, the
acquisition and use funds must be well managed for the benefit of the firm.

To understand how the company manages its finance function, the basic principles of
financial management will be discussed as the initial theme of the chapter. We will likewise
explore other topics, including the challenges of raising funds, the choice between debt
financing and equity financing, alternatives on raising funds for micro and small enterprises,
and the role of social bricolage in financing entrepreneurs.

PRINCIPLES OF FINANCIAL MANAGEMENT

As mentioned earlier, the two dimensions of financial function of a company consist of the
acquisition of funds and the optimal use of funds. Thus, we can define financial management
as a dimension of management that pertains to the acquisition, financing, and management
of monetary assets to achieve certain organizational objectives. These tasks can be
achieved by using principles of sound financial management. The following 10 guiding
principles have been incorporated in the corpus of several textbooks in financial
management."

● Principle 1: An investment project with a return may also have higher risks. There is a
trade-off between risks and returns. When you put your money in a project that
promises higher returns be prepared for a corresponding higher risks attached to it.
Because of this principle, there is a need for the firm to undertake rigorous study on
projects that promises huge returns because they may expose the company to huge
risks and possible losses.
● Principle 2: The value of money changes over time. Because money is considered
both as a medium of exchange and as a store of value, the value of a PHP 100,000
today is more compared with PHP 100,000 next year. Thus, there is a trade-off
between using money today to buy a computer or using the money next period to
 acquire the same computer. Those that acquired the computer today currently enjoy
the benefits of a computer, while those that postponed their consumption are making
a sacrifice until the next period. Thus, it is better to have the money now than to have
the money in the future. This is also the principle behind the payment of interest on
borrowed funds.
● Principle 3: Cash, not profit, is the basis for creating value. Firms create wealth or
value through investment. Since cash, not accounting profit, can be reinvested, it can
create value for the firm. This is because accounting profit is a recorded value but
does not reflect the firm's actual cash on hand. For example, allowance for
depreciation is an expense and can reduce the accounting profit of the firm.
However, although depreciation is an expense there is no monetary outlay on the
part of the firm, resulting in a net cash flow higher than the recorded accounting
profit.
● Principle 4. In creating value, it is important to consider incremental cash flows. In
introducing a project, there is a need to compare the cash flow generated a project is
implemented with the cash flow if the project was not implemented. This has to be
done because the introduction of a new project may have affected the cash flows of
existing projects. For example a bakery introducing pan de abodo may increase
sales and cash inflows but this may reduce the demand for regular pan de sal and
reduce the cash flow. Thus, the net or incremental cash flow should be considered.
● Principle 5: In a competitive market it very difficult to reap huge profits. Any
abnormally high profit in a competitive market can easily be reduced and removed
with the ease of entry of new players in the market. Thus, there are limited
opportunities of creating value based on the normal profit in a competitive market. In
such a case, there are two options open for the firm to create value. They can either
differentiate their product or reduce its cost of production to reap profits from the
market.
● Principle 6 You cannot outsmart an efficient capital market. Because all information is
incorporated in the price of securities in an efficient capital market, the participants
are quick to react on changes in prices. What affect share prices are sound decisions
of the firm that lead investors to buy their securities and other financial instruments.
Shareholders' valuation of the security and their demand for it are influenced by the
financial health of the company as reflected by their cash Thus, the firm cannot
artificially mask its financial standing to attract demand for its security.
● Principle 7: Creating value for the firm is tempered by the agency problem. The
agency problem arises when the interests of the managers are not aligned with the
interests of the shareholders. For example, increasing the value of the shareholders
equity may not be the primary objective of the managers. Thus, when managers
pursue their own interests rather than the interest of the owners, the optimal wealth
of the company is not attained.
● Principle 8: Taxes may influence business decisions. Cash flows from a project may
increase tax liabilities of the company, thus reducing the net or incremental cash
flow. On the other hand, to attract more foreign investment, government can provide
fiscal incentives like tax holidays, and accelerated depreciation to companies that
employ more workers, spend on R&D and other capital expenditures. These tax
rebates can increase cash flows for these targeted companies.
● Principle 9: Not all risks are created equally. Firm face numerous risks. Some can
emanate from within and others can come outside the company. In addition, the
probability of occurrence and gravity of their impact on the company may also vary.
In the light of variability of risks, a sound financial demands diversification of assets
to increase the value of the firm by minimizing the expectation of risks.
●
● Principle 10. In creating value for the firm, the financial managers must be ethical in
their actions and decisions. This includes competence, confidentiality, integrity, and
objectivity in their conduct. Since trust is the basis of commercial transactions,
 unethical behavior of managers can lead to loss of confidence on the firm. This, in
turn, may erode the value of the company in the market. Beyond ethical behavior,
firms may engage in activities and programs that project them as socially responsible
firms. This proactive stance of firms is believed to enhance value of the firm.

As seen from the discussion, these principles are focused on the second motivation of
financial management, which is the optimal use of funds. As such, these principles are
applicable to companies that are large, have excess funds, and trade their bonds, stocks,
and other commercial papers in the capital market. Thus, these guiding rules can be very
relevant to businesses operated by what we referred to in earlier chapters as Schumpeterian
entrepreneurs. For microenterprises increasing the value or wealth of the enterprise,
although a legitimate objective, may not be their immediate concern. Many of these small
enterprises are interested in the acquisition of funds to finance the of their business.

Whether the firm is large or small, or whether the enterprise is more interested in the
acquisition of funds or the optimal use of funds, the financial health of the company is an
important information that stakeholders would like to know. It is for this reason that
companies, big or small, prepare various financial reports to indicate their financial status.

RAISING CAPITAL FOR NEW VENTURES: SOME CHALLENGES

Any business enterprise will require a variety of resources to produce. These resources have
their respective price tags. However, these new business ventures may not have enough
internal funds to finance the acquisition of these resources for production. Thus, some
companies may have to resort to external sources of funds. But raising capital from external
sources involves several challenges, whether the funds are meant for small ventures or for
large start-ups. According to experts on financial management, these challenges revolve
around the concept of awareness or knowledge-knowledge on one's firm, knowledge on
financiers, and knowledge on financial venues. These key challenges are as follows:

1. Need to convince the lenders and investors that the firm is a creditworthy business
enterprise.

External funding institutions tend to have lukewarm interest in business ventures with
inadequately prepared business and financial plans. This weakness is perceived as lack of
knowledge of business managers on the companies they manage. This inadequacy may
arise from the vagueness of the vision-mission of the firm, and how this overall goal of the
firm is not fully articulated by the owners, managers, and its workforce.

In addition, if the firm does not fully understand the market it is entering, it can give signals to
creditors and lenders that the enterprise is not well thought-out. If the firm has limited grasp
of the market clientele, potential rivals, market risks, and future prospects, the owners did
not do their assignments of studying carefully the market and preparing a business plan.

Moreover, creditors and lenders may not view the company favorably if the prospective
entrepreneurs do not know exactly the amount of money that is needed to start their
business. "Any amount that you can lend or invest is highly appreciated" is an unacceptable
answer from a company trying to impress lenders and creditors. Lastly, the quality of the
management team and the company's human talent can enhance the credit worthiness of
the firm.

In order to respond to this challenge, the firm should prepare a business plan that states its
vision-mission and that enumerates the specific strategies and programs that will be
pursued. It should also include a financial plan that lays down how these programs and
strategies are going to be funded, as well as a human resource plan that will map out the
implementation of the programs and strategies. In mobilizing funds, a business venture
should recognize the perspectives and interests of lenders and investors

2. In the financial plan of a company, there is a need to identify and choose which fund
raising option the firm will tap to finance the business venture. If it chooses borrowing, it
should understand that borrowed funds must be repaid. In this light, lenders tend to consider
the capacity of the firm to pay the loan borrowed. In addition, they look on how the firm
manages its risks so it can pay its financial obligations to its creditors.

If the lender is a nongovernment agency, it may not charge high interest rates on loans
granted to the company but may consider other indicators. Aside from the repayment of the
loan, such nonbank NGO may look for indicators on the sustainability of the firm and its
social contributions.

On the other hand, if the firm chooses an investor as the source of external funds, the
entrepreneur should be aware that investors are always interested in the value of the money
that they have invested. In this light, they are looking at the profitability, cash flows and
growth prospects of the firm. These indicators can increase the value of their equity invested
in the company.

Meanwhile, a nongovernment agency can likewise invest in a new business venture. It may
not be as interested in the changes in value of its equity in the firm but in how the firm is
answering its social obligations particularly in generating employment and addressing
poverty. 3. Need to understand alternative venues for financial intermediation.

Aside from the usual bank credit and selling equities in the stock market, there are other
venues for raising funds for new business ventures. One option is called crowdfunding which
uses social media as venue for raising funds for the new business venture. Crowdfunding
makes use of social ties, connections, and networks in raising funds for an emerging
company. This option is common in developed economies including the US and Australia.
However, it is also beginning to appear in developing countries including the Philippines. In
the Philippines, crowdfunding can be a platform for several types of fund mobilization
including donations (the crowd contributes money to support a worthwhile program), reward-
based (the crowd puts money into the company in exchange for a product or service), equity
based (contributions from the crowd make them part owners of the business venture) and
credit-based (the crowd extends loans to the firm with the expectation of being repaid in the
future).

Although crowdfunding may appear as a simple venue for fund mobilization, it is, however,
not that as easy to pursue. For one, it needs a huge amount of time and resources to project
a good image for the new business venture to potential investors, creditors, and contributors,
using connections in the social media. Aside from a detailed plan as mentioned in the initial
challenge above, the new venture must be specific in stating the exact amount to be raised.
Moreover, the new company must have a strategy on how to create and sustain the interest
of future investors, creditors, and contributors using social media. Related to this, the
manager of a crowdfunding site must conduct due diligence on potential applicants to ensure
that potential crowd contributors will not be deceived. And more importantly, the firm using
this alternative venue should know how to manage what is known as the lead investor game.
Usually, investors get interested in a new business if other eminent investors have
previously committed funds to the new firm. Once these eminent investors come in they
create a bandwagon effect on other investors, resulting to the accumulation of funds for the
new firm.
TYPES OF CAPITAL-DEBT VERSUS EQUITY

As implied in our previous discussion, the usual sources of external financing of firms are
creditors and investors. A large proportion of transactions of commercial banks deal with the
extension of loans to business ventures mainly used as working capital and the acquisition
of capital equipment. On the other hand, large firms that would like to expand their physical
plant and other strategic projects may resort to the capital market through the issuance of
bonds in the bond market and equities in the stock market. However, the choice between
debt and equity is not the only option for firms in managing the finances. Many mature
business enterprises create a portfolio in sourcing of funds for capital accumulation. They
simultaneously borrow money, issue bonds, stocks, and other commercial papers to raise
funds. for the company. In choosing these alternatives, they weigh the benefits and costs of
every alternative funding source.

ADVANTAGES AND DISADVANTAGES OF CREDIT FINANCING

For a small amount of money that is immediately needed, credit financing is probably the
most efficient route for sourcing funds. An entrepreneur can talk to a nearby commercial
bank to secure a loan. The bank may require the submission of its business plan, financial
plan, various financial statements, and other documentary requirements. After careful review
and positive evaluation, the bank can issue a check or provide a credit line to the borrowing
firm. A major requirement on the extension of credit is the attachment of collateral that the
commercial bank can acquire in case the borrowing firm fails to pay its loan.

Although credit financing may appear simple to pursue, the payment of the loan becomes
part of the fixed cost in the operation of the firm. Whether the does well or not, the firm is
obligated to pay the bank and other

Creditors Otherwise, if it defaults or becomes delinquent, the penalties and surcharges can
increase loan repayment. Worse, if the firm cannot pay its obligation and becomes insolvent,
the assets of the firm used as collateral are taken over by creditors

Advantages and disadvantages of equity financing On the other hand, firms can raise funds
by issuing stocks and selling them to potential investors in the stock market. The main
advantage of equity financing is the huge amount of money that can be accumulated. In
addition, it can earn substantial savings for not borrowing and servicing debts. These
potential funds can be used by the firm for its operations and further capital expansion. Since
the investors are interested in the value of their share in the company this may pressure the
company and its managers to provide strategic programs for growth. In addition, the
experience of venture capitalists and other investors can be a source of expertise that the
firm can harness. These investors can also advise the management on strategies on
enhancing growth, increasing cash flows, and profit.

The main disadvantage in equity financing is the complexities of preparing and issuing
honds, securities, stocks, and other commercial papers in the capital market. Aside from due
diligence and the provision of documentary requirements, the financial performance of the
company must be reviewed, evaluated, and rated by independent credit rating agencies.
This process is not only time consuming but very expensive. In addition, the management
team can have less control and flexibility as investors actively participate in the drafting of
strategic plans for the firm. Lastly, the monitoring cost of the firm increases as the
management team devotes more time and resources in the preparation of information and
documents for investors, credit rating agencies, and regulators.

SOURCES OF CAPITAL FOR ENTREPRENEURS

Our discussion above covers issues and concerns that pertain primarily to large-scale
enterprises. These business ventures usually go to formal financial markets including
commercial banks, the bond market, the securities market, the stock market, and even
crowdfunding to raise funds for their new projects and business enterprises. However, there
are numerous small enterprises in developing countries, including the Philippines, that
source their funds beyond what were discussed above. A number of micro- and small-scale
enterprises source their funds from their own savings, specialized programs of commercial
banks, government grants and other NGOs, venture capitalists and business angels.

Self-financing. Because of the complexities of using the formal financial markets, many
microenterprises normally source their funds from their own savings. In addition, since many
of these microenterprises are household-based and use family members as workers in all
likelihood funding sources also come from family contributions. For example, many
households in the Philippines receive remittances from their relatives working abroad. A
number of these remittance-receiving households spend a portion of the amount received in
entrepreneurial activities. These remittance-receiving households that are engaged in
entrepreneurial activities usually have lower income. Thus, they rely on remittance-financed
entrepreneurship to augment their limited income.

Borrowing from local credit market. Because of limited income and lack of savings, on the
one hand, and the difficulties of getting credit in the formal financial market, on the other
hand, micro and small entrepreneurs source their financing needs from the informal credit
market in their locality. For example, owners of stalls and other vendors in many public
markets in the country depend on a credit mechanism known as 5/6 system. This means
that if an entrepreneur borrows PHP 5,000 from an informal credit provider he has to repay
the creditor PHP 6,000 or PHP 150 daily for 40 days. Under this condition, the implied
interest rate is more than 180%, computed on an annual basis. Although the interest rate is
quite exorbitant, many vendors continue to get their financing needs from what we refer to as
loan sharks because of the simplicity and convenience of paying PHP 150 per day
compared to submitting the paper requirements of formal credit institutions.

To address the exorbitant interest rate charged by informal credit providers, a number of
these vendors have organized themselves and formed credit cooperatives. Under this
system, a member can borrow an amount which is a multiple of his share capital and
savings in the cooperative. The interest rate charged is significantly lower than in the
informal credit market and the paper and other requirements are not as cumbersome as in
commercial banks. In addition, at the end of the year, part of the net surplus of the
cooperative is returned to members in terms of dividends and patronage refunds.

Borrowing from commercial banks A number of commercial banks in the Philippines have
programs in support of entrepreneurship. For example, the Land Bank of the Philippines has
a Microfinance Program whose objective is to reach out to the poor and marginalized that
have difficulties getting credit from formal credit institutions. The banks extend leans to
microfinance institutions including cooperatives and nongovernment institutions which can
be relent to individuals who are engaged in microenterprises. They charge interest, service
fee, and value-added tax. Meanwhile, the bank also has a program for the development of
small and medium enterprises. The Easy Pondong Pang-asenso (EPPA) Program is meant
to provide financing for entrepreneurs in setting up, sustaining, and improving small
enterprises with easy collateral

Similarly the Development Bank of the Philippines has its Credit Line for Micro, Small, and
Medium Enterprises Program intended to assist small and medium enterprises (SMEs) in
expanding their physical plant through construction, expansion, and modernization. It also
supports other investment activities of SMEs including acquisition of new equipment and
investment in research and development.*

Government grants credit, and incentives The government has recognized the economic
contributions of SMEs in generating employment and alleviating the problem of poverty. In
this light, the government through various agencies has provided assistance to these
enterprises that have difficulties in accessing credit from the formal market. For example, the
National Livelihood Support Fund (NLSF) has its Youth Entrepreneurship Financing Facility
Program (YEFFP) whose objective is to provide credit to young graduates of training
programs of the Technical Education and Skills Development Authority (TESDA) and the
National Youth Commission (NYC) who plan to start income-generating enterprises.
Through the Livelihood Development Program for Overseas Filipino Workers (LDPO), the
NLSF provides credit, training, and other assistance programs for OFWs in establishing and
sustaining their business enterprises. In addition, the NLSF also has its Isang Bayan, Isang
Produkto, Isang Milyong Piso (1M1) meant to support SMEs in the development of a single
product or a cluster of products in every municipality. The local government unit can apply
for a grant up to PHP 1 million for the development of enterprises engaged in manufacturing
and processing and agribusiness in the municipality" Meanwhile the Department of Science
and Technology (DOST) has its Small Enterprises Technology-Upgrading Program (SET
UP), the objective of which is to improve the viability of SMEs by providing financial
assistance to facilitate technology adoption and improve productivity"

Venture capitalists and business angels. Another source of funds can come from a group of
investors buying equity directly from a start-up company. They are called business angels
and venture capitalists. A business angel uses his own personal funds to acquire private
equity in the company. On the other hand, a venture capitalist uses the funds of a group of
individuals or a company to purchase equity in a start-up company. In terms of the amount
invested, it is likely that a venture capitalist can invest more than a business angel since the
former is able to pool funds from a group of individuals. In terms of participation in the
operation of the business, a business angel can provide expert advice drawn from his
experience while a venture capitalist may want to be actively involved in mapping the
strategic policies of new company by asking a seat in the board of directors. In terms of
exposure to risks, a business angel has a greater exposure compared to a venture capitalist
since the latter is able to distribute the risks among the members of the group.

SOCIAL BRICOLAGE

In our discussion above on sourcing of funds, entrepreneurs seek outside financing formally
through the capital markets or from informal credit providers or from government agencies
and nongovernmental organizations. However, there are enterprises known as social
enterprises that tend to shy away from these traditional sourcing of finance.

The concept of social bricolage refer to the behavior of social enterprises that improvise in
an environment of meagre resources. Di Domenico, et al. (2010) enumerated six elements
of social bricolage. These include making do with modest resources, refusal to be restricted,
improvisation, social value formation, stakeholder participation, and persuasion for support
from others. Given these elements, we can understand why social enterprises normally do
not seek funds through debt financing and equity financing. As social enterprises pursue
their primary concern of creating social value instead of profit, they may not be interested in
seeking credit since debt this will increase their cost of production at the expense of their
social impact. In the same manner, they will shy away from equity financing because they
are unattractive to investors interested in the firm's profitability instead of its social
contribution. Instead, they seek support from nongovernment agencies as well as national
and international institutions for their financing needs.

As a consequence, many of these social enterprises do a lot of improvisation, including

recycling, to cut on cost. For example, there are social enterprises that recycle Tetrapaks or
packaging of fruit juices and transform them into wallets, bags, and other containers using
informal settlers as workers. These enterprises create employment with low levels of cost
since the raw materials are almost free. At the same time, they contribute to the protection of
environment. Similarly, various products are made from water lilies harvested from Pasig
River by a number of social enterprises using social bricolage. As mentioned earlier, for the
sustainability of these enterprises they seek support from agencies, national and
international funding institutions. Others persuade global marketing networks to distribute
their socially relevant products in various parts of the world.
CHAPTER 11 Managing the Human Resource Function

Introduction

While entrepreneurs need to mobilize physical and financial resources to get their business
started, it is critical for them to develop the capabilities of their employees and to build
human capital if they aim for long-term growth. In this chapter, we begin by presenting two
different paradigms in managing people. We then discuss how businesses can attract,
nurture, engage, and retain employees through the implementation of the basic human
resource functions.

ALTERNATIVE APPROACHES TO MANAGING PEOPLE

There are two approaches that entrepreneurs can adopt in managing its employees. The
first is the strategic human resource management (HRM) approach, which is mainstream.
The second is the integral human development (IHD) approach, which has emerged as an
alternative paradigm.

Under the strategic HRM approach, managers design the components of the HRM system
so that they are consistent with each other and with the organization's structure, strategies,
and goals. The goal of strategic HRM is to develop a human resource management system
that enhances an organization's efficiency, quality, innovation, and responsiveness to
customers, which, in turn, build competitive advantage. Under this approach, 'human
resources are primarily seen as instruments for achieving organizational goals. Their
contributions can be maximized through the effective implementation of the various HR
functions, including recruitment and selection, compensation and benefits, training and
development, performance evaluation, quality of work life, and employee, and labor
relations.

The integral human development (IHD) approach, on the other hand, is anchored on the
principles of human dignity and the common good. Respecting human dignity is based on
the conviction "that each person, regardless of age, condition, or ability, is an image of God
and so is endowed with an irreducible dignity or value." That each person "is an end in
himself or herself, never merely an instrument valued only for its utility-a who, not a what; a
someone, not a something." Common good, on the other hand, is defined by the Second
Vatican Council as "the sum total of social conditions which allow people, either as groups or
as individuals, to reach their fulfilment more fully and more easily."

The various facets of integral human development are as follows: bodily development,
cognitive development, emotional development, social development, aesthetic development,
moral development, and spiritual development. The manifestations of human development at
work are described in Table 11.1.
Table 11.1 Integral Human Development at Wik

HD Dimension

Bodily development

The physical structure of the workplace and the design of work processes and equipment
are calculated to protect employees health and to respect their overall physical well-being

Cognitive development

Employees' expected contributions to the work process are made intelligible to them. Jobs
are kept "smart" to exercise and develop employees talents and skills. Overall, employees'
cognitive abilities are matched to proportionately challenging work.

Emotional development

Through the freedom to take initiative without fear of reprisal, employees exercise
responsibility and accept accountability for their work.

Social development

The organization encourages appropriate expressions of collegiality in the workplace. It also

exhibits a "social conscience," encouraging the same in employees, and supporting
employees' initiatives to serve the wider community

Aesthetic development

Craftsmanship is encouraged. Within the limits THAT prescribed by their uses, products are
designed and manufactured with an eye for beauty, elegance, and harmony with nature.
Services are conceived and delivered in ways that honor the dignity of both the provider and
the receiver.

Moral development

The organization's managerial practices and work rules recognize that human acts are as
such moral acts. Working relationships demonstrate respect for human dignity of each party
to them.

Spiritual development

Work is understood as a vocation, and valued as collaboration, in the presence of God, for
the good of one's fellow human beings

Table 11.1 is Adapted from Alford and Naughton (2001)

This approach underlies the humanistic management practices of Pandayan Bookshop, a

retail store that sells school and office supplies, books and magazines, school bags, fashion
accessories, personal care items, gift items, greeting cards, home décor, and arts and crafts
products for special occasions. The core mission of the company is for its regular employees
to end up with a house and lot, be able to send their children to a good school, eat nutritious
food, wear decent clothing, and spend leisure time once in a while. The concern given to
them by management is something that employees also exhibit toward the bookshop's
customers. There was a time, when the bookstore clerks pooled their own money upon
overhearing two young siblings who did not have enough money to pay for an item they
needed. There was also a store executive who subsidized the purchase of a good quality
scientific calculator for a cash-short teacher about to take her licensure exam.

According to its managing director Gerardo Cabochan Jr., there are many more stories of
generosity like these in Pandayan Bookshop, where employees are driven by malasakit
(concern for others) and a sincere desire to help others. It is no surprise then that there is a
strong sense of community among the bookshop's employees and customers. The
bookshop, for example, has a community board, on which students post their greetings for
their teachers, and where customers write notes describing how they found friendships, even
romantic relationships, inside the store.

ATTRACTING AND RETAINING TALENT

Attracting talent involves the human resource functions of recruitment and selection.
Recruitment refers to activities that influence individuals to apply for a job and to accept jobs
that are offered to them. Selection, on the other hand, is the process by which an
organization chooses from the pool of applicants the person that best fits the requirements of
the job.

Entrepreneurs starting their businesses recruit people by tapping their own social network,
by getting referrals, by tapping employment agencies, by going to schools, colleges, and
universities; and by participating in job fairs. Companies are now also recruiting online by
posting job openings in their websites, by utilizing job boards, and by tapping social media,
especially through Facebook and LinkedIn. Before selecting people, the entrepreneur must
be clear on what specific tasks and activities the new employee must perform. This can be
done through a form of job analysis. After this, the entrepreneur must define what knowledge
skills, and experience are needed to perform the job well. This is known as competency
profiling. For entrepreneurs starting out their businesses, it would help to translate the results
of the job analysis and competency profiling into a brief written description of the major
duties and responsibilities that the new employee must perform (see Figure 11.1 for a
sample job description)

Figure 11.1. Job Description of a Sales Associate

General description

Reporting directly to the store manager, sales associates are responsible for selling the
company's products and assisting customers with their product needs. They engage
customers by asking them questions and by providing them information about the product's
features and benefits. They also handle returns of merchandise, and help in stocking and
maintenance activities.

Specific duties and responsibilities

1. Acknowledge and greet customers when they enter the store or when they approach
the area where the associate is working

2. Engage the customer through conversation. Determine the customer's needs.

3. Provide information about the product (eg, features, values, and benefits) when
customers seek information.

4. Know where products are located within the store.

5. Suggest additional items and services that the customer might not have anticipated they
will need.

6. Correctly handle all register transactions.

7. Handle returns or complaints graciously

8. Treat associates, customers, and vendors courteously.

9. Ensure that the store is neat, clean, and organized throughout each business day

10. Actively participate in all programs and procedures that drive sale.

11. Participate in store opening and store closing duties.

12. Perform related duties, as required

Minimum qualification, training, and experience

1. Must have some high school education

2. Must have proficient communication skills in English anil Filipino

3. Must be proficient in Math Must be able to work in a standard workday as set by the
company

4. Must have a flexible schedule and be able to work evenings, weekends, and holidays, if
required

5. Previous sales experience is a plus

The job description, as shown above, is important because it provides the basis for choosing
among potential employees When conducting the job interview and when subjecting
applicants to work sampling (ie., requiring the applicant to perform a small sampling of actual
job activities), the entrepreneur can use the job description as guide in assessing the fitness
of employees for the job.

Another important human resource function that is critical in attracting and retaining talent is
the administration of compensation and benefits. This function deals with every type of
reward employees receive for performing their duties and responsibilities. These would
include wages, salaries, bonuses, commissions, incentives, and both financial and
nonfinancial perks. An attractive compensation package or the promise of potential rewards
is an important consideration, especially among highly-qualified and skilled individuals.

Under the strategic HRM approach, instituting pay for performance systems or incentive
systems might best serve the purposes of an entrepreneur who prefers to recognize and
reward employees according to how much they have contributed to the company's success.
Depending on the resources of the company and its profitability level, it can offer merit pay
plans or bonuses that are tied to employee performance. They can also offer awards or
tangible prizes (eg, paid vacations, electronic equipment, or other items that might be
desirable to employees). In addition, the company might want to offer incentives to teams of
employees based on their overall performance.

These pay-for-performance schemes, if designed and administered carefully, can encourage

employees to work harder and more effectively, thus contributing to organizational
productivity.

Some companies also offer company-wide benefits. Under a profit sharing plan, for example,
they distribute a portion of the company's earnings to their employees. Some even offer
employee stock ownership-plana (EOP) or options to purchase the company's stock at a
favorable price. These reward systems are ways by which new ventures can not only attract
but also retain high-performing employees

NURTURING AND ENGAGING TALENT

While financial rewards are important, entrepreneurs should not underestimate the power of
other aspects of employment in keeping valuable talent, especially those that belong to
Generation Y (millennials). Some young professionals, for example, might be willing to
receive relatively lower compensation in exchange for flexible work arrangements, which
would allow them to spend time for their other interests off the job. They also appreciate
programs that promote health and wellness through better nutrition and regular exercise
programs. It seems that there is some truth to what F&H Solutions Group COO Brad
Federman said: "Paychecks can't buy passion."

Moreover, many employees give value to opportunities that would develop their skills, which
will enhance their "marketability" in the job market. Companies can provide these through
the HR function of training and development.

Specifically, training helps employees do their current work better. This would include on-
the-job training, which involves a trainee working alongside more experienced employees
who could teach them the tasks they need to perform job rotation, which allows employees
to perform different jobs and which provides exposure to a variety of tasks; apprenticeships,
which are frequently used in skilled trade or craft jobs. Training could also be done off the-
job, and could take the form of classroom lectures, multimedia learning, and simulations.

Development, on the other hand, prepares individuals for future positions or responsibilities
within the business. Popular methods would include job rotation, job coaching or mentoring
by seasoned managers, and assigning employees with potential to committees or task
forces to help solve particular problems within the organization. Companies might even send
employees to attend seminars off-the-job, whether these are within the country or abroad.
Training and development efforts are best done in tandem with performance evaluation,
which are meant to determine the extent to which employees perform their work effectively.
Managers can use this to pinpoint employees' areas for development, and to help them
achieve their potentials on the job.

For entrepreneurs that subscribe to the IHD approach, investing in training and development
and quality of work life programs are excellent means of enhancing not only the cognitive
development of their employees but also their physical, social, and even emotional
development. It is a reality, though, that many entrepreneurs see training and development
and quality of life programs as expense items that can be put off in favor of more urgent
operational concerns: This stance, though, might have some negative implications for the
company in the long run. One, without appropriate training and development programs,
some employees might not develop the right skills needed to perform their jobs at high levels
of performance. This could affect the quality of service given to customers. Two, companies
might lose valuable talent, especially those who feel that their potentials can be more fully
realized if they work elsewhere. This brings us to the challenge of building employee
commitment.

BUILDING EMPLOYEE COMMITMENT

Retaining valuable talent depends a great deal on building organizational commitment-the

extent to which an individual identifies with and is involved in his or her organization, and is,
therefore, unwilling to leave it.' Entrepreneurs must make sure that as the business grows,
employee commitment does not wane.

There are three kinds of organizational commitment: Continuance commitment refers

primarily to the costs of leaving. For example, an employee might have second thoughts
leaving a company because this might mean giving up an attractive compensation package
or being away from close friends. Affective commitment refers mainly to a person's positive
feelings toward the company and what its core values are. Finally, normative commitment
refers to an employee's feeling of obligation to others (e.g., the business owner who gave
him his first job; a manager who has served as a mentor) who might be negatively affected
by their departure.

It is also worth noting that individuals who are highly committed to their organizations
demonstrate higher willingness to share and make sacrifices to help their organizations,
especially during hard times. They are likely to exhibit organizational citizenship or actions
that go beyond the formal requirements of the job. These actions would include helping
coworkers on the job, giving customers special attention, and speaking well about the
company. Clearly organizational commitment works to the benefit of the company. Steve
Jobs, the late cofounder, chairman, and CEO of Apple, Inc., captured this in his words: "The
only way to do great work is to love what you do."