Chapter 3: Business Basics

Monica Sharlene C. Calupe

Angelica Pauline A. Cruz

Abstract
This chapter discusses management and managers
different roles. It elaborates major business systems
and incorporates managers role to every business
system and function. It gives emphasis to every input
vital to an organization and its significance and
relation to another input within the organization.
Different ways of measuring the performance of a
business will be also tackled. Important financial
accounts will be also discussed to further analyze a
business and its management performance.
Introduction
A business in the industry has its own purposes to
gain profit, satisfy customers, and the like. However,
whatever their purposes are, all these businesses
have two things in common: it is made up of people
and certain individuals are in charge of them. In
todays harsh, tough and uncertain economy,
problems may arise in the life of a business. That is
why there is a need of managers in order to solve
those problems (5).
Managers have different roles and responsibilities in
an enterprise. They are the one responsible leading
and directing personnel and employees. They give
directions in a process; analyze a problem and device
a solution to the problem. Basically managers have a
major role in a business. They are significant in
almost all the processes because they are the one in
charge managing those processes. They always have
a definite goal and they strive to achieve that goal
with the help of the employees and personnel even
though the operations are conducted within varying
conditions and circumstances.
Manage this is the root word of manager. This term
can then be transformed into management.
Managers usually do management in a business.
Business is basically a group activity and
management plays an important role in making it
more effective.
In a business environment, managers aim to achieve
some objectives. On the other hand, whatever their
objectives are, they follow a certain process and
function. After all the processes are done, the
business performance will be evaluated and
measured.
Significance of the Chapter
For a manager to successfully manage the
employees, processes and the system of a company
he should know the basics. Knowing the inputs in a
business system will enable him to know the proper
combination of inputs in a certain enterprise to
achieve the goal of the business.
Certain qualities to be possessed by managers
should be also tackled for him to properly perform his
different roles. Managers have to execute many roles
within a firm thus requires him to fully understand
every role for him to execute it well.
It is also significant that a manager should understand
the major business process and corporate system for
him to manage properly those processes and system.
Knowing each function will enable him to apply the
right and efficient management to each element of the
process and system.
Every business requires evaluation of its
performance. It is also a job for a manager to know if
he manages the business well. Learning about
different measuring tools and knowing how to
examine different data sheets would help him analyze
the current state of the business, his management
and the possible source of the problem thus leading
him to possible solutions.
Objectives of the Chapter
The purpose of this chapter is for the reader to:
Describe the concept of management
Enumerate the roles of a manager or the
management
Enumerate the inputs within a business
system
Enumerate and describe the processes within
a business system
Understand and enumerate the basic
corporate system.
Understand how a business system works
Compute profit
Compute elements of a balance sheet
Compute elements of a cash flow
Understand and perform measuring tools to
analyze performance of a business
Know the importance of management in
operating a business
Main Discussion
Absolute Basics
In a business world, there is no shortcut or easy way
in reaching success. To become successful, the
business is faced by difficulties, obstacles and
problems. Because of this, many entrepreneurs
choose to give up and just take the easy way out.
However, if there is a strong will, determination, and
proper management among them, overcoming those
problems will be possible. With proper management,
entrepreneurs may find a feasible solution to their
problem. Figure A.1 shows how an idea can lead the
business to success.

Fig A.1 From the idea to the rewards managements task is to
find the most efficient, most effective route.
Definition of Management
Management is the organization and coordination of
the activities of a business in order to achieve defined
objectives. It is often included as a factor of
production along with machines, materials, and
money (1). On the other hand, a manager manage
the inputs to the business system.

Input to a business system
During the 19
th
century there are only 3 inputs to a
business system- Land, Labour and Capital. Land is
very important because of agricultural based
economies. CAPITAL provides tools and raw
materials for LABOUR to work on the LANDS. Figure
A.2 shows the flow of input in a business system
during the early 19
th
century.
Fig A.2 Flow of input in a business system during the early 19
th

century.
As Industrialization took place emphasis on capital as
a more important input rather than land took place too
because of the vast need of materials equipment for
labour.
Developments of machines that ease work load and
increase productivity occur. Mechanization is the
process of doing work with machinery. As well as
numerically and computer controlled machines rises
(automation). It significantly increases productivity
and significantly decreases the emphasis labours
share of cost. Material and equipment cost become
more significant.
Competition increased and in able to survive the need
of fast information regarding internal operations and
external environment as vital input in a business
arises.
As of 1980, there are four inputs to business system
which is all managed by managers Land, Labour,
Capital and Information. Figure A.3 shows the flow of
input within a business system.

Fig A.3 Flow of input within a business system.
Figure A.4 sows how the four inputs are the basic
source of a business. The figure also shows that there
are several external factors in a business operations.
Capital Labour Land
Capital
Information
Labour
Land

Fig. A.4 Basic Business System.
Business system is the methodical procedure or
process that is used as a delivery mechanism for
providing specific goods or services to customers.
Perspectives on Management
Henry Mintzberg quoted Henri Fayols definition of
management, Manager plans, organizes, coordinates
and controls and he include the three roles of
management interpersonal, informational and
decisional. Elements in each roles is show in Figure
B.1.


Fig. B.1 Mitzbergs three roles of management.
Some of the dictionary definition of management is
retained in Mitzbergs analysis but there are important
additions.
One of the important and significant roles of a
manager is to be a leader. Being a leader entitles that
he must motivate and encourage his employees,
somehow reconciling their individual needs with the
goals of the organization. Goals are important to be
established and a manager should establish it and he
should be able to inculcate it to the employees.
Sharing same goals will help them all succeed.
As an entrepreneur it is the job of a manager to adapt
to the ever changing environment. In able to adapt a
manager should always improve and develop new
ideas.
In general managers have many roles necessary in a
business system. Shown in Figure B.2 the roles of a
manager in a business system.
Fig. B.2 the roles of a manager in a business system.
The Business System
A manager performs within varying situation and
circumstances. He manages from raw materials and
resources to the processes and the finished goods or
service. Shown in Figure C.1 are sequence of
process and functions to be performed within an
organization and managed by managers.
Interpersonal
Figurehead
Leader
Liaison
Informational
Monitor
Disseminator
Spokesman
Decisional
Roles
Entrepreneur
Disturbance Handler
Resource Allocator
Negotiator
MANAGER
Enabler
Coach
Counselor
Leader
Communicator Planner
Coordinator
Organizer
Controller
Fig. C.1 Major Business processes and functions.
Design: encompasses the specification of a good to
be produced. It includes the goods dimension,
composition, and performance to meet market
requirements. Answers the question What is the
product or system contains?
Product Engineering: deals to how do a product or
system is made or assembled.
Production, Distribution and Support Functions:
concerned when operations are performed.
Transactions that includes raw materials, labor and
information is within this function.
A corporate system is the collection of processes and
functions through which ideas are processed and
eventually became a product to be sold in the market.
Finished product in time will be replaced, scrapped
and recycled. Figure C.2 represents a basic corporate
system.

Fig. C.2 Basic Corporate System.
Figure C.3 is an example of a corporate system of a
paper business enterprise. From raw material
gathering paper is produce during production process.
When paper is produced it is sold in the market and
undergoes further distribution for the consumer to be
able to use it. When it is used already it is being
decomposed to its smaller unit and eventually
recycled.
Fig. C.3 Corporate system of a paper business enterprise.
How the System Works
Identifying the customers needs by gathering
feedback via surveys, questionnaires or a website
this is one of the things the business specialists or
entrepreneurs conduct in order to brainstorm creative
ideas for the product they are going to manufacture.
For that idea to become a manufactured product, it
undergoes a process.
According to Payne and his co-authors, design and
development for an idea is needed to make a good
production. Hence, making a need to develop a
production process. An employee in charge of the
production will complete the product and will then be
put to market or directly delivered to customers.
Customers will pay the suppliers for the product.
Support will also be needed after the product has
been sold. When the life of the product has ended,
disposal and recycling should be considered.
However, in order to initiate this process and put the
product in the market, money should be used. Money
may come from the owners pocket or borrowed from
financial institutions such as banks (7). Figure D.1
below shows the representation of the processes in a
corporate system.

Fig.D.1. Representation of a corporate system
Due to big cash flows in the start of a business, it
would be expected that there would be a big loss. But
this is normal in every starting businesses. The first
few months of a starting business is critical since
patience is needed until the incoming flow of
Design
Production
engineering
Production
Distribution
Support
Idea Design Production
Distribution
Scrapped
Recycled
payments would overcome the expenses for the cost.
Typically, enterprises allow big outflow of payments
for manufacturing their product. And when the product
hits the market and it became successful, those
outflows will be replace by the inflow of payments (7).
Fig.D.2 show the relationship of sales, cost and profit
to the product life cycle.
Fig.D.2. Relationship of sales, cost and profit to the product life
cycle.
The graph shows another lost in the latter part of
business. This is brought about by a customer factor
wherein they always look for something new.
Measuring the Systems Performance
The following are used to measure the performance
of the business:
Profit and loss accounts (P&L) or Statement
of Comprehensive Income: A financial
statement that summarizes the revenues,
costs and expenses gained during a specific
period of time. These records provide
information that shows the ability of a
company to generate profit by increasing
revenue and reducing costs (6). Moreover, it
implies whether a business has made a profit
or loss over a financial year. This financial
account is required by the law for companies
to keep. It is characterized by the equation,
Profit = Revenue Cost
If the value computed for the profit is
negative, it implies that there has been a loss
(7).
Balance Sheet or Statement of Financial
Position: A financial statement that
summarizes a company's assets, liabilities
and shareholders' equity at a specific point in
time. These three balance sheet segments
give investors an idea as to what the
company owns and owes, as well as the
amount invested by the shareholders (8). Like
the P&L, this financial account is also
required by the law for companies to keep. It
is characterized by the formula,
Assets = Liabilities + Owners Equity
Asset refers to anything that an individual
owns. It may be fixed assets, intangible fixed
assets or long term investments (9). Liability
refers to an obligation that legally binds an
individual or company to settle a debt.
Borrowing money is considered as a liability.
On the other hand, the owners equity refers
to the shares of owners in the business (7). In
general, these three elements are often
described as snapshot of a companys
financial condition (7). Every single day in the
life of a company is not always the same
since there are transactions daily. Hence, the
assets, liabilities and ownership equity
changes.
It's called a balance sheet because the two
sides balance out. A company has to pay for
its assets or all the things it has by either
borrowing money or getting it from the owners
of the enterprise (8).

Statement of Changes in Equity: it generally
shows the movements of equity in addition to
accumulated earnings and losses so as to
enable the readers to illustrate on where did
the equity come from and where did it go (11).

Statement of Cash Flows: it is a financial
statement that provides an overview of the
cash inflows and outflows of the business
during a certain period of time (12). This
reports activities in operation, investment and
finance (7). Operating activities are normal
daily operating activities of running a
business. This includes production, sales and
delivery of the company's product as well as
collecting payment from its customers (13).
Buying and selling property, plant, and
equipment items are classified as investing
activities. Financing activities include
obtaining financial resources from and
returning the financial resources to the
owners of the business (14).
The following gives an indication on how well
the assets have been used:
o Return on capital employed (ROCE)
= (profit before tax/capital employed):
To be more attractive, the normal
target for ROCE is 10% (7).
o Return on sales (ROS) = (profit
before tax/sales revenue): As for
(ROS), normal target is 5%. The profit
before tax is computed as, Profit
before tax = sales revenue cost.
Here, costs may include labour,
material and overhead. The overhead
includes depreciation, utilities, rates
and central staff (7).
o Sales per employee: it is the ratio of
productivity changes over successive
accounting periods. This ratio is most
useful when compared against other
companies in the same industry.
Ideally, a company wants the highest
revenue per employee possible, as it
denotes higher productivity. The
higher the ratio is, the better (7).
o Inventory turnover: it is characterized
by the equation, Inventory turnover =
cost of goods sold / average
aggregate inventory value (7). This
indicates how good the business is
going. If the computed value for this
is less than one, it implies that no
customer has interest on the product
the business is selling.
o Average aggregate inventory value:
The total value of all items held in
inventory for the firm valued at cost
(7).

Percentage of Sales: this determines how
innovative and competitive your business is.
This is derived from the products less than
one or two years old. The higher the
percentage of sales, the more innovative your
company gets.
Summary and Conclusion
No matter how big or small a business is, it
undergoes a single sequence of processes, namely
the design process, product engineering process,
production, distribution and support. Each of these
processes are vital in a business system. Having
removed one process, the system may go wrong and
would not function well.
Before starting those sequence of processes, ideas
are brainstormed by specialists and entrepreneurs.
That idea is then transformed into design, then a
manufactured product which is to be sold and
distributed to reach its customers. Having done this
process has caused the company to make expenses.
But in return, they could regain those expenses with
the profits they have earned.
To know if they have gained or loss profit, the
performance of the business as well as their product
in the market is measured. Measuring the business
performance is important because it determines how
innovative the company is, and how well their product
is doing in the market. With that, the business, with
the help of a manager, may improve parts of the
system where it has problems.
References
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