MGT 474G Small Business Exam 3
e-commerce 6 Factors for Success
1. Acquiring customers 2. Optimizing conversions - looking to buying 3. Maximizing Web site performance 4. Ensuring a positive user experience 5. Retaining customers 6. Use Web analytics as part of a cycle of continuous improvement - see what customers are doing to the website
Rising Costs for a business What to do?
1. Communicate with customers - why prices are rising 2. Add a temporary surcharge - temporary charge 3. Eliminate discounts, coupons, promotions - or reduce it to cut cost 4. Offer products in smaller sizes or quantities or modify it - smaller plate sizes 5. Improve efficiency - energy consumption 6. Emphasize value to customers 7. Raise prices incrementally and consistently - won't notice the increase as much 8. Use less expensive raw materials - beef expensive then use more chicken 9. Lock in prices in anticipation of price increases - purchase early and lock in price 10. Absorb price increases - only if profiting enough
Pricing techniques for new product 3 objectives
1. Get the product accepted - Revolutionary ( brand new product can charge more) - evolutionary ( upgraded product can increase current price) - me-too-products ( stay conservative on the price) (charge similar to competitors) (products that offer the same basic features as existing products on the market) 2. Maintain market share as competition grows - if new product is successful, competitors will enter the market - reappraise the price to stay competitive - more advertising and promotions too 3. Earn a profit - price has to be higher than the total cost - have to make money
11 Myths of E-Commerce
1. If I launch a Web site, customers will flock to it 2. Online customers are easy to please 3. Launching an E-Commerce site is free or at least relatively inexpensive 4. Making money on the Web is easy 5. Privacy is not an important issue on the Web 6. Strategy? I don't need a strategy to sell on the Web! Just give me a web site and the rest will take care of itself! 7. The most important part of any e-commerce effort is technology 8. Customer service is not as important online as it is in a traditional retail store - High % customers leave site with items in cart and no purchase 9. Flashy web sites are better than simple ones 10. It's what's up front that counts 11. My business doesn't need a web site
Pricing Strategy components
1. Image - pricing sends an important signal to customers about a company, its brand, its position in the market, the quality, the image it wants to create, and more 2. Competition and prices - competitors prices can impact small company's sales 3. Focus on value - the value it provides to customer should determine price - what the customer is willing to pay Objective value - willing to pay considering the benefits that product/service delivers Perceived value - what the customer is willing to pay
2 Conflicting Goals of Security
1. Want to make the site easily accessible for potential customers BUT 2. Want to make the site secure enough to prevent hackers from taking data Find the middle ground
steps in the cash budgeting process
1. determining an adequate minimum cash balance 2. forecasting sales 3. forecasting cash receipts 4. forecasting cash disbursements 5. estimating the end-of month cash balance
projected income statement
1st step is to create a sales forecast - develop a sales forecast for a business start-up - or set a profit target and work up 2nd step is to estimate the expenses the business will incur 3rd figure out what net sales would have to be to get the targeted profit
Financial Management
A process that provides entrepreneurs with relevant financial information in an easy-to-read format on a timely basis Allows us to know how we are doing financially and also why we are performing as we are
What are some of the costs we have to consider as we look at pricing our good or service?
Acceptable price range - Price ceiling, price floor ( how high or how low is reasonable to charge) the price range is the area between the price ceiling defined by customers in the market and the price floor established by the company's cost structure.
Big Three of Cash Management
Accounts receivable, accounts payable, and inventory
How to Avoid A Cash Crunch
Barter Trim overhead costs by... - Discounts and freebies - Periodic expense audits - Lease instead of buy - Cut nonessential costs - Buy used and reconditioned items - Hire part-time workers - Outsource - Use email instead of regular mail - Negotiate fixed loan payments that match cash flow - Internal security and control system - System for check fraud - Change shipping terms - Sell gift cards/certificates - Switch to zero-based budgeting ( Start and zero and build up the budget ) - Watch for shoplifting and employee theft Build a cash cushion Invest surplus funds - Money market accounts - Zero balance accounts - Sweep accounts Keep your business plan current
Seasonal business concerns
Be financially disciplined Manage your time and your employees' time carefully Use permanent employees sparingly Put aside cash for lean months Maximize productivity in the off-season Keep minimal inventory in off-season Negotiate payment terms to match cash flow Offer off-season discounts Start a complimentary business that will be needed in off-season Create a cash flow forecast Establish a bank line of credit
Understand Purchase funnel
Beginning —promote online presence Think through the next steps Ends —streamlined checkout process
e-commerce cosider
Benefits of selling on the web - Increase revenue - Educate and inform customers - 24 hours a day ( can be bad( Ideal domain name - Short - Memorable - Easy to spell
Privacy and Security
Big Concerns Privacy - What information we collect, develop a privacy policy, post the policy prominently and follow it - Privacy policy contents (what is being collected and what the info is used for) Security - Costs - Tools to use ( software to protect) - Charge-backs
compute break-even selling point making 5,000 units fixed costs $88,750 variable cost $18.45
Break even point = (fixed costs / quantity) + variable costs (88,750/5000) + 18.45 = $36.20
Statement of cash flows
Changes in our working capital — lists sources and uses of funds where the money is coming from loans, sales, you, friends
Web Analytics
Commerce metrics - what sales - number of items sold Visitor segmentation measurements - how did they get to the website Content reports - what did the customers look at Process measurements - how many abandoned their cart
Income Statement
Compares revenues and expenses over a certain time period to show our net income or loss Revenue, cost of goods sold, gross profit Gross profit margin — gross profit divided by net sales revenue - Important to monitor Operating expenses —general, other Net income
Web Analytics Other common measures
Cost per acquisition Bounce rate Retention rate Conversion (browse-to-buy) rate Average order value Latency Customer lifetime value Cart abandonment rate
Manufacturers Pricing Concepts
Cost-plus pricing - all overhead + profit Need reliable cost accounting system Traditional method of product costing - Absorption costing ( all overhead) - Variable (direct) costing ( only cost of quantity produced that is being purchased) Must have a price that covers variable and fixed costs and gives us a profit Contribution margin - amount left over after cost Break even selling price - no profit
Pricing Techniques
Discounts (Markdowns) - reductions from normal price Bundling - put things together so it is a cheaper price than buying it separately Optional-product pricing - sale base product for 1 price but accessories are marked up even more Captive-product pricing - base product not functional without the accessories (video games) - selling a product for a low price and charging a higher price for the accessories that accompany it By-product pricing - saw dust Suggested retail prices - what manufactures suggest Follow the leader pricing - follow competitors prices
Operating Ratios
Evaluate overall performance and how effectively we employ our resources
We may develop our own ratios or key performance indicators
Financial benchmarking - our ratio's to averages or competitors Break even analysis - want to generate sales greater than our breakeven point so we have a profit - manufactured items - service businesses harder to compute
Strategies for Ecommerce
Focus on a niche in the market Build a community - followers Listen to your customers and act upon what you hear Attract visitors by giving away "freebies" Sell the experience - make it easy Make creative use of email but avoid being a spammer - Click through rate ( open email "click" go to website) - CAN-SPAM Act 2003 (ask permission to email ) Make sure your web site says "credibility" Make the most of the web's global reach Go mobile - make sure website comes up on phones too Promote your web site online and off line Use the tools of social media to attract and retain customers - Facebook Develop an effective search engine optimization strategy - Natural or organic listings - Paid or sponsored listings ( pay for spot but only pay when a user clicks through to the website) - Search engine optimization Tips - relevant content on your page - current information updated - download speed Paid listings Product listings ads - ads on google Click fraud - hire someone to keep clicking and they will get charged for the fake clicks
Cash Management
Forecasting, collecting, disbursing, investing and planning for the cash a company needs to operate meet our demands, avoid retaining large cash balances, stretch the profit-making power of each dollar we have
Profitability ratios
How efficiently our company is managed —ability to use resources to make profit Net profit on sales ratio - measure company's profit per dollar of sales - net profit divided by net sales Net profit to assets ratio - how much profit we generate for each dollar of assets it owns - net profits divided by net assets Net profit to equity ratio - owner's rate of return on investment - net profit divided by owner's equity
Cash conversion cycle
Length of time required to convert inventory and accounts payable into sales and accounts receivable and finally back into cash Days inventory outstanding plus days sales outstanding-days payable outstanding
Ratio Analysis
Look at relationships between any two elements on financial statements that allows us to analyze our performance Will want to monitor ratio trends Choose a few key ratios for our business not all 12
Designing A Killer Web Page
Lots of hints given What are some of the things we need to consider? Bottom line is the customer wants (convenience) They are concerned about the look, feel, efficiency, and navigability of the site—1st impressions are key short memorable domain name
Retailer Pricing Strategies
Markup - Markup of retail price percent - Markup of cost percent Figuring Markup - Average markup required - Operating expenses and reduction and profits divided by net sales and reductions - Reductions include employee and customer discounts, markdowns, special sales and costs of stock outs Retail price - Dollar costs divided by 1 minus percentage of retail price markup
Leverage ratios
Measures financing supplied by a firm's owners against that supplied by creditors—measures risk Debt ratio —percentage of total assets financed by creditors compared to owners Debt to net worth ratio - looks at how highly leveraged we are - Total debt divided by tangible net worth - High ratio—more leveraged, less ability to borrow, higher risk Times interest earned ratio - measures our ability to make the interest payments on our debt - Desired ratio of 4:1 to 6:1 for most lenders
Pricing
Monetary value of the product or service in the marketplace
Accounts Receivable letting people charge to your business
Need to establish a credit and collection policy Screen customers before offering credit - Use basic credit profile Firm written credit policy Send invoices promptly - mail statements at the same time each month Account past due—take immediate action - Steps to follow—notices, calls, collection agency Fair Debt Collection Practices Act Security agreements and financing statement - UUCL after 90 days probably won't get paid
Established goods pricing
Odd pricing —prices end in odd numbers, think it is cheaper - 9.99 instead of 10 Price lining -price different products in a product line at different price points based upon quality, features and costs Freemium pricing —provide a basic product or service for free and then charge a premium for expanded options Price Anchoring —relate to first piece of information (anchor) Subscription pricing -pay a fee for services for year normally Dynamic pricing —different prices for different customers Leader pricing -marking down a normal priced item to draw people into store - goal is for the customer to buy the marked down popular item and also to buy other items in the store at regular prices
pricing options
Penetration - Low price to gain acceptance, build market share Skimming - Higher than normal price because it is new/unique - introduces a new product into a market with little or no competition. it is unique or a superior product Life cycle - Introduce at high price, then lower price quickly before competition does
Service Businesses
Price based upon the labor used, materials to provide the service, allowance for overhead and profit Normally stated in an hourly rate Need to recalculate hourly rate several times during the year Check competitor's pricing Flexibility in pricing
Fair price
Price paid in past, what competitors charge, company costs
issues to consider with profitability ratios
Problems Found in Analyzing Financial Ratios - too much inventory, too much debt, overextending credit, can't pay bills on time, etc. Level of sales needed - income for year divided by net profit margin Average payable period in days - days in year divided by payables turnover ratio
Cash Budget
Shows the amount and timing of cash receipts and cash disbursements day by day, week by week, month by month Monthly projection for first year and then quarterly projections for 2nd year Based upon cash accounting Five basic steps 1. determine an adequate minimum cash balance 2. forecast sales 3. forecast cash receipts - electronic collections and remote deposit 4. forecast cash disbursements 5. estimating the end of month cash balance
Accounts Payable
Stretch payments out without hurting credit reputation Payment calendar Verify all bills before paying Negotiate best credit terms Can't make a payment be honest Schedule payments at different times
Liquidity ratios
Tells us whether or not we can meet our short term obligations Current ratio —ability to pay current liabilities from current assets - Desire a 2:1 ratio Quick ratio—acid test ratio —measures whether our liquid assets cover current liabilities - Desire 1:1 ratio
Inventory
Too much or too little Surplus inventory Stock outs Minimize investment in inventory without sacrificing sales, selection, and customer satisfaction Quantity discounts Cash discounts Schedule inventory deliveries ASAP Use suppliers who can get the goods to you quickly to keep your inventory level up
Offering credit to customers
Types - Credit cards, installment credit and trade credit Credit cards - 1-6% of card charge plus transaction fee of 5-25 cents - Must apply for merchant status - Fraud is an issue - Interchange fees Debit cards - don't charge as much for a fee to use Mobile wallets Installment credit - Down payment, pay over time, may sell to another party - furniture companies Trade credit - Charge on open account and bill once a month Layaway - Down payment, pay over a specified period of time
Proforma Financial Statements
Want realistic forecasts May rely on some published statistics Helps us determine how much funding we will need to start and keep the business running Need enough money to start along with some reserve funds New businesses commonly have a loss the first 2-3 years Projected income statements and balance sheets and many lenders will require the cash flow projections also May create statements that are optimistic, pessimistic and most likely Will probably get some help from an accountant they want 3 years worth of proforma financial statements
Bolster customer service
Well-staffed knowledgeable employees Simple return policy Easy order tracking Think from a customer's viewpoint - make it easy for them
E-Commerce
What are we going to do? - to online shopping Issues to consider A serious matter —adds a new dimension to running our small business but can we afford to do nothing? 80% do research before buying online
cash budget
a "cash map" showing the amount and the timing of cash receipts and cash disbursements on a daily, weekly, or monthly basis goal is to have enough cash available to meet the company's cash needs at a given time helps predict the amount of cash a company will need to operate it can find approaching problems it reveals clues about how well the company balances its accounts payable and accounts receivable, control inventory, finances its growth, and makes use of the cash it had
sweep account
a checking account that automatically sweeps all funds in a company's checking account above a predetermined minimum into an interest-bearing account
quick ratio
a conservative measure of a firm's liquidity that indicates the extent to which the firm's most liquid assets cover its current liabilities sometimes called the acid test ratio is a more conservative measure of a company's liabilities because it shows the extent to its most liquid assets cover its current liabilities assets that can be converted into cash immediately quick assets / current liabilities 1:1 ratio
high dept ratio
a dept ratio is a measure of the percentage of total assets financed by a company's creditors compared to its owners. total debt (or liabilities) / total assets high dept ratio - means that creators provide a large percent of a company's total financing and therefore bear most of its financial risk - owners prefer higher leverage ratios, otherwise, business funds must come either from the owner's personal assets or from taking on new owners - with a greater portion of a firm's assets financed by creditors, the owner is able to generate profits with a smaller personal investment
statement of cash flow
a financial statement showing the changes in a company's working capital from the beginning of the year by listing both the sources and the uses of those funds many small businesses never need to prepare such a statement... instead they rely on a cash budget that keeps track of the flow of cash into and out of a company over time
balance sheet
a financial statement that provides a snapshot of a business's financial position, estimating its worth on a given date it is built on the fundamental accounting equation: - assets = liabilities + owner's equity
income statement
a financial statement that represents a moving picture of a business, comparing expenses against its revenue over a period of time to show its net income (or lose)
current ratio
a measure of a small firm's solvency that indicates the firm's ability to pay current liabilities out of current assets current assets/ current liabilities also called working capital ratio and is the most commonly used measure of short-term solvency suggest a 2:1 ratio
leverage ratios
a measure of the financing supplies by a firm's owners against that supplies by its creditors it is a gauge of the depth of a company's debt theses ratios show the extent to which an entrepreneur relies on debt capital rather than equity capital measure the degree of financial risk in a company lower ratios less affected by economic downturns
average inventory turnover rate
a measure of the number of times a company's average inventory is sold out, or turned over, during an accounting period tells the owner if they are managing inventory properly understocked, overstocked, or obsolete cost of goods sold/ average inventory tells the owner how fast the merchandise is moving
bounce rate
a measure of the percentage of visitors to a company;s web sit who view a single page and leave without viewing other pages high bounce rate means the website lacks credibility or meaningful content that attracts customer's attention
click fraud
a situation that occurs when a company pays for clicks that are generated by someone with no interest in or intent to purchase its products or services
big 3 of cash management
account receivable - what customers owe account payable - what the business owes inventory - things that can be sold into cash these 3 are leading indicators of a company's cash flow
advantages and disadvantages of accepting credit cards as payment
advantages - customers who use credit cards spend more (12 to 18 percent more) than people who pay with cash - accepting credit cards broaden a small company's customer base and closes sales that it would normally lose if customers had to pay in cash - score higher on reputation, reliability, and service in the customers eyes disadvantages - incur additional expenses. must pay to use the system (2% charge), transaction fee of 5 to 25 cents per charge -interchange fee from bank - credit card company fee - the retailers bank fee - the transaction fee
projected balance sheet
assets - cash is the most useful because it is highly liquid and can quickly be converted into other tangible assets - cash balance should cover the operating expenses for at least 1 inventory turnover period liabilities - the claims that creditors have against its assets
current assets
assets such as cash and other items to be converted into cash within one year or within the company's normal operating cycle
Balance sheet
assets=liabilities and net worth Point in time Assets —current, fixed, intangible Liabilities —current and long-term Owner's equity
Average collection period ratio
average number of days it takes to collect accounts receivable days in accounting period divided by receivables turnover ratio
Average payables period ratio
average number of days it takes us to pay our accounts payable days in accounting period divided by payables turnover ratio average payable ratio minus average collections ratio equals float
creating a simple web site
avoid clutter, especially on your site's home page use less text on your site's home page, landing pages, and initial product or service pages avoid huge graphic headers make the site easy to navigate minimize the number of clicks required for a customer to get to any particular page in the site incorporate meaningful content in the site that is useful to visitors, well organized,easy to read, and current include a frequently asked questions section be sure to prominently post privacy and return policies as well as product guarantees the company offers include a search tool that allows visitors to find the product or information they want avoid fancy typefaces and small fonts because they are too hard to real, limit font and color choices to 2 or 3 to avoid a circus look be vigilant about misspelled words, typos, and formatting mistakes avoid using small fonts on busy backgrounds choose colors carefully use your website to collect info from visitors but don't tie up visitor immediately with a tedious registration process make sure the overall look of the page is appealing simpler is better
Basic financial statements
balance sheet income statement statement of cash flows
Geographic pricing
based upon where customer is 1. Zone pricing - involves setting different prices for customers located in different territories because of different transportation costs 2. Delivered pricing - charges all customers the same price, regardless of their locations and different transportation costs 3. FOB factory pricing - a company sells merchandise to customers on the condition that they pay all shipping costs
benefits of leasing
by leasing automobiles, computes, office equipment, machinery, and more assets, the entrepreneur can conserve valuable cash leases offer 100% FINANCING, MEANING THAT THE OWNER AVOIDS THE LARGE Capital outlays required as down payments on most loans protects the business against obsolescence leasing is of the balance sheet method of financing and requires no collateral no depreciation involved is considered an operating expense on the income statement lease payments are flexible and then they are fixed to a monthly payment
cash requirements
cash balance should cover the operating expenses for at least 1 inventory turnover period
factors affecting company's cash flow
cash flow defined - a method of taking a company's liquidity and its ability to pay its bills and other financial obligations on time by tracking the flow of cash into and out of the business over a period of time seasonality improper cash management slow sales decreases in cash occur when a business purchases, on credit or for cash, goods for inventory or materials for use in production
domain name
decide on a domain name that is consistent with the image you want to create for your company and register it. keep it short memorable indicative of a company's business or business name - just the company's name easy to spell domains are given on a first come first service bases
financial ratios tell us what
financial ratios identify problems in the business while they are still problems and not business-threatening crises
Net sales to net assets ratio
measures our ability to generate sales in relation to our assets net sales divided by net total assets
pricing guidelines
must price high enough to cover costs to make profit or go out of business
handling past due accounts
must take immediate action start with a friendly reminder before getting tough follow up with an email that summarizes what they own and when to pay if still refuse - send a letter from the company's attorney - turn the account over to a collection attorney - as a last resort hire a debt collection agency
Average inventory turnover ratio
number of times our average inventory is sold out, or turned over, during the accounting period average inventory cost of goods sold divided by average inventory number of days items remain in inventory - number of days in accounting period divided by average inventory turnover
online customer service activities
offer live help provide an east order-tracking process offer a simple return process listen-and-respond on social media
head-to-head price competition
price wars usually begin when one competitor thinks he or she can achieve higher volume and take market share from rivals instantaneously by lowering prices
intrusion detection software
programs that constantly monitor the activity on a a company's network server and alert the company if they detect someone breaking into the system or if they detect unusual network activity
fair debt collections practices act
prohibit any kind of harassment when collecting debts can' call repeatedly no threats can't tell a 3rd party about the debt no abusive language can't call before 8 am or afer 9 pm
proforma financial statements
projected financial statements help entrepreneurs transform their business goals into reality answers questions like: - what profit can be expected to earn - if the owner's profit objective is $x, what sales level must the company achieve - what fixed and variable expenses can the owner expect at that level of sales - how much cash will the business need to stay operational projected income statements and balance sheets make proforma statements to get lenders and investors interest must be realistic
purchase, sales, collections relationship
purchases then sales then collections purchases for inventory and production lead sales - a company typically pays these bills before sales are generated collection of accounts receivable lags behind sales - customers who purchase goods on credit do not pay until after the sale, sometimes moths later
compute markup based on retail price markup is 65% cost is $125
retail price = (1+markup) (cost) (1+.65) (125) = retail price of $206.25
getting customers to pay promptly
speed up orders by having customers e-mail them to you send invoices when goods are shipped or when the job is complete ensure all invoices are clear, accurate, and timely include a phone number for a contact person if the customer has a question highlight the balance due and the terms of sale allow customers to use multiple payment methods offer incentives to encourage customers to pay early and penalties of payed late restrict a customers credit until past dues are paid make daily deposits of people that pay monitor customers behavior to know which ones are hard to get to pay find your top 20% of customers that generate 80% of all account receivables ask for a up front portion to be paid what for signs of a customer about to declare bankruptcy
reasons for leaving a website without purchasing anything
taxes and shipping charge how long it takes to ship find a cheaper price elsewhere
intercharge fee
the fee banks collect from retailers whenever customers use a credit or debit card to pay for a purchase
cash management
the process of forecasting, collecting, disbursing, investing, and planning for the cash a company needs to operate smoothly cash is the most important yet least productive asset a small business owns
things to consider before launching an e-commerce effort
the way in which a company exploits the internet's ability to connect with people anywhere in the world and the opportunities it creates to transform relationships with customers, suppliers, and vendors, and other external stakeholders are crucial to its success success requires a company to develop a plan for integrating the internet into its overall business strategy developing deep, lasting relationships with customers takes on even greater importance on the internet creating a meaningful presence on the internet requires an ongoing investment of time, money, energy, and talent measuring the success of its internet-based sales effort is essential if a company is to remain relevant to customers whose tastes, needs, and preferences are always changing
Cash flow cycle
time lag between paying suppliers for merchandise and materials and receiving payments from customers after we sell the product or service purchases—then sales—then collections Need to daily monitor cash reports Profit? Cash? Cash flow? Signs of impending cash flow crisis
spam
unsolicited and universally despised e-mail messages did not get permission to send email advertisement
