Barringer_pebp2e_01 (1)

Chapter 1

Why Plan?

Preparing Effective Business Plans Dr. Bruce Barringer Oklahoma State University Copyright © 2015 Pearson Education, Inc.

1-1

Chapter Learning Objectives 1.

Identify Reasons for Writing a Business Plan

2.

Discover Who Reads the Business Plan and What They are Looking For

3.

Review Guidelines for Writing a Business Plan

4.

Discuss Types of Business

5.

Determine Plan for the Text Book Copyright © 2015 Pearson Education, Inc.

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Introduction  Increased

Interest in Study of Entrepreneurship

 2/3

of Colleges and Universities Offer Entrepreneurship Coursework

 320

of 100,000 Adults Created Businesses in 2011

◦ Approximately 543,000 Businesses Each Month  54%

of Millennials (Age 18-34) Either Want to, or Have Already Created Businesses ◦ 63% African Americans ◦ 64% Latinos

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The Business Plan  Written

Document That Carefully Explains Every Aspect of a New Business Venture

 Dual

Purpose Document:

◦ Inside the Firm - Used to Develop a Road Map to Execute Strategies and Plans ◦ Outside the Firm - Plan Introduces Potential Investors and Other Stakeholders to the Business Opportunity Firm is Pursuing  Last

Step in Comprehensive Process of Screening a Business Concept Copyright © 2015 Pearson Education, Inc.

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Reasons for Writing a Business Plan Internal:

Forces Business Founders to Think Through Every Aspect of Their New Venture

External:

◦ Sells the Merits of New Venture to Outsiders    

Prospective Investors Business Accelerators and/or Incubators Suppliers Potential Partners

◦ Increases Credibility of New Venture  Win a Business Plan Competition

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Who Reads the Business Plan and What They are Looking For? Employees Company Vision Future Plans Develop Strong Team Reveal Potential Problems

External Stakeholders Realistic Plainly Explains Business Business is Viable Business Has Impressive Potential

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Guidelines for Writing a Business Plan  Structure

and Style:

◦ Conventional Format; 25 to 35 Pages Long  Content:

◦ Follow a Standard Format (Table 1-1) ◦ Review for Completeness, Spelling, and Grammar ◦ Avoid Red Flags (Table 1-2)  Plan

vs. Personal Goals and Aspirations:

◦ Be Careful What You Wish For  Elements

of Plan May Change Over Time:

◦ Ask Potential Customers for Feedback ◦ Corridor Principle – Which Pathway to Choose? ◦ Write Deliberate But Act Emergent Copyright © 2015 Pearson Education, Inc.

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Business Plan Insight: Elevator Speech Description 

Brief, Carefully Constructed Statement



One or Two Minutes Long



Outlines Merits of a Venture or Business Plan

Four Steps 1. Describe Opportunity or Problem 2. Describe How Product or Service Meets the Opportunity or Solves the Problem 3. Describe Your Qualifications 4. Describe your Market

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Red Flags Table 1-2

 Founders  Poorly

with None of Their Own Money at Risk

Cited Plan

 Defining

the Market Size Too Broadly

 Overly Aggressive  Hiding

or Avoiding Weakness

 Sloppiness  Too

Financials

in Any Area

Long of a Plan Copyright © 2015 Pearson Education, Inc.

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Content of the Business Plan Convince Reader the Opportunity is: Exciting, Feasible, Defensible and Within Capabilities of the Founders

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Measuring the Business Plan Against Your Personal Goals and Aspirations Meeting Venture Capitalists’ Expectations vs. Choice of Lifestyle 

VCs Expect Fast Growth Providing 30 to 40% Annual Return on Investment for 4 to 7 Years



Requires Founder’s Total Commitment of Time and Attention



Must Share Ownership with VC Copyright © 2015 Pearson Education, Inc.

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Recognizing that Elements of the Business Plan May Change Corridor Principle Once Entrepreneur Starts a Business, He or She Begins a Journey Down a Path Where Corridors Leading to New Venture Opportunities Become Apparent Copyright © 2015 Pearson Education, Inc.

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Recognizing that Elements of the Business Plan May Change Be Alert Write

to New Ideas

Deliberate (But) Act Emergent

◦ Create a Deliberate Plan That is a Specific Blueprint to Follow ◦ Think Emergent With a Mindset That is Open to Change and Influenced by the Realities of the Marketplace

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Four Types of Business Table 1-3

Survival Lifestyle Managed

Growth

Aggressive

Our Focus

Growth

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Types of Business: Survival Provides Just Enough Money to Put Food on the Table and Pay Bills Examples:

◦ Handyman ◦ Lawn Service ◦ Part-Time Childcare

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Types of Business: Lifestyle Provides Owner the Opportunity to Pursue a Certain Lifestyle and Make a Living Examples:

◦ Clothing Boutique ◦ Personal Trainer

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Types of Business: Managed Growth Employs 10 or More People, May Have Several Outlets, and May be Introducing New Products or Services to the Market Examples:

◦ Multi-Unit Franchise ◦ Regional Restaurant Chain ◦ Web Retailer

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Types of Business: Aggressive Growth Bringing New Products and Services to the Market and Has Aggressive Growth Plans  Examples:

◦ Computer Software ◦ Medical Equipment ◦ National Restaurant Chain

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The Plan for the Book Section

Process

One: Starting the

Section Two: What

to do Before the Business Plan is Written

Section Three:

Business Plan

Preparing a

Section

Four: Presenting the Business Plan Copyright © 2015 Pearson Education, Inc.

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Section 1: Starting the Process Chapter 1: Why Plan? 

Systematically Think Through Each Aspect of the New Venture



Focus on Structure, Style and Content



Introduce Business Plan to External Stakeholders



Business Plan Coincide With Personal Goals and Aspirations Copyright © 2015 Pearson Education, Inc.

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Section 2: What to Do Before Plan is Written Chapter 2: Develop and Screen Ideas 1.

Identify a Business Idea

2.

Screen the Idea to Determine its Initial Feasibility

Chapter 3: Feasibility Analysis 3.

Conduct a Full Feasibility Analysis to Determine if Proceeding with a Business Plan is Warranted

4.

Write the Plan Copyright © 2015 Pearson Education, Inc.

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From an Idea to a Business Plan

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Section 3: Preparing a Business Plan Chapter 4: Introductory Material Chapter 5: Industry Analysis Chapter 6: Market Analysis Chapter 7: Marketing Plan Chapter 8: Management Team & Company Structure Chapter 9: Operations Plan Chapter 10: Financial Projections Copyright © 2015 Pearson Education, Inc.

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Section 4: Presenting the Business Plan 

Chapter 11 ◦ Suggestions for Making Effective Presentations ◦ Using PowerPoint Slides Effectively ◦ Fielding Questions From an Audience Effectively

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Did You Learn? 1.

Identify Reasons for Writing a Business Plan

2.

Discover Who Reads the Business Plan and What They are Looking For

3.

Review Guidelines for Writing a Business Plan

4.

Discuss Types of Business

5.

Determine Plan for the Text Book Copyright © 2015 Pearson Education, Inc.

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Copyright © 2015 Pearson Education, Inc.

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Chapter 2

Developing and Screening Business Ideas

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Chapter Learning Objectives 1.

Identify 3 Most Common Sources of New Business Ideas

2.

Determine Techniques for Generating Ideas

3.

Conduct a First Screen Analysis

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Introduction Must

Have a Good Idea to Begin With to Avoid Failure ◦ Select Business Idea that Fills a Need, and ◦ Provides Unique Value to the Customer

Techniques

Exist to Explore Most Common Sources for Ideas ◦ Be Curious and Alert, and Follow Leads ◦ Subject Best Ideas to Scrutiny Before Judging

First

Screen Determines if Idea is Potentially Viable Copyright © 2015 Pearson Education, Inc.

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Overview: Three Most Common Sources of Business Ideas 1.

Changing Environment Trends

2.

Unsolved Problems

3.

Gaps in the Marketplace

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Idea Source 1: Changing Environment Trends 1.

Economic Trends

2.

Social Trends

3.

Technological Advances

4.

Political and Regulatory Changes

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1. Economic Trends  During

a Strong Economy Customers are More Willing to Purchase Discretionary Products and Services

 Evaluate Who

has Money to Spend

 Identify Areas

to Avoid

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2. Social Trends Impact

How People Live Their Lives and Products and Services They Need

Products

Often Do More to Satisfy a Social Need Than the Actual Need the Product Fills

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3. Technological Advances Ongoing

Source of New Ideas

Technologies

Used to Satisfy Basic or Changing Human Needs

Once

a Technology is Created, Products

Emerge to Advance It

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4. Political and Regulatory Changes  New

Laws and Regulations Create Opportunities

 Changes

in Regulations Motivate Entrepreneurs to Differentiate Themselves by Exceeding Regulations

 Political

Change Encourages Emergence of New Ideas

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Idea Source 2: Unsolved Problems  People Trying

to Solve a Problem End Up Starting

a Company  Emerging

Environmental Trends Create Problems

 Find

a Similar Problem That was Solved, and Then Apply That Solution to Your Problem

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Idea Source 3: Gaps in the Marketplace Large

Retailers Compete on Price, But Leave Gaps: ◦ Economies of Scale ◦ Target Mainstream Consumers

Take

Existing Product and Target New Market or Geographic Area ◦ Can’t Find Needed Product ◦ Geographic Location with Small Population Copyright © 2015 Pearson Education, Inc.

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Techniques for Generating Ideas Recognize

Ideas Based on Casual Observation, Intuition, Serendipity, or Luck

Intentionally

Seek Ideas Through Three

Sources: ◦ Brainstorming ◦ Focus Groups ◦ Library and Internet Research

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Brainstorming  Target

a Specific Topic

 Group

Shares Ideas in Lively, Freewheeling Manner

 No

Evaluation or Criticism Allowed

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Focus Group Gathering

of 5 to 10 People Selected Due to Their Knowledge of Issue

Used

as Follow-Up to Brainstorming to More Thoroughly Examine Idea

Conducted

by Moderator Who Keeps Everyone Focused on Topic

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Library and Internet Research Best Ideas Include Extensive Library and Internet Research  Discuss Area

of Interest with Reference Librarian

◦ Trade Journals and Industry Reports  Use

Search Engines and Alerts for Internet Research

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First Screen First

Pass for Quickly Assessing Merit

◦ Ideas Passing First Screen Move to Full Feasibility Analysis Parts:

1. 2. 3. 4. 5. 6.

Strength of the Idea Industry-Related Issues Market- and Customer-Related Issues Founder-Related Issues Financial Issues Overall Potential Copyright © 2015 Pearson Education, Inc.

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First Screen Part 1: Strength of the Business Idea Idea Takes Advantage

of Trend, Solves a Problem, or Addresses Gap



Timeliness of Entry to Market

Adds Value

for Buyer

Customer is

Satisfied by Current Products

Product

Requires Consumers to Change Behavior Copyright © 2015 Pearson Education, Inc.

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First Screen Part 2: Industry-Related Issues Industry

Issues Account for 8 to 30% of Variation in Firm Profitability

Number of Stage

Competitors

of Industry Life Cycle

Growth

Rate of Industry

Importance Industry

of Products

Operating Margins Copyright © 2015 Pearson Education, Inc.

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First Screen Part 3: Market- and Customer-Related Issues  Identification

of Target Market

◦ Place Within Larger Industry/Market Segment that Represents Narrower Group of Customers with Similar Interests  Ability

to Create Barriers to Entry

 Purchasing  Ease

Power of Customers

of Promoting New Product

 Growth

Potential of Target Market Copyright © 2015 Pearson Education, Inc.

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Part Three, continued Barrier to Entry: Ability to Create Disincentives for Other Firms to Enter a Company’s Niche Market  Economies  Product

of Scale

Differentiation

 Unique Access  Intellectual

to Distribution Channels

Property

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First Screen Part 4: Founder-Related Issues Experience

in the Industry

Skills

Related to New Product

Social

& Professional Networks

Personal

Goals and Aspirations

Likelihood Team

Can Grow and Launch New

Venture

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First Screen Part 5: Financial Issues  Initial

Capital Investment:

◦ Average Business Started for ~$10,000 from Owners’ Personal Savings  Number of  Time

Revenue Drivers

Needed to Break Even

 Financial

Performance of Similar Firms

 Funding

of Initial Product Development and/or Startup Expenses Copyright © 2015 Pearson Education, Inc.

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First Screen: Overall Potential Analyze Potential of Each of the Parts Strength

of Idea Industry Issues Market and Customer Issues Founder Issues Financial Issues

Potential: High? Moderate? Low?

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Did You Learn? 1.

Identify 3 Most Common Sources of New Business Ideas

2.

Determine Techniques for Generating Ideas

3.

Conduct a First Screen Analysis

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Copyright © 2015 Pearson Education, Inc.

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Chapter 3

Feasibility Analysis

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Chapter Learning Objectives 1.

Review Template for Completing a Feasibility Analysis

2.

Determine Product/Service Feasibility

3.

Research Industry/Target Market Feasibility

4.

Complete Organizational Feasibility

5.

Develop Financial Feasibility

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Feasibility Analysis Definition: Process of Determining if a Business Idea is Viable 

Sequential Steps



Critically Assess Merits of Idea



Lays Foundation for a Well-Reasoned and Researched Business Plan

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Comprehensive Feasibility Analysis/Business Planning Process Step 1 Identify a business idea. Step 2 Favorable Step 3 Favorable Step 4 Screen (or test) the results/proceed Conduct a full results/proceed Prepare idea to determine feasibility a written its preliminary Unfavorable analysis Unfavorable business Feasibility. Results/stop or results/stop or plan reevaluate idea reevaluate idea

Figure 3-1

Step 5 Present the plan to investors and others

business

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Template for Completing a Feasibility Analysis See Table 3-1

 Introduction  Part1:

Product/Service

 Part

2: Industry/Target Market

 Part

3: Organizational

 Part

4: Financial

 Summary

Feasibility Analysis: • Not Feasible • Unsure • Feasible

and Conclusion

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Primary and Secondary Research  Primary

Research

◦ Original Research Collected by Person Completing the Analysis ◦ Industry Experts ◦ Prospective Customers ◦ Surveys  Secondary

research

◦ Probes Data Already Collected ◦ Internet and Library Sources ◦ Examples: Industry Studies, Census Data

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Step 1: Product/Service Feasibility Product Desirability Questions to Answer Through Research      

Does it Make Sense? Is it Reasonable? Will Consumers Get Excited? Take Advantage of Environmental Trend, Solve a Problem, or Fill a Gap? Good Time to Introduce to the Market? Any Fatal Flaws in Basic Design or Concept?

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Concept Test Definition: Preliminary Written Description Shown to Industry Experts and Prospective Customers to Obtain Feedback Concept Statement Outline: ◦ ◦ ◦ ◦ ◦ ◦

Description of Product/Service Intended Target Market Benefits of Product/Service How Positioned vs. Competitors How it Will be Sold Management Team

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Step 1: Product/Service Feasibility Product/Service Demand Buying

Intentions Survey Attached to Concept Statement ◦ Example: How Likely Are You to Buy? ___Definitely Would Buy ___Probably Would Buy ___Might or Might Not Buy ___Probably Would Not Buy ___Definitely Would Not Buy

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Step 2: Industry/Target Market Feasibility Definitions Industry:

Group of Firms Producing Similar

Product ◦ Example: Shoes Target

Market: Limited Portion of Industry Which the Firm Wants to Attract ◦ Example: Children’s Shoes Must Research Both Industry and Market Copyright © 2015 Pearson Education, Inc.

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Industry Attractiveness  Choose

Industry That is:

◦ Large, Growing, Young, Fragmented, and Has Low Operating Margins ◦ Structurally Attractive: Low Barriers to Enter, so is Easy to Enter and Compete

◦ Favorable Environmental & Business Trends ◦ Importance of Product to Customers: No Good Substitutes Available in Other Industries  Example: Very Few Substitutes for Prescription Drugs

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Target Market Attractiveness  Target

is Group of Customers with Similar Needs

 Start-Ups

Lack Resources to Participate in Larger

Markets  Ideal Target

Market is:

◦ Large Enough for New Business to be Profitable ◦ Small Enough to Avoid Head-to-Head Competition with Industry Leaders

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Market Timeliness Window

of Opportunity is

◦ Determine if Timing is Right to Enter a Market Economics Trends

in the Industry

◦ Determine if Timing is Right to Enter an Industry

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Step 3: Organizational Feasibility Management

Prowess:

◦ Understand the Market ◦ Prior Entrepreneurial Experience ◦ Professional & Social Networks ◦ Creativity ◦ Experience and Education

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Organizational Feasibility, Continued Resource

Sufficiency:

◦ Location Availability ◦ Key Managers and Support Personnel ◦ Favorable Government Regulations ◦ Proximity to Similar Firms ◦ Intellectual Property

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Step 4: Financial Feasibility • Total Start-Up Cash Needed • Financial Performance of Similar Businesses • Overall Financial Attractiveness of the Proposed Venture

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Did You Learn? 1.

Review Template for Completing a Feasibility Analysis

2.

Determine Product/Service Feasibility

3.

Research Industry/Target Market Feasibility

4.

Complete Organizational Feasibility

5.

Develop Financial Feasibility

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Chapter 4 Introductory Material Executive Summary and Description of the Business

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Chapter Learning Objectives 1.

Review Cover Page and Table of Contents

2.

Examine Executive Summary

3.

Identify Company Description

4.

Select the Name for a Business

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Introduction Description of Business Plan: 

Written Document that Carefully Explains Every Aspect of a New Venture



25 to 35 Pages Long



Provided to Investor or Other Interested Party



Describes: ◦ Why Business is Starting ◦ How Business Will Make Money Copyright © 2015 Pearson Education, Inc.

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Cover Page My Company, Inc. Business Plan March 2, 2015

Ms. Jan Okla [email protected] 561-555-5611 123 Maple St. Page, GA 32899 myco.net

Information to Include: • Company Name • Street Address • E-mail Address • Phone Number(s) • Date • Contact Person • Website Address • Confidentiality

Confidentiality Statement Copyright © 2015 Pearson Education, Inc.

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Table of Contents Follows Cover Page Main Sections Subsections Appendices

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Executive Summary  Short

Overview of Entire Plan

◦ Goal is to Capture Reader’s Attention  Provides  Two

Everything Reader Needs to Know

Pages Maximum

 Write

it Last, Not First

 Content

Mimics Plan Format

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Overview of the Company Description Headings Company Mission

Statement

Products Current Legal

History

and Services

Status

Status and Ownership Copyright © 2015 Pearson Education, Inc.

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Company History Brief

Explanation of Where Idea for Company Originated

Be

Interesting or Heartfelt

How

Business Meets Compelling Need

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Mission Statement  Defines

why Company Exists and What it Aspires to

Become ◦ Acts as Financial and Moral Compass  Articulate

Firm’s Mission or Purpose

 Few Words

as Possible

◦ Google: “Don’t be Evil”

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Products and Services Explanation

of Product or Service:

◦ How Product/Service is Unique ◦ Positioning in Marketplace Relative to Rivals Report

Results of Feasibility Analysis

Explain

Proprietary Aspects and Protection of Intellectual Property

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Current Status Company Current Early

Development Milestones

Composition of Management Team

Customer Reactions

Company’s

Financial Status:

◦ How Firm Has Been Funded to Date ◦ Current Debt or Equity, and Future Intentions

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Legal Status and Ownership •

Owners of Business

•

Ownership Split

•

Founder’s Agreement Contents:     

Legal Written Document Split of Equity Among Founders Founders’ Compensation Time Founders Have to Remain with Firm for Shares to be Vested Legal Form of Business (LLC or Corporation)

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Selecting a Name for the Business Facilitates How Business Brands and Differentiates Itself  Customer-Driven ◦ Big and Tall Guys

 Product-

or Service-Driven

◦ Whole Foods Market

 Industry-Driven: ◦ General Motors

 Personality-

or Image-Driven

◦ Ben & Jerry’s Homemade Copyright © 2015 Pearson Education, Inc.

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Legal Issues in Choosing a Name Name

Must be Unique

Internet

Domain Name

Adapts Well

to Foreign

Cultures

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Did You Learn? 1.

Review Cover Page and Table of Contents

2.

Examine Executive Summary

3.

Identify Company Description

4.

Select the Name for a Business

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Chapter 5

Industry Analysis

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Learning Objectives 1.

Discuss Industry Definition

2.

Research Industry Size, Growth Rate, and Sales Projections

3.

Define Industry Characteristics

4.

Identify Industry Trends

5.

Determine Long-Term Prospects

6.

Discuss How Industry Analysis Affects and is Affected by Other Sections of the Plan

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Introduction Definition: Industry is a Group of Firms Producing Similar Product or Service

• Industries Vary by: o

Size

o

Growth-Rate

o

Structure

o

Financial Characteristics

o

Attractiveness

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Target Market Definition: Limited Portion of Industry Firm Goes After or Appeals To Complete

Industry Analysis First

◦ Must Understand Industry Before Attempting to Identify Target Market

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Section 1: Industry Definition Provide

NAICS Code and Description:

◦ Two – Six Digit Hierarchical Classification Code System  www.naics.com

Two

or Three Sentences

Define

a Narrow Scope of a Company’s Industry ◦ Example:  Broad Scope - Shoe Industry  Narrow Scope – Cowboy Boots Copyright © 2015 Pearson Education, Inc.

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Section 2: Industry Size, Growth Rate, and Sales Projections  Make

Sense of the Numbers to Build Credibility

 Four General

Rules of Thumb:

1.

Display Financial Information in Multiyear Format to Show Trends

2.

Display Information Graphically

3.

Produce Industry Information on a Regional or Local Basis if Appropriate

4.

Report Both Positive and Negative information

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Industry Size Display in Dollars Over Three- to Five-Year Period

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Industry Growth Rate Report

on Percentage Basis with Interpretation of What the Numbers Mean ◦ Suggestion: Compare Your Industry to Similar Industries

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Industry Sales Projections Report

Future Sales Projections for industry

Include

Concrete Numbers of Anticipated Sales and Growth Rates

Discuss

Own Interpretation of Published Projections

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Section 3: Industry Characteristics Industry Nature

Structure

of Participants

Key

Ratios

Key

Success Factors Copyright © 2015 Pearson Education, Inc.

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Industry Structure Concentrated:

Dominated by Few Large

Firms (Example – Home Depot)

Fragmented:

Companies

Large Number of Smaller

A Structurally Attractive

◦ ◦ ◦ ◦

Industry Has:

High Barriers to Entry No Good Substitutes for Products Suppliers’ Power Limited Buyers’ Power Limited Copyright © 2015 Pearson Education, Inc.

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General Attractiveness

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Nature of Participants Major Players

◦ Percentage of Market Share ◦ Online or Traditional? ◦ Where Your Firm Fits or Fills a Gap Industry

Segmentation

◦ Product Type ◦ Customer Segment

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Ratios Report

Industry’s Key Financial Ratios and Other Ratios of Interest

Compare Your Financial

and NonFinancial Projections Against the Industry Ratios

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Key Success Factors What

Firm Must be Good At to be Successful in the Industry ◦ Be Competent in All Factors ◦ Excel in Two or Three Factors

Factors Vary

by Industry

◦ Examples:       

Brand Name Recognition Access to Distribution Channels Quality of Products Ease of Use Price Marketing Support Quality of Customer Service Copyright © 2015 Pearson Education, Inc.

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Section 4: Industry Trends Environmental Trends:

◦ ◦ ◦ ◦

Economic Trends Social Trends Technological Advances Political and Regulatory

Business Trends: o o o

Profit Margins Innovation Input Costs Copyright © 2015 Pearson Education, Inc.

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Section 5: Long-term Prospects Brief

Statement of Your Beliefs Regarding LongTerm Prospect for the Industry

Tips:

◦ No New Information ◦ Draw Conclusions from Previous Sections but Do Not Repeat What Was Said ◦ Be Consistent with Previous Information ◦ Be Precise in Several Sentences

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How Industry Analysis Impacts Other Sections of the Plan Industry Analysis Affects

Other Sections of the Business Plan: ◦ Provides Point of Reference ◦ Determines What is Realistic ◦ Provides Comparison Between Industry and Firm’s Projections

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Did You Learn? 1.

Discuss Industry Definition

2.

Research Industry Size, Growth Rate, and Sales Projections

3.

Define Industry Characteristics

4.

Identify Industry Trends

5.

Determine Long-Term Prospects

6.

Discuss How Industry Analysis Affects and is Affected by Other Sections of the Plan

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Copyright © 2015 Pearson Education, Inc.

5-105

Chapter 6

Market Analysis

Copyright © 2015 Pearson Education, Inc.

6-1

Chapter Learning Objectives 1.

Describe Market Segmentation and Target Market Selection

2.

Discuss Buyer Behavior

3.

Develop Competitor Analysis

4.

Estimate Annual Sales and Market Share

Copyright © 2015 Pearson Education, Inc.

6-107

Introduction Market Analysis Breaks

Industry into Segments Targets a Specific Segment

Focuses

on Describing:  Target Market Customers Competitors How it Will Compete Potential Sales and Market Share Copyright © 2015 Pearson Education, Inc.

6-108

Market Analysis  Defines

Nature of the Business

 Affirms That

Company Has a Well-Thought-Out Target

Market  Understands

Customers and Can Generate Sales

Copyright © 2015 Pearson Education, Inc.

6-109

Section 1: Market Segmentation Answer Questions: 1.

Who Are Our Customers?

2.

How Will We Appeal to Them?

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Market Segmentation  Definition:

◦ Process of Dividing a Market into Distinct Subsets ◦ That Behave in Same Way or Have Similar Needs  Segment

◦ ◦ ◦ ◦ ◦

Markets By:

Geography Demographic Variables Psychographic Variables Behavioral Variables Product Type

 Can

Segment Market on More Than One Dimension Copyright © 2015 Pearson Education, Inc.

6-111

Market Segmentation and Target Market Selection Market Segmentation Test  Homogeneity

of Needs and Wants Within Segment?  Heterogeneity of Needs and Wants Among Segments?  Small Differences Within Segments?  Distinct?  Determine the Size?  Large Enough to be Profitable?

Copyright © 2015 Pearson Education, Inc.

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Selecting a Target Market  Select  

Segment With Best Prospects for Entry:

Sales Growth and Profitability Consistent with Founders’ Passion and Core Competencies

 Typical  

Mistakes:

Define Target Market Too Broadly Try to Target More Than One Segment

 Goal: 

Become Expert in Specialized Area

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Target Market Size and Trends  Rely

on Primary Research When Possible

 Reliability

of Assumptions:

◦ Reasonable ◦ Degree it is Based on Facts ◦ Good Faith Effort to be Accurate  Estimate  Review

Size of Similar Businesses

Pertinent Industry Trends

Copyright © 2015 Pearson Education, Inc.

6-114

Section 2: Buyer Behavior Why Will Target

Customers Buy?

◦ Motivation to Solve a Problem Who

Makes Decision to Purchase?

◦ Individuals or Groups? Length

of Buying Process?

◦ Steps in Approval Process ◦ Buyer’s Need for Information

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Degree of Involvement in Purchase Process High

Involvement

Medium

Low

Involvement

Involvement Copyright © 2015 Pearson Education, Inc.

6-116

Section 3: Competitor Analysis  Definition:

◦ Detailed Analysis of Firm’s Competition  Purpose:

◦ Understand Positions of Major Competitors ◦ Opportunities Available to Gain Competitive Advantage in One or more Areas ◦ Tells Reader You Understand Competitive Environment

Copyright © 2015 Pearson Education, Inc.

6-117

Identification of Direct, Indirect, and Future Competitors Direct

Competitors

◦ Similar Products or Services Indirect

Competitors

◦ Close Substitutes to Yours Future

Competitors

◦ Businesses that Could Move into Direct or Indirect Competitor Roles

Copyright © 2015 Pearson Education, Inc.

6-118

Competitive Analysis Grid Definition: Tool for Organizing and Presenting Information About Competitors  Lists

Primary Sources of Competitive Advantage and Disadvantage

 Firm

Must Have at Least One Key Success Factor

 Helps

to Fine-Tune Your Product Offering

Copyright © 2015 Pearson Education, Inc.

6-119

Competitive Analysis Grid Factor

Comp 1 Comp 2

Comp 3

Me

Location Services Quality Pricing

Copyright © 2015 Pearson Education, Inc.

6-120

Section 4: Estimate of Annual Sales and Market Share Four Ways

1. 2. 3. 4.

to Estimate Initial Sales

Premier Trade Association Comparable Firm Conduct Internet Search Multiplication Method:  Try to Arrive at Reasonable Number  See Figure 6-4 for Example

Use

More Than One Method

◦ Estimate Must be Based on Sound Assumptions Copyright © 2015 Pearson Education, Inc.

6-121

Did You Learn? 1.

Describe Market Segmentation and Target Market Selection

2.

Discuss Buyer Behavior

3.

Develop Competitor Analysis

4.

Estimate Annual Sales and Market Share

Copyright © 2015 Pearson Education, Inc.

6-122

Class Activities Reflect

the Market analysis into your business idea project. Estimate your annual sales for 3 years period.

Copyright © 2015 Pearson Education, Inc.

6-123

QUIZ 1 Explain

the purpose of market analysis section of a business plan.

OR Discuss

the key issues dealt with in the industry characteristic section of an industry analysis in the business plan. Copyright © 2015 Pearson Education, Inc.

6-124

Copyright © 2015 Pearson Education, Inc.

6-125

Chapter 7

Marketing Plan

Copyright © 2015 Pearson Education, Inc.

7-1

Chapter Learning Objectives 1.

Describe the Overall Marketing Strategy

2.

Identify Pricing Strategy

3.

Select Sales Process and Promotions Mix

4.

Develop Distribution and Sales

Copyright © 2015 Pearson Education, Inc.

7-127

Introduction Marketing Plan Articulates Firm’s:       

Marketing Strategy Positioning Points of Differentiation Price Promotional Mix Sales Process Distribution Strategy Copyright © 2015 Pearson Education, Inc.

7-128

Marketing Plan Focus  Develop

Marketing Plan with the Customer Plainly

in Mind ◦ Satisfy Customers’ Needs ◦ Restrict Promotion Budget to Media Most Likely to be Seen By Target Customer  Detail

Exactly Who Will Sell the Product and How the Sales Process Will Work ◦ Describe Sales Process and Methods to be Used

Copyright © 2015 Pearson Education, Inc.

7-129

Section 1: Overall Marketing Strategy  Marketing

Strategy: Firm’s Approach to Marketing Products and Services ◦ Stated in Broad Terms ◦ Basis of all Marketing-Related Activities

 Sets

the Tone for This Section

 Reassures

Reader Marketing Activities are Part of an Overall Plan

 Includes

Positioning and Points of Differentiation Copyright © 2015 Pearson Education, Inc.

7-130

Positioning Strategy Positioning:

How Firm is Situated Relative to Rivals in Target Market Examples  BMW (Luxury) vs. Chevrolet (Functional)  Starbucks vs. Maxwell House

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Points of Differentiation Clear Points About

Product Differences

◦ Choose Maximum of 3 Points Which Demonstrate the Product is:  Memorable and Distinct  Different and Better than Existing Products

Product Attribute

Map

◦ Visual Depiction of Two Points of Differentiation ◦ Example:  Range of Amenities Provided  Tailored to Specific Needs of Clientele Copyright © 2015 Pearson Education, Inc.

7-132

Product Attribute Map, Figure 7-1

Range of Amenities Provided

High

Gold’s Gym, LA Fitness, Bally

Prime Adult Fitness

YMCA

Community Center Fitness Clubs

Curves International

Low Low

Tailored to the Specific Needs of Clientele

High

Copyright © 2015 Pearson Education, Inc.

7-133

Section 2: Pricing Strategy How

to Price Your Product or Service

◦ Determines Firm’s Revenue ◦ Sends Message to Customers Two

Basic Options

◦ Cost Based:  Price = Cost + Markup Over Cost

◦ Value Based:  Customer’s Perceived Value of Product  Other Choices Available to Customer

Usually Best

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Other Pricing-Related Issues  Resist Temptation

to Charge Low Prices:

◦ Win Sales but Generate Low Profit  Customers

Make Price-Quality Attribution:

◦ Higher Price = Higher Quality ◦ Lower Price = Lower Quality  Price You

Can Charge is Function of:

◦ Objective Quality of Product ◦ Perception of Value Offered

Copyright © 2015 Pearson Education, Inc.

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Section 3: Sales Process and Promotions Mix 

◦ ◦ ◦ 

Sales Process is Firm’s Steps to: Identify Prospects Establish Relationships Close Sales

Typical Process: 1. 2. 3. 4. 5. 6. 7.

Prospect for Leads Initial Contact Qualify the Lead Make Sales Presentation Meet Customer Objections Close the Dale Follow Up Copyright © 2015 Pearson Education, Inc.

7-136

Benefits of Sales Process 1.

Fine Tune Firm’s Sales Approach

2.

Selling Becomes Set of Defined Steps

3.

Selling Process Requires Less Time by Targeting Only Most Likely Buyers

4.

Facilitates Firm’s Growth by Increasing Sales and Cutting Selling Costs

Copyright © 2015 Pearson Education, Inc.

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Promotions Mix Specific Tactics

Firm Uses to Communicate With Potential Customers ◦ ◦ ◦ ◦

Advertising Public Relations Social Media Other Promotions-Related Activities

Copyright © 2015 Pearson Education, Inc.

7-138

Advertising  Major Goals:

◦ Raise Customer Awareness of product ◦ Explain Product's Comparative Features and Benefits ◦ Create Association Between Product and Lifestyle  Choose

Media Options Based on Target Market

 Weaknesses:

◦ ◦ ◦ ◦ ◦ ◦

Low Credibility High Percentage Will Not be Interested People Tune Out Due to Message Clutter Expensive Perceived to be Intrusive Poorly Crafted Ads are Irritating Copyright © 2015 Pearson Education, Inc.

7-139

Public Relations (PR) • Establish and Maintain Company's Image • Startups Favor PR Because it is Free • Common Techniques: o o o o o o o o

Press Release Event Sponsorship Traditional Media Coverage (Local Newspaper) Article in Industry Trade Journals Monthly Newsletter Social Media Blogging Civic, Social, and Community Involvement Copyright © 2015 Pearson Education, Inc.

7-140

Social Media  Use When:

◦ Build Brand, Engage Customers, Generate Sales Leads ◦ Target Customers are Active in Social Media  Men: Aged 45 to 54  Women: Aged 25 to 34

 Sources:

◦ Blogging :  Familiarize with Business  Develop Emotional Bonds

◦ Social Networking Sites (Twitter, Facebook, Google)  Build Communities Around Product Copyright © 2015 Pearson Education, Inc.

7-141

Other Promotions-Related Activities Expose

Potential Customer to Product:

◦ Free Samples ◦ Trial Memberships Goal:

◦ Create Word-of-Mouth Advertising ◦ Develop a Sense of Anticipation

Copyright © 2015 Pearson Education, Inc.

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Section 4: Distribution and Sales  Distribution: Activities

that Move Products From Place of Origin to the Consumer ◦ Manufacturer

 Variety

◦ ◦ ◦ ◦

Wholesaler

Distributor

Retailer

of Choices:

Sales Force Direct to Consumers through Catalogs or Website Intermediary – Distributor or Manufacturer’s Rep Blended Approach  Beware of Channel Conflict

 Choice

is Based on Best Way to Reach Your Target Customer Copyright © 2015 Pearson Education, Inc.

7-143

Sales Strategy and Related Issues  Decide Whether to

Field Own Sales Force or Use

Intermediaries ◦ Handle Own Inventory and Distribution? ◦ Use Fulfillment Service Instead?  Determine

Number of Sales People

◦ Identify Compensation ◦ Project Future Needs for More Sales People  Examples

of Creative Firms:

◦ Dell ◦ IKEA Copyright © 2015 Pearson Education, Inc.

7-144

Did You Learn? 1.

Describe the Overall Marketing Strategy

2.

Identify Pricing Strategy

3.

Select Sales Process and Promotions Mix

4.

Develop Distribution and Sales

Copyright © 2015 Pearson Education, Inc.

7-145

Copyright © 2015 Pearson Education, Inc.

7-146

Chapter 8

Management Team and Company Structure

Copyright © 2015 Pearson Education, Inc.

8-1

Chapter Learning Objectives 1.

Discuss Importance of the Management Team

2.

Identify Composition of the Board of Directors

3.

Determine Importance of the Board of Advisors

4.

Explain Role of Other Professionals

5.

Outline Company Structure

Copyright © 2015 Pearson Education, Inc.

8148

Introduction 

Unless Firm Has Strong Management Team Little Else Matters



Investors Prefer: ◦ ◦

Untested Business Idea – Have More Potential Tested vs. Untested Management Team

Sensitive Issues:



1. 2.

Demonstrate Openness to Advice Describe How Team Will Evolve

Copyright © 2015 Pearson Education, Inc.

8149

Section 1: Management Team  Founder(s)

and Key Management Personnel

 Discuss

Employment Status Today, and Plans for Future Employees

Copyright © 2015 Pearson Education, Inc.

8150

Management Team Personnel  Profile

◦ ◦ ◦ ◦

Current Members of Management Team:

Job Title and Duties Previous Industry Experience and Successes Education Why Each Will Uniquely Contribute to Firm’s Success

 Discuss

Gaps in Management Team and Plans for Filling Them ◦ (Figure 8-1) ◦ Part-Time or Temp ◦ Consultant or Advisor

Copyright © 2015 Pearson Education, Inc.

8151

Management Team Ownership and Compensation  Show

in Table Format for Management Team:

◦ See Figure 8-1 Name J. Ryan

Position

Pay

% Ownership

Investment in Firm

President

$68,500

20.0%

$100,000

 Options

Pool - Inventory of Company Stock Set Aside for Future Employees

 Discuss

How Funding of Firm Has Been Raised to Date

Copyright © 2015 Pearson Education, Inc.

8152

Common Mistakes to Avoid  Place

Unqualified Friends in Key Positions

 Assume

Previous Success in Other Industries Translates to This Industry

 Present

a “One-Man Team” Philosophy

 Hire Top  Not

Managers Without Sharing Ownership

Disclosing Skill or Competency Gaps

 Vague

or Unclear Plans for Filling the Skill or Competency Gaps

Copyright © 2015 Pearson Education, Inc.

8153

Section 2: Board of Directors  Panel

Elected by Corporation's Shareholders to Oversee Management of Firm

 Responsibilities:

1. Appoint Officers of Firm 2. Declare Dividends 3. Oversee Affairs of Corporation

Board Composition:



◦ ◦

Three to Five Members Insiders and Outsiders Copyright © 2015 Pearson Education, Inc.

8154

Other Advantages of Board of Directors  Provide

Guidance

◦ Help Management Team Avoid Missteps ◦ Ask Tough and Probing Questions ◦ Fill Competency Gaps  Lend

Legitimacy by “Signaling”

◦ Appoint High Profile Individual to Board ◦ High Profile Person Can Open Doors to Suppliers, Customers, and Financing

Copyright © 2015 Pearson Education, Inc.

8155

Section 3: Board of Advisors Board

◦ ◦ ◦ ◦

of Advisors

Panel of Experts No Legal Responsibility Provide Guidance and/or Lend Legitimacy See Figure 8-3

Copyright © 2015 Pearson Education, Inc.

8156

Section 4: Other Professionals Attorneys,

Bankers, Investors, College Professors, Accountants

Include

Short Bio and Types of Assistance

Provided Consultants:

◦ Fee Paid ◦ Free Through Government Agency  Small Business Development Center  SCORE

Copyright © 2015 Pearson Education, Inc.

8157

Section 5: Company Structure Organizational

Chart

◦ Graphic Representation of How Authority and Responsibility are Distributed Organize

By:

◦ Function ◦ Product ◦ Geography

Copyright © 2015 Pearson Education, Inc.

8158

Did You Learn? 1.

Discuss Importance of the Management Team

2.

Identify Composition of the Board of Directors

3.

Determine Importance of the Board of Advisors

4.

Explain Role of Other Professionals

5.

Outline Company Structure

Copyright © 2015 Pearson Education, Inc.

8159

Copyright © 2015 Pearson Education, Inc.

8-160

Chapter 9

Operations Plan and Product (or Service) Development Plan Copyright © 2015 Pearson Education, Inc.

9-1

Chapter Learning Objectives 1.

Identify Contents of the Operations Plan

2.

Discuss the Product or Service Plan

Copyright © 2015 Pearson Education, Inc.

9162

Introduction Operations

Plan:

◦ How Product or Service Will be Produced and How Business Will be Run Development

Status of Product or Service

(Optional) Provide

General Information

◦ Focus Only on Essentials that Set Firm Apart from Competitors

Copyright © 2015 Pearson Education, Inc.

9163

Section 1: Operations Plan How Business will be Run and How Product or Service will be Produced Topics:

◦ ◦ ◦ ◦

Operating Model and Procedures Business Location Facilities and Equipment Operations Strategy and Plans

Copyright © 2015 Pearson Education, Inc.

9164

Operations Model and Procedures  Demonstrate

Full Understanding of Operational Details of Launching and Running Business

 “Back  “Day

Stage” and “Front Stage”

in the Life”

 Include

Operations Flow Diagram

Copyright © 2015 Pearson Education, Inc.

9165

Important Operational Issues  Order Fulfillment  Inventory  Length

and Shipping or Outsourcing

Storage and Turnover

and Nature of the Production Cycle

 Potential

Bottlenecks

 Seasonal

Production Load

 Quality

Control

 After-Sale

Service Copyright © 2015 Pearson Education, Inc.

9166

Business Location  Discuss

Importance or Unimportance of Geographic Location

 When

◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦

Location is Important:

Proximity to Qualified Labor Force Closeness to Suppliers Access to Transportation Access to International Shipping Alternatives Proximity to Target Customers Access to Favorable State and Local Tax Rates Access to Economic Incentives Proximity to High-Quality Community

Copyright © 2015 Pearson Education, Inc.

9167

Facilities and Equipment  List

Most Important Facilities and Equipment:

◦ Acquire Through Purchase or Lease?  Contract

or Outsource Production:

◦ Discuss Facilities of Business Partners  Ability

to Grow Within Existing Facility or Transition to Larger Facility

Copyright © 2015 Pearson Education, Inc.

9168

Operations Strategy and Plans Strategic

and Longer Term Issues

◦ Produce In-House or Outsource  In-House Production of What You’re Good at  Outsource What You’re Not Good at

Link

Business Strategy to Operations Strategy

◦ Quality Control ◦ Production Control ◦ Inventory Control

Copyright © 2015 Pearson Education, Inc.

9169

Section 2: Product or Service Development Plan Include This Section if Developing Completely New Product or Service  Topics

Include:

◦ Development Status and Tasks ◦ Challenges and Risk ◦ Costs ◦ Intellectual property

Copyright © 2015 Pearson Education, Inc.

9170

Development Status and Tasks Describe Present State of Development of Product or Service  Product Conception 



Prototyping: First Physical Depiction of New Product Initial Production and Full Production

Copyright © 2015 Pearson Education, Inc.

9171

Prototype Testing • Prototype and Usability Testing Measure: o Product’s Ease of Use • Pilot, Beta Test, Field Trial o User’s Perception of the Experience

• Include Timeline Showing Remaining Milestones

•Insert Photos or Drawings

Copyright © 2015 Pearson Education, Inc.

9172

Challenges and Risks  List

Major Design and Development Challenges and Risks Involved in Bringing Product to Market

 Be

1. 2.

Candid and Transparent Reader Already Knows They Exist Reader Wants to See if You are Aware



Discuss Possible Effects of the Challenges and Risks, Costs, and Timeline



Identify How You Plan to Avoid or Deal With Challenges and Risks Copyright © 2015 Pearson Education, Inc.

9173

Costs Budget

for Remaining Design and Development

Work Typically

◦ ◦ ◦ ◦ ◦

Includes:

Costs of Labor Material Consulting Fees Prototyping Usability Testing

Copyright © 2015 Pearson Education, Inc.

9174

Intellectual Property Any

Product of Human Intellect:

◦ Is Intangible ◦ Has Value in Marketplace Types:

1. 2. 3. 4.

Patents Trademarks Copyrights Trade Secrets

Copyright © 2015 Pearson Education, Inc.

9175

Trade Secrets Examples:

Formula, Pattern, Physical Device, Idea, Process, or Other Information

Provides

Owners with Competitive Advantage in Marketplace

Must

Keep Confidential and Safeguard Access

Copyright © 2015 Pearson Education, Inc.

9176

Patents  Patents

are expensive ($5,000 to $50,000)

 Must

be Applied for Within One Year of When Product is First Offered for Sale, Put into Public Use, or is Described in Printed Publication, or the Right to File a Patent Application is Forfeited

 Patent

or Not Patent?

Copyright © 2015 Pearson Education, Inc.

9177

Did You Learn? 1.

Identify Contents of the Operations Plan

2.

Discuss the Product or Service Plan

Copyright © 2015 Pearson Education, Inc.

9178

Class Exercise Reflect & Draft on A4 paper your business plan idea related to this topic.

Copyright © 2015 Pearson Education, Inc.

9179

Copyright © 2015 Pearson Education, Inc.

9-180

Chapter 9

Operations Plan and Product (or Service) Development Plan Copyright © 2015 Pearson Education, Inc.

9-1

Chapter Learning Objectives 1.

Identify Contents of the Operations Plan

2.

Discuss the Product or Service Plan

Copyright © 2015 Pearson Education, Inc.

9182

Introduction Operations

Plan:

◦ How Product or Service Will be Produced and How Business Will be Run Development

Status of Product or Service

(Optional) Provide

General Information

◦ Focus Only on Essentials that Set Firm Apart from Competitors

Copyright © 2015 Pearson Education, Inc.

9183

Section 1: Operations Plan How Business will be Run and How Product or Service will be Produced Topics:

◦ ◦ ◦ ◦

Operating Model and Procedures Business Location Facilities and Equipment Operations Strategy and Plans

Copyright © 2015 Pearson Education, Inc.

9184

Operations Model and Procedures  Demonstrate

Full Understanding of Operational Details of Launching and Running Business

 “Back  “Day

Stage” and “Front Stage”

in the Life”

 Include

Operations Flow Diagram

Copyright © 2015 Pearson Education, Inc.

9185

Important Operational Issues  Order Fulfillment  Inventory  Length

and Shipping or Outsourcing

Storage and Turnover

and Nature of the Production Cycle

 Potential

Bottlenecks

 Seasonal

Production Load

 Quality

Control

 After-Sale

Service Copyright © 2015 Pearson Education, Inc.

9186

Business Location  Discuss

Importance or Unimportance of Geographic Location

 When

◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦

Location is Important:

Proximity to Qualified Labor Force Closeness to Suppliers Access to Transportation Access to International Shipping Alternatives Proximity to Target Customers Access to Favorable State and Local Tax Rates Access to Economic Incentives Proximity to High-Quality Community

Copyright © 2015 Pearson Education, Inc.

9187

Facilities and Equipment  List

Most Important Facilities and Equipment:

◦ Acquire Through Purchase or Lease?  Contract

or Outsource Production:

◦ Discuss Facilities of Business Partners  Ability

to Grow Within Existing Facility or Transition to Larger Facility

Copyright © 2015 Pearson Education, Inc.

9188

Operations Strategy and Plans Strategic

and Longer Term Issues

◦ Produce In-House or Outsource  In-House Production of What You’re Good at  Outsource What You’re Not Good at

Link

Business Strategy to Operations Strategy

◦ Quality Control ◦ Production Control ◦ Inventory Control

Copyright © 2015 Pearson Education, Inc.

9189

Section 2: Product or Service Development Plan Include This Section if Developing Completely New Product or Service  Topics

Include:

◦ Development Status and Tasks ◦ Challenges and Risk ◦ Costs ◦ Intellectual property

Copyright © 2015 Pearson Education, Inc.

9190

Development Status and Tasks Describe Present State of Development of Product or Service  Product Conception 



Prototyping: First Physical Depiction of New Product Initial Production and Full Production

Copyright © 2015 Pearson Education, Inc.

9191

Prototype Testing • Prototype and Usability Testing Measure: o Product’s Ease of Use • Pilot, Beta Test, Field Trial o User’s Perception of the Experience

• Include Timeline Showing Remaining Milestones

•Insert Photos or Drawings

Copyright © 2015 Pearson Education, Inc.

9192

Challenges and Risks  List

Major Design and Development Challenges and Risks Involved in Bringing Product to Market

 Be

1. 2.

Candid and Transparent Reader Already Knows They Exist Reader Wants to See if You are Aware



Discuss Possible Effects of the Challenges and Risks, Costs, and Timeline



Identify How You Plan to Avoid or Deal With Challenges and Risks Copyright © 2015 Pearson Education, Inc.

9193

Costs Budget

for Remaining Design and Development

Work Typically

◦ ◦ ◦ ◦ ◦

Includes:

Costs of Labor Material Consulting Fees Prototyping Usability Testing

Copyright © 2015 Pearson Education, Inc.

9194

Intellectual Property Any

Product of Human Intellect:

◦ Is Intangible ◦ Has Value in Marketplace Types:

1. 2. 3. 4.

Patents Trademarks Copyrights Trade Secrets

Copyright © 2015 Pearson Education, Inc.

9195

Trade Secrets Examples:

Formula, Pattern, Physical Device, Idea, Process, or Other Information

Provides

Owners with Competitive Advantage in Marketplace

Must

Keep Confidential and Safeguard Access

Copyright © 2015 Pearson Education, Inc.

9196

Patents  Patents

are expensive ($5,000 to $50,000)

 Must

be Applied for Within One Year of When Product is First Offered for Sale, Put into Public Use, or is Described in Printed Publication, or the Right to File a Patent Application is Forfeited

 Patent

or Not Patent?

Copyright © 2015 Pearson Education, Inc.

9197

Did You Learn? 1.

Identify Contents of the Operations Plan

2.

Discuss the Product or Service Plan

Copyright © 2015 Pearson Education, Inc.

9198

Copyright © 2015 Pearson Education, Inc.

9-199

Chapter 10

Financial Projections

Copyright © 2015 Pearson Education, Inc.

10-1

Chapter Learning Objectives 1.

Discuss Source and Use of Funds Statement

2.

Design Assumptions Sheet

3.

Develop Pro Forma Financial Statements

4.

Utilize Ratio Analysis

Copyright © 2015 Pearson Education, Inc.

10-201

Introduction Tips for Success:



1. 2. 3.

Provide Lenders and Investors What They Want to Know Show You Can Get Up and Running Successfully Get Accountant’s Help

Six Parts:



◦ ◦ ◦ ◦ ◦ ◦

Sources and Uses of Funds Statement Assumptions Sheet Income Statements Balance Sheets Cash Flows Ratio Analysis Copyright © 2015 Pearson Education, Inc.

10-202

Section 1: Sources and Uses of Funds Statement 1.

How Much Money Firm Needs

2.

Where Money Will Come From: ◦ ◦ ◦

3.

Founders, Initial Management Team Early Investor(s) Remaining Funds Needed

What the Money Will be Used For

Example:

Figure 10-1

Copyright © 2015 Pearson Education, Inc.

10-203

Section 2: Assumptions Sheet Explanation

of Most Critical Assumptions that Financial Statements are Based on ◦ General Assumptions  Reflect a Consensus View of Common Knowledge

◦ Financial Statements Assumptions  Information in Earlier Sections of the Plan  Gumshoe Inquisitiveness

Example:

Figure 1-2 Copyright © 2015 Pearson Education, Inc.

10-204

Section 3: Financial Statements  Pro

Forma = Projected Future Estimates

 Pro

Forma Financial Statements:

1. 2. 3.

Income Statement Balance Sheet Cash Flow Statement

 Years

to be Projected:

◦ Complete Income and Cash Flow Statements on Monthly Basis for First Two Years ◦ All Statements Annually for Three to Five Years

Copyright © 2015 Pearson Education, Inc.

10-205

Pro Forma Income Statement  Projected

Sales – Expenses = Profit (or Loss)

 Numbers

Receiving Most Attention:

◦ Net Sales = Total Sales – Returns & Discounts ◦ Cost of Goods Sold = Direct Costs Associated with Producing or Delivering Product/Service ◦ Operating Expenses = Marketing, Utilities, Indirect Administrative Costs  Example:

Figure 10-3 Copyright © 2015 Pearson Education, Inc.

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Pro Forma Balance Sheet  Projection

of Firm’s Assets, Liabilities, and Owner’s Equity at Specific Point in Time

 Assets:

◦ Current Assets ◦ Fixed Assets (non-current asset)  Liabilities:

◦ Current Liabilities ◦ Long-Term Liabilities ◦ Owner’s Equity Copyright © 2015 Pearson Education, Inc.

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Balance Sheet Categories and Questions to Answer  Categories:

Assets

Liabilities

Current

Current

Fixed

Long-Term Owners’ Equity

 Questions

to Answer:

1.

Does Firm Have Sufficient Short-Term or Current Assets to Cover Short-Term Debts?

2.

Is Firm Financially Sound Overall? Copyright © 2015 Pearson Education, Inc.

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Pro Forma Cash Flow Operating Activities Investing Activities Finance Activities

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Cash Flow: Operating Activities Includes:

◦ Net Income (or Loss) ◦ Depreciation ◦ Changes in Current Assets and Current Liabilities Other Than Cash

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Cash Flow: Investing Activities Includes:

◦ Purchase, Sale, or Investment in Fixed Assets  Examples: Real Estate, Equipment, and Buildings

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Cash Flow: Financing Activities Includes:

◦ Cash Raised During the Period  Examples: Borrowing Money, Making Payments on Loans, or Paying Dividends

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Reminders  Financial

Statements Must be Prepared as Accurately and Realistically as Possible

 Process

of Preparing Projections May be as Valuable as the Projections Themselves

 Ability

to Prepare Statements and Think Through the Issues Behind Them is Vital

 Prepare

Break-Even Analysis:

◦ Determine Volume of Business Required to “Break Even” in Terms of Profit and Loss

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Section 4: Ratio Analysis  Practical  Most

Method to Interpret Financial Statements

Common Categories:

◦ Profitability Ratios – Compare Income Earned Against Resources Used to Generate It ◦ Liquidity Ratios – Measure Relationship Between Short-Term Assets and Short-Term Liabilities ◦ Overall Financial Stability – Measure Overall Financial Stability

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Did You Learn? 1.

Discuss Source and Use of Funds Statement

2.

Design Assumptions Sheet

3.

Develop Pro Forma Financial Statements

4.

Utilize Ratio Analysis

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