CHAPTER 13 Managing Small Business Finance

Two of the most important concerns of the small business owner:

 Sources
 applications of funds
Errors in decision-making regarding these two concerns could put in jeopardy the existence and survival of the firm.

When business operations are in full swing, the firm cannot afford to lose the opportunity to make profits because of the
shortage of funds to sustain production efforts. Inversely, when funds or a part of it remains unused, the profitability
stature of the firm is diminished. In any case, there is a need to manage properly the finances
Financial Planning for Small Business
To increase the chances of reaping the financial rewards expected from the business, financial planning becomes a
requisite. Although the requirements for financial planning in small business are not as elaborate as those for big business,
a semblance of such activity must be undertaken.
Financial planning
 involves an analysis of possible future events and how these events might affect the firm.
 It is an activity that involves analyzing the financial flows of the firm as a whole, forecasting the consequences of
various investments, financing, profit decisions, and weighing the effects of various alternatives,
For the small firm, financial planning will mean knowing the profit objectives of the firm, identifying the sources and
uses of funds, and making decisions on various financing alternatives. The preparation of a budget will satisfy most of
the requirements for financial planning in small business.
Budget
 is an estimate of the income and expenditures for a future period of time, usually one year.
 It must be made with the objective of satisfying the target market, employees, and management goals.

Steps in Budget Preparation

1. Build the foundation for the budget.
a. Project the best estimate of the volume of products or services (or both) expected and the revenue that will be
received.
b. Divide the estimate into monthly figures.
c. Obtain an estimate of monthly cost of sales or rentals, by product or service.
2. Determine anticipated fixed costs.
3. Establish projected non-operating income and costs.

Types of Budget Applicable to Small Business

1. Cash budgets - for all types of firms;
2. Production budgets - for small manufacturing firms; and
3. Sales budgets - for small service firms.

1. The Cash Budget

A cash budget is a forecast of future cash receipts and cash disbursements over various intervals of time. It is also
alternately referred to as cash receipts and cash disbursements statement.
The cash budget contains the following main section:
 1. total cash available;
2. cash disbursements;
3. cash excess or deficiency;
4. financing; and
5. cash balance.
Cash available section - identifies the beginning cash balance and the expected cash receipts.
Cash disbursement section - lists all cash outlays for the period except for interest payments on short-term loans. The
cash excess or deficiency is shown by subtracting cash available from cash needs.
In event of a deficiency, financing section - will show the planned borrowings and repayments, including interests.
cash balance - is a result of cash available plus borrowings less cash disbursements

2. The Production Budget:

The production budget is an estimate of the quality of goods to be manufactured mine the budget period. It
describes how many units must be produced in order to meet sales needs and satisfy ending inventory
requirements.
The production budget is the primary basis for planning the following:
1. raw material requirements;
2. labor needs;
3. capital additions;
4. factory cash requirement; and
5. factory costs.

3. The Merchandise Purchases Budget

In a retailing firm, the merchandise purchases budget is the equivalent of the manufacturing firm's production
budget. It identifies the quality of each item that must be purchased for resale, the unit cost of the items, and the
total purchase cost.
The merchandise purchases budget usually includes the following:
1. planning of sales;
2. stocks;
3. reductions;
4. markdowns;
5. employee discounts;
6. stock shortages;
7. purchases;
8. and gross margin

4. The Sales Budget

The sales budget that is applicable to service firms identifies each service and quality that will be sold. The
services produced are identical to services sold.
Financial health of the firm is the primary concern of the small business operator. The firm can achieve its objective if it
can continue to supply with the necessary funds its current and proposed activities.
Financial analysis refers to the process of interpreting the past, present, and future financial condition of a firm.
In making a financial analysis of a small business, the following are basic requirements:
 1. financial statements;
2. break-even analysis; and
3. financial ratio analysis.
1. Financial Statements
There are three major classes of financial statements that provide major financial data about a small business. They are the
following:
a) balance sheet;
b) income statement; and
c) statement of changes in financial position.
Balance Sheet As shown in Chapter 7 the balance sheet gives a man a business at any given point, showing its assets,
liabilities, and net worth.
The balance sheet shows at a glance the financial health of a firm. The information becomes more relevant if
compared with the company's balance sheets of previous years.
Assets and liabilities that are indicated in the balance sheet may be categorized as either current or non-current.
Current assets include cash and all other assets a be turned into cash within a year, such as receivables or
inventory. Current and are those due within a year.
Non-current assets, such as plant and equipment, as assets that generally have a life of more than one year; while
non-current liabilities are debts with maturities exceeding one year.
Net worth or equity is the residual amount left after deducting total liabilities from total assets.
Income Statement shows the revenue and other income, expenses, and net income for the small business
covering a period of time, usually one year.
Four different profit measures are found in most income statements. They are the following:
1. gross profit (sales minus cost of goods sold);
2. operating profit (gross profit minus operating expenses);
3. profit before tax (operating profit plus other income, such as interest earned from investing idle cash,
minus interest expenses on borrowed funds); and
4. net profit (profit before tax minus the tax liability).
The statement of changes in financial position is designed to explain the financial changes that occur in a company from
one accounting period to the next. The statement reflects the firm's ability to meet its operating expenses and to purchase
additional merchandise for resale. Highlighted in this are the increases and decreases in working capital and this shows
whether the firm is becoming more solvent or less solvent
2. Break-even Analysis
is a very useful tool in managing the finances of a small firm. to determine at what point in a business activity the total
revenue equals expenses. Above the break – event point, the business will be making a profit. Below it, the firm will incur
a loss.
Break -even analysis is used to determine the following information which are useful to SBO:
1. sales in pesos for a period, resulting on a zero net income;
2. sales in pesos for a period, resulting in a reasonably calculated and net income; and
3. sales in pesos for a period resulting in maximum net income for capacity available.
Calculating the Break – even Point
1. calculating the break – even point in units
BEPU = F/P – V
2. calculating break – even point in pesos
BEPP = F/1 – V/P
Where P = price per unit
 F = fixed per unit
V = variable cost per unit
3.Financial Ratio Analysis
Financial ratios are useful tools used by SBOs to determine the financial of the firm. They are used to spot trends (good
or bad), get a better way cash, and forecast the effect of operations on profitability. Information provided in the balance
sheet and the income statement can be used to create certain ratios that provide useful insight into the business. Through
the use of financial ratios, SBOs can gauge the financial strengths and weaknesses of their business operation and which
can be used as basis for determining which course of action to take a problem. Financial ratios also indicate a firm's
competitive strength similar businesses in that industry.
Financial ratios may be classified as follows:
1. liquidity ratios;
2. activity ratios;
3. profitability ratios; and
4. leverage ratios.
Liquidity ratios reveal the firm's ability to pay debts as they become due. The most commonly used liquidity
ratios are:
(1) current ratio and
(2) quick ratio.
Current ratio is used to measure the ability of the firm to meet current debt. It is calculated by dividing
current assets with current liabilities. The current ratio should be 2:1.
Current ratio = current assets/current liabilities
Quick ratio is also used to measure a firm's ability to pay its debts on time. It is, however, more stringent
than current ratio because inventory is excluded from the calculation.
Quick ratio = current assets less inventory/current liabilities

Activity ratios. Also referred to as turnover ratios, activity ratios provide glimpse of how effectively the firm is
using its assets. The following ratios are useful in determining activity:
1. accounts receivable turnover
2. inventory turnover.
Accounts receivable turnover is the type of activity ratio that relates accounts receivable to sales. It
provides an understanding of the appropriate level of accounts receivable. This shows how many times
the accounts receivable is paid off during the latest accounting period. To compute for the accounts
receivable turnover, the following formula is used:
Accounts receivable turnover = total yearly sales/ outstanding accounts receivable at year end
Average collection period must also be calculated along with the accounts receivable turnover to
determine how long the accounts receivables are collected. The formula for the average collection period
is:
Average collection period = accounts receivable/ daily sales
The average collection period of the firm will be more meaningful when compared with the
following:
1. the previous year's collection period of the firm, and
2. the average collection period of the industry where the small firm belongs.
inventory turnover ratio measures the number of times inventory turns over during the year. A high
inventory turnover may mean good liquidity for the firm, or of excellent merchandising. A low inventory
turnover may mean the company is overstocking, or has trouble selling its products. The method of
calculating inventory turnover is as follows:
 Inventory turnover = cost of goods sold/ inventory beginning +
inventory end/2
Profitable ratio. This term refers to a class of financial ratios that measure the overall financial performance of a
firm. The ratios show the ability of the firm to generate revenues in excess of operating costs and other expenses.
These ratios are ted by comparing the earnings of the firm with total sales or investments.
The most common profitability ratios are:
1. net profit margin on sales; and
2. rate of return on equity.
Net profit margin ratio may be calculated by using the formula as follows:
Net profit margin = net profits / sales
This ratio will show how much after-tax profits are generated by each peso of sales.
rate of return on equity measures the rate of return on the book value.
This ratio is expected to give great satisfaction
Leverage Ratios. These ratios measure the extent to which a firm relies on debt financing. They describe the
financing strategy of the firm and are used to evaluate the risk accruing to the creditors, or the risk that the firm
faces in its financing operations.

The two most commonly used leverage ratios are:

1. debt ratio;
The debt ratio compares the total liabilities of the firm to its total assets. It may be calculated by
using the formula as follows:
Debt ratio = total liabilities / total assets
2. debt-equity ratio.
The debt-equity ratio compares debt to equity. This ratio may be obtained by liabilities with
equity. Thus, the debt-equity ratio would appear as follows:
Debt-equity ratio = liabilities/equity
Sources of Financing
In managing small business finance, one of the major concerns of the SBO is managing the firm's sources of financing.
The SBOs responsibility is to choose and tap the best source of funds that the company can use to finance its operations.
Sources of funds fall into two major categories:
1. debt capital; and
2. equity capital.
Debt Capital
Debi capital represents funds obtained through borrowing. Debt financing may be classified according to length
of maturity which are as follows:
1. short-term capital;
2. intermediate financing; and
3. long-term financing.
Short-term Capital: Short-term borrowings need to be repaid within one year. The small
business has two alternative sources of short-term financing: (1) trade credit and (2) banks.
Trade credit refers to products or services provided by suppliers to small business on deferred
payment, usually short-term. This arrangement allows the small business to keep a bigger
inventory of stock and the use of much needed equipment with less pressure on his working
capital.Another source of short-term capital is banks. A number of banks provide credit line
facilities to small business. analysis
 Intermediate and Long-term Financing. The high rates of failure of small businesses have
caused much worry to bankers and they shy away from lending to small firms.To fill the
financing gap, however, the government and some private sector institutions made available
financing facilities for facilities for the SBOs including intermediate and long-term financing.
Equity Capital
Financing fund requirements through equity consists of the following options:
1. additional capital infusion from the sole proprietor;
2. additional capital generated through a partnership agreement; and
3. sale of stock through a corporate form of business.
Sole proprietors of a small firm may have reserves of capital which may be infused into his business, or he may reinvest
his earnings. If these options are not available, then he may arrange for a partnership agreement with interested parties
who are capable of providing additional capital.
If the small firm is already a corporation, selling more stocks to the public will definitely increase the firm's capital.
CHAPTER 14 Managing Small Business Risk
Risks - are man's ever present concern in any of his undertakings including the operation of a small business. Even if the
objective of the SBO is to make profits, there is always a chance for a loss to occur.
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. In any case, these are examples of instances where the SBO must be well prepared to
deal with.
When risks such as those are not managed properly, they could cause difficulties to the firm and which could even lead to
bankruptcy.
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. There were instances when some firms were not able to recover when damages had
been done by unmanaged risks. Such misfortunes should provide the SBO with sufficient reason to engage in risk
management.
Major Types of Risks
Risks may be classified into two major types, namely:
1. speculative risk; and
2. pure risk
Speculative Risk. This involves a chance of either profit or loss. Engaging in entrepreneurship is an example of
speculative risk. The venture may be successful, or it may fail. If the firm is successful and a branch is opened in
another town, operating that branch is a kind of speculative risk. Speculative risk is dealt with the use of effective
management.
Pure Risk. This involves a threat of loss with no chance of profit. Examples are the risk of fire, robbery, and
injuries to third parties. If any of these events occur, the firm loses money. If they do not occur, the firm gains
nothing. 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 risks confronting the firm;
2. estimate the probability of financial loss in various situations that could go wrong;
3. decide on the most economical way to handle the possible losses.
Methods of Dealing with Risk
In deciding the most economical way of handling possible losses, the SBO must be familiar with the different methods of
dealing with 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. For instance, if
someone wants to avoid the risk of fire, renting a building; (instead of owning it) avoids the risk. However, there
are times when no buildings are available for rent, and even if there are, they are in the wrong place.
Moreover, even if the person is able to avoid owning the building, he may not avoid owning machinery and
equipment which may be lost to fire.
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.
Examples of risk reduction measures are the following:
1. installation of nonskid stairways to minimize falls;
 2. implementation of accident prevention programs;
3. requiring truck drivers to wear seatbelts to minimize injuries from accidents;
4. using fire sprinkles to minimize fire loss; and 5. requiring machine operators to wear safety glasses, gloves, and
safety shoes to reduce the risk of injury.
3. Assuming the Risk
Some companies 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. In this manner, the company assures the risk
and gets ready for whatever loss comes from the risks covered.
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 to the insurance company for coverage against losses
is called a premium.
This method is most applicable to large risks that the firm cannot afford to ass line.
Life Insurance
People working in 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. If the sole owner of a small firm dies, for instance,
the surviving heirs may not be able to operate the firm effectively if they still have to worry about expenses related to the
death of the owner. As such, it becomes mandatory that such risks are covered by life insurance.
Types of Life Insurance Policies
Types of Life Insurance According to Coverage.
1. Life policies – cover death due to any cause with some exceptions like suicide;
2. Accident policies - cover death due to accidents. Sometimes, murder and assault are also covered; 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 Factors.
1. term life insurance;
2. whole life insurance;
3. endowment life insurance; and
4. other types.
Term life insurance
Term insurance provides 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. If a small firm is cash
strapped, term insurance is a good alternative.
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
the time the insurance is purchased.
Whole life policies, unlike term policies, have cash value. This value refers to the amount received by the assured
if he gives up the insurance. The value increases over the years until the policy is surrendered.
Whole life policies, also known as straight or ordinary life policies are further
1. limited payment policies;
2. single premium policies;
3. modified life policies;
4 variable life policies;
5. adjustable life policies; and
6. universal life policies
 Limited payment policy requires that premium be paid for a stipulated period, usually 20 to 30
years, or until a specified age such as 60 or 65 is reached. The payments of premiums stop 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 the policy is paid. payment is made.
Single premium payment policy is a type of contract where only one premium
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 the policy and slightly larger than average for
the remaining years of the contract. This arrangement fits the needs and the ability to pay of a
young married person with a limited income.
Variable life policy has a cash value that fluctuates according to the yields earned by a separate
fund. A minimum death benefit is guaranteed.
Adjustable life policy is one whose coverage can be increased or decreased by changing either
the premium payment or the period of coverage.
Universal life policy combines term insurance with investment. Premiums are paid at anytime in
virtually any amount with the effect that the amount of insurance can be changed easily. The
interest earned on short-term investment poured into the plan increases the cash value of the
policy.
Endowment life policy is one that builds 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 life policies are group life and credit life.
Group life insurance are term life insurance issued on a master contract 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 any or all of the following reasons:
1. for use as a fringe benefit for employees;
2. to protect the firm against the financial problems caused by the loss of a keyperson; and
3. to aid in transferring ownership rights.
When purchased as a benefit for employees, group life insurance helps attract and maintain employees.
When a key employee dies, financial losses may come as a result. The purchase 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.
Life insurance proceeds also make the transfer of ownership interest easier because of the availability of cash at the time
of death. This may also help the family keep control of the business.
Non-life Insurance
Small firms also face risks regarding the following:
1. losses on properties owned by the firm due to fire, robbery, theft, and the like; and
2. losses due to ability claims of third parties.
The firm may be protected against such risks through the purchase of non-life insurance appropriate to each specific
requirement.
The following types of non-life insurance may be bought from reputable companies:
1. fire insurance;
2. motor car insurance;
3. marine insurance;
4. general liability insurance;
5. bonds; and
6. miscellaneous insurance.
Fire Insurance
The risks of losses due to fire may be covered by fire insurance. The subject of fire insurance may include
properties owned by the firm such as:
1. buildings;
2. machinery;
3. furniture,
4. stocks of merchandise;
5. raw materials; and
6. work-in-process.
A fire insurance policy may also provide coverage on allied risks such as:
1. earthquake fire;
2. earthquake shock;
3. windstorm, typhoons, and flood;
4. riot and strike damage and riot fire damage; and
5. explosion.
Motor Car Insurance
If the firm owns motor cars like automobiles and delivery vans, losses may occur due to the following:
1. damage on the motor car itself;
2. damage to properties of third parties; and
3. physical injuries to third parties.
The following coverages can be purchased from insurance companies:
1. own damage and theft insurance to cover losses on the vehicle itself;
2. third party property damages;
3. third party liability - body injury to third parties; and
4. passenger liability insurance.
Marine Insurance
This type of insurance is a form of property insurance which indemnifies the insured for loss or damage to
property, and a form of liability insurance protecting the insured against the consequences of legal liability for
loss or damage to property or for personal injury, illness, or death of another person.
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 (but sometimes water)
transportation perils of property shipped by railroads, motor trucks, and other means of transport.
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. Examples of these are several incidents of death and illness
caused by food poisoning. If these happen to customers of food shops, the owners of these establishments could
be sued. 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:
 1. Owner's, Landlord's, and Tenant's Liability Policy:
2. Manufacturer's and Contractor's Form;
3. Comprehensive General Liability Form;
4. Contractual Liability Form;
5. Owner's and Contractor's Protective Liability Insurance; 6. Products and Completed Operations
Liability Form;
7. Products Recall Insurance;
8. Personal Injury Liability Policy;
9. Storekeeper Liability Policy; and
10. Dramshop Liability Policy.
Bonds
Surety bonds guarantee the performance of certain obligations. Bonds are useful to small firms concerning the following
risks:
1. employee dishonesty;
2. supplier's failure to honor a supply contract; and
3. contractor's failure to complete a construction contract with the small business firm.
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 for receiving and
shipping merchandise.
Supply Contract Bond. This guarantees the faithful performance of contracts for furnishing supplies and materials at an
agreed price, the SBO may require this bond from a 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:
1. crime;
2. glass;
3. boiler and machinery; and
4. credit Special kinds of insurance may be purchased to cover losses on such risks.
Crime Insurance. This insurance protects SBOs against losses due to its being wrongfully taken by someone else.
Crime coverage includes possible losses from burglars, robbery, larceny, theft, forgery, embezzlement, and other
dishonest acts.
Glass Insurance. The large amounts of cash outlay invested in glass used for light, displays, and ornamentation
exposes the SBO to losses. Glass insurance covers such 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 the small firm against loss that may result from the insolvency of persons
to whom the SBO may extend credit within the term of insurance.
CHAPTER 15 Magna Carta for Micro, Small, and Medium Enterprises

Entrepreneurships thrive in environments conducive to survival and growth. They have better chances of success if the
government provides them with support in terms of appropriate legislation.
To fulfill its objective of developing the economy, the Philippine government recognizes the importance of
entrepreneurship. As such, laws were enacted and guidelines were also formulated to promote, support, strengthen, and
encourage the growth of micro, small, and medium enterprises.
The laws and guidelines consist of the following:
1. Magna Carta for Micro, Small and Medium Enterprises (Republic Act No. 6977, as amended by R.A. 8289
and further amended by R.A. 9501).
2. Republic Act No. 9501: An Act to Promote Entrepreneurship by Strengthening Development and Assistance
Programs to Micro, Small and Medium Scale Enterprises, Amending for the Purpose Republic Act No. 6977, as
Amended, Othewise Known as the "Magna Carta for Small Enterprises” and for the Other Purposes.
3. DTI Department Administrative Order (DAO) No. 9, Series of 2008: Rules and Regulations to Implement
Republic Act No. 6977, as amended by Republic Act No. 8289, and further amended by Republic Act No. 9501,
Otherwise Known as the Amended “Magna Carta for Micro, Small and Medium Enterprises."
4. Bangko Sentral ng Pilipinas Circular No. 625, Series of 2008: Revised Rules and Regulations Governing the
Mandatory Allocation of Credit Resources to MSMEs.
5. Republic Act No. 8289: An Act to Strengthen the Promotion and Development of, and Assistance to Small and
Medium Scale Enterprises, Amending for that Purpose Republic Act No. 6977, Otherwise Known as the "Magna
Carta for Small Enterprises” and for Other Purposes.
5. Executive Order No. 793: Making "Go Negosyo, Sagot sa Kahirapan and Entrepreneurship” As Banner
Programs of the Administration and Expanding the Composition of the Small and Medium Enterprises Council
into the Micro, Small and Medium Enterprises Development Council. Features of the Magna Carta for
MSMEs

The Magna Carta for MSMEs consist of Republic Act 6977, amended by R.A. 8289, and further amended by R.A. 9501.
These important pieces of legislation are directed towards the full development of entrepreneurship in the Philippines.
The policy of the State are specifically indicated in the Section Two of the Magna Carta. They are as follows:

a. intensifying and expanding programs for training in entrepreneurship and for skills development for labor;
b. Facilitating their access to sources of funds;
c. Assuring to them access to a fair share of government contracts and related incentives and preferences;
d. Complementing and supplementing financing programs for MSMEs and doing away with stringent and
burdensome collateral requirements that small entrepreneurship find extreme difficulty complying with;
e. Instituting safeguards for the protection and stability of the credit delivery system;
f. Raising government efficiency and effectiveness in providing assistance to MSMEs throughout the country, at the
least cost;
g. Promoting linkages between large and small enterprises, and by encouraging the establishment of common
service facilities;
h. Making the private sector a partner in the task of building up MSMEs through the promotion and participation of
private voluntary organizations, viable industry association, and cooperatives; and
i. Assuring a balanced and sustainable development through the establishment of a feedback and evaluation
mechanism that will monitor the economic contributions as well as bottlenecks and environment effects of the
development of MSMEs.
The Magna Carta contain features indicated in sections as follows:
1. Definition of micro, small and medium enterprises (Sec. 3);
2. Requirements for government assistance (Sec. 4);
3. Guiding principles that the State will observe in the development of MSMEs (Sec. 5);
4. The Department of Trade and Industry's responsibility in preparing a 6-year development plan for MSMEs
(Sec. 6);
5. The creation of the MSME Development Council (Sec. 7);
6. The composition of the MSME Development Council (Sec. 7-A);
7. Powers and functions of the MSME Development Council (Sec. 7-B);
8. Designation of the Bureau of MSME Development as Council Secretariat (Sec, 8);
9. Annual appropriation of the Council (Sec. 9);
10. Continuing review of government programs for MSMEs (Sec. 10);
11. Creation of the Small Business Guarantee and Finance Corporation (SB Corp.) (Sec. 11);
12. Composition and powers of the board of directors of SB Corp. (Sec. 11-A);
13. Corporate structure and powers of the SB Corp. (Sec 11-B);
14. Capitalization, and funding of the SB Corp. (Sec. 12);
15. Bangko Sentral supervises SB Corp. (Sec. 13);
16. Venture Capital and micro finance trust fund (Sec. 14); 17. Mandatory allocation of credit resources of all
lending institutions to MSMEs (Sec. 15);
18. MSME Work (Sec. 16);
19. Presidential awards for outstanding MSMEs (Sec. 17);
20. Creation of the Congressional; Oversight Committee on MSME development (Sec. 18);
21. Penal clause (Sec. 19); and
22. Implementing Rules and Regulations (Sec. 20).