Business Quantification and Implementation Notes

Business Quantification and Implementation

• Business implementations drive activities to achieve objectives in a business plan.
• Entrepreneurs ensure team alignment with company objectives by understanding and overseeing business implementations.
• A strategic plan is essential for providing direction, ensuring goal attainment, delivering customer value, and achieving success.
• A plan guarantees desired performance.
• Effective business implementation provides a competitive advantage.

Forecasting and Ratio Analysis

• Forecasting involves using past and present data to predict future trends, enabling businesses to identify risks and opportunities and efficiently allocate resources.

Factors to Consider in Sales Forecasting:

• Competition: A competitor's performance impacts sales volume, requiring forecast adjustments. Tactics like discounting can level up presence if a competitor is doing well. Seizing market share is possible if a competitor exits.
• Macroeconomics: Regional to global macroeconomic factors affect sales. A solid economy facilitates sales.
• Events: National or global events can positively impact some businesses (e.g., pandemic benefiting hand sanitizer producers).
• Law: Changes in regulations or legal requirements can affect sales if a product or business structure is impacted.
• Season: Time of year impacts sales. For example, ice cream shops have excellent projections for summer but slim projections for winter.
• Employees: Hiring more salespeople can directly impact sales, especially for tech startups.
• New businesses must factor in time to set up sales pipelines and establish stakeholder relationships.

How to Create a Sales Forecast

• Sales forecast estimates the number of goods and services a business can sell over time, including costs and profits.

Formulas

• Markup: $Markup = Cost \ per \ unit \times Desired \ Markup$
• Selling Price: $Selling \ Price = Cost \ Per \ Unit \times Markup \ Price$
• Projected Daily Revenue: $Projected \ Daily \ Revenue = Selling \ Price \times Volume \ of \ Items \ Sold$
• Projected Items Sold Monthly: $Projected \ Items \ Sold \ Monthly = Items \ Sold \ Daily \times 30 \ Days$
• Projected Monthly Revenue: $Projected \ Monthly \ Revenue = Selling \ Price \times Projected \ Items \ Sold \ Monthly$
• Projected Items Sold Annually: $Projected \ Items \ Sold \ Annually = Items \ Sold \ Monthly \times 365 \ Days$
• Projected Annual Revenue: $Projected \ Annual \ Revenue = Selling \ Price \times Projected \ Items \ Sold \ Annually$

Example: La Mirabella RTW Shop

• Ms. Mira Bella launched "La Mirabella RTW Shop" in January 2022, specializing in ready-to-wear clothes for teens and young adults.
• Average daily sales: 20 summer dresses, 16 ripped jeans.
• Cost: Summer dress - P83, Ripped jeans - P215.
• Markup: 50% on each item.

Forecasted Daily Revenue of La MiraBella RTW Shop

Forecasted Monthly Revenue of La MiraBella RTW Shop

Projected Annual Revenue of La MiraBella RTW Shop

Adjusted Monthly Revenue Sales Forecast Based on Assumed Factors

• February to May: +5% increase from previous revenue (peak season)
• June: +10% increase from previous revenue (start of school season)
• July to August: -2% decrease in revenue from the previous month
• September to October: -9% decrease in revenue from the previous month
• November: +6.5% increase in revenue from the previous month (Christmas season)
• December: +14.7% increase in revenue from the previous month (Christmas season)

Ratio Analysis

• Financial ratio compares two numbers from a company's financial statements to evaluate financial health.

A. Profitability Ratio

• Assesses a company's profitability and ability to generate shareholder returns; compares net income to revenue, assets, or equity.

Return on Investments (ROI)

• Also called return on equity (ROE); compares income or profit after taxes to total stockholder's equity, specifically average stockholder's equity.
• Average asset is calculated by adding the beginning and ending balances of total assets and dividing by two.
• Formula: $Return \ on \ Investment = \frac{Net \ Income}{(Average \ Assets / 2)}$
• Example: Beginning total asset of P100,000, ending total asset of P25,000, net income of P30,000.
  • $ROI = \frac{P30,000}{((P100,000 + P25,000) / 2)}$
  • $ROI = \frac{P30,000}{P62,500}$
  • $ROI = 0.48$

Operating Income Ratio (OIR)

• Shows the percentage of profit a company can generate from each peso of its investment. Creditors prefer a higher ratio.
• A desirable interest coverage ratio is 4:1 or higher; if this ratio decreases, the company's credit rating drops.
• Formula: $Operating \ Income \ Ratio = \frac{(Operating \ Expenses + Cost \ of \ goods \ sold)}{Net \ Sales}$
• Example: Apple reported net sales of $59.68 billion, cost of goods sold of $37.00 billion, and operating expenses of $9.59 billion.
  • $OIR = \frac{(\$37.00 \ billion + \$9.59 \ billion)}{\$59.68 \ billion}$
  • $OIR = 0.78$

Return on Assets (ROA)

• A measure of how well a company has used its assets; calculated by dividing the operating income by the average total assets.
• Using operating income instead of income after tax is important to focus on asset utilization related to operations.
• Formula: $Return \ on \ Assets = \frac{Operating \ Income}{Average \ Total \ Assets}$
• Example: Net Income = $500,000, Total Assets = $2,500,000
  • $ROA = \frac{\$500,000}{\$2,500,000}$
  • $ROA = 0.2$

B. Financial Health Ratio

• Determines the company’s capacity to pay its short-term and long-term obligations as they become due.

Stockholder's Ratio

• Stockholders' claims show the firm's long-term financial stability.
• Formula: $Stockholder’s \ Ratio = \frac{Total \ Equity}{Total \ Assets}$
• Example: A company has 1,000,000 total assets and stockholders hold 800,000 equity shares.
  • $Stockholder \ Ratio = \frac{800,000}{1,000,000}$
  • $Stockholder \ Ratio= 0.8$

Debt Ratio

• Compares a company's total debt to its assets; helps creditors and investors understand how much debt a company uses.
• Lower ratios indicate less debt and a stronger financial position; higher ratios indicate a higher risk.
• Formula: $Debt \ Ratio = \frac{Total \ Liabilities}{Total \ Assets}$
• Example: Company XYZ has total debt of $500,000 and total assets of $1,000,000.
  • $Debt \ ratio = \frac{\$500,000}{\$1,000,000}$
  • $Debt \ ratio = 0.5$

Debt-to-Equity Ratio

• Shows how much of a company's balance sheet is financed by suppliers, lenders, creditors, and obligors compared to what shareholders have invested.
• A lower percentage indicates less leverage and a stronger equity position.
• Formula: $Debt-to-Equity \ Ratio = \frac{Total \ Liabilities}{Total \ Shareholder’s \ Equity}$
• Example: Company ABC has a total debt of $1,500,000 and a total equity of $2,500,000.
  • $Debt-Equity \ Ratio = \frac{\$1,500,000}{\$2,500,000}$
  • $Debt-Equity \ Ratio = 0.6$

C. Liquidity Ratio

• Refers to the company’s ability to pay its short-term obligations or liabilities.

Quick Ratio (Acid-Test Ratio)

• Measures a company's short-term liquidity and ability to meet obligations with liquid assets.
• A ratio below one (1) doesn't imply bankruptcy but could depend on inventory or other assets. A higher ratio indicates better liquidity, but too high may mean excessive cash reserves.
• It may also mean that the company has high accounts receivable, indicating that it may be having problems collecting its account receivables.
• Formula: $Quick \ Ratio = \frac{Quick \ Assets}{Current \ Liabilities}$

Current Ratio

• Shows a company's ability to pay short-term bills and debts and compares current assets to current liabilities.
• A ratio of 2:1 means that the company has P2 worth of current assets for every peso of current liability. A higher current ratio indicates better solvency and liquidity.
• Example: Company XYZ has Cash: $50,000, Accounts Receivable: $30,000, Inventory: $20,000, Short-term investments: $10,000, Current liabilities: $40,000
  • $Quick \ assets = \frac{\$50,000 + \$30,000 + \$10,000}{\$40,000}$
  • $Quick \ ratio = \frac{\$90,000}{\$40,000}$
  • $Quick \ ratio = 2.25$
• Formula: $Current \ Ratio = \frac{Current \ Assets}{Current \ Liabilities}$
• A company has the following financial information: Current assets of $100,000 and current liabilities of $50,000.
  • $Current \ Ratio = \frac{\$100,000}{\$50,000}$
  • $Current \ Ratio = 2$

Value Chain Analysis (VCA) Model

• The value chain represents a firm's internal activities when transforming inputs into outputs.
• Value Chain Analysis (VCA) is a process that involves identifying the primary and support activities of a particular organization or industry and capitalizing on these activities to reduce costs or increase differentiation.

Primary Activities

• Inbound logistics: raw materials handling and warehousing.
• Operations: machining, assembling, and testing.
• Outbound logistics: warehousing and distribution of finished products.
• Marketing and sales: advertising, promotion, pricing channel relations.
• Service: installation, repair, and parts.

Secondary Activities

• Firm infrastructure: general management, accounting, finance, and strategic planning.
• Human resource management: recruiting, training, and development.
• Technology development: research and development and product or process improvement.
• Procurement: purchasing raw materials, machines, and supplies.

Managing Human Resource

The People Strategy

• A people strategy is the organization’s prioritized people plan that enables a business to be successful by attracting, developing, retaining, and inspiring the workforce.
• It is designed to inspire and achieve company-wide alignment on goals that concern the people.

The Eight (8) Rs of Human Resource Management (Morato, 2016)

1. Recruiting – Finding and attracting potential resources for vacant positions.
2. Routing – Assessing potential to contribute in various functions over time.
3. Retaining – Holding onto desired employees, involving fair wages and work-life balance.
4. Resonating – Employees embracing company goals and realizing personal goals within the company.
5. Reviewing – Measuring and evaluating performance against organizational goals.
6. Rewarding – Compensating, incentivizing, and recognizing employees.
7. Retooling – Re-orienting employees to new directions and improving corporate culture.
8. Recycling – Allowing employees to change jobs or careers within or outside the organization.

Business Model Canvas (BMC)

• A plan that outlines a company's financial goals, customer base, value proposition, and financing.
• It provides information about a company's target market, the market need, and the role the market offerings will play in satisfying those needs.

Nine Components of BMC:

1. Customer Segment – Groups of people or organizations the enterprise aims to reach and serve.
2. Customer Relationship – Personal or automated interactions to acquire and retain customers.
3. Channels – Ways a company reaches out to customer segments.
4. Revenue Streams – How the business verifies profitability.
5. Key Activities – Most crucial actions to run a business smoothly.
6. Key Resources – Necessary for each business model to reach markets and generate revenue.
7. Key Partners – Relationships with other entities, like suppliers or advisors, to make the business model work.
8. Cost Structure – Helps focus on innovation and developing a value proposition; aims to cut costs.
9. Value Proposition - Why customers choose a business over others (meets their needs or solves the customers' problems).

Business Permits and Licenses

• Entrepreneurs must obtain several business permits and licenses before launching their business.

Essential Business Permits and Licenses:

1. Bureau of Internal Revenue Tax Identification Number (TIN)
   • Required for all necessary permits and licenses.
   • Business owners must submit a tax statement using their TIN at the end of each fiscal year.
2. Social Security System (SSS)
   • Employer's Registration ensures employees are covered with insurance benefits.
3. Philippine Health Insurance Corporation (PhilHealth)
   • PhilHealth Employer’s Registration will cover their employees’ health insurance.
4. Pagtutulungan sa Kinabukasan: Ikaw, Bangko, Industriya at Gobyerno (Pag-IBIG)
   • Pag-IBIG Employer's Registration will benefit employees who intend to apply for housing loans.
5. Barangay Clearance
   • Certifies business compliance with barangay requirements.
   • Requires community tax certificate (cedula), a duly accomplished form, and a valid government-issued ID.
6. Department of Trade and Industry (DTI) Business Name Registration Certificate
   • Valid for five years, allowing the use of a trading name for business operations and protecting it from others.
   • Applicants must be Filipino citizens and at least 18 years old.
7. Mayor’s Permit/ Business Permit
   • Ensures business safety under city or town ordinance.
   • Requires registration with DTI (for self-employed) or SEC (for corporations and partnerships).
   • Must be renewed annually.
8. Securities & Exchange Commission (SEC) Registration Certificate
   • Required for corporations and partnerships.
9. Government-Mandated Permits (for businesses with employees)