Technology Assessment and Operations Viability

lnorder to get the enterprise going. the entrepreneur must go through the intricacies of detailing the
operations that would be required by the business, which also includes technology assessment. By going
through this process, the entrepreneur would be able to determine whether the product or service
offering will meet customer demand or not. There are at least four target customer expectations
affecting the scale and complexity of an enterprise's operations:

1. Quantities demanded. This would determine the 'needed capacity of operations.

2. Quality specifications demanded. This would dictate the following: (a) quality of input or raw
materials; (b) quality assurance process in transforming input to output; (c) quality output that meet the
operations, standards set; and (d) quality outcomes for the customers who will be looking for specific
results.

3. Delivery expectations. Knowing how much, how frequent, and when to deliver to customers.

4. Price expectations. The selling price of the product or service would be evaluated by the customers
according to the value they would receive (in terms of quality, delivery, and quantity) and this value
added should be matched against competitors.

Investment Requirements and Production/Servicing Costs

Now comes the challenging part, the entrepreneur needs to determine how much money is needed to
start the business opportunity with consideration to the technologies and operating levels required. In
this respect, there are three investments that need to be funded:

1. Pre-Operating Costs. These are the costs related to the preparation for the launch of the business.
These include the pre-feasibility study, in-depth feasibility study, market research, product development,
organizational development, and initial promotional costs.

2. Production/Service Facilities Investment. This refers to the long-term investment for the actual
business establishment, including investment in land, buildings, machinery, equipment, computers,
software, furniture, vehicles, etc. if the business would be renting or leasing space, the leasehold
improvement (or renovation) would also be part of the facilities investment.

3. Working Capital investment. This includes the investment needed to operationalize the business,
composed of cash, accounts receivable, and inventories (raw materials. work-in-process, and finished
goods). The entrepreneur must see to it that he or she has enough cash to cover the inventories to be
purchased (or manufactured), the accounts receivable to accommodate customers, and the operating
expenses to be incurred. These operating , expenses would include the following:

a. Employee salaries , wages , and benefits

b. Rent and lease expenses

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c. Utilities

d. Transportation e Fees and licenses

f .Commissions

g. Office supplies, etc.

In effect, this part of the pre-feasibility Study asks two questions:

1. Do I have enough resources to cover the necessary investments?

2. Would my sales estimates be significantly higher than my monthly production / service costs in order
to produce profits?

Financial Forecasts and Determination of Financial Feasibility

Upon completing the first three parts of the pre-feasibility study, the entrepreneur should now be able
to proceed in constructing his or her enterprise's financial forecasrs for the business. The financial
forecasts refer to the monetary transactions that the business is expected to engage in. Ultimately, the
end result of the financial forecasts Will indicate the feasibility of the enterprise.

Financial forecasting calls for the creation of the four critical financial statements: namely, (1] income
statement; (2) balance sheet; (3) cash flow statement; and (4) funds flow statement. The marketing
strategy and action program should translate into revenue or sales forecasts. The operations strategy and
the production or service delivery program should translate into forecasts of costs of goods produced.
The rest of the Enterprise Delivery System should translate into forecasts of operating and non-operating
expenses. Together, they comprise the income statement forecasts. The resources mobilized and held by
the enterprise are translated into forecasts of the balance sheet (which show the investments in the
form of assets and their corresponding financing in the form of liabilities). The flow of resources should
be translated into funds and cash flow statements. For a better understanding, this discussion will
concentrate on preparing a simple income statement and balance sheet.

Income Statement

The income statement is a financial statement that measures an enterprise’s performance in terms of
revenue and expenses over a certain period. Simply put, the formula is:

REVENUES - EXPENSES = INCOME 0R PROFIT (LOSS)

From revenues forecasted (quantities sold times the prices they are sold for), the entrepreneur must
subtract the estimated cost of goods sold corresponding to the forecasted sales. This should give the
gross profit. From the gross profit, the operating expenses must be deducted to arrive at the operating
profit. Then, the taxes due are b. Rent and lease expenses must be deducted to arrive at the operating
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profit. Then, the taxes due are subtracted to derive the net profit after taxes, lf the enterprise has non-
operating revenues and expenses, these should be added or Subtracted from the Operating profit before
the taxes are computed. An example of a simple income statement is shown in Table 2.4.

Table 2.4. Monthly Income Statement of Mang Juan's Manufacturing

Gross Sales P 750,600

Less: Cost of Goods Sold 468,487

Gross Profit/Margin 282,113

Less: Operating Expenses 166,145

Operating Profit/Margin 1 15,968

Less: Taxes 21,392

Net Profit After Taxes P 94,576

' Note that cost of goods sold refers to the materials, labor costs, and overhead of making a product. For
service establishments, the entrepreneur can compute the costs of servicing the customers directly as
cost of services rendered.

Balance Sheet
Creating the balance sheet is a bit more complicated because one has to look at three different things:
assets, liabilities, and equities.

Assets represent all the investments in the enterprise including the initial investments that you
considered in the pre-feasibility study (investment requirements). These include cash (on hand and in
bank), accounts receivable, inventory of goods, equipment and machinery, facilities, vehicles, etc.

Financing the assets or investments are the liabilities and equity. Liabilities represent the enterprise's
debts to suppliers, to banks, to government, to employees, and other financiers. Stockholders' equity
represents the investors’ investments in the stock (or shares) of the business.

The balance sheet equation is: ASSETS = LIABILITIES + EQUITY.

The above equation means that the resources invested into the enterprise in the form of liabilities and
stockholders' equity must be equal to the total value of the assets or the enterprise itself. An example of
a simple balance sheet is shown in Table 2.5.

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ASSETS LIABILITIES
Current Assets Current Liabilities
Cash ₱ Accounts Payable ₱
100,500 150,000
Accounts Receivable Income Taxes Payable
370,200 20,500
Inventory Wages Payable
405,350 75,000
Fixed Assets Short Term Debt
Land 125,000
422,100 Long Term Liabilities
Building Long Term Debt
200,000 777,650
Vehicles STOCKHOLDERS’ EQUITY
150,000 Capital
350,000
Retained Earnings *
150,000

TOTAL ASSETS TOTAL LIABILITIES & EQUITY

₱1,648,150 ₱1,648, 150

* Retained Earnings are the accumulated profits or losses of the enterprise over the years, which have
not yet been given back to investors as dividends.

Financial Ratios and Measurements

In any business endeavor, the investor or the entrepreneur himself or herself will always be interested in
knowing the payback period or how long will it take for him or her to get back what he or she has
invested in the enterprise.

However, payback period is just one of the many financial computations one can take a look at in
considering a particular business opportunity. But this will only be possible if the entrepreneur can come
up with financial statements. The income payback period can be computed as follows:

PAYBACK PERIOD = TOTAL INVESTMENT

ANNUAL NET INCOME AFTER TAXES

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To compute for the income payback period based on ABC Company's financial statements, which specify
investments of ₱1,500,000 and net income after taxes of ₱500,000 a year, we can conclude that it would
take around 3 years for the company to recover the investment.

INCOME PAYBACK PERIOD = 1,500,000 = 3 years

500,000

In the Cash Payback Period, the entrepreneur should add back the non-cash deductions from the income
statement, which is the depreciation expense. Thus, if the depreciation expense is ₱250,000 a year, the
net income after taxes plus depreciation would amount to ₱750,000 a year. This would then represent a
cash payback period of two years only.

In effect, the faster you are able to earn back the money invested. the better it is for the entrepreneur
and the more attractive the business opportunity becomes.

There is also the return on sales (ROS) ratio where the entrepreneur calculates how much profit the
enterprise is earning for Each peso sold. The formula is as follows:

RETURN ON SALES = NET PROFIT AFTER TAXES

SALES

Substituting the variables into ABC Company's estimated figures:

RETURN ON SALES = 500,000 = 10%

5,000,000

Furthermore, if the entrepreneur is interested to know the return on the investments mede. which come
in the form of assets, then he or the can compute for the return on assets (ROA) or return an
Investments (ROI) shown by the formula:

RETURN ON ASSETS or RETURN 0N INVESTMENTS = NET PROFIT AFTER TAXES

TOTAL ASSETS / INVESTMENTS

Again. substituting the variables using ABC Company's estimated figures:

RETURN ON ASSETS = 500,000 = 33%

1,500,000

The above ratios are but a few of the frequently used financial measurements. Should the resulting
figures for all three ratios be favorable, this means that the business opportunity is quite promising.

The Feasibility Study

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For bigger projects that entail millions of pesos worth of investment, a full-blown feasibility study might
be required more than the pre-feasibility study. As compared to a pre-feasibility study, a feasibility study
is more comprehensive and detailed. it requires a more rigorous approach. A feasibility study is prepared
to convince bankers and investors to put money into the business opportunity. in writing the feasibility
study, the entrepreneur should take into consideration the following:

1. a more in-depth study of market potential to ensure that the business proposai will reach the
forecasted sales figures;

2. proof that the product or service being offered has the right design. attributes, speciiications, and
preferred features;

3. proof that the entrepreneur and his or her team have the necessary experience, skills, and capabilities
to maximize the venture’s chances of success;

4. legal Visibility;

5. more detailed costing on the different assets and more justification for the production and operating
expenses; and

6. more thorough‘analysis of the technology and its sustainability.

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