Entrepreneurship Exam 2

Business Plan

A business plan is a written narrative, typically 25 to 35 pages long, that describes what a new business intends to accomplish and how it intends to accomplish it.

price

Price is the amount of money consumers pay to buy a product. The price a company charges for its products sends an important message to its target market.t

Financial Objectives of a Firm

profitability, liquidity, efficiency, stability

Pro Forma Financial Statements

- A firm's pro forma financial statements are similar to its historical financial statements except that they look forward rather than track the past. - The preparation of pro forma financial statements helps a firm rethink its strategies and make adjustments if necessary. - The preparation of pro forma financials is also necessary if a firm is seeking funding or financing.

Bootstrapping

- A third source of seed money for a new venture is referred to as bootstrapping. - Bootstrapping is finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost cutting, or any means necessary. - Many entrepreneurs bootstrap out of necessity. examples- Buy used instead of new equipment. Coordinate purchases with other businesses. Lease equipment rather than buying. Obtain payments in advance from customers. Minimize personal expenses. Avoid unnecessary expenses, such as lavish office space or furniture.

Financial Ratios

- Depict relationships between items on a firm's financial statements. - An analysis of its financial ratios helps a firm determine whether it is meeting its financial objectives and how it stacks up against industry peers.

• Financial Management

- Financial management deals with two things: raising money and managing a company's finances in a way that achieves the highest rate of return. - Chapter 10 focuses on raising money. This chapter focuses primarily on: How a new venture tracks its financial progress through preparing, analyzing, and maintaining past financial statements. How a new venture forecasts future income and expenses by preparing pro forma (or projected) financial statements. The financial management of a firm deals with questions such as the following on an ongoing basis: How are we doing? Are we making or losing money? How much cash do we have on hand? Do we have enough cash to meet our short-term obligations? How efficiently are we utilizing our assets?

• Stability

- Is the strength and vigor of the firm's overall financial posture. For a firm to be stable, it must not only earn a profit and remain liquid but also keep its debt in check.

• The Economics of the Business

- This section addresses the basic logic of how profits are earned in the business and how many units of a business's profits must be sold for the business to "break even" and then start earning a profit. - Items to include in this section: Revenue drivers and profit margins. Fixed and variable costs. Operating leverage and its implications. Start-up costs. Break-even chart and calculations. Key Insights Two companies in the same industry may make profits in different ways. One may be a high-margin, low-volume business, while the other may be a low-margin, high-volume business. It's important to check to make sure the approach you select is sound. Computing a break-even analysis is an extremely useful exercise for any proposed or existing business.

IndustryAnalysis

- This section should begin by describing the industry the business will enter in terms of its size, growth rate, and sales projections. - Items to include in this section: Industry size, growth rate, and sales projections. Industry structure. Nature of participants. Key success factors. Industry trends. Long-term prospects. Key Insights Before a business selects a target market it should have a good grasp of its industry—including where its promising areas are and where its points of vulnerability are. The industry that a company participates in largely defines the playing field that a firm will participate in.

• Importance of Financial Statements

- To assess whether its financial objectives are being met, firms rely heavily on analysis of financial statements. A financial statement is a written report that quantitatively describes a firm's financial health. The income statement, the balance sheet, and the statement of cash flows are the financial statements entrepreneurs use most commonly.

• Two Types of Crowdfunding Programs

Rewards-based crowdfunding allows entrepreneurs to raise money in exchange for some type of amenity or reward. - Equity-based crowdfunding helps businesses raise money by tapping individuals and investors who provide funding in exchange for equity in the business.

Twelve PowerPoint Slides to Include in an Investor Presentation

1. Title Slide 2. Problem 3. Solution 4. Opportunity and target market 5. Technology 6. Competition 7. Marketing and sales 8. Management team 9. Financial projections 10. Current status 11. Financing sought 12. Summary

Selecting a Market and Establishing a Position

1. segmenting the market- what groups of customers in my market are similar enough that the same product or service will appeal to all of them 2. selecting a target market- which specific group of customers have I decided to target? 3. crafting a unique positioning strategy- what position will my firm occupy in the minds of my customers?

What is a Competitor Analysis?

A competitor analysis is a detailed analysis of a firm's competition. - It helps a firm understand the positions of its major competitors and the opportunities that are available. - A competitive analysis grid is a tool for organizing the information a firm collects about its competitors.

Outline of business plan

A suggested outline of a business plan is shown on the next several slides. Most business plans do not include all the elements introduced in the sample plan; we include them here for the purpose of completeness. Each entrepreneur must decide which elements to include in his or her plan.

Competitive Analysis Grid

A tool for organizing the information a firm collects about its competitors. - A competitive analysis grid can help a firm see how it stacks up against its competitors, provide ideas for markets to pursue, and identify its primary sources of competitive advantage.

Establishing a Unique Position

After selecting a target market, the firm's next step is to establish a "position" within the market that differentiates it from its rivals. A "position" is the part of a market that the firm is claiming as its own.A product attribute map illustrates a firm's positioning strategy relative to its rivals.

Initial Public Offering

An initial public offering (IPO) is a company's first sale of stock to the public. When a company goes public, its stock is traded on one of the major stock exchanges. Most entrepreneurial firms that go public trade on the NASDAQ, which is weighted heavily toward technology, biotech, and small- company stocks. An IPO is an important milestone for a firm. Typically, a firm is not able to go public until it has demonstrated that it is viable and has a bright future.

Forecasts

Are an estimate of a firm's future income and expenses, based on past performance, its current circumstances, and its future plans. New ventures typically base their forecasts on an estimate of sales and then on industry averages or the experiences of similar start-ups regarding the cost of goods sold and other expenses. - The analysis of a firm's historical financial statements are followed by the preparation of forecasts. - Forecasts are predictions of a firm's future sales, expenses, income, and capital expenditures. A firm's forecasts provide the basis for its pro forma financial statements. A well-developed set of pro forma financial statements helps a firm create accurate budgets, build financial plans, and manage its finances in a proactive rather than a reactive manner.

Business Angels

Are individuals who invest their personal capital directly in start-ups. Angel investors generally invest between $10,000 and $500,000 in a single company and are looking for companies that have the potential to grow 30 to 40 percent per year before they are acquired or go public. Many angels are motivated by more than financial returns: they enjoy the process of mentoring a new start- up. Most angel investors remain fairly anonymous and are matched up with entrepreneurs via referrals.There are organized groups of business angels. • These groups typically consist of 10 to 150 angel investors in a local area that meet regularly to listen to business plan presentations.

Budgets

Are itemized forecasts of a company's income, expenses, and capital needs and are also an important tool for financial planning and control.

Pro Forma Financial Statements

Are projections for future periods based on forecasts and are typically completed for two to three years in the future. Pro forma financial statements are strictly planning tools and are not required by the SEC.

Sources of Competitive Intelligence

Attend conferences and trade shows. Purchase competitors' products. Study competitors' Web sites and social media sites. Set up Google e-mail alerts. Read industry-related books, magazines, and Web sites. Talk to customers about what motivated them to buy your product as opposed to your competitor's product.

Sources of Debt Financing

Commercial Banks• SBA Guaranteed Loans

Comparing a Firm's Financial Results to Industry Norms

Comparing a firm's financial results to industry norms helps a firm determine how it stacks up against its competitors and if there are any financial "red flags" requiring attention.

two methods for setting the price of a product

Cost-Based Pricing • The list price is determined by adding a markup percentage to a product's cost. Value-Based Pricing • The list price is determined by estimating what consumers are willing to pay for a product.

Two most common alternatives

Equity Funding • Means exchanging partial ownership in a firm, usually in the form of stock, for funding. Debt Financing • Is getting a loan.

Branding

Establishing a Brand - A brand is the set of attributes—positive or negative— that people associate with a company. These attributes can be positive, such as trustworthy, innovative, dependable, or easy to deal with. Or they can be negative, such as cheap, unreliable, arrogant, or difficult to deal with. - The customer loyalty a company creates through its brand is one of its most valuable assets.

he Nature of the Funding and Financing Process

Few people deal with the process of raising investment capital until they need to raise capital for their own firm. As a result, many entrepreneurs go about the task of raising capital haphazardly because they lack experience in this area.

Tagline

Firms often develop a "tagline" to reinforce the position they have staked out in their market, or a phrase that is used consistently in a company's literature and thus becomes associated with the company. An example is Nike's familiar tagline, "Just do it." • The beauty of this simple three-word expression is that it applies equally to a 21-year old triathlete and a 65-year-old mall walker.

Dual-Use Document

For most new ventures, the business plan is a dual- purpose document that is used both inside and outside the firm.

Emerging Industries

Industries in which standard operating procedures have yet to be developed. Opportunity: First-mover advantage.

Fragmented Industries

Industries that are characterized by a large number of firms of approximately equal size. Opportunity: Consolidation.

Declining Industries

Industries that are experiencing a reduction in demand. Opportunities: Leadership, establishing a niche market, and pursuing a cost reduction strategy

Global Industries

Industries that are experiencing significant international sales. Opportunities: Multidomestic and global strategies.

Mature Industries

Industries that are experiencing slow or no increase in demand. Opportunities: Process innovation and after-sale service innovation.

Segmenting the Market

Involves studying a firm's industry and determining the different target markets in that industry. • Markets can be segmented in a number of different ways, including: - Geography (city, state, country).- Demographic variables (age, gender, family size).- Psychographic variables (personality, lifestyle, values). - Behavioral variables (benefits sought, brand loyalty).- Product type (varies by product).

Liquidity

Is a company's ability to meet its short-term financial obligations. Even if a firm is profitable, it is often a challenge to keep enough money in the bank to meet its routine obligations in a timely manner.

Efficiency

Is how productively a firm utilizes its assets relative to its revenue and its profits. Southwest Airlines, for example, uses its assets very productively. Its turnaround time, or the time its airplanes sit on the ground while they are being unloaded and reloaded, is the lowest in the airline industry.

Profitability

Is the ability to earn a profit. Many start-ups are not profitable during their first one to three years while they are training employees and building their brands. However, a firm must become profitable to remain viable and provide a return to its owners.

product

Is the good or service a firm offers to its target market. The most important attribute of a product is that it adds value in the mind of its target customers. An important distinction should be made between a firm's core product and the actual product. The initial rollout is one of the most critical times in the marketing of a new product. All firms face the challenge that they are unknown and that it takes a leap of faith for the first customers to buy their products.

Operations Plan

Outlines how your business will be run and how your product or service will be produced. ‒ A useful way to illustrate how your business will be run is to describe it in terms of "back stage" (unseen to the customer) and "front stage" (seen by the customer) activities. ‒ Items to include in this section: General approach to operations. Business location. Facilities and equipment. Key Insights • Your have to strike a careful balance between adequately describing this topic and providing too much detail. • As a result, it is best to keep this section short and crisp.

promotion

Promotion- Refers to the activities the firm takes to communicate the merits of its product to its target market. - There are several common activities that entrepreneurs use to promote their products and services. • Advertising- Advertising is making people aware of a product or service in hopes of persuading them to buy it.

Historical Financial Statements

Reflect past performance and are usually prepared on a quarterly and annual basis. Publicly traded firms are required by the SEC to prepare financial statements and make them available to the public.

Establishing a Brand

So how does a firm establish a brand? On a philosophical level, a firm must have meaning in its customers' lives. It must create value— something for which customers are willing to pay. On a more practical level, brands are built through a number of techniques, including advertising, public relations, sponsorships, support of social causes, social media, and good performance. A firm's name, logo, website design, Facebook page, Instagram account and even its letterhead are part of its brand.

Selecting a Target Market

Target Market Once a firm has segmented the market, a target market must be chosen. The market must be sufficiently attractive and the firm must have the capability to serve it. By focusing on a clearly defined market, a firm can become an expert in that market and then be able to provide customers a high level of service.

Executive Summary

The executive summary is a short overview of the entire business plan. - It provides a busy reader with everything that needs to be known about the new venture's distinctive nature. - An executive summary shouldn't exceed two single- spaced pages. - Even though the executive summary appears at the beginning of the business plan, it should be written last. The plan itself will evolve as it's written, so not everything is known at the outset. Key Insights In many instances an investor will first ask for a copy of the firm's PowerPoint deck or executive summary and will request of a copy of the full business plan only if the PowerPoint deck or executive summary is sufficiently convincing. The executive summary, then, is arguably the most important section of a business plan.

Financial Projections

The final section of a business plan presents a firm's pro forma (or projected) financial projections. - Items to include in this section: Sources and uses of funds statement. Assumptions sheet. Pro forma income statements. Pro forma balance sheets. Pro forma cash flows. Ratio analysis. Key Insights • Having completed the earlier sections of the plan, it's easy to see why the financial projections come last. • They take the plans you've developed and express them in financial terms.

Management Team and Company Structure

The management team of a new venture typically consists of the founder or founders and a handful of key management personnel. ‒ Items to include in this section: Management team. Board of directors (if you have one). Board of advisors (if you have one). Company structure. Key Insights This is a critical section of a business plan. Many investors and others who read the business plan look first at the executive summary and then go directly to the management team section to assess the strength of the people starting the firm.

Market Analysis

The market analysis breaks the industry into segments and zeroes in on the specific segment (or target market) to which the firm will try to appeal. - Items to include in this section: Market segmentation and target market selection. Buyer behavior. Competitor analysis. Estimate of the firm's annual sales and market share. Key Insights Most start-ups do not service their entire industry. Instead, they focus on servicing a specific (target) market within the industry. It's important to include a section in the market analysis that deals with the behavior of the consumers in the market. The more a start-up knows about the consumers in its target market, the more it can tailor its products or services appropriately.

SBA Guaranteed Loans

The most notable SBA program available to small businesses is the 7(A) Guaranty Program. - The program operates through private-sector lenders who provide loans that are guaranteed by the SBA. - The loans are for small businesses that are unable to secure financing on reasonable terms through normal lending channels. - Almost all businesses are eligible to apply for and SBA loan.

Ratio Analysis

The most practical way to interpret or make sense of a firm's historical financial statements is through ratio analysis. The same financial ratios used to evaluate a firm's historical financial statements should be used to evaluate the pro forma financial statements. - This work is completed so the firm can get a sense of how its projected financial performance compares to its past performance and how its projected activities will affect its cash position and its overall financial soundness.

Personal Funds

The vast majority of founders contribute personal funds, along with sweat equity, to their ventures. Sweat equity represents the value of the time and effort that a founder puts into a new venture. Friends and family funds are second source of funds for many new ventures

Why Most New Ventures Need Funding

There are three reasons most new ventures need to raise money during their early life. Cash flow challenges - inventory must be purchases, employees must be trained and paid, and advertising must be paid for before cash is generated from sales capital investments- the cost of buying real estate, building facilities, and purchasing equipment typically exceeds a firms ability to provide funds for these needs on it own Lengthy product development cycles- some products are under development for years before they generate earnings. the up front costs often exceed a firms ability to fund these activities on its own.

Company Description

This section begins with a general description of the company. - Items to include in this section: Company description. Company history. Mission statement. Products and services. Current status. Legal status and ownership. Key partnerships (if any). Key Insights • While at first glance this section may seem less important than the others, it is extremely important. • It demonstrates to your reader that you know how to translate an idea into a business.

Collecting Competitive Intelligence

To complete a competitive analysis grid, a firm must first understand the strategies and behaviors of its competitors. - The information that is gathered by a firm to learn about its competitors is referred to as competitive intelligence. - A new venture should take care that it collects competitive intelligence in a professional and ethical manner.

Structure of the Business Plan

To make the best impression, a business plan should follow a conventional structure, such as the outline for the business plan shown in the chapter. - Although some entrepreneurs want to demonstrate creativity, departing from the basic structure of the conventional business plan is usually a mistake. - Typically, investors are busy people and want a plan where they can easily find critical information. Software Packages ‒ There are many software packages available that employ an interactive, menu-driven approach to assist in the writing of a business plan. ‒ Some of these programs are very helpful. However, entrepreneurs should avoid a boilerplate plan that looks as though it came from a "canned" source. • Sense of Excitement ‒ Along with facts and figures, a business plan needs to project a sense of anticipation and excitement about the possibilities that surround a new venture. • Content of the Business Plan - The business plan should give clear and concise information on all the important aspects of the proposed venture. - It must be long enough to provide sufficient information yet short enough to maintain reader interest. - For most plans, 25 to 35 pages is sufficient. • Types of Business Plans - There are three types of business plans, which are shown on the next slide. Recognizing the Elements of the Plan May Change - It's important to recognize that the plan will usually change while written. - New insights invariably emerge when an entrepreneur or a team of entrepreneurs immerse themselves in writing the plan and start getting feedback from others.

Venture Capital

Venture capital is money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential.A distinct difference between angel investors and venture capital firms is that angels tend to invest earlier in the life of a company, whereas venture capitalists come in later. Venture capitalists are looking for the "home run." The result is that they do not fund the majority of the business plans they receive and review.

preparation for debt or equity financing

step 1- determine precisely how much money is needed step 2- determine the most appropriate type of fiancing or funding step 3- develop a strategy for engaging potential investors or bankers.

Overall Schedule

‒ A schedule should be prepared that shows the major events required to launch the business. ‒ The schedule should be in the format of milestones critical to the business's success. ‒ Examples of milestones: Incorporating the venture. Completion of prototypes. Rental of facilities. Obtaining critical financing. Starting production. Obtaining the first sale. Key Insight • An effectively prepared and presented schedule can be extremely helpful in convincing potential investors that the management team is aware of what needs to take place to launch the venture and has a plan in place to get there.

• Design and Development Plan

‒ If you're developing a completely new product or service, you need to include a section in your business plan that focuses on the status of your development efforts. ‒ Items to include in this section: Development status and tasks. Challenges and risks. Projected development costs. Proprietary issues (patents, trademarks, copyrights, licenses, brand names). Key Insights Many seemingly promising start-ups never get off the ground because their product development efforts stall or the actual development of the product or service turns out to be more difficult than thought. As a result, this is a very important section for businesses developing a completely new product or service.

The Oral Presentation

‒ The first rule in making an oral presentation is to follow directions. If you're told you have 20 minutes, don't talk for more than the allotted time. ‒ The presentation should be smooth and well-rehearsed. ‒ The slides should be sharp and not cluttered. • Questions and Feedback to Expect from Investors - The smart entrepreneur has a good idea of the questions that will be asked.

Marketing Plan

‒ The marketing plan focuses on how the business will market and sell its product or service. ‒ Items to include in this section: Overall marketing strategy. Product, price, promotions, and distribution. Sales process (or cycle). Sales tactics. Key Insights The best way to describe a start-up's marketing plan is to start by articulating its marketing strategy, positioning, and points of differentiation, and then talk about how these overall aspects of the plan will be supported by price, promotional mix, and distribution strategy. It's also important to discuss the company sales process.

Sources of Equity Funding

• BusinessAngels• Venture Capital• Initial Public Offerings

Crowdfunding

• Crowdfunding is the practice of funding a project or new venture by raising monetary contributions from a large number of people (the "crowd") typically via the Internet.

Creative Sources of Financing or Funding

• Crowdfunding• Grant Programs

commercial banks

• Historically, commercial banks have not been viewed as a practical source of financing for start-up firms. Banks are interested in firms that have a strong cash flow, low leverage, audited financials, good management, and a healthy balance sheet. The good news is that despite these historical precedents, some banks are starting to engage start-up entrepreneurs.

Alternatives for Raising Money for a New Venture

• Personal Funds• Debt Financing• Equity Capital• Creative Sources