Lesson 2

THE SEARCH FOR A

SOUND BUSINESS IDEA
What is a Sound Business Idea
•A sound business idea may be defined as the
economic opportunity which is within the
reach of the entrepreneur, and which will
provide him with a desirable value.
•Any successful venture started with the
adaption of a sound business idea for
instance, before the advent of parcel
delivery services. People had to contend
with the very poor service rendered by the
post office. Complaints about delayed
delivery and lost parcels have become
common.
•The situation was ripe for a business
solution. Enterprising personalities
recognized the economic opportunity and
adapted a business idea to serve the
people better. Th success of DHL, FEDEX
and LBC proves that the business idea
they adapted is a sound one.
 Business idea differ in form.
Examples of this forms are the
following:
1. An old type of business can be professionalized.
Operation can be streamlined and better organized.

2. A standard product can be customized.

3. New technology can be adapted to manufacture an

old product.
4. Imported products can be replaced by local
products. Importing products can be too
cumbersome and difficult. Local production could be
a good business
idea.
5. Business operations can be internationalized. This
is the real challenged to the entrepreneur. The
rewards are great, however, when he is successful.
Procedure in Determining the Business Idea

•Business ideas may be generated by anyone connected

with the firm, but it is very important that the most
applicable idea to the firm’s objectives and resources is
chosen. As such, a procedure must be adapted. The steps in
the proposed procedure are as follows: (Figure 4)
1. preparation of the list of business ideas;

2. screening of the listed ideas; and

3. Final selection.
 
 Figure 4.Procedure in Determining the Best
Business Idea
 
•Methods of Searching for Ideas
- There are two general methods of generating business
ideas. They are as follows:
1. Unanticipated Means
When the entrepreneur finds business ideas without serious effort, the method
is referred to as unanticipated means. Included in this means are the following:

a. The Person’s Work

Employees who are in direct contact with customers are sometimes confronted
with demand for products or services that are not currently provided by the
company. To the enterprising employee, this may be interpreted as an opportunity
for entrepreneurship

b. The Person’s Hobbies

There are times that a person’s hobby turns out to be a business opportunity. A
hobby is a useful means of developing some skill which can be useful later when
the hobbyist decides to operate a business.
C. The Person’s Acquaintances
There are times when a person fails to notice the existence of a
business opportunity. Sometimes, it takes another person to make
him aware of a wisdom of starting a new business venture. This other
person could be a friend, a neighbor, or just anybody he meets once
in a while.

D. A Chance Event Encountered by the Person

There are times when a person encounters an event that will provide
him with a clue to a business venture.
 2. Deliberate Search
• A disadvantage of unanticipated means in idea
generation is the difficulty of ascertaining the exact
date when the ideas will come pouring in. To offset
this problem, a deliberate search for ideas is made.
This type of idea generation takes the form of the
following:
a.Using Search Questions
- Business ideas are expected to provide answers to some
needs. Answer can be obtained if the right questions are
asked. When the questions are used to draw out specific
answers, they are referred to as “search questions”.

Examples of search questions are:

 How this product be made differently?
 What will motivate the consumers to buy my product instead
of the competitor’s brand?
 
 Idea Prompting
 

•Encounters with someone else’s idea, or a

customer request, or some other event may
provide hints or cues leading to business ideas.
Customer request could also be analyzed to
give way to idea prompting.
 
•Screening Generated Ideas
The search for business idea calls for the preparation of a list so
the best can be selected. Before the selection is made, however,
the ideas listed must be screened first.

Business idea may be screened by the following criteria:

 1. Market Feasibility
A business idea must pass the test of market
feasibility. This means that there must some
positive indication about the following:

1.stable and sufficient demand; and

2.potential competitive strength of the firm.
 Stable and Sufficient
Demand
•A business idea will not last if there is
insufficient demand for whatever product or
service that is contemplated. Demand that
remains constant or show signs of growth
throughout long period indicates the probability
of market feasibility.
 Competitive Strength
• The business idea must be such that the venture can
effectively compete with current or potential competitors.
The competitive strength of the competitors must e
determine in terms of product offerings, price, distribution
methods, promotion methods, and others.

• The proposed business idea must be strong enough to

withstand the competition.
 Sources of Market Information
• Information required to determine the market
fit of the business idea may be derived from
the following:
 2. Technical Feasibility
•Business ideas oftentimes appear easy
to execute, but it is not really so when
converting them into real products or
services with the required quality or
quantity.
 3. Financing Feasibility
One of the factors necessary in determining whether a business idea
should be considered or not is financing. This means that there must be a
sufficient funds to finance operations.

The proposed owner of the venture must have sufficient capital or if insufficient, must be
good credit standing in the community. In general, the sources of financing, include the
following:

1. the proposed owner’s savings;

2. relatives and friends; and
3. financing institutions like banks.
• 
 Financial Feasibility
Profit is the result of the financial feasibility of the
business idea. Financial feasibility may determine
through an analysis of financial prospects of the
proposed business idea. This may be done in two
steps:
a. the preparation of projected financial statements, such as
 income statement;
 balance sheet statement;
 cash flow statement.
a. the preparation of projected financial
statements, such as
 income statement;
 balance sheet statement;
 cash flow statement

b. The determination and analysis of financial

ratios derived from the projected statements.
Projected Financial Statements
- The forecast of something which will happen in the future is referred to as the
projected financial statement.

The projected income statement is a financial record summarizing a firm’s planned

or expected financial performance in terms of revenues, expenses, and profits over
a given time period.

The projected balance sheet shows the planned or expected financial position of
the enterprise on a particular date.
The projected cash flow statement is one which show the planned or expected
cash sale and/or purchases.
 Final Selection
• The purpose of screening is to eliminate from
the list the generated business ideas that did not
pass the adapted criteria. After screening, the list
may be appear as any of the following: (1) status
quo; (2) a shorter list; (3) zero listing.
Status quo listing means all business ideas listed passed the
adapted criteria. A short list means some of idea generated
were eliminated. Zero listing means all business ideas
generated and listed were eliminated.
Final selection is applied to the status quo list, or the shorter
list, whichever is produced by the screening stage. A new set of
criteria is adapted so the best among those listed can be
determined.
An example is shown in Table 4 using the expected
value criteria. The three shortlisted proposal are
shown with assumed projected net income along
probabilities of occurrence. Projected net income is
multiplied by probability to get the expected values of
each proposal. It showed proposal A as the best
choice because of the expected value criteria. When
other criteria, however are used, the final outcome
may be altered (Table 4).
Business Projected Net Probability Expected Value
Income

Proposal A ₱ 5 million 60% ₱ 3 million

Proposal B 4 million 70% a.million
Proposal C 3 million 80% 2.4 million
•Organizational Culture and Creativity
Effective innovation assures the continuous survival and growth of the
enterprise, but innovation can only thrive in a creative organization
with a culture characterized by the following:

1. Encouragement of Creativity and Risk-taking

•Creativity refers to activities involved in finding solutions to problems that hinder the
achievement of the firm’s objectives. It is the proactive way of solving problems. In a
creative environment, solutions to problems are expected to come by more easily. If this is
true, innovation will thrive in an organization that encourages activity.
1. Rewards for Creativity
•When an activity is rewarded, there is an assurance that such
activity will continue existing, creativity is no exception.
 
2. Open Communication
•The free-flowing exchange of ideas between the members of an
organization is referred to as “open communication”.
Communication flows through the vertical and horizontal
relationships in the organization’s structure. An important
advantage of open communication is that problems are easily
directed to persons with the ability to offer solutions.
4. Allowance for Errors
• Innovation thrives in an environment that provides allowance e for errors. It is
not right to expect any activity to be devoid in imperfections. When a n error is
detected, a move should be made to correct it. When this is done, the creative
individual is not discouraged from pursuing his creative endeavors. In the end, it is
the company that benefits.

5. A Climate of Participation
• When somebody feels that the organization espouses participation, that person
will not hesitate to make a contribution to the creative efforts of the organization.
The firm will benefit from the good effects of employee participation. This is so
because there is a chance that more bright ideas will be generated if employees
feel free to participate in the creation of solutions to problems.
 
6. Structural Mechanisms that Aide Creativity
•The urge to create solutions to problem would be needed by innovative
person more easily if there are structural mechanism within the organization
to support the exercise. An example of mechanism is the unit that is
responsible for providing logistical support to activities that are creative in
nature. The person in charge of unit is usually qualified to manage such
activities as creativity.

7. Training in the Creative Process

•Creative pursuits are a bit complicated and it will help if those expected to
perform such functions are properly trained. Although some persons have
natural talent for generating business ideas those who are not considered as
such would benefit from acquiring the required skills through training.
 
8. Flexibility
•One of the distinct characteristics of the creative
organization is flexibility. The creative employee is
allowed to engage in creative in hours most
convenient to him and to the company. Whenever
possible, his working hours are adjusted to
accommodate the time he is more creative.
TOPIC 1:

STRATEGIC PLANNING
FOR SMALL BUSINESS
 What is Strategic Planning
•Strategic planning refers to the process of determining
the primary objectives of the entrepreneurship and
then adopting courses of action and allocating
resources to achieve those objectives. The definition
involves three distinct steps: (1) determination of
objectives, (2) adoption of course of action, and (3)
allocation of resources (Figure 5).
 Figure 5. Steps in Strategic Planning
The Determination of Objectives  
- The objectives of the firm are important components of the firm’s
strategic planning activities but before these are determined, the firm’s
mission statement must first be developed.

The Mission Statement. This term refers to the basic description of the
fundamental nature rationale, and direction of the firm. It consists of
three concerns:
1.how entrepreneur intends to use his
resources;
2.how the entrepreneur expects to relate to
the ever-changing environment; and
3.the kinds of values the entrepreneur
intends to offer to his customers.
Strategic Objectives. This term refers to specific performance
targets that the entrepreneurship hopes to accomplish. The
objectives define, in specific terms, how the firm’s mission will be
realized.

Adoption of Course of Action

After the primary (or strategic) objectives are established, the
entrepreneur must develop a strategy which is alternately called
course of action. A strategy indicates how the entrepreneur
attempt to accomplish the goals with the resources available.
 •In developing realistic strategies, the
entrepreneur can make use of the most
popular tools. These are the following:

1.SWOT analysis; and

2.forecast of future sales performance.
SWOT Analysis. It is an organized method of
assessing firm’s strength and weaknesses and the
opportunities and threats in the external environment
that confront or will confront the firm.
-The purpose of SWOT analysis is to match the firm’s
strengths and weaknesses with external opportunities
and threats to determine what strategy to adopt.
 The firm’s strength refers to as skill, a competence a
valuable organizational resource or competitive
capability, or an achievement that gives the firm a
market advantage.

Examples of strength are as follows:

1.a recording firm’s line-up of contract singers; and
2.the firm’s exclusive supply contract with a reliable
manufacturer.
 The firm’s weakness refers to something a company
lacks or does poorly (compared with others) or a
condition that puts it at a disadvantage.

Examples of weaknesses are as follows:

1.lack of qualified managers; and
2.poor design of the firm’s products.
 Opportunity refers to the chance offered by
external environment to
improved the firm’s situation significantly.

Examples of opportunities are the following:

1.For a small restaurant – the withdrawal from business of a
major competitor; and
2.For a tailor residing in provincial city – the absence of
reliable tailoring shop.
 Threats refer to a challenge post by an unfavorable trend or
development in the external environment that would lead to, in the
absence of purposeful entrepreneurial action, the erosion of the
entrepreneurship’s position.

Examples of threat are the following:

1.To the grocery store – the proposed opening of the mall in the vicinity;
and
2.To the local dealer of skin-whitening soap and cream – the proposed
dissolution of the company supplying the product.
 Forecast of Future Sales Performance.

- Forecast are supplementary tools for SWOT

analysis. It is an estimate or prediction of the future
sales or income of the firm. Sales forecast are often
determined through a combination of statistical
and intuitive forecast tempered by the experience
of entrepreneur.
 
Implementing Strategic Plans
Strategies are useless unless they are implemented. To
put strategies into action, the following activities are
required:

1.identifying the specific methods to be used; and

2.deploying the resources needed to implement the
intended plans.
Identifying Specific Methods
Strategies determine the best way to use resources.
There is a need, however, to develop tactics which
will be used to implement the strategies. Tactics are
more detailed and they are used to determine how
the specific task can best be accomplished on time
with available resources.
 If “establish branches in strategic locations” is a
stated strategy, the tactical plan to implement it may
appear as follows:

1.identify strategic locations;

2.determine the potentials of the identified strategic
locations; and
3.set a timetable for installing the branches.
Deploying the Resources
The specific aim of planning is to able to
deploy the right quality and quantity or
resources in the various activities required to
achieve the objectives. The resources would
be indicated in terms of human and
nonhuman elements.
Fundamental Strategies for Small
Business

There are certain basic strategies that

are necessary for the survival of small
business. These are the following:
 Flexibility Strategy
It is very difficult for small business to effect
changes in its environment because its resources
are usually limited. When hindrances such as
those prevent the small business from pursuing
its objectives, it must consider other means. This
is possible if the small business is flexible enough
 Strategy of Effectiveness as a Higher
Priority
Effectiveness is sometimes sacrificed for the sake of
efficiency.
At the early stages in the life of the small firm, when the
venture is still trying to gain a foothold in the market,
turning out the first products and closing the first sale
are of a more basic concern than making a profit.
 
 Strategy of Starting Simple
In starting a new business venture, the
entrepreneur often encounters problems related to
financing. As expected, however, funds are not
always sufficient. It may be wise for entrepreneur to
let his subordinates perform the more simple tasks
and subcontract those that will need those
elaborate employees skills and/or special
equipment.
 In choosing the subcontract option, the entrepreneur is
afforded with the following advantages:
1.he has more time to attend the more important tasks
like searching for new markets; and
2.he is relieved of burden of financing the subcontracted
task.
The general idea is for the small business venture to
start simple and absorb slowly the more complicated
task as it grows.
Strategy Concerns of Small Business
In determining what strategy to adapt, the
entrepreneur is confronted with two general
situations.

1.is he organizing a new business? or

2.is he currently running an old business?
 New Business
• This term refers to one that will be operated for
the first time by the business operator. If so, his
option is consist of the following:
1.acquiring an existing business;
2.organizing a new business; and
3.buying a franchise.
 Strategies for a Going Concern
-The strategic problems of small business are
not as intense as those of large business. even
if small business cannot compete head-on
with bis business, his size as a built-n
maneuverability which is a very important
competitive weapon.
Any or all of the following strategies are applicable to small business:

1.Segment markets – The small business operator will have to

identify the market segment with which it has an expertise,
then compete.
2.Efficient use of research and development – Since the small
business cannot fight the research and development efforts
of big companies, it must concentrate its R and D efforts to
lowering process cost or to bring new products to the
market.
3. Think small – The small business can still be
strong with being small. The emphasis must be on
profit rather than sales growth, and specialization
rather than diversification.
Why Small Business Operators Ignore Strategic Planning
- Important as it is, strategic planning in small business
management is often ignored. The reasons could be any
of the following:

1. Lack of expertise – Few small business operators

are trained in strategic planning.
2.Inability to get started – Even if small business
operators are convinced about the importance of
planning, they fail to get started for lack sufficient
exposure to planning activities.

3.Uncontrollable, often intangible variables – The

uncontrollable and often intangible variables complicate
planning which later on discourages the small business
operator from repeating the enterprise.
4. Resource poverty – Planning requires time, but the
small business operator oftentimes does not have it. This
is so because he must attend to the problems related to
lack of adequate capital, managerial experience, outside
advice, management specialist, and other key assets.
5. Focus on daily operations – the daily requirements of
small business usually keep the small business operator
so busy that he is left with no time for planning
6. Failure to realize the importance of
strategic planning
– The small business operator is exposed to
the environment of successful Filipino
businessmen who do not engage in strategic
planning. This gives sufficient reason to
disregard the benefits of strategic planning.
Topic 2:
FORMS OF SMALL BUSINESS
OWNERSHIP
 Sole Proprietorship
A sole proprietorship is a business owned
and operated by a single person. Most
business owners choose this form because
of certain advantages unique to sole
proprietorships.
Advantages of Sole
Proprietorships
1. Ease and Cost of Formation- Among
the three from of ownership the sole
proprietor ship is the easiest and least costly
to establish. The legal requisites for its legal
existence to commence are the following:

 the sole owner’s resolution to start operating; and

 getting the required permit and license.
 2. Secrecy
One way of effectively competing with others is for
the businessperson to determine the plans as well
as the strengths and weaknesses of his competitors.
The sole proprietor is ahead in this regard because
he has the advantage of keeping his intentions
secret. Thus, he can proceed with his activities in
secrecy.
3. Distribution and Used of Profits
- If his business made a large profits, the sole proprietor
is the sole beneficiary. He may use it in any way he
pleases and he is free to do so.

4. Control of the Business.

the power to control the business is vested solely to the
single proprietor. This authority is very important
especially under critical moments of competition.
5. Government Regulations
- The sole proprietorship is spared from various government
rules which cover partnerships ad corporations. Also, sole
proprietorships are required to submit fewer reports to the
government.
- Sole proprietorships are also spared from charter
restrictions on operations. For example, a sole proprietorship
manufacturing “pastillas de leche” can switch to he
manufacturing of kitchen utensils without violating any legal
restriction.
6. Taxation- The net income of the sole proprietorship is
regarded as the personal income of the sole owner and is taxed
accordingly. This is not so in the case of partnerships and
corporations wherein net incomes are taxed and will be subject to
taxation again when the owners individually receive their share of
the profits.
7. Closing the Business- Sole proprietorships can be
dissolved at will. Once the owner makes a decision to cease
operations, he does need to seek the approval of co-owners
or partners because he is the sole owner.
Disadvantages of Sole
Proprietorships
 
1. Possibility that the Owner Lacks Ability
and Experience-
The success of the sole proprietorships will depend
largely on the management and entrepreneurial skill
of the owner. The firm will need a generalist with
sufficient exposure to the various specialized functions
required, like marketing, production, finance,
accounting personnel, and research development.
2. Difficulty in Attracting and Keeping
Good Quality Employees-

The assurance that the firm will survive for a long

period is not a feature of sole proprietorships. As
a consequence, good employee will end to join a
more stable enterprise which is most often a
corporation.
3. Difficulty in Raising Additional Capital-
In a sole proprietorship, the amount of capital could be
raised will depend on the financial resources of the sole
owner.

4. Limited Life of the Firm .

The existence of the sole proprietorships depends on the

physical well-being of the owner. Ill health on the part of the
owner could cause bankruptcy. His death will mean
liquidation of the business
5. Unlimited Liability of the Proprietor
- Any liability incurred by the sole
proprietorship extends to the owner’s
personal assets. Unlimited liability is the
greatest disadvantage of sole
proprietorship.
 
 Partnership
A partnership is a legal association of
two or more persons as co-owners of an
unincorporated business.
Advantages of Partnership
1. Ease of Formation

The only requirement before the partnership starts

to operate is for the partners to agree on basic
aspects of the business like the nature of the
business, localization, capitalization, and the like. A
written agreement called partnership agreement
is drawn to formalize what has been agreed upon.
2. Pooling of Knowledge and Skills
- The combined skills of the partner provide the partnership
with a distinct advantage. His condition leads to
specialization which is a very important competitive tool in
business.
3. More Sources of Capital.
-The combined resources of the partners provide a bigger
source of funding. A combination of resource potentials of the
partners and a high credit rating is regarded as a formidable
financing capability of the firm.
4. Ability to Attract and Retain Employees-
- Partnerships ae able to offer partner status to valuable
employees. This advantage also minimize the potential
harm that may be done when a key employee moves
over to another firm.
5. Tax Advantage.
The income of the partnership is not taxed separately
from the partner’s incomes. Any profits derived by the
partners are taxed as their individual incomes. 
Disadvantages of Partnerships
1. Unlimited Liability.
Partnerships, like sole proprietorships, are saddled with the
disadvantage of unlimited liability. Although one or more
partners may opt to have limited liability, the remaining
partner carries the burden of unlimited liability.
2. Limited Life
When a partner dies or withdraws from the business, the
partnership is terminated. If there are five partners, the risk of
the termination of the life of the partnership is five times
greater than that of a sole proprietorship.
3. Potential Conflict Between Partners
-There are occasions when partners disagree on certain ways of operating
the business, and there are many potentials areas for disagreement. When
conflict between partners persist, operations are affected. The condition
may even lead to bankruptcy.

4. Difficulty in Dissolving the Business

- in a partnership dissolution. It may not be easy to divide whatever
assets are left for distribution to the partners as some of the assets
may be fixed or immovable. The more difficult the dissolution
becomes when certain debts are to be shared by the partners.
Types of Partnerships
1. General partnership – a general partnership is a
association of two or more persons, each with unlimited
liability, and who are actively involved in the business.

2. Limited partnership – is an arrangement which the

liability of one or more partners is limited to the amount of
assets they invested in the business.
Partnerships Agreement
-The disagreement between partners is always preset in a
[partnership. There are certain operational concerns that could
be the subject of disagreement. Disagreement oftentimes
negatively affects employee morale and work attitude.

The partnership agreement is a document designed to prevent

or at least minimize disagreements between partners. It usually
covers the following:
1.purpose of the business;
2.terms of the partnership;
3.goals of the partners and the partnership;
4.financial contribution made by each partner at the beginning
and during the lifetime of the business;
5.distribution of profits and losses;
6.withdrawal of contribute assets or capital by a partner;
7.management powers and work responsibilities of each partner;
8.provisions for admitting new partners;
9.provisions for expelling a partner;
10. provisions for continuing te business in the events
of partners death, illness, disability, or withdrawal;
11. provision of determining the value of a departing
partner’s interest and method of payment of that
interest;
12. methods of settling disputes through mediation or
arbitration; and
13. duration of the agreement and the terms of
dissolution of the business.
 Corporation
A corporation is a legally chartered enterprise with
most of the legal rights of aperson, including the
right to conduct a business, to own ad sell property,
to borrow money, and to sue and be sued.
Corporations are owned by stockholders. They are
issued certificates called stocks.
Advantages of
Corporation
1. Limited Liability
The liability of a stockholder is limited to his shareholdings.
The advantage of limited liability attracts all kinds of investors,
big or small.

2. Ease of Expansion
The authority granted to sell its own share of stock provides a
means to pool large amounts of funds. The price per share of
stocks can be made low enough to attract even the smallest
investor. The cited features make it easier for the corporation
to consider expanding operations.
3. Ease of Transferring Ownership.
If the stockholder losses interest in maintaining part
ownership of the corporation, he may disassociate himself
by selling and donating his shares to another person. This
feature allows the corporation to change ownership often as
required without actually dissolving it.
4. Relatively Long Life. Corporations are established to
have a life of up to 50years and is extendible for longer periods.
Because ownership is readily transferable, the death or
withdrawal of any or all stockholders do not terminate the
corporation.
5. Greater Ability to Hire Specialized Management
The expanded operations of corporations make it possible to
subdivided the overall task into smaller specialized positions. The
said requirement paves the way for hiring fully trained
management experts.
Disadvantages of Corporations
 
 1. More Expensive and
Complicated to Organized

-A corporation may start operations only after receiving

rom the Securities and Exchange Commission (SEC) a
certificate of incorporation. The SEC will only issue the
certificate of incorporation after reviewing the articles
of incorporation previously submitted by the initial set
of corporation officers.
 The articles of incorporation contains the
following:

1.name of the corporation;

2.specific purpose or purposes;
3.principal office of corporation;
4.term of existence of corporation;
5.names, nationalities and residences of incorporators;
6.number of directors;
7.amount of authorized capital stock; and
8.other matters.
 2. Double Taxation
The profits derived by stockholders are taxed tice by the
government: first, when the corporation realizes profits;
and second, when individual stockholders declare as part of
their personal income the dividends they receive from the
corporation.
3. More Extensive Government Restrictions and Reporting
Requirements.

•Corporations are subject to stringent

government restrictions and are required
to submit various reports on a periodic
basis.
 4. Employees Lack of Personal
Identification and Commitment.
Many stockholders are detached from the daily
operations of the corporation. The relationship
between the corporation and the employees are too
impersonal. Employees do not feel identified with
the corporation and therefore, lack commitment of
their work.
 Topic 3:

MANAGING SMALL
BUSINESS RISK
 Risk and the Small Business
Risk refers to the uncertainty about loss or injury. There
is always a chance that for some reason the assets of
the firm may just lose its value totally or partially, or an
injury is inflicted to an employee or customer, and the
SBO is held liable for some form of damage claims.
 Risks Confronting Small Business
The kinds of risk that are potentially damaging to the
firm are fire, burglary, accidents, infidelity of employees,
damage to other people’s property, among others. Such
misfortunes should provide the SBO with sufficient
reason to engage in risk management.
Major Types of Risks
 
1. Speculative Risk.
Engaging in entrepreneurship is an example of speculative
risk. The venture may be successful, or it may fail. Speculative
risk is dealt with the use of effective management.

2. Pure Risk.
This involves a threat of loss with no chance of profit. Pure
risks are better confronted with the application of risk
management techniques.
What is Risk Management
Risk management is an organized strategy for protecting and
conserving assets and people.it helps reduce financial losses
caused by destructive or damaging events.

To effectively implement, the following must be undertaken:

1.identify the pure risk confronting the firm;
2.estimate the probability of financial loss in various situations
that could go wrong; and
• decide to the most economical way to handle the possible losses
•Methods Dealing with the Risk

The four methods of dealing with

risk are the following:
1. Avoiding the Risk
Avoiding the risk is a method of dealing with risk wherein the
source of risk is eliminated. Risk avoidance is an effective way of
dealing with some risks, it is not so in many cases.

2. Reducing the Risk

Risk reduction refers to the steps undertaken to lessen the
likelihood of a loss. It is an alternative to risk avoidance.
Example of risk reduction measures are the following:
implementation of accident
prevention programs; and
using fire sprinkles to minimize
fire loss.
3. Assuming the Risk
Some company find that setting aside an amount periodically
to cover possible losses is a viable alternative. This practice of
building a contingency fund is called self-insurance.

4. Shifting Risks to an Insurance Company

This involves the process by which the firm, for a fee, agrees to
pay another firm a sum of money stated in a written contract
when a loss occurs. The insured party’s fee for the insurance
company for coverage against losses is called a premium.
 Types of Insurance Coverages
The insurance coverages that the small business may use to
protect interest consist of the following general
classifications: (1) life; and (2) non-life.
Life insurance policies are those that cover risks of losing
one’s life, disability, or sickness.
Non-life policies cover any following risk:

1.fire and allied risks;

2.motor car;
3.marine;
4.surety;
5.general liability;
6.miscellaneous risks
 Life Insurance

- People working on a small firm will have to worry

about losses due to sickness, injury, and death. This is
true with the employees, the managers, and the
owner/s of the firm. The financial strain may be too
much for the firm to carry if losses happen as a result of
not having such risks covered by life insurance.
 Types of Life Insurance Policies

Life policies have evolved into several

variations. They may be classified according
to the type of coverage and according to the
type of benefits and premium payments
period.
 Types of Life Insurance According to
Coverage

1.Life policies – cover death due any cause with some

exceptions like suicide;
2.Accident policies – cover death due to accidents; and
3.Health policies – are policies that cover medical
expenses related to sickness and preventive health check-ups.
 Types of Life Insurance Policies
According to Other Factor

1.term life insurance;

2.whole life insurance;
3.endowment life insurance; and
4.other types.
 Term life insurance
is a kind of policy providing protection for specified
period like one or two years. Term insurance provide
pure insurance cover, i.e., no other benefits are
included like accumulation of savings. This limited
coverage lowers premium and makes term insurance
more affordable.
whole life insurance policy
provides the benefits of a stipulated sum when the assured
dies. Premiums are paid each year for as long as the assured
lives. The amount of premium depends primarily on the age
of the assured at that time the insurance is purchased.

Whole life policies, also known as straight or ordinary life

policies are further classified into the following:
a. limited payment policy
- requires that premium be paid for stipulated period, usually
20 to 30 years, or until a specified age such as 60 or 65 is
reached. The payments of premium stops at the end of the
stipulated period or at the time of death of the assured,
whichever comes first. Coverage extends beyond the
stipulated payment period until the assured dies and the face
amount of policy is paid.
b. single premium payment policy
is a type of contract where only one premium payment is
made.

c. Modified life insurance contracts

are those in which the premiums are arranged so that they
are smaller than average for the first five or 10 years of a
policy and slightly larger than average for the remaining years
of the contract
 d. A variable life policy has a cash value that
fluctuates according to the yields earned by a separate fund.
A minimum death benefit is guaranteed.

e. An adjustable life policy is one whose average

can be increased or decreased by changing either the
premium payment or the period of coverage.
f. A universal life policy combines term insurance
with investment. Premiums are paid at anytime in virtually any
amount with the effect that the amount of insurances can be
changed easily.
endowment life policy
is one that build up a large cash value within
a stated period of years. The face amount of
the policy is payable in the event of death
before the policy expires.
• Other types of policies are group life and
credit life.
• Group life insurance are term life insurance
issued for a maser contracts for members of a
group.
• Credit life insurance is a contract arranged in an
amount needed to pay a debt in the event of
death of the borrower.
•Business Uses of Life Insurance
Business firms purchase life policies for all or any of the following
reasons:

1. For use as a fringe benefits for

employees.
When purchased as a benefit for employees, group life insurance helps
attract and maintain employees.
2. To protect the firm against the financial
problem caused by the loss of a key person.

The purchased of life insurance offers protection against such

type of losses. The beneficiary of the policy is the firm and the
key employee is the subject of insurance.

3. To aid in transferring ownership.

Life insurance proceeds also make the transfer of ownership
interest easier because of the availability of cash at the time of
death. This may help the family keep control of the business.
Non- Life Insurance
Small firm also face risks regarding the following:

1.losses of property owned by the firm due to fire, robbery,

theft, and the like; and
2.losses due to liability claims of third parties.
 The following types of non-life insurance are as
follows:

a. Fire Insurance
The risks of losses due to fire may be covered by life insurance. The subject of fire
insurance may include properties owned by the firm such as:

 buildings;
 machineries;
 furniture;
 stocks of merchandise;
 raw materials; and
 work-in-process.
A fire insurance policy may also provide
coverage on allied risk such as:

 earthquake fire;
 earthquake shock;
 windstorm, typhoons and floods;
 riot and strike damage and riot fire damage;
and
 explosion.
b. Motor Car Insurance
If the fi rm owns motor cars like automobiles and delivery vans, losses may occur due to the following:

 damage on the motor car itself;

 damage of properties of third parties; and
 physical injuries of third parties.
The following coverages can be purchased
from insurance companies:

 own damage and theft insurance to cover losses on

the vehicle itself;
 third party property damages;
 third party liability – body injury to third parties; and
 passenger liability insurance.
c. Marine Insurance
Someti mes, deliveries involve transporti ng overseas or over long inland routes which increases the risk of loss or damage to the products.
 Marine insurance may be classified as
follows:

1. Ocean marine insurance – covers primarily

sea perils of ships and cargoes,
which can be protected from the warehouse of the seller to
the warehouse of the buyer.
2. Inland marine insurance – covers primarily the land
or over the land
transportation perils of property shipped by railroads,
motortrucks, or other means of transport. 
 d. General Liability Insurance

There are times when business firms become the subject of

liability suits arising from loss or damage caused by any of
the various aspects of business operations. The risks of
liability suits are always present in all firms including small
business. to protect himself, the SBO should consider
buying liability coverage for his specific need.
Business liability forms of insurance consist of the
following:

 Owner’s Landlord’s, and Tenant’s Liability Policy;

 Manufacture’s and Contractor’s Form;
 Comprehensive General Liability Form;
 Owner’s and Contactor’s protective Liability Insurance;
 Products and Completed Operations Liability Form;
 Products Recall Insurance;
 Personal Injury Policy;
 Storekeeper Liability Policy; and
 Dramshop Liability Policy.
 e. Bonds
Surety bonds guaranteed the performance of certain obligations.
Bonds are useful to small firms concerning the following risks:

 employee dishonesty;
 supplier’s failure to honor a supply contract; and
 contractor’s failure to complete a construction contract with
the small business.
 Fidelity Bond
This protects the SBO against losses suffered as the
result of dishonesty on the part of employees. It is an
especially important kind of insurance to carry if the
SBO has delegated authority over the handling of large
sums of money, the control of large blocks of
merchandise or other company assets, or the
responsibility of receiving and shipping merchandise.
 Supply Contract Bond
This guaranteed the faithful performance of
contracts for furnishing supplies and materials at
an agreed rice, the SBO may require this bond
from the supplier if the materials required are
critical to the operations of the firm.
 Performance Bond
This guarantees performance and may be
required by a small firm from a contractor
who agreed to construct a building or a
facility for the firm.
 Miscellaneous Insurance

Apart from those mentioned above, the small firm may

incur losses connected with any of the following:

 crime; ●boiler and machinery; and

 glass; ●credit.
Crime Insurance
The insurance protects SBOs against losses due to its being
wrongfully taken by someone else.

Glass Insurance
The large amount of cash outlay invested in glass issued for
light, displays, and ornamentation exposes the SBO to
losses.
Boiler and Machinery Insurance
This insurance provides protection against loss from the
accidental bursting or breaking of a great variety of
apparatus.

Credit Insurance
This insurance protects small firm against loss that may
result from the insolvency of persons to whom the SBO
may extend credit within the term of insurance.
THANK YOU!!!