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Entrepreneurship
Learning Activity Sheet
Quarter 4
LESSON 1: DEVELOPING A BUSINESS PLAN (DP)

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 I. Title Topic
→ Describe the 4Ms (Manpower, Method, Machine, Materials) of operations in
relation to the business opportunity:
• Develop a product description.
• Create a prototype of the product.
• Test the product prototype.
• Validate the service description of the product.
• Select/pinpoint potential suppliers of raw materials.
• Discuss the value/supply chain
• Recruit qualified people for one’s business enterprise.
→ Develop the business model;
→ Forecast the revenues of the business;
→ Forecast the costs to be incurred;
→ Compute for profits; and
→ Create the company’s five (5) year projected financial statements.
II. Concept Notes

Background Information for Learner

In the previous modules, we have discussed about marketing mix (7Ps) in relation to
the business opportunity and how one can develop their own brand name. Let us have our
review of what we have learned before we proceed with the 4Ms of Production.
If Sales is the engine that powers Auto Salvage yards, then Production is the drive
train that gets us where we are going. Production is both reactive and proactive almost
simultaneously. It reacts to what is sold today and must meet the expectations set by the
sales team; also, it must anticipate what most likely will be needed in the near future. The
key for production is to have procedures and processes that can accomplish both.
Operations Management then controls the implementation of the business plan. Once our
procedures are set up to maximize efficiency, it is time to train the production staff on
their individual responsibilities centered on the 4Ms of Production.
So, what are the 4Ms of Production? It is the Method, Manpower, Machine and
Materials. They are also called as the four critical domains, usually associated to
manufacturing. These four are also related to business opportunities since most business
is tied to manufacturing also. The businessman per se should look all four into account.

4M’s of Operations mainly represent factors that influence on results of any concern
process. A method that has been used for a long time in a root cause analysis like using a
fish-bone diagram created by Kaoru Ishikawa of Japan. It is a causal diagram that shows
potential causes of a specific event. This was used to make product design and quality

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defect prevention to identify potential factors on cause and overall effect. A cause of
imperfection from a source of variation which was grouped into 4 major domains to
identify classification of each variation. In manufacturing industries this method was used
to apply on production control, improvement, overall efficiency measurement, processes,
and design. Let us now describe the 4 major domains of 4M’s of Operations in relation to
business opportunity.
1. Method
- is a detailed procedure for accomplishing something.
- It is a systematic way of doing a particular job.
- used in business when developing or innovating a new products or services,
expanding your business enterprise, searching for skilled workers to include in the
workforce, and for improving the efficiency of its process.
- All this activity was documented as reference for every development of the business
including notations that identifies product or service and customer preferences.

This will result to a standard operating procedure in all activities that the business will
implement. In analyzing this method, an entrepreneur must do these steps:
1.Identify the operation to analyzed.
2. Gather all relevant information about the operation, including tools, materials,
and procedures.
3. Talk to employees who use the operation or have used similar operations. They
may have suggestion for improving it.
4. Chart the operation, whether you are analyzing an existing operation or a new
operation.
5. Evaluate each step in the existing operation or proposed new operation. Does the
step add value? Does it only add cost?
6. Revise the existing or new operation as needed.

If labor is abundant and cheap in the locality, the firm might use more labor-intensive
techniques. This only means that they will use labor more than other factor inputs.
However, if labor is expensive and capital is cheap the firm or company may implement a
capital-intensive technology. This means that will use more capital compared to the other
factor inputs.
Ex. Now in the production of pandesal, the mixing of ingredients will use manual
labor intensively as applied by small bakeries. On the other hand, large bakeries in
urban areas will use modern baking equipment and utensils that are capital intensive.
2. Manpower
→ A wise selection of manpower to join in your workforce provides strategic
solutions in promoting a sustainable competitive advantage that quickly adapts
changing demands in business and its operations.
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→ These are employees that processes and give insights on how to reduce cost,
increase productivity to achieve a better business result.
→ Finding an honest and capable people is always a challenge in business. To have
them work happily and satisfied, an employer should always take good care and
treasure them by providing the right salaries and benefits as they are integral to the
growth of the business.

To look for the right employee for the business operation, the following are the kind of
staff one should have:
1. Skilled
2. Well qualified and well verse in business
3. Responsible
4. Dedicated and committed to work
5. Honest and with integrity
6. Able to attain targets and set goals
7. Not indulge in wasteful expenditure
8. Loyal
9. Team player
How to maximize the staff contribution to work?
• Motivate the staff. It helps to improve their morale.
• Make sure they are comfortable in their workplace. They must be provided
with the required amenities so that their work does not appear burdensome.
• Staff should be provided with necessary benefits. They must feel that their
work is worth performing. Not only the entrepreneur should gain, but also the
employee should benefit.
• Self-respect is very essential. The employee should be treated well. He must not
be treated as a slave.
• The staff should also share in the profits if possible. Yearly bonus apart from
his or her salary is added income for him or her.
• Appreciation. Hard work and dedicated effort should be appreciated.
• Leisure time should be provided for extra-curricular activities. He or she
should also be given time to take off from work so that he or she can go on a
holiday. A change of scene refreshes the mind.
• One must listen to the woes of the employees. Understanding their difficulties
in performing the task is essential.

As the business grows, the entrepreneurs should hire qualified employees that can
handle operational functions even without his assistance, so that he will be free
from daily activities and can focus on thinking of new strategies and functions of
the business.

Ex. In the production of pandesal, manpower resources include the baker, and his
assistants who will implement the recipe using the available equipment, and
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 technology. The manager, sales clerks , and janitors are also part of the manpower
of the bakery

3. Machines
→ plays a vital part in operating a business. Aside from manpower the use of
machinery is important nowadays to make the process of production more effective
and efficient.
→ is a mechanical structure that uses power to apply forces and control movement to
perform an intended action.
→ It is controlled by people or a machine itself to produce the necessary or required
number of productions needed. You may be able to use the manpower to do a
particular job, but it is usually more efficient if machines are able to automate the
work.
→ The right machine equipment can improve your processes, productivity, and
capacity to innovate. Not only will you save time and resources, but you’ll also
avoid costly quick fixes.

The following are the right equipment to purchase in starting a business:

1. Assess your business reality. It is important to understand your objectives why you
need to purchase machinery.
2. Get an external point of view. Depending on the scale of your investment, it may
be worth working with an external consultant who can ensure you make the most of
your purchase by helping you assess your needs. To do this, you need to make a cost-
benefit analysis, which helps you justify your purchase and determine its advantages
and disadvantages.
3. Invest in digital technologies. According to a survey conduct in 2017 by 960
Canadian manufacturers, they found out that companies who adopted digital
technologies reaped impressive rewards, including improved productivity, lower
operational costs, and better product quality.
4. Create a technology roadmap. Rather than making an isolated purchase, look at
the overall needs of your business and plan for the long term. A technology roadmap
is a planning tool that aligns your business objectives to long- and short-term
technology solutions. It helps you understand your current technological systems, set
technology development priorities, and provide timeline for the implementation of a
new system.
5. Shop around for suppliers. You may browse the internet to access different
website that offers specialized machinery equipment. Check out newsletters and attend
trade shows where you can get some hands-on time equipment.

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 6. Keep training in mind. All to often, entrepreneurs don’t’ consider the time, money
and resources required to train employees on new equipment. You want to avoid the
productivity drop that occurs when employees take too much time to adapt to new
technology or processes. If the equipment is new or has new features, ensure that
employees who uses the machine will have time to be trained.
7. Think safety first. A healthy and safe work environment means your employees
and your company can be more productive, and this rule applies to your equipment
and technology purchases as well.
8. Keep it green. When purchasing equipment, be sure that it’s energy efficient. Not
only to save money, but also by contributing to the health of the planet.
Ex. In the production of our pandesal, the machinery comprises the oven, baking
utensils and the bakery itself.
4. Materials
→ In manufacturing industry, companies are involved in turning raw materials into
physical products, which are then sold to consumers.
→ One of the things that a manufacturing company can do to achieve efficiency is to
source quality raw materials from credible suppliers.
→ For perishable and edible products, the business should investigate how raw materials
are stored, processed, and shipped to consumers.

Ex. In the process of producing pandesal, we need several materials that serve as
intermediate inputs which include flour, sugar, butter, eggs, salt and other ingredients.
Make sure that your supplier of raw materials should have consistent and have sufficient
amount of supplies that can accommodate the demand of your company .
The selection of the supplier depends on how they will not cause interruptions in the
production of goods and serving customers.
Once the production process is in place, an entrepreneur shifts to the daily activities of
materials management, which encompass the following activities: Purchasing, Inventory
control, and work scheduling.
❖ Purchasing and Supplier Selection
o The process of acquiring the materials and services to be used in production
is called purchasing (or procurement). For many products, the costs of
materials make up about 50 percent of total manufacturing costs. Not
surprisingly, then, materials acquisition gets a good deal of the
entrepreneur’s time and attention.
✓ E-Purchasing

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 ▪ Technology is changing the way businesses buy things. Through e-
purchasing (or e-procurement), companies use the Internet to interact
with suppliers.
❖ Inventory Control
- If a manufacturer runs out of the materials it needs for production,
then production stops. In the past, many companies guarded against
this possibility by keeping large inventories of materials on hand. It
seemed like the thing to do at the time, but it often introduced a new
problem—wasting money.
✓ Just-in-Time Production
- One method is called just-in-time (JIT) production: the
manufacturer arranges for materials to arrive at production facilities
just in time to enter the manufacturing process. Parts and materials
don’t sit unused for long periods, and the costs of “holding”
inventory are significantly cut. JIT, however, requires considerable
communication and cooperation between the manufacturer and the
supplier.

✓ Material Requirements Planning

- Another method, called material requirements planning (MRP),
relies on a computerized program both to calculate the quantity of
materials needed for production and to determine when they should
be ordered or made.
- The basic MRP focuses on material planning, but there’s a more
sophisticated system— called manufacturing resource planning
(MRP II)—that goes beyond material planning to help monitor
resources in all areas of the company.
❖ Work Scheduling
- In production, the control process starts when operations managers
decide not only which goods and how many will be produced, but when.
This detailed information goes into a master production schedule (MPS).
To draw up an MPS, managers need to know where materials are located
and headed at every step in the production process. For this purpose, they
determine the routing of all materials—that is, the workflow of each item
based on the sequence of operations in which it will be used.

Traditionally, these are the crucial four (4) domains of production where one cannot
function properly without the other. However, allow me to add another M in this list.
✓ Money – it is a financial resource used to purchase all the resources
needed by the firm for its operation. The owners of the company
contribute seed money for the initial operations of the firm. It is also
needed to purchase raw materials, pay salaries of the workers and
managers and durable equipment needed for the company.

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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 semi-processed materials that need
further transformation to produced a finished product. They are
also called raw materials or materials.
• Factor inputs – are the transforming inputs that will process the
intermediate inputs into finished products. They are also called
productive inputs because of their transforming properties. This
includes labor (manpower), capital (machinery), land and
technology (method).
→ While 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,
we use it to purchase materials, pay workers’ salaries and wages and even the
machineries we use.

▪ DEVELOPING A PRODUCT DESCRIPTION

→ A Product description is the marketing copy that explains what a product is and why it’s
worth purchasing. The purpose of a product description is to supply customers with
important information about the features and benefits of the product, so they are compelled
to buy.
→ How will we do that? Through an effective product description, you can guarantee that
they will hit that “add to cart” button in an instant.
→ Product description is one of the important aspects of selling, you have to visualize what
your target market will patronize and would like to have.
→ A Product Description is normally written for each of the identified products in the product
breakdown structure if required. Here are some things to consider when creating the
product descriptions. Remember that quality information forms a good part of these
descriptions.
1. Know who your target audience is – you might want to highlight the things that
might interest your potential buyers. You can actually do this by knowing what
specific demographics you are going to cater. Is it for teens? Young professionals or
Seniors. By knowing such you will have a specified goal to achieve once you roll
your product.
2. Focus on the Product Benefits – know the difference between product features
and benefits. A product feature is a factual statement about the product that provides
technical information. A product benefit, on the other hand, tells how the product can
improve the buyer’s life. If you are the customer, I know you will choose the latter.
However, you can always convert the features into benefits.
3. Use good product images – aside from the description, a quality image will do the
trick. Why? Because 63% of customers think that a product image is more important
than the description or even the reviews. So an important aspect of your product
description is actually in the photo itself. Quality photos will show the customer all
of the key features about your product. They will also allow the customer to imagine
having this product in her life.
4. Tell the Full story. A good product description should give all relevant details,
convince the buyer of its benefits, and pack an emotional punch. Emotions influence
the buyer behavior, so your product description is the perfect place to elicit emotions.

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 How do you do this? By filling in any gaps that a potential buyer may have about the
product.
5. Use Natural Language and Tone. If you read your description aloud, does it sound
like a real conversation that you would have with your friend? Or does it sound like a
computer-generated string of words? If your product description isn’t something that
you would say to your friend about the product, then it’s time to inject a little life into
them.
6. Use Power Words that Sell. There are certain words and phrases that naturally
elicit an emotional response in humans. Luckily for Lazada online shopping store,
this also increases sales. By being mindful of these words and phrases, you can
more easily convince your customers to take the leap and make the purchase.
7. Make it easy to scan. If you are going to publish your product online, you can do
this by making your descriptions scannable. As in, the buyer is able to find exactly
the information they want without wasting time sifting through other pieces of
information. Make your product descriptions easy to scan by including bullet points,
short paragraph made up of just a few sentences each, lots of white space, and
different size fonts.
→ Once you already have a clear vision of what should be the description of your product. We
can now create our own prototype.

▪ CREATING A PRODUCT PROTOTYPE

→ What is Prototype?
❖ You have visualized a great product. You can imagine how this product will
make a change and how it will be a great help to make our life easier.
However, what we have in mind is sometimes a lot difficult to explain so we
create a mock-up of what the final product will look like, that is a prototype.
❖ Prototype is an initial creation of a product that shows the basics of what
product will look like, what it will do and how it will work.
❖ Creating a prototype can also be one of the most fun and rewarding steps
you’ll take. That’s because developing a prototype gives the opportunity to
really tap your creativity, using those skills that inspired your invention idea in
the first place.
one of the essential early steps in the inventing process is creating a prototype, which simply
defined as a three-dimensional version of your vision. Creating a prototype can also be one
of the most fun and rewarding steps you’ll take. That’s because developing a prototype gives
the opportunity to really tap your creativity, using those skills that inspired your invention
idea in the first place.
→ A prototype provides other advantages, as well:
1. It enables you to test and refine the functionality of your design. Sure, your idea
works perfectly in theory. It's not until you start physically creating it that you'll encounter
flaws in your thinking. That's why another great reason to develop a prototype is to test the
functionality of your idea. You'll never know the design issues and challenges until you
begin actually taking your idea from theory to reality.
2. It makes it possible to test the performance of various materials. For example, your
heart may be set on using metal--until you test it and realize that, say, plastic performs
better at a lower cost for your particular application. The prototype stage will help you
determine the best materials.
3. It'll help you describe your product more effectively with your team, including your
packaging or marketing expert, and potential business partners.
→ Why PROTOTYPE?

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 - Prototyping is the Design Verification phase of Product Development because
it demonstrates or proves the design. Think of a Prototype as simply taking a design
from the virtual, imaginary realm into the physical world. Of course, there are lots of
reasons we want to touch and feel and try our new widget, and a prototype is the
way to do that, But there are some specific reasons to prototype. Some of the
most common are:
o Display or Show the new product — maybe at a show or for
investors.
o Test an idea to see if it really works.
o Test the design to see if it passes certain requirements.
o Use it to evaluate where improvements are necessary.
o Get customer feedback.
→ Prototypes typically fit in these categories:
1. Looks Like;
2. Works Like;
3. Concepts to Test.
→ You can think of it as Form and Function. Basically, there are prototypes that look and feel
complete (but may not actually function); then prototypes that function properly (though just
cobbled together). and, prototypes for testing just a portion of the whole concept. Of
course, there are the combination versions that both Look right and Function correctly.
Those are usually the finals.
❖ With the concepts of “Functional” and “Display” (form) types in mind,
there are many levels of Prototypes:
• Some are simple duct-tape and bailing wire prototypes to visualize or test
how something might work;
• Then there is clay or paper mache to show roughly what it might look like;
• Still others are functional representations that work but may not look so good
or be as strong as needed for the final product.
• 3D printed prototypes can look great and may also function, but usually not
at full capacity.
• Some are high polish, fragile representations for show and tell.
• And some are complete representations of the final product. (Both form and
function.)
→ Prototyping Methods
❖ Traditional prototyping methods include mock-ups (clay, wood or other),
fabrication, and of course, the infamous bailing wire and duct tape. More
modern methods include CNC and rapid prototyping (like 3D Printing, SLA,
SLS and many more).
- Mock-ups are typically early in the design for visualization, feel, and to allow
adjustments or fiddling with shape and size.
- Fabricated prototypes are typically functional versions that may or may not look
like the final product but given the opportunity to test function or prove that
something works

▪ Testing the product prototype

→ Testing a prototype/developed design is a very important part of the design and
manufacturing process.
→ Testing and evaluation simply confirm that the product will work as it is supposed to, or if
it needs refinement.
→ In general, testing a prototype allows the designer and client to assess the viability of a
design. Will it be successful as a commercial product?

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→ Testing also helps identify potential faults, which in turns allows the designer to make
improvements

There are many reasons why testing and evaluation takes place. Some reasons are
described below.

1. Testing and evaluation allow the client / customer to view the prototype and to give
his/her views. Changes and improvements are agreed, and further work carried out.

2. A focus group can try out the prototype and give their views and opinions. Faults and
problems are often identified at this stage. Suggestions for improvement are often made at
this stage.

3. Safety issues are sometimes identified, by thorough testing and evaluation. The
prototype can be tested against any relevant regulations and legislation. Adjustments /
improvements to the design can then be made.

4. Evaluating a prototype allows the production costs to be assessed and finalized. Every
stage of manufacturing can be scrutinized for potential costs. If the client has set financial
limits / restrictions, then alterations to the design or manufacturing processes, may have to
be made. This may lead to alternative and cheaper manufacturing processes being
selected, for future production.

5. Component failure is often identified during the testing process. This may mean a
component is redesign and not the entire product. Sometimes a component or part of a
product, will be tested separately and not the whole product. This allows more specific tests
to be carried out.

6. Evaluating the manufacture of the prototype, allows the designer to plan an efficient and
cost-effective manufacturing production line.

7. Prototype testing can be carried out alongside the testing of similar designs or even the
products of competitors. This may lead to improvements.

8. Testing ensures that any user instructions can be worked out, stage by stage, so that the
future consumer can use the product efficiently and safely. This guarantees customer
satisfaction.

9. Testing a prototype allows ‘concept’ designs to be evaluated fully. This is sometimes

called ‘proof of concept’. This usually happens during the early development of a product.

10. Testing against the design specification, helps ensure a full and relevant evaluation of a
prototype is carried out. This should be carried out during the entire development process.

11. The testing and evaluation phase allows fellow designers, knowledgeable in the
specialist area, to offer opinions and suggest critical improvements. This may lead to a
more successful design.

▪ Validating the service description of the product with potential customers to

determine its market acceptability.
→ One of the most important aspects of starting a business is validating that there is a
demand for your products.
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 → There is nothing more discouraging than spending your time and energy creating a
product that you think people will love, only to realize that there is no interest when
you launch.
→ You can validate your service description of the product with potential customers to
determine its market acceptability using a number of means.
8. Surveys. You can create a survey using available online survey platform like
Microsoft and Google Forms and send it out to groups, to your friends, and to all
people who are your ideal clients. Gather responses about how they like to have
some products delivered, about their needs and their pains so you will know exactly
how to serve them.
9. Beta Test. Other ways to validate your product include creating a test version of
something and running it past a small group or audience to get their feedback. A test
version of the product can either be paid, or free, and is a great way to get
testimonials and feedback while you create. This way, the pressure is off to create a
fantastic product until you have tested that it works in the way that you hoped it
would.
10. Early Bird Offer. Another way you can validate your product is to offer to your
subscriber list, survey attendees, or people who have expressed some interest in
your product, access for an early bird price to see if people actually buy.
11. Be Yourself. It is so tempting to follow models and ideas of what other small
businesses have created – and that can be a great starting point to help brainstorm
some ideas – but we all bring a different set of skills, experiences, and benefits to
our work.
12. Stay Passionate. Once you begin to check what people need, what their pain points
are, and how you can serve them, you can stay inspired by making sure you are
using your own unique combination of skills and the passion that makes this product
unique to you.
→ What happens if no one seems interested? If your audience does not want your amazing
idea? Look at the execution; it might be they love the concept, but the delivery needs to be
different. Or, that the idea is sound, but the offer isn’t clear. If you are super passionate
about your idea and truly believe it has a place in your business, test it with a few variants
of concepts and play around with some methods of delivery and adding value.

▪ Select/pinpoint potential suppliers or raw materials and other inputs necessary for
the production of the product or service.

→ Choosing the right supplier involves much more than scanning a series of price lists. Your
choice will depend on a wide range of factors such as value for money, quality, reliability,
and service.
→ How you weigh up the importance of these different factors will be based on your business'
priorities and strategy. A strategic approach to choosing suppliers can also help you to
understand how your own potential customers weigh up their purchasing decisions.
→ This guide illustrates a step-by-step approach you can follow that should help you make the
right choices. It will help you decide what you need in a supplier, identify potential suppliers,
and choose your supplier.
1. Thinking strategically when selecting suppliers
- The most effective suppliers are those who offer products or services that match - or
exceed - the needs of your business. So, when you are looking for suppliers, it's best to
be sure of your business needs and what you want to achieve by buying, rather than
simply paying for what suppliers want to sell you. For example, if you want to cut down
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 the time it takes you to serve your customers, suppliers that offer you faster delivery will
rate higher than those that compete on price alone.
- The numbers game It's well worth examining how many suppliers you really need.
Buying from a carefully targeted group could have a number of benefits:

• It will be easier to control your suppliers

• Your business will become more important to them
• You may be able to make deals that give you an extra competitive advantage For
example, if you've got a rush job for an important customer, your suppliers will be more
likely to go the extra mile if you spend P1,000 a month than if you spend P250.
However, it's important to have a choice of sources. Buying from only one supplier can
be dangerous where do you go if they let you down, or even go out of business?
2. What you should look for in a supplier
• Reliability. Remember - if they let you down, you may let your customer down.
• Quality. The quality of your supplies needs to be consistent - your customers
associate poor quality with you, not your suppliers.
• Value for money. The lowest price is not always the best value for money. If you want
reliability and quality from your suppliers, you'll have to decide how much you're willing
to pay for your supplies and the balance you want to strike between cost, reliability,
quality and service.
• Strong service and clear communication. You need your suppliers to deliver on
time, or to be honest and give you plenty of warning if they can't. The best suppliers will
want to talk with you regularly to find out what needs you have and how they can serve
you better.
• Financial security. It's always worth making sure your supplier has sufficiently strong
cash flow to deliver what you want, when you need it. A credit check will help reassure
you that they won't go out of business when you need them most.
• A partnership approaches. A strong relationship will benefit both sides. You want
your suppliers to acknowledge how important your business is to them, so they make
every effort to provide the best service possible. And you're more likely to create this
response by showing your supplier how important they are to your business.
3. Identifying potential suppliers. You can find suppliers through a variety of channels.
It's best to build up a shortlist of possible suppliers through a combination of sources to
give you a broader base to choose from someone who has used its services.

• Recommendations. Ask friends and business acquaintances. You're more likely to

get an honest assessment of a business' strengths and weaknesses from someone who
has used its services.
• Directories. If you're looking for a supplier in your local area, it's worth trying
directories such as Yellow Pages or Google Search Engine.
• Trade associations. If your needs are specific to a particular trade or industry, there
will probably be a trade association that can match you with suitable suppliers.
• Business advisors. Local business-support organizations, such as chambers of
commerce, can often point you in the direction of potential suppliers.
• Exhibitions. Exhibitions offer a great opportunity to talk with a number of potential
suppliers in the same place at the same time. Before you go to an exhibition, it's a good
idea to check that the exhibitors are relevant and suitable for your business.
• Trade press. Trade magazines feature advertisements from potential suppliers. You
can contact our Strategic Information Centre for a list of specialist trade magazines.

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4. Drawing up a shortlist of suppliers. Once you've got a clear idea of what you need to
buy and you've identified some potential suppliers, you can build a shortlist of sources
that meet your needs. When considering the firms on your shortlist, ask yourself the
following questions:

• Can these suppliers deliver what you want, when you want it?
• Are they financially secure?
• How long have they been established?
• Do you know anyone who has used and can recommend them?
• Are they on any approved supplier lists from trade association or government?

Do some research and try to slim your list down to no more than four or five candidates.
It's a waste of time for you and the potential supplier if you approach them when there's
little chance of them fulfilling your requirements.

5. Choosing a supplier. Once you have a manageable shortlist, you can approach the
potential suppliers and ask for a written quotation and, if appropriate, a sample. It's best
to provide them with a clear brief summarizing what you require, how frequently you'll
require it and what level of business you hope to place.
• Get a quotation. It's worth asking potential suppliers to give you a firm price in
writing for, say, three months. You can also ask about discounts for long-term or
high-volume contracts.
• Compare potential suppliers. When you've got the quotation, compare the
potential suppliers in terms of what matters most to you. For example, the quality of
their product or service may be most important, while their location may not matter.
Price is important, but it shouldn't be the only reason you choose a supplier.
• Check that the supplier you employ is the one that will be doing the work.
Some suppliers may outsource work to subcontractors, in which case you should
also investigate the subcontractor to determine if you are happy with this
arrangement.
• Negotiate terms and conditions. Once you have settled on the suppliers you'd
like to work with, you can move on to negotiating terms and conditions and drawing
up a contract. See our guide on how to negotiate the right deal with suppliers.

6. Getting the right supplier for your business

• Know your needs. Make sure you know what you need. Don't be tempted by sales
pitches that don't match your requirements. Understand the difference to your
business between a strategic supplier, who provides goods or services that are
essential to your business - such as high-value raw materials - and non-strategic
suppliers who provide low-value supplies such as office stationery.
• Spend time on research. Choosing the right suppliers is essential for your
business. Don't try to save time by buying from the first supplier you find that may be
suitable.
• Ask around. People or other businesses with first-hand experience of suppliers
can give you useful advice.
• Credit check potential suppliers. It's always worth making sure your supplier has
sufficiently strong cash flow to deliver what you want, when you need it. A credit
check will also help reassure you that they won't go out of business when you need
them most.
• Price isn't everything. Other factors are equally important when choosing a
supplier - reliability and speed, for example. If you buy cheaply but persistently let
down your customers as a result, they'll start to look elsewhere.
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 • Agree on service levels before you start. It's a good idea to agree on service
levels before you start trading, so you know what to expect from your supplier - and
they know what to expect from you. See our guide on how to manage your suppliers.
• Don't buy from too many suppliers. It will be easier for you to manage - and
probably more cost-effective - if you limit the number of sources you buy from. This
is particularly the case with low value-added suppliers.
• But don't have just a single supplier. It's always worth having an alternative
supply source ready to help in difficult times. This is particularly important with regard
to suppliers strategic to your business' success.

▪ VALUE/SUPPLY CHAIN IN RELATION TO THE BUSINESS ENTERPRISE

→ The term value chain refers to the process in which business receive raw materials,
add value to them through production, manufacturing, and other processes to create
a finished product, and then sell the finished product to consumers.
→ A supply chain represents the steps it takes to get the product or service to the
customer, often dealing with Original Equipment Manufacturer (OEM) and
aftermarket parts.
→ While supply term value chain involves all parties in fulfilling a customer request and
leading to customer satisfaction, a value chain is a set of interrelated activities a
company uses to create a competitive advantage.
→ The idea of a value chain was pioneered by American academic Michael Porter in
his 1985 book "Competitive Advantage: Creating and Sustaining Superior
Performance." He used the idea to show how companies add value to their raw
materials to produce products that are eventually sold to the public.
→ The concept of the value chain comes from a business management perspective.
→ Value chain managers look for opportunities to add value to the business. They may
look for ways to cut back on shortages, prepare product plans, and work with others
in the chain to add value to the customer.

There are five steps in the value chain process. They give a company the ability to create value
exceeding the cost of providing its goods or service to customers. Maximizing the activities in
any one of the five steps allows a company to have a competitive advantage over competitors
in its industry. The five steps or activities are:
1. Inbound Logistics: Receiving, warehousing, and inventory control.
2. Operations: Value-creating activities that transform inputs into products, such as
assembly and manufacturing.
3. Outbound Logistics: Activities required to get a finished product to a customer. These
include warehousing, inventory management, order fulfillment, and shipping.
4. Marketing and Sales: Activities associated with getting a buyer to purchase a product.
5. Service: Activities that maintain and enhance a product's value, such as customer
support and warranty service.
→ In order to help streamline the five primary steps, Porter says the value chain also requires
a series of support activities.
→ These include procurement, technology development, human resource management,
and infrastructure.
→ A profitable value chain requires connections between what consumers demand and what
a company produces. Simply put, the connection or sequence in the value chain originates
from the customer's request, moves through the value chain process, and finally ends at the
finished product.
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 → Value chains place a great amount of focus on things such as product testing, innovation,
research and development, and marketing.
→ The supply chain comprises the flow of all information, products, materials, and funds
between different stages of creating and selling a product to the end-user.
→ The concept of the supply chain comes from an operational management perspective.
Every step in the process—including creating a good or service, manufacturing it,
transporting it to a place of sale, and selling it—is part of a company's supply chain.
→ The supply chain includes all functions involved in receiving and filling a customer request.
These functions include:
• Product development • Marketing • Operations • Distribution • Finance • Customer
service
→ Supply chain management is an important process for most companies and involves
many links at large corporations.
→ For this reason, supply chain management requires a lot of skill and expertise to
maintain. While many people believe logistics—or the transportation of goods—to be
synonymous with the supply chain, it is only one part of the equation.
→ The supply chain involves the coordination of how and when products are manufactured
along with how they are transported.
→ The primary concerns of supply chain management are the cost of materials and effective
product delivery.
Proper supply chain management can reduce consumer costs and increase profits for the
manufacturer.

▪ Recruit Qualified People for One’s Business Enterprise.

People are integral part of any organization today. No organization can run without its
human resources. In today’s highly complex and competitive situation, choice of right person
at the right place has far reaching implications for an organization’s functioning. Employee
well selected and well placed would not only contribute to the efficient running of the
organization but offer significant potential for future replacement.

RECRUITMENT is a process of searching for obtaining applications of job from among

from whom the right people can be selected.

Purpose and importance

The general purpose of recruitment is to provide a pool of potentially qualified job
candidates. Specifically, the purposes are to:
1. Determine the present and future requirement of the organization in conjunction with its
personnel planning and job analysis activities.
2. Increase the job pool of job candidates at minimum cost.

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3. Help increase the success rate of the selection process by reducing the number visibly
under qualified or job application.
4. Help reduce the probability that job applicants, once recruited selected, will leave the
organization only after a short period of time.
5. Meet the organizations legal and social obligation regarding the composition of its
workforce.
6. Being identifying and preparing potential job applicants who will be appropriate
candidates.
7. Increase organization individual effectiveness in the short term and long term. 8. Evaluate
the effectiveness of various recruiting technique and sources for all types of job applicants.

The Recruitment Process

Organizations, depending on their structure and specific needs, may have special
procedures that they integrate into their recruitment process. For purposes of discussion,
however, we will take a look at the general approach of a recruitment process, one that is
used by most organizations or companies across various industries.
Many say that recruitment begins when the job description is already in place and the
hiring managers begin the process of actually looking for candidates. However, if we are
looking at it more holistically, the process begins way earlier than that.
Prior to the recruitment process, the organization must first identify the vacancy and
evaluate the need for that position. Will the organization suffer if that vacancy is not filled
up? Is there really a need for that open position to be occupied by someone? If the answer is
affirmative, then you can proceed to the recruitment.

Step 1: Conduct of a job analysis Basically, this step will allow the human resources
manager, hiring manager, and other members of management on what the new employee
will be required to do in the position that is currently open for filling up.
a. Build a job description. Before anything else, the organization must first know exactly
what it needs. Or who it needs. It could be that the organization deemed a need for a job that
is not included in the current roster of jobs.
The job description generally includes the following:
• Title and other general information about the position
• Purpose of the position in the unit, department, and organization as whole

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• Essential functions of the job or position
• Minimum requirements or basic qualifications

b. Review the job description. Once the job description has been created, it is a good idea
to review it for accuracy, and to assess whether it is current or not. Also, in cases where job
descriptions are already in place, there is a need to revisit them and check their accuracy and
applicability with respect to the status quo.

Step 2: Sourcing of talent

This is the stage where the organization will let it be known to everyone that there is an open
position, and that they are looking for someone to fill it up. Before advertising, however, the
organization must first know where to look for potential candidates. They should search out
the sources where the persons that can potentially fill the job are going to be available for
recruitment. That way, they will know where to direct their advertising efforts. Various
methods are employed by organizations in order to advertise the open position.
▪ Networking. Word-of-mouth is the best form of advertising, and when it takes the
form of networking, it becomes more effective. In recruitment, this is often done
through representatives of the company attending college and career fairs, letting them
know about the opening in their organization.
▪ Posting. Recruitment often involves the application of candidates both from within
and outside the company. Thus, in order to attract the best possible talents, it is
recommended that the posting of the open positions be made internally and externally.
Internal posting usually takes the form of the vacancy announcement being displayed
in bulletin boards and other areas within the business premises where the employees
and visitors to the company are likely to see it.
▪ Print and media advertising. One classic example of this would be the Classifieds
section of the local daily or weekly newspaper. Companies looking for people to fill
up open positions make the announcement in the newspapers, providing the
qualifications and the contact details where prospective applicants may submit their
application documents.
▪ Developing and using proper techniques. The company may include various
offerings in order to attract the best candidates. Examples are attractive salaries, bonus
and incentive packages, additional perks and opportunities that come with the job,
proper facilities at work, and various programs for development.
▪ Using the reputation of the company. Perhaps the best publicity that the company
can use to attract candidates is its own reputation in the market. If the company is
known for being a good employer – one that aids in its employees’ personal and
professional growth and development – then it is a good point for the company to
capitalize on in advertising its open positions.

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 Step 3: Screening of applicants
This is most probably the part of the recruitment process that requires the most amount of
work. This is where the applicants’ skills and personalities are going to be tested and
evaluated, to ascertain whether they are a good fit for the job and its description.
▪ Preliminary screening. It is often the case, especially in large organizations,
where one open position will receive hundreds to thousands of applications from
candidates. In an ideal world, it would be good for the hiring managers to be able
to interview each and every single one of them.
▪ Initial interview. The candidates who were able to pass the preliminary screening
will now undergo the initial interview. In most cases, the initial interview is done
through phone.
▪ Conduct of various tests for recruitment. The hiring managers may conduct tests
on the skills of the candidates and how they use these skills and talents. Other tests
that are often employed are behavioral tests and personality assessment tests.
▪ Final interview. Usually depending on the number of candidates for the job, and
the preference of the hiring managers and senior management, a series of
interviews may be conducted, gradually narrowing down the list of candidates.
▪ Selection. In this stage, the hiring managers, human resources representatives, and
other members of the organization who participated in the process meet together to
finally make a selection among the candidates who underwent the final interview.
During the discussion, the matters considered are:
o Qualifications of the candidates who were able to reach the last stage of the
screening process.
o Results of the assessment and interviews that the final pool of candidates
were subject to hiring.

SELECTION is the process of picking individuals (out of the pool of job applicants) with
requisite qualifications and competence to fill jobs in the organization. A formal definition of
selection is : “ It is the process of differentiating between applicants in order to identify (and
here) those with a greater likelihood of success in a job.’’ Recruitment and selection are the
two crucial in the HR process and are often used interchangeably.

The role of selection in an organization’s effectiveness is crucial for at least, two reasons;
first, work performance depends on individuals. The best way to improve performance is to
hire people who have the competence and the willingness to work. Arguing from the
employee’s viewpoint, poor or inappropriate choice can be demoralizing to the individual
concerned (who finds himself or herself in the wrong job) and de-motivating to the rest of
the workforce. Effective selection, therefore, assumes greater relevance. Second, cost
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incurred in recruiting and hiring personnel speaks about volumes of the selection. Costs of
wrong selection are greater.

The “7 C’s that should consider in finding the best new employees, as follows:
1. Competent: This is still the first factor to consider. Does the potential employee have the
necessary skills, experiences and education to successfully complete the tasks you need
performed?
2. Capable: Will this person complete not only the easy tasks but will he or she also find
ways to deliver on the functions that require more effort and creativity? For me, being
capable means the employee has potential for growth and the ability and willingness to take
on more responsibility.
3. Compatible: Can this person get along with colleagues, and more importantly, can he or
she get along with existing and potential clients and partners? A critical component to also
remember is the person’s willingness and ability to be harmonious with you, his or her boss.
If the new employee can’t, there will be problems.
4. Commitment: Is the candidate serious about working for the long term? Or is he or she
just passing through, always looking for something better? A history of past jobs and time
spent at each provides clear insight on the matter.
5. Character: Does the person have values that align with yours? Are they honest; do they
tell the truth and keep promises? Are they above reproach? Are they selfless and a team
player?
6. Culture: Every business has a culture or a way that people behave and interact with each
other. Culture is based on certain values, expectations, policies and procedures that influence
the behavior of a leader and employees. Workers who don’t reflect a company’s culture tend
to be disruptive and difficult.
7. Compensation: As the employer, be sure the person hired agrees to a market-based
compensation package and is satisfied with what is offered. If not, an employee may feel
unappreciated and thereby under perform. Be careful about granting stock in the company; if
not handled well, it will create future challenges.

Step 4: Finalization of the job offer

The last step of the previous phase involves the selection of the best candidate out of the pool
of applicants. It is now time for the organization to offer the job to the selected applicant.
o Making the offer: To make things more formal, a representative of the company or of
the human resources department will contact the candidate and inform him that he has

20
 been selected for the job. In this stage, complete details of the compensation package
will also be made known to the applicant.
o Acceptance of the offer by the applicant: The applicant should also communicate
his acceptance of the offer for it to be final. Take note that, if the selected applicant
does not accept the job offer and declines it, the recruitment process will have to start
all over again.

Step 5: Introduction and induction of the new employee

The moment that the applicant accepted the job offer, he has officially gone
from being an applicant to an employee of the organization. The induction process
will now begin. Usually, the beginning of the induction process is marked by the
signing of the employment contract, along with a welcome package given to the new
employee.
The date for the first day that the employee will have to report for work and
start working in the company will be determined and communicated to the newly hired
employee. However, it doesn’t end there. The employee will still have to undergo pre-
employment screening, which often includes background and reference checks. When
all this pre-employment information has been verified, the employee will now be
introduced to the organization.

DEVELOP THE BUSINESS MODEL

Understanding the problem, you are solving for your customers is undoubtedly the biggest
challenge you’ll face when you’re starting a business. Customers need to want what you are
selling, and your product needs to solve a real problem. But, ensuring that your product fits
the needs of the market is only one part of starting a successful business.
The other key ingredient is figuring out how you’re going to make money. This is where
your business model comes into play.
What is a business model?
A business model is a framework for how a company will create value. Ultimately, it distils
the potential of a business down to its essence. It answers fundamental questions about the
problem you are going to solve, how you will solve it, and the growth opportunity within a
given market.
Creating a business model is essential, whether you are starting a new venture, expanding
into a new market, or changing your go-to-market strategy. You can use a business model to
capture fundamental assumptions and decisions about the opportunity in one place, setting
the direction for success.
At its core, your business model is a description of how your business makes money. It’s an
explanation of how you deliver value to your customers at an appropriate cost.

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Preferred tool: The Business Model Canvas
Based on our definition of a business model, it is clear that many factors must be factored in,
when designing a business model, which makes it a more complex task. Therefore, we
recommend that entrepreneurs use the Business Model Canvas (a visual tool created by
Alexander Osterwalder) to facilitate the design process. The visual component of the tool
simplifies the design process by making it easier to understand how the various components
of a business affect each other. It also enables you to involve the rest of your team and
advisors in the process. (To learn more about business model see Q3 module 2 page 12)

The Business Model Canvas consists of nine interrelated building blocks, which are briefly
described below in the order each block is typically addressed. Once you become more
familiar with the contents of each building block and the flow between the related blocks, the
Business Model Canvas will become easier to use.
The Building Model Canvas is versatile, as it can be used to design a business model,
which is the purpose of this workbook; it also functions as a diagnostic tool and aids in
scenario planning.
The Business Model Canvas categorizes the processes and internal activities of a business
into 9 separate categories, each representing a building block in the creation of the product or
service. These categories represent the four major aspects of a business; customers, offer,
infrastructure, as well as financial viability. All 9 categories are listed and explained
below.
1. Customer Segments
The total customer pie is divided into segments based on the manner in which an
organization’s products or services address a specific need for the segment. The customer
segment is an essential part of an organization’s business model and is key to ensuring that
the product features are aligned with the segment’s characteristics and needs. To carry out an
effective customer segmentation, a company must first know its customers, both through
their current and future needs. Then the organization must list its customers in terms of
priority, including a list of potential future customers. Finally, the company should do a
thorough assessment of its customers by understanding their strengths and weaknesses and
exploring other kinds of customers who may benefit the company more if they are to focus
on them.
Various customer segments are as below:
1. Mass Market: An organization opting for this type of customer segment gives
itself a wide pool of potential customers because it feels that its product is a relevant
need amongst the general population. A potential product for such an organization
could be Flour.

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 2. Niche Market: This customer segment is based on highly specific needs and
unique traits of its clients. An example of an organization with a niche customer
segment is Louis Vuitton
3. Segmented: Organizations adopting the segmented approach create further
segmentation in their main customer segment based on slight variations in the
customer’s demographics and resultantly, their needs.
4. Diversify: An organization with a Diversified Market Segment is flexible in the
iterations of its product or service tweaking it to suit the needs of segments with
dissimilar needs or traits.
5. Multi-Sided Platform/ Market: This kind of segment serves customers who have
a relationship to each other, i.e. blogging sites need a large group of active bloggers to
attract advertisers. And they need advertisers to create cash flow. Hence, only by
creating a pull with both segments will the blogging site be able to have a successful
business model.
2. Value Propositions
An organization’s value proposition is the combination of products and services it provides
to its customers. Osterwalder stated that these offerings need to be unique and easily
differentiated from competition. Value propositions can be divided into two categories:
1. Quantitative: this stresses the price or efficiency of the product or service
2. Qualitative: this value proposition highlights the experience and results the product
and its use, produce.
The value proposition provides value through a number of attributes such as
customization, performance, “getting the job done”, brand/ status, design, newness,
price, cost and risk reduction, accessibility, as well as convenience/ usability.
3. Channels
The medium through which an organization provides its value proposition to its customer
segment is known as a channel. There are various options for channels available to an
organization, and the selection is based on the channel that is the quickest, most efficient
with the least amount of investment required. There are two basic kinds of channels;
Company owned channels such as store fronts or Partner Channels such as
Distributors. A company can opt to choose either one or employ a combination of both.

4. Customer Relationships
An organization must select the kind of relationship it will have with its customer
segment to create financial success and sustainability. Customer Relationships can be
categorized as follows:
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 1. Personal Assistance: In this kind of relationship the company interacts with the
customer directly through an employee who provides the human touch by assisting the
customer presale, during the sale and even may provide after sales services.
2. Dedicated Personal Assistance: This kind of relationship is characterized by a
very close interaction between the customer and the company through a dedicated
representative who is assigned a set of clients and is personally responsible for the
entire experience the customer has with the company.
3. Self-Service: Self-Service places the onus of the customer experience on the tools
the company provides for the customer to serve him or herself.
4. Automated Services: These are customized self-service relationships where the
historical preference of the customer is considered to improve the overall experience.
5. Communities: In today’s electronic age creating communities of clients allows
organizations to communicate with them directly. This allows for an enhanced client
experience because the community allows clients to share their experiences and come
up with common challenges and solutions.
6. Co-creation: The customer has a direct hand in the form the company’s product or
service will take. For an entrepreneur, the priority is to identify the type of relationship
he/ she has with the customer. Then the value of the customer must be evaluated in
terms of the frequency of his expenditure on the firm’s product and services. Loyal
customers are relationships that the company should aim to invest in as they will yield
steady revenue throughout the year.
5. Revenue Streams
A revenue stream is the methodology a company follows to get its customer segments to
buy its product or service. A revenue stream can be created through the following ways:
1. Asset Sale: the company sells the right of ownership over the good to the customer.
2. Usage Fee: the company charges the customer for the use of its product or service.
3. Subscription Fee: the company charges the customer for the regular and consistent
use of its product or service.
4. Lending/ Leasing/ Renting: the customer pays to get exclusive access to the
product for a time-bound period.
5. Licensing: the company charges for the use of its intellectual property.
6. Brokerage Fees: companies or individuals that act as an intermediary between two
parties charge a brokerage fee for their services.
7. Advertising: a company charges for others to advertise their products using their
mediums. When setting up revenue streams, it is important to recognize that an
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 effective price for the product and/or service will be arrived at through the process of
elimination. Different iterations of prices should be listed and evaluated. It is
important, in the end to take a break ad reflect on possible avenues open to you as a
business.

6. Key Resources These are the assets of the organization fundamental to how it provides
value to its customers. Resources can be categorized as human, financial, physical and
intellectual.
For an entrepreneur, it is important to begin with listing your resources. This gives you a
clear idea of what final product or service your company needs to create for the customer
and which resources are dispensable, resulting in cost savings for your company. Once
the final list of resources is available, the company can decide on how much it needs to
invest in these key resources to operate a sustainable business.

7. Key Activities
Activities that are key to producing the company’s value proposition. An entrepreneur
must start by listing the key activities relevant to his/her business. These activities are the
most important processes that need to occur for the business model to be effective. Key
activities will coincide with revenue streams. Now it is important to evaluate which
activities are key by adding or removing some and evaluating their impact.
8. Key Partnerships
To create efficient, streamlined operations and reduce risks associated with any business
model, an organization forms partnerships with its high-quality suppliers. Key
partnerships are the network of suppliers and partners who complement each other in
helping the company create its value proposition. Partnerships can be categorized as
follows:
• Strategic alliance between competitors (also known as coopetition),
• Joint ventures and
• Relationships between buyers and suppliers.
An entrepreneur must begin by identifying its key partners followed by making future
partnership plans. This can be done through an evaluation of the partnership
relationship to judge which characteristics of the relationship need improvement and
what kind of future partnerships will be required.

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9. Cost Structure
This defines the cost of running a business according to a particular model. Businesses can
either be cost driven i.e. focused on minimizing investment into the business or value driven
i.e. focused on providing maximum value to the customer. Following are some traits of
common cost structures:
1. Fixed Costs: costs that remain the same over a period of time.
2. Variable Costs: as the name suggests, these costs vary according to a variance in
production
3. Economies of Scale: costs decrease as production increases
4. Economies of Scope: costs are decreased by investing in businesses related to the
core product. The first step for an entrepreneur is to obviously identify all costs
associated with the business. A realistic understanding of the costs of the business is
one of the hallmarks of a good business model. After identification, it is important to
list all the costs on the canvas, so they are visually present and then create plans for
each cost. Some costs may be decreased through certain measures while others may go
up if you decide that an investment in a particular section will result in future gains.

FORECAST THE REVENUE OF THE BUSINESS

You’ve likely heard hundreds of times from mentors and business experts that you need to
set a budget to keep your small business expenses on track. But how do you make decisions
about your budget? Like how many employees you can afford to hire or how much you can
spend on advertising? If you don’t know how much revenue, you’ll be bringing in the
coming months and years? If you’re starting a business from scratch, making revenue
forecast will be particularly challenging, where established businesses use historical data
to predict what will happen in the future. In order to prepare an accurate budget, you first
need to develop a revenue forecast for your business. A forecast is an educated
prediction for the upcoming year about how much money your company will likely
bring in, so that you can estimate what you can afford to spend, and what your profit
margin be like? On the other hand, Revenue is the amount of money that a company
receives during a specific period, including discounts and deductions for a returned
merchandise. Don’t worry if your forecasts aren’t completely accurate, you can always alter
them after your first few months. Concentrate instead on trying to make your figures as
realistic as possible.
The entrepreneur after realizing the potential for profit of his/her business concept, the next
step is to estimate how much the revenue is on daily, monthly, and annual basis. Before
going to forecasting and projecting the revenues of the business, let us determine first what
revenue and forecasting are.

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WHAT IS FORECAST?
Forecast is advance information that could help us prepare and ready for any incoming
event. Forecasting is the tool used in planning that aims to support management or a business
owner in its desire to adjust and cope up with uncertainties of the future.
WHAT IS REVENUE?
Revenue is a result when sales exceed the cost to produce goods or render the services.
Revenue is recognized when earned, whether paid in cash or charged to the account of the
customer. Other terms related to revenue includes Sales and Service Income. Sales is used
especially when the nature of business is merchandising or retail, Service Income is used to
record revenues earned by rendering services.

You have just learned about what revenue is. This time, let us study the various factors to
consider in forecasting revenues.
The entrepreneur would want his/her forecasting for his/her small business as credible and as
accurate as possible to avoid complications in the future. In estimating potential revenue for
the business, factors such as external and internal factors that can affect the business must be
considered. These factors should serve as basis in forecasting revenues of the business.
These factors are:
1. The economic condition of the country. When the economy grows, its growth is
experienced by the consumers. Consumers are more likely to buy products and
services. The entrepreneur must be able to identify the overall health of the economy
in order to make informed estimates. A healthy economy makes good business.

2. The competing businesses or competitors. Observe how your competitors are doing
business. Since you share the same market with them, information about the number
of products sold daily or the number of items they are carrying will give you the idea
as to how much your competitors are selling. This will give you a benchmark on how
much products you need to stock your business in order to cope up with the customer
demand. This will also give you a better estimate as to how much market share is
available for you to exploit.

3. Changes are happening in the community. Changes happening in the environment

such as customer demographic, lifestyle and buying behavior gives the entrepreneur a
better perspective about the market. The entrepreneur should always be keen in
adapting to these changes in order to sustain the business. For example, teens usually
follow popular celebrities especially in their fashion trend. Being able to anticipate
these changes allows the entrepreneur to maximize sales potential.

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4. The internal aspect of the business. Another factor that affects forecasting revenues
in the business itself. Plant capacity often plays a very important role in forecasting.

For example, a “Puto” maker can only make 250 pieces of puto every day; therefore
he/she can only sell as much as 250 pieces of puto every day. The number of products
manufactured and made depends on the capacity of the plant, availability of raw materials
and labor and the number of salespersons determines the amount of revenues earned by
an entrepreneur.
Now that all factors affecting forecasting revenues are identified, you can now calculate
and project potential revenues of your chosen business. The table below shows an
example of revenues forecasted in a Ready to Wear Online Selling Business.

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29
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Why Revenue Forecasting Matter?
Can you afford to hire a new employee or launch a new marketing campaign? If you were
to take on a business loan in the coming months, how much of a monthly payment could
you reasonably handle? These questions, and thousands more that you likely ask yourself
about your business every day, cannot be answered with any degree of accuracy without
revenue forecasting. And the more thoroughly researched and realistic your revenue
forecasting is, the easier it will be to stay on budget throughout the year.

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2. Start with last year’s revenue statements for a basis of prediction. The thought of
forecasting sales intimidates a lot of people, but in actually, it’s simply an act of looking
at some raw data and making some logical assumptions from it. If you own an existing
business, look at your past sales figures, and then consider the following factors to make
an educated guess about future sales on a month-by-month basis:
• Your customers: Identify your customer base and determine which ones you’ll include
in the forecast. Remember, common wisdom says that you’ll get 80 percent of your
business from 20 percent of your customers.
• Your service area: Do you have plans for expansion? If so, include your current
geographical area as well as the area you plan to include in the future.
• Market conditions: What is the state of the market? Will it remain steady or increase?
• Business position: Consider the position of your business within your industry, and
factor in your growth expectations.
• Seasonal adjustments: Many businesses have increased and decreased sales in a
cyclical seasonal cycle. If your business falls into that pattern, take this into
consideration.

3. Consider any recent changes in personnel, products, pricing, competition, or other

factors. The forecaster should choose a technique that makes the best use of available
data. If there are changes in personnel like reassignment of an employee to a higher job
position, innovation of the product which may need additional budget that will also affect
pricing, changes in competitors and other factors to consider in making your forecast.

4. Calculate anticipated revenue. You have a great idea for a business. But now you need
to know how to calculate start up costs and expected revenue for business. The type of
business you open will determine the amount of money you will need to open. However,
as a rule you should count on having six months’ worth of money on hand to cover your
expenses. Startup cost are the expenses that are incurred prior to opening. For example,
startup costs may include legal work, logo design, brochures, site selection and building
improvements. Compare startup costs with your startup assets. This include cash, starting
inventory and equipment.
5. Separate individual income sources to get a clear picture of potential ups and downs
from each revenue stream. Revenue streams are the various sources from which a
business earns money from the sale of goods or the provision of services. The types of
revenue that a business records on its account depend on the types of activities carried out
by the business. Generally speaking, the revenue accounts of retail businesses are more

32
diverse, as compared to business that provide services. Separating your individual income
sources will give you good and accurate forecast of your business.
6. Constantly review and update the forecast to reflect changes in your business. Once
your business is established and running well, you may be inclined to let things continue
to run as they are. However, it’s actually time to plan again. After the crucial early stages,
you should regularly review your progress, identify how you can make the most of the
market position you’ve established and decide where to take your business next. You will
need to revisit and update your business plan with your new strategy in mind and make
sure you introduce the development you’ve noted.

FORECAST THE COST TO BE INCURED

Financial forecast assists you to meet your business goals. They are a future prediction of
your business finances, as compared with statement, which provides details of actual
results or progress. Predicting the financial future of your business is not easy, especially
if you’re starting a business and don’t have a trading history. However, forecasting and
making adjustments frequently will enable you to become more accurate. Monthly or
weekly forecasts may be necessary when starting your business, experiencing rapid
growth, or having financial difficulties. Regular forecasts allow you to closely monitor
your finances and develop strategies to fix problems before they become major issues.
Monthly or quarterly forecasts may be more appropriate for a stable, established business.

What is cost?
Cost denotes the amount of money that a company spends on the creation or production
of goods or services. It does not include the markup for profit.
You have learned that the revenue generated by selling RTW’s has a corresponding
amount of costs incurred. This cost was the amount of RTW before adding its mark-up
price. Each piece of t-shirt has a corresponding cost of 90.00 pesos, while each pair of
jeans has a corresponding cost of 230.00 pesos. On the other hand, the business also
incurs costs in its operation, these costs are called Operating Expenses. Operating
expenses such as payment on Internet connection, Utilities expense (i.e.Electricity),
Salaries and Wages and Miscellaneous are essential in the operation of the business; this
allows the business to continue operate in a given period of time.
You have just learned about what cost is. This time let us identify costs and expenses
incurred by the business.
1. Cost of Goods Sold / Cost of Sales refer to the amount of merchandise or goods sold
by the business for a given period of time. This is computed by adding the beginning

33
inventory to the Net Amount of Purchases to arrive with Cost of goods available for sale
from which the Merchandise Inventory end is subtracted.
2. Merchandise Inventory beginning refers to goods and merchandise at the beginning
of operation of business or accounting period.
3. Purchases refer to the merchandise or goods purchased. Example: Cost to buy each
pair of Jeans or t-shirt from a supplier.
4. Merchandise Inventory end refers to goods and merchandise left at the end of
operation or accounting period.
5. Freight-in refers to amount paid to transport goods or merchandise purchased from the
supplier to the buyer. In this case, it is the buyer who shoulders this cost.
In a merchandising business such as Fit Mo’to Ready to Wear Online Selling Business,
the formula to compute for costs of goods sold is as follows:

34
 Table 5 shows how freight-in is calculated. It is assumed that at an average, Ms.
Nista pays at least 250.00 pesos for every 12 items delivered successfully by her supplier
through a courier service. Since her average order is 480 pieces every month, she pays:
480 pcs. / 12 pcs. = 40 40 x 250.00 = 10,000.00

Table 5 Freight-in paid by Ms. Nista every month

Projected Volume
Type of RTW's No. of Items Freight In (January
Sold (Daily) Only)
Average No. of Items
Purchased (Monthly)
(A) F = (D x 30 days) K = (F/12) x 250
T-Shirt 10 300 6,250.00
Jeans 6 180 3,750.00
Total 16 480 10,000.00

Let us now substitute the values from table 4 and table 5. Since there is no Merchandise
Inventory, beginning and end, let us add Cost of Purchases and Freight-in to get the Cost of
Goods Sold.
Merchandise Inventory, beginning P 00.00
Add: Net Cost of Purchases 68,400.00
Freight-in 10,000.00
Cost of Goods Available for Sale P 78,400.00
Less: Merchandise Inventory, end _____ 00.00
Cost of Goods Sold P 78,400.00

Now that the cost of goods sold is now calculated, let us now
identifyexpenses that the business incurs in its operation. Operating expenses
such as Internet connection, Utilities like electricity and miscellaneous
expense are important to keep the business running. These expenses are part
of the total costs incurred by the business in its day-to-day operation and are
paid every end of the month. The operating expenses and assumed amount
are presented below:

35
 Operating Expenses
Add: Internet Connection P 1,299.00
Utilities (Electricity) 800.00
Miscellaneous expense P 300.00
Total Operating Expense P 2,399.00
To calculate the total costs incurred by the business, cost of goods sold, and total
operating expenses are then added. The calculation for the costs incurred for the month
of January is presented below:
Cost of Goods Sold P 78,400.00
Total Operating Expense P 2,399.00
Cost P 80,799.00

The projected monthly costs covering the first of operation of Ms.

Nista’s Fit Mo’to RTW Online Selling Business is presented in Table 6.
Table 6
Forecasting Monthly Costs (Year 1)
Fit Mo'to Ready to Wear Online Selling Business

Month January February March April May June

Cost of
78,400.00 82,320.00 86,436.00 90,757.80 95,295.69 104,825.26
Goods Sold
Expenses 2,399.00 2,446.98 2,495.92 2,545.84 2,596.75 2,648.69
Total Cost
& 80,799.00 84,766.98 88,931.92 93,303.64 97,892.44 107,473.95
Expenses

Month July August September October November December

Cost of
Goods Sold 110,066.52 110,066.52 104,563.20 99,335.04 104,301.79 114,731.97

Expenses
2,701.66 2,755.70 2,810.81 2,867.03 2,924.37 2,982.85

Total Cost
&
112,768.19 112,822.22 107,374.01 102,202.06 107,226.16 117,714.82
Expenses

36
 COMPUTE FOR PROFIT
It is important for a business to understand how much profit they’ve made to give it an
idea as to whether the business is successful. With so much money going in and out of a
business, it is not always easy to see whether what a small business owner is doing is
actually making money. By calculating profit, it helps give some clarity. If a business is
making a profit it can:
• expand and grow
• attract more investment
• employ more staff
It is worth mentioning that profit is a different to cash. Some things will affect the cash
flow of the business, but won’t affect profit e.g. money taken out of the business for
personal use. Likewise, some items will affect profit but will not affect cash such as
provisions e.g. where a business makes an adjustment for a customer not paying.

Making a profit is one of the most important objectives of a business. Calculating your
profit can not only help you determine your level of success, it also provides information
about where your business is making money and where you are spending it. Before we
compute the profit let identify what profit is?

What is Profit?
• Profit is a financial gain from a transaction or from a period of investment or
business activity, usually calculated as income in excess of costs or as the final
value of an asset in excess of its initial value.
• It is a total revenue minus total expenses,
• Profit is the amount of money a business "makes" during a given accounting
period.
Profit = Revenue - Cost of Goods Sold
Depending on the quantity of units sold, the following are the variables used to
determine Profit:
1. cost - the amount for which items are acquired or produced, also known as the cost of
goods sold,
2. unit cost - the amount for which a single item is acquired or produced,
3. price - price for which the items are sold,
4. unit price - the amount for which a single item is sold,
5. quantity - the number of items for which the profit is calculated,
6. total cost - cost multiplied by the number of items,
7. discount - the percentage price reduction, 8. total profit - total amount of money gained.

37
 3 Kinds of Profit:
1. Gross Profit
• Gross profit is the total revenue less only those expenses directly related to the
production of goods for sale, called the cost of goods sold (COGS). COGS
represents direct labor, direct materials or raw materials, and a portion of
manufacturing overhead that's tied to the production facility.

COGS does not include indirect expenses, such as the cost of the corporate office. COGS is a
key metric since it directly impacts a company's gross profit, which is calculated as follows:
Gross profit = Revenue - Cost of Goods Sold

2. Operating Profit
• Operating profit serves as a highly accurate indicator of a business’s health
because it removes all extraneous factors from the calculation. All expenses
that are necessary to keep the business running are included, which is why
operating profit takes into account asset-related depreciation and
amortization— accounting tools that result from a firm's operations.
• Operating profit is also referred to as operating income as well as earnings
before interest and tax (EBIT)—although the latter may sometimes include
nonoperating revenue, which is not a part of operating profit. If a firm does
not have non-operating revenue, its operating profit will equal EBIT.
• Operating Profit = Operating Revenue - Cost of Goods Sold ( COGS) -
Operating Expenses - Depreciation - Amortization

3. Net Profit / Net Income

• It is the profit that remains after all expenses and costs have been subtracted
from revenue.

Compute the Gross Profit

The profitability ratios are a group of financial statement that primarily determine the
profitability of the business operation.
The gross profit rate on a product is computed as:

Net Sales xxxxxxx

Less: Cost of sales xxxxxxx
Gross profit xxxxxxx

Example: XYZ Trading in the year 2017 has a net sales of 734,000 pesos and the cost of
sales is 577,000 pesos. By using the formula. we can get the gross profit, as shows below:
38
 Net Sales P 734, 000.00
Less: Cost of Sales 577, 000.00
Gross Profit 157, 000.00

The gross profit margin

• The gross profit rate measures the percentage of gross profit to sales, indicating the
profit that the business realizes from the sale of the product
• It is computed as follows:

Gross profit rate = Gross Profit

Net Sales

• The gross profit rate measures the percentage of gross profit to sales, indicating the
profit that the business realizes from the sale of the product.
• The gross profit rate of XYZ Trading for the year computed as follows:

Gross profit rate =

Gross profit rate = 21.39 %

The gross profit rate may signal to the entrepreneur that the amount of margin on sales is
21.39%. This rate will be used to determine whether the amount of gross profit can cover
the operating of the business. Since the gross profit rate of XYZ. Trading is 21.39%, the
cost ratio to sales will be 78.61%. This information will help the entrepreneur in assessing
whether the cost is too high or too low. Any product with a very high cost will not become
competitive in the market.
• The gross profit rate will also help the entrepreneur set the selling price.

Operating Profit Margin Rate

The operating the profit margin is the excess of gross profit from operating
expenses.
Gross profit xxxxx
Less: Operating Expenses xxxxx
Operating profit margin xxxxx

The operating profit margin is the second level of revenue in the income statement. At this
stage, not only the cost of buying or making the product that has been deducted is included
39
but also the operating expenses. These are expenses incurred during a particular period
only, and are not expected to provide benefits to any future period. The operating expenses
are also period costs.
In case there are no financing charges like interest, expenses, and income tax, the amount
of the operating profit margin is equal to the net income.
Gross profit P 157,000.00
Less: Operating expenses 90,000.00
Operating profit margin P 67,000.00

This information that the business realized an income of P 67,000.00 during the year after
deducting the cost and operating expenses from the sales made.

Operating profit margin rate = Operating Profit Margin

Net Sales

Operating profit margin rate =

Operating profit margin rate = 9.31%

The operating profit margin of the business measures the percentage of profit available
after deducting the cost of sales & operating expenses of the business. A higher operating
profit margin is favorable to the business.

The Income statement is Net Profit Margin & the third level in the revenue. The
business is only given consideration like interest expense and income tax.

Net Profit Margin

Operating profit margin xxxxxxx
Add: Interest Income xxxxxxx
Total
Less: Interest Expense xxxxxx
Income Tax xxxxxx xxxxxx
Net Profit margin xxxxxx
Operating profit margin P 67,000.00
Less: Income tax 20,000.00
Net profit margin P 46,900.00

The income statement of XYZ Trading does not reflect any data on interest expense. Only
income tax has been deducted from the operating profit margin.
40
 Net profit
Net profit margin rate =
Net Sales
By applying the formula, the profit margin rate using the data of XYZ Trading

46 , 900.00
Net profit margin rate =
734,000.00
Net profit margin rate = 𝟔. 𝟑9%

XYZ Trading appears to have earned 6.39% of its total sales of P734,000 during the year.
This profits rate must be compared with those of other similar businesses within the
industry.

III. Learning Tasks 1

Activity 1: Directions: Complete the sentence by filling up the blank. Find the correct answer in
the puzzle below. (copy and answer)

41
Activity 1.1 (answer directly)

Activity 1.2 (copy and answer)

42
 Learning Tasks 2 (put this in a 1 whole yellow pad paper)
Activity 2.1 SUPPLIER’S CHECKLIST. Choosing the right supplier involves
much more than scanning a series of price lists. Your choice will depend on a wide
range of factors such as value for money, quality, reliability, and service. In the given
template below, create a list of suppliers available in your area.

Activity 2.2 Key business model questions

To begin the process of designing the business model, please answer the following questions.
Answer as accurately as possible because you will need this information later in the process.
1. How do you acquire customers? Briefly describe the steps involved, the amount of time
required, the typical value of a deal and the stakeholders required (including the people on
your side and the customers’ side) to sign a new deal.
2. After you have landed a new customer, how do you plan to relate to that customer and
manage the relationship (if at all)?
3. How do you charge your customers? What is your revenue model?
4. How much do you charge your customers? Can you calculate your revenues for the next
month, quarter and year?
5. What assets are available to you or under your control?
6. Who are your key partners?
7. What key activities do you need to engage in to deliver your value proposition?
8. What are your fixed costs?
9. What are your variable costs? Can you calculate your total cost for the next month, quarter
and year?
10. Does your revenue forecast demonstrate increased profitability toward the end of the
forecast period?

43
Activity 2.3
A. Direction: Compute, the projected revenue by day, month and year based on your
business concept.

Aling Minda is operating a buy and sell business, she sells broomsticks (walis tingting) in
her stall at a local market. She gets her broomsticks from a local supplier for 25 pesos each.
She then adds 50 percent mark-up on each broomstick. Every day, aling Minda can sell 30
broomsticks a day.

Use the template below and fill in the necessary figures based on the scenario. Remember
to use the factors to consider in projecting revenues and refer to tables 1, 2 and 3 as your
guide.

Table 1
Projected Daily Revenue
________________________________________________________

Project Projected
Types Cost per Mark-up Selling Price ( C ) Volume (D) Revenue
of unit 50% (E)
RTW (A) (B) Average No.
Of ( Daily )
Items Sold
( Daily )
(A) (B) = ( A x 0.50) ( C ) = ( A + B ) (D) (E)=(CxD)

Total

Use the calculations you have made in Table 1 to successfully complete the information in
Tables 2 and 3 and calculate the projected monthly and yearly revenue of Aling Minda’s
business.

44
 Table 2
Forecasting the Monthly and Yearly Revenue
_________________________________________________

Project Volume Projected

Project Volume Projected Revenue
Revenue
Types Selling Price Average No. Of Average No. Of ( Yearly )
of Items Sold Items Sold
RTW ( Monthly) (Monthly) ( Yearly )
( C ) = ( A + F = ( D x 30 ( G ) = ( C H = (D x 365 I = ( C x H )
B) days) x F) days)

Total

For Table 3, use the following assumed increases in sales every month. From January to
May, 5 percent increase from previous sales. For the month of June, 10 percent increase
from previous sales. For the months July to December, record the same sales every month.

Table 3
Projected Monthly Revenue
____________________________________________________________
Month January February March April May June

Revenue

Month July August September October November December

Revenue
B. Compute the projected costs by month on your business concept. Use the template
below and fill in the necessary figures based on the scenario.

Mang Eduard operates a buy and sell business. He sells umbrellas in his shop near the city
mall. He gets his umbrellas from a local dealer. Each umbrella costs 90.00 pesos each.
Expecting rainy season to come, Mang Eduard purchased 4 dozen of umbrellas every
week. The supplier then charges 200.00 pesos per dozen for freight. Mang Eduard can sell
12 umbrellas every day. Remember to use the factors to consider in projecting revenues

45
 and refer to tables 4, 5 and 6 as your guide. Suppose Mang Eduard purchases and sales is
the same every month, fill in the necessary information in table 6.
Table 4 Forecast the Cost of Goods Sold (Monthly)
______________________________________________________

Projected Volume Projected Costs of

Cost per Unit Average No. of Items Purchases
Type of RTW's
Sold (Monthly) (Monthly)
(A) F = (D x 30 days) J = (A x F)

Total

Table 5 Freight-in paid by Ms. _____________________________

Projected Volume
Type of RTW's No. of Items Sold Freight In (January
(Daily) Only)
Average No. of Items
Purchased (Monthly)
(A) F = (D x 30 days) K = (F/12) x 250

Total

Table 6 Forecast the Monthly Costs (Year 1)

_______________________________________________________

Month January February March April May June

Cost of
Goods
Sold

Expenses

Total
Cost &
Expenses
Month July August September October November December
46
Cost of
Goods
Sold
Expenses
Total
Cost &
Expenses
C. Compute the Gross Profit Answer the given problem.
1. Annie bought one dozen smartphones for P200,000.00 with a discount of 5%. She sold
half dozen at a price of P18,000.00 per unit. However, a new model of smartphone
became available in the market, so she sold the remaining half dozen @ P12,000.00
each unit. What was her profit or loss?
Compute the following requirements:
a. Profit
b. Gross profit rate
c. Operating profit margin rate
d. Net profit margin rate

IV. Reflection
Instructions: Complete the statement:

I have learned that.

_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

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Compiled by:
Name of Teacher Lenie Santos Pasigna
Designation Teacher 2
Name of School Mactan National High School- Senior High
Name of Division DepED-Division of Lapu-Lapu City

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Reviewed and Checked by:
LERA R. MORA
Master Teacher I - Math

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