2.1 Researching and Analyzing the Market

Analyzing the Market

In this module you will delve more deeply into market analysis. Industry and customer characteristics, especially your options for distribution should come into focus. You will define your competitive advantage and analyze your competition.

Primary Research

Primary research is data collected specifically for your business. It is obtained by observing or communicating with customer or competitors. Primary research data could be collected through surveys, interviews, focus groups, or direct observation of potentials and existing customers, and similar business in the industry. The information can provide insights into customers' needs or perceptions, the benefits of a product or service, packaging or delivery options, or other information as needed.

Industry Profile

To conduct business in your industry successfully, you should know the industry's size, potential for growth and profitability, notable trends unique to your industry, typical distribution channels, and other information that will help you stay competitive.

Current Size

• How many similar companies exist nationally, regionally, and locally?
• How does the current size of the industry compare to historical figures from five or ten years ago?
• How many companies do business primarily or exclusively on the Internet?
• What are the total dollars spent, or the total units consumed, by buyers nationally, regionally, and locally?

Growth potential

Consider these questions to research industry growth:

• What is the growth pattern for the industry? Is it growing, declining, or remaining stable?
• What factors attribute to this growth potential?

Profitability

Asking these questions can help you find out about your industry's profit expectations:

• What factors contribute to profit in this industry?
• What are the industry's standards for gross margin and net profit percentages?
• What factors affect gross margin and net profit?

Industry trends

Consider these questions about trends as you research your industry:

• What are the primary trends in the industry?
• What trends in outside forces such as seasonality, economic fluctuations, demographics, or changes in other industries might affect this industry?
• What opportunities and threats do these trends create?

Distribution Channels

Consider these questions about distribution:

• What are the common ways that businesses in this industry get their products or services to their target customers?
• Are these distribution channels exclusive to this industry?

Prepare an industry profile based on the data and information collected.

Industry Profile

What do you already know about your industry, and what do you still need to know? Check the following items to determine what you still need to research about your industry.

Conduct Market Research

Identify resources for questions that I need to answer through market research.

Market

Competition

Additional Information To Collect

 

2.2 Information to collect to develop business idea and identify market needs

What information should I collect to develop my business idea and identify market needs ? Check the box that indicates the information you will research for your business concept.  

2.3 Researching Markets for Identifying Opportunity and Meeting Market Needs

Identifying and Meeting Market Needs

To confirm that the business will attract enough paying customers to become a profitable business, it is necessary to understand consumer needs, wants, habits, and consumption behavior of the target market. You can learn to spot trends by observing people, asking questions, and listening to what customers and competitors are saying and doing.

Ways of studying industries, markets, and competition

Consider the following ways of finding information:

1. Look for growth industries

Growth industries experience rapidly expanding customer demand.

2. Examine new knowledge

Scan trade journals, browse in the library, and talk to people in your industry to discover what is new and exciting. Ask questions about other organizations, markets, products or services, and challenges. New knowledge often results in rethinking old ways and inventing different ways of packaging, delivering, or marketing products or services.

3. Study the competition

Find out what the competition is doing. Careful gathering and analyzing of competitive data is known as market intelligence. What are competitors doing right? What are their weaknesses? Before launching a new business, scan the marketplace to see who is already there and ask industry experts, customers, and suppliers about present and possible rivals.

4. Read constantly

Plan to spend a significant amount of time reading and scanning publications. Entrepreneurs read intuitively, looking for what is different, new, and exciting. They read publications outside of their own industry as well as newspapers and business journals, which cover community developments and trends in local markets.

Researching Demographics, Lifestyles, and Habits

Changes in tastes, lifestyles, and habits are constant and volatile. By anticipating and responding quickly to such changes, you greatly increase your chances of having a successful business. Demographic and lifestyle changes are constantly evolving, but often their consequences are not readily apparent. You will be able to anticipate many potential opportunities years in advance by studying changes, such as the aging population, ethnic shifts, and movements of populations to different geographic areas.

Consider these ways to find market information

1. Monitor demographic changes

Assess changes in demographic and income statistics. Population shifts have a disproportionate impact on consumer demand because economic undercurrents.

2. Engage in people watching

Watching people's behavior and listening to conversations provide ideas on needs and desires in the marketplace.

3. Do online research

Online information is a great source for the latest information in various industries. Spot new trends on the internet, and shop various e-commerce sites.

Watching Trends

Look for trends through these resources:

1. Trade and industry associations

Review trade and industry information and join associations and conventions that serve your industry.

2. Other entrepreneurs

Having already taken the entrepreneurial leap themselves, these individuals have proven their ability to identify business opportunities and are typically very alert to industry changes and marketplace needs.

3. Vendors and suppliers

Through their close work with customers, vendors and suppliers become a valuable resource for information about new products and services as well as customers' unmet needs.

4. Entrepreneur's infrastructure

Accountants, lawyers, bankers etc. can provide valuable information about changes or the latest trends affecting their industries and the marketplace.

5. Various governmental agencies

The government has a host of agencies whose mission is to collect and report information on the economy and society. Others provide valuable assistance to entrepreneurs launching and growing businesses.

6. Professors

Professors stay current in their specific fields and often have in-depth knowledge of trends and problems in their area of study.

Fill the following table based on the information gleaned and its interpretation:

Recognizing Opportunity

Does my business concept come from one or more of the following opportunities?   If not, how do I describe the source of my business concept and how do I know it is a sound business opportunity?

Establishing a Personal Network

Successful entrepreneurs build a network or team of people to serve as mentors and advisers throughout the life of their business. This network provides insights and information concerning the business's market or industry. You can build such a network through industry and trade associations, professional and business organizations, interactions with service providers (accountants, attorneys, and bankers), and suppliers.

2.4 Direct Indirect Competitors

Direct Competitors

Direct competition for any business includes entities that sell similar products or services in the same market. To gain a competitive advantage in the marketplace, you will need to differentiate your product or service from your direct competitors' product or service. To do this, you must first understand the needs of your customer and identify the strengths and weaknesses of your direct competitors. Then, you can ensure that your product or service meets the needs of the customer while incorporating your strengths and improving on competitors weaknesses. Some entrepreneurs contact their competitors' employees and ask questions about products or services, pricing discounts, and areas for improvement. Interviewing competitors customers or visiting the competition may also yield this information. One of the best strategies you can use is to interview a competitor who competes outside of your target location. By talking with a competitor outside your trade area, you may obtain a significant amount of information about the industry, the marketplace, and the operations of the business that local competitors will not share. Potential customers may be buying similar products or services from a competitor who offers a different mix than you plan to carry or from a competitor over the internet.

Indirect Competitors

The indirect competitor sells different products or services that fulfill the same need or provide the same benefits as yours. Targeted customers can also be indirect competition when they provide the product or service themselves or eliminate it entirely when times are tough financially. Prepare a competitive profile of your target market by answering the following questions

Competitors - Direct and Indirect continued

Consider all the alternatives my customers have to buy a product or service similar to mine.

Step 1 Identify direct Competitors.

Direct competitors are businesses that sell similar products or services in the same market. Consider companies located in the geographic region well as companies.  

2.4 Defining the business identifying market needs customer point of view

Verify your information by actually conducting primary and secondary market research.

Defining the business - Identifying market needs

This step enables you to look at your business idea from a customer point-of-view

The above image is from Disciplined Entrepreneurship Workbook by Bill Aulet

Developing my business idea

Entrepreneurs are idea people. They see opportunities everywhere. But it takes more than an idea to make a business. Converting an idea into a business requires you to think about - who will buy the product/service, the benefits of the product or service, how it is differentiated from similar ones, how the product or service will be sold and methods of delivery.

Defining Products and Services

You need to identify the exact product or service you plan to offer. It includes the purpose of the product or service and its unique features and distinct characteristics. You need to define how your business solves a problem or fulfills a need, is unique, and works as planned.

Solve a Problem or Fulfill a Need

You need to answer the following questions:

• 1. What are the physical or technical features of the product or service?
• 2. What is the purpose of the product or service? What problem does the product or service solve, or what need does it fill?
• 3. What makes this product or service unique-better than the competition?
• 4. Is the product or service workable? Does it do what it is intended to do?

Identify the Uniqueness of a Product or Service

Successful businesses have products or services that differ significantly in meaningful ways from competitors. Just copying the competitors' products or services typically will not lead to a successful product or service. You need to set your product or service apart from its competition. This requires answering questions like: What is the point of difference? Is it faster or slower, larger or smaller, less expensive or higher priced with higher quality? Does it provide added features resulting in new benefits to the customer?

Fill the following table

How Do I Define My Product/Service?

What Is My Business Concept?

Develop your business concept by filling the following table.

Answer the following questions as completely as you can with what you currently know about your business idea.

  A good way to make your business idea cogent is to accurately and clearly describe the essence of your business to others in two or three sentences. You can consider this your marketing speech. To create a 60-90 second marketing speech:

• Answer the question - What does the business do?
• Use the words work with, want, or offer.
• State how your business solves a problem or offers a solution.
• Describe what makes your business unique.
• Tell a quick story.
• Keep it to sixty or ninety seconds or less.

One-Minute Marketing Speech

List some ideas for your one-minute marketing speech or elevator pitch.  

2.5 Develop a Business Concept statements clarity of thought

Prepare your business concept statement.

Directions

A. Identify the key components of your business concept.

Answer the questions on the Business Concept Development Worksheet to identify the key components of your business concept.

Business Concept Development Worksheets

Market Selection

An initial profiling of a potential customer and identifying a target market, a cluster of similar customers, helps in developing the startup. This is preliminary work and will help focus the development of the startup. Fill up the following table. You can use this profile of the end user. When you meet potential customers you can assess whether they are actually in your End User Profile and are worth your time. If they do not fit the profile, engaging with their needs will distract you from building a great product to meet a specific customer pain. This will also help gauge how many end users exist in your market

End User Profile for Initial Target Market

The next 3 tools – market segmentation tool, target markets to consider and market selection worksheet – will help prioritize the startup by focusing and deploying resources on the highest potential cohort of customers. Filling the market segmentation matrix helps identify segments of the market based on the segments characteristics. The 'Target Markets to Consider' template starts with the end user profile and helps rank the segments based on critical criteria. The market selection template, as the name suggests, helps rank the segments on executable potential.

Market Segmentation Matrix Row Definitions

Market Segmentation Matrix Starter Template

 

Target Markets to consider for My Startup

 

Market Selection Worksheet

2 Step - Target Market Customer

Target Market

Identify key characteristics of each market segment related to your product or services.

On the chart below, list the market segments you identified above in the left hand column. Across the top list the major feature or benefits of your product or services.

Feature and Benefits

 

Select a target market.

Which of your market segments appears to be the best fit for your product or services? Using this segment, choose a target market. You may choose this target market because its member are easy to identify, It is easy to enter, it offers a significant profit potential, or competitors have identifiable weaknesses.

Market Analysis

Target Market Profile

• What target market will be selected?
• How many potential customers and/or potential dollars are available in this market segment?
• What is your share of the market?
• What other markets, if any, will be targeted and at what stages of the business?
• Note that the target market might be firms in the distribution channel instead of the end user.

Customer Profile

• What is the profile of the intended customer, including age, gender, profession, income, and geographic location?
• What attitudes, values, belief systems, and social status define this customer group?
• For business customers, what is your customer's business type, intended use for the product/service, geographic location, and size of organization?

Future Markets

What opportunities could occur in future markets, including market size, method of market penetration, projected date of entry, and approximate costs?

Target Market Selection

Based on the above research fill the following table. Don’t be perturbed if you can’t or fill only partially? As we progress the information will start to get richer.

Target Markets to Consider for My Startup

  Our end goal will be to fill the following table for each target segment we intend to focus on as we start the business. Note that these change and evolve as the business is implemented and you meet more and more customers.

Market Segmentation Matrix Row Definitions

End User This is the person who is actually using the product, not the economic buyer or the champion even if you are selling to a company or a general organization, you want to list here the people in that company who will be using your product.

Market Segment Name	Carefully name the market segment so it appropriately and precisely captures the group you want and no more; it is okay to be general at first, but you will have to narrow this down in time to make real progress.
Task	What exactly is it that the end users do that you will significantly affect or allow them to do that they could not do before?
Benefit	What is the benefit that you believe the end users will get?
Urgency of Need	What is the level of urgency to solve the problem or capture the new opportunity for the end user?
Example End Users	Who are examples of end users that you can, have, or will talk to, so as to validate your perceptions of this market segment?
Lead Customers	Who are the influential customers where, if they buy the product, others will take note and likely follow?
Willingness to Change	How conservative is this market segment? How open are they to change? Is there something to force change?
Frequency of Buying	How often do they buy new products? What does their buying cycle look like at a high level?
Concentration of Buyers	How many different buyers are there in this market segment? Is it a monopoly? Oligopoly (a small number of buyers)? Or many competitive buyers?
Other Relevant Market Considerations	This allows for customization of your segment for relevant considerations such as "high employee turnover," "very low margins/commodity," "high-growth industry," "high virality effect" (i.e., word of mouth), etc.
Size of Market (# of End Users)	Estimation of the number of end users to a relevant range
Est. Value of End User	A first-pass estimate of the value of each end user, again to a relevant order of magnitude so you can make some relative decisions now (you will do a deep dive into this and other numbers later).
Competition/ Alternatives	What will be your competition from the end users' perspective? Include the "do nothing" option as well as who else would be competitors if the end users analyzed their options.
Other Components Needed for a Full Solution	Since most customers will only buy a full solution and not an individual component that they have to assemble into a full solution, what other elements are needed to construct a full solution to achieve the benefits above? These are the complementary assets that you do not currently have but would need to build or acquire to give the end user a full solution.
Important Partners	Who are the partners or distributors you will have to work with to fit into the end user's need and use?
Other Relevant Personal Considerations	In many Market Segmentation analyses, there are additional important factors that should be considered. These could be things like where the market segment is geographically centered, whether it matches the values of the founding team, existing knowledge and contacts in market, etc.

Often, entrepreneurs spend far too much time on competitors at the expense of focusing on their target customer- especially when they start doing feature-by-feature comparisons with their competitors. Customers don't care about features; they care about benefits!

Market Segmentation Matrix Starter Template

  You must know the major competitors, especially that incredibly persistent one known as the "do nothing" option, and at some point later on you'll want to do a more robust analysis of your competition, asking holistic questions like what is the competitor's strategy, who funds them, who are their key customers, and what are the strengths and weaknesses of the leadership team. At this stage of the startup journey you need to focus on defining your company first. The Competitive Position is designed to quickly make sure you have fundamentally differentiated yourself from your competition and that your customer sees you are uniquely positioned to create sustainable, superior value for them.

Apply the framework to your new venture

Often, entrepreneurs spend far too much time on competitors at the expense of focusing on their target customer- especially when they start doing feature-by-feature comparisons with their competitors.

Customers don't care about features; they care about benefits!

You must know the major competitors, especially that incredibly persistent one known as the "do nothing" option, and at some point later on you'll want to do a more robust analysis of your competition, asking holistic questions like what is the competitor's strategy, who funds them, who are their key customers, and what are the strengths and weaknesses of the leadership team.

At this stage of the startup journey you need to focus on defining your company first. The Competitive Position is designed to quickly make sure you have fundamentally differentiated yourself from your competition and that your customer sees you are uniquely positioned to create sustainable, superior value for them.

Target Customer Priorities

1

2

Competitive Positioning

Priority #1

Priority #2

 

A = Do nothing option

B =

C =

D =

=

 

Where are you positioned relative to your competiton, including the "do nothing" option? Are you in the upper-right corner? If not, why do you think that is? If other competitors are close to you on the chart, Why?

What capabilities of the proposed business enables enables you to deliver so much more value that you are in the upper-right corner and your competitors are not?
Explain precisely and make the linkage clear.

Submit

Customer Profile Worksheets

Step 2 Complete the Customer Profile Worksheet.

Using the information from the checklist, write a customer profile in the Customer Profile Worksheet

Step 3 Identify research needed on major customer groups.

Additional research regarding your customers will help you later when you determine the size of your target market, how to reach potential customers, and how to best sell your product or services. What market research on your major customer groups would be helpful? Note this information in the right-hand column of the Customer Profile Worksheet.

Step 4 Complete the research.

Note: These worksheets are meant to guide you but not constrain you. The Persona should paint a rich picture and convey important information about your target market, so feel free to customize this worksheet as appropriate.

Verify the draft customer profile by actually conducting primary and secondary market research

By identifying and knowing your customers, you can assess their needs and consider if your business concept will meet those needs.

The Chooser vs. the User

Sometimes the customer who chooses your product or service is not the end-user, the person who uses it.

Purchasing Process

When a business is the customer, multiple individuals may be involved at each step in the process. One common arrangement is shown here. Understanding the purchasing process and identifying business customers is part of the market analysis.

B2B vs. B2C Markets

Businesses can target other businesses or consumers. Your customer profile will vary depending on whether your customers are businesses or consumers.
Answer the following questions to define who is the customer of your business?

Who is my customer?

Customer Profile Worksheet

Identify major customer groups and their distinguishing characteristics.

Directions

In this activity you will clearly describe your customers and identify the type of market research you need.

Step 1 Identify major customer groups. Identify in the chart below which of the distinguishing demographic variables, psychographic variables, and buying behaviors best describe your customers. Not all variables and factors will apply to your situation. If something doesn't apply, skip it.

Customer Profile Worksheet (continued)

Buying Behavior (where, when, what and how they buy)

Customer Persona

General Information on Persona(Worksheets)
What is the name of your persona?
Where did you source this person from?
What types of biases are possible with this Persona? (e.g., it is a friend/relative who won't be as honest, the Persona is a potential customer so you might advocate for your product too early instead of staying in inquiry mode)
What will you do to mitigate these biases as you work with the Persona?
What kind of access do you have to the Persona? (Be careful to use their time wisely because they are not as motivated as you by your process.)
What do you see as the strengths of this Persona?
What do you see as the weaknesses of this Persona?

Persona Profile for Initial Target Market

General Information on Persona (Worksheets)
Name
Address
E-mail and phone
Title (if appropriate)
If business-to-business (B2B), where they exist in the overall org chart
Demographics:
Gender	Male Female
Age
Income
Education level
Education specifics (schools, majors, awards, etc.)
Employment History (companies, jobs, awards, etc.)
Marital status	Married Unmarried
Kids and other family info
Ethnicity
Political affiliations
Other demographic 1:
Other demographic 2:
Other demographic 3:
Other demographic 4:
Psychographics:
Why do they do this job or live the life they do?
Hobbies
Heroes
Aspirations in life
Fears in life
Personality traits
Interesting habits
Other demographic 1:
Other demographic 2:
Other demographic 3:
Other demographic 4:
Proxy Products (which products have the highest correlation with your Persona)
Is there a product or products that the Persona needs to have in order to get benefit from yours?
Are there products the Persona uses that embody the psychographics and demographics from the end user profile?
Any other unusual or interesting products of note that the Persona has?
Watering Holes (real or virtual places where the Persona interacts with others like him or her):
Favorite sources for news (e.g., which newspapers, TV shows, websites, blogs)
Places where Persona congregates with other similar people
Associations Persona belongs to and the importance of each
Where does the Persona go for expert advice and/or to get questions answered?
Day in the Life (describe a day in the life of the end user and what is going on in this person's head):
What are the typical tasks the Persona does each day, with the amount of time associated with each?
Which of these typical tasks are habits?
Which require the most effort?
Which does the Persona enjoy?
Which does the Persona not enjoy?
Day for the Persona? What makes it a good
What makes it a bad day?
Who is the Persona trying to please the most?
What is the top priority of the person/people the Persona is trying to please?
Priorities:
Priorities (what are your Persona's priorities-focus first on biggest fears, then biggest motivations- and assign a weighting to each so that it adds up to 100)

Submit

© Scott Adams, Inc

Planning Product / Service

The brochure is used for elevator pitch about your product because it can be done when you are not in the room and even when you are sleeping. It makes consistent messaging possible and scalable. It really matters. You have to back it up with a great product that is coming. First, you have to make sure you are building the right product for your customer, and this process helps to communicate the idea to key participants.

Detailing the Product/Service

Before you can do anything about your new business, you need to know exactly what you are selling. What is your product? What is your service? This module will not only help you think through the aspects of your product or service, it will also enable you to write down your thoughts and keep track of them as you refine them.

What Are the Unique Features and Benefits of My Product/Service?

• Features are what the product or service does or has. Benefits are the reasons customers buy it.
• Unique features, highly valued by customers, result in increased marketability. And marketability leads to profitability.
• The uniqueness of a product or service sets it apart from its competition.

How is my product/service Different from My Competitors?

Successful businesses differ in significant ways from competitors. You will not succeed just by copying competitors' product or service. A significant difference in what you offer creates built-in motivation for customer to buy your product or service. Your venture's success depends upon its competitive advantage. What advantage do you have over your competition? Some business compete on price. Can you sell the same product or service for less than others? Perhaps you can, but generally not, especially for start-up business. If you can't compete on price as a start-up, then you should establish your market differentiation as your competitive advantage. Your differentiate is the unique difference which influences consumer demand by setting your product or service apart from others offering the same product or service.

Visual Representation of Product

Sketch a visual representation of your product / service and how it works / is experienced. Annotate your drawings. Avoid too much detail.

Product Alignment with Persona

Ready for Action?

DRAFT HIGH-LEVEL PRODUCT BROCHURE

Build a draft brochure that outlines the benefits your product provides. A good brochure should have the following items:

First draft of company name and tagline.

Name of product and tagline.

Image or picture of product so it is clear what it is.

Clearly identified benefits aligned with the Persona #1 priority.

Two additional benefits (if appropriate), aligned with the second and third priorities of the Personal, that don't dilute the impact of the first benefit.

Use the Life Cycle Use Case to provide a sense of the magnitude of the benefit to be expected by the end user.

Any other information might be relevant. Don’t add for the sake of adding and diluting your main message.

Have a clear call to action.

Everything should be fully aligned with the customer's priorities and will resonate with the customer in all elements (e.g., names, taglines, pictures, benefits emphasized, fonts, colors, word choice, language, references, call to action).

Why this is necessary? It never happens straight

The above image from Disciplined Entrepreneurship Workbook by Bill Aulet says it all

Measure Value Proposition

What is the Persona #1 priority?

What units should it be measured

Persona General Verbal Description of the "As Is" State and the Opportunities for Improvement

Persona General Verbal Description of the "Possible" State and the Opportunities for Improvement

Visual One-Page Summary of Quantified Value Proposition

Strength and capability analysis core

Think long, hard, and creatively about what assets your team and new venture have. They can include capabilities, connections, branding opportunities, personal attributes, personal finance, intellectual property, unique insights, key customer commitments, or something else.

Defining Your Core Worksheet

Core is what creates and delivers value. It is unique to your business.

Decision:

Current search choice use behavior

The above image from Disciplined Entrepreneurship Workbook by Bill Aulet says it all

Stage #	1	2	3	4	5	6	7	8	9	10
Action	How do they determine need, and what is their catalyst to take action?	How do they find out about their options?	How do they analyze their options?	How will they acquire your product?	How will they pay for your product?	How will they use your product?	How will they get value out of your product?	How will they determine the value they gain from your product?	How will they buy more of your product?	How will they tell others about your product?
Who is involved?
When
Where
How

Full Life Cycle Use Case

Reflection on Full Life Cycle Use Case

Where do you see the gaps in your understanding?
How do you intend to fill those knowledge gaps?
Which stages of the Use Case are you most concerned about as posing risks to the adoption of your new product / solution?
Sketch of How the End User Will Use Your Product

Submit

Customer buying process sales cycle

Getting customers and sales will be your focus. The table after the cartoon depicts the customer awareness, understanding, appreciation, choice and post consumption behavior. Use the table to assess your understanding of how this happens, how long it takes, how you intend to manage this and the time and risks.

Process to Acquire a Paying Customer

Fill the Draft Sales Funnel Worksheet

Sales Cycle Length Estimate

For all time estimates except for lead generation, use the numbers from your Process to Acquire a Paying Customer table above. Make a reasonable estimate for lead generation.

Qualitative Summary

Go to market strategy

Marketing Activities Schedule

This step helps create a schedule of marketing and sales activities (see image below) that will be implemented on a weekly, monthly, quarterly, and annual basis. You start by listing all your marketing ideas. You won't have enough time to do everything on the list or enough money to budget for them. After creating the list of ideas, estimate the amount of time or expense involved with each item. Then prioritize which ones you want to implement for the first six months of the year. Depending on the outcomes of these activities, you can determine which ones to repeat or try for the first time in the second half of the year.

Developing Sales Methods

All the marketing strategies in the world will be ineffective if they do not result in sales. No business will survive without sales. Without sales, you cannot pay for overhead and operating expenses. No sales-no profits. It is necessary to develop metrics for each step of the sales process to manage results and control costs.

The image depicts a sales process.

Marketing costs

Think about costs associated with marketing your business. Some of the costs are one-time only, such as designing the company logo, while others, such as advertising may occur monthly or quarterly. The following are possible costs. Put a check by each that might apply to your business. Indicate whether you already know this amount or need to research it.

Marketing Plan

Develop a Marketing for marketing my product or service.

Directions

Follow the steps below to create marketing plan for your business that includes actions to achieve sales. You have identified target market segments in an earlier step 3.

Step 1 Determine marketing plan strategies for your business.

Respond to the following questions to determine which marketing actions are best for your business.

Step 2 Sales / service process

Identify one marketing strategy in the circle. In each of the three triangles, identify a tactic that will support this strategy. Then list two or more activities for each tactic that you can use to support this strategy. Design a sales/service process for my business

Directions

Using the following steps, write out how you anticipate selling your product or service. Feedback from others participants will help you refine these steps.

Step 3 Achieving market entry and increasing share

Complete the market penetration section of my marketing plan.

Step 3 Achieving market entry and increasing share

Write My Marketing Financial Assumptions

Operating Expenses Worksheet

Sales Funnel Inputs

DMU = Decision Making Unit

Sales Channels for the Short, Medium, and Long Term

Techniques and Actions to Maximize Yield Rate at Each Stage

Short Term: Summary of Techniques and Actions to Maximize Yield

Techniques and Actions to Maximize Yield Rate at Each Stage

Medium Term: Summary of Techniques and Actions to Maximize Yield

Techniques and Actions to Maximize Yield Rate at Each Stage

Long Term Term: Summary of Techniques and Actions to Maximize Yield

Risk Factors

What are your three biggest risk factors in your go-to-market plan? How do you intend to mitigate those risks? What metrics will you use to monitor them and intervene as needed? (Remember, things never go exactly the way you want them to or as you plan them!)

Risk factor #1 and mitigation plan:

• Metrics to watch:
• Potential intervention strategy:

Risk factor #2 and mitigation plan:

• Metrics to watch:
• Potential intervention strategy:

Risk factor #3 and mitigation plan

• Metrics to watch:
• Potential intervention strategy:

Step 6 Cost of Customer Acquisition (COCA) and Drivers

Assumptions for COCA Estimation

What time intervals define - "Sales Channels for the Short, Medium, and Long Term"?

Total Sales and Marketing Expenses List

List the expected sales and marketing expenses, and their costs. This input will be used when estimating the Cost of Customer Acquisition (COCA).

Estimate the COCA

Convert Estimation into Short, Medium, and Long Term

Understanding these numbers are not precise, estimate your COCA for the short, medium, and long term, based on the time periods you defined in the first worksheet. Make an estimate that you are comfortable with, and express the estimate as a range instead of an exact number.

Key Drivers of COCA and Ways to Decrease It

COCA risk factor #1 and mitigation plan

• Metrics to watch
• Potential intervention strategy

COCA risk factor #2 and mitigation plan

• Metrics to watch
• Potential intervention strategy

COCA risk factor #3 and mitigation plan

• Metrics to watch
• Potential intervention strategy:

Exploring Marketing Strategies

As a new entrepreneur, you have a lot to do with few resources. It's important that you focus your marketing energies on target markets where you have the greatest opportunity to succeed and on marketing activities that fit your budget. Your market analysis enables you to prioritize opportunities in your market and use your resources to get the biggest return possible. Develop a marketing strategy that focuses on:

• Selected target markets you are most able to reach during your first year of business.
• Specific market and selected products/services that best meet those needs.
• Your competitive advantage.

In the previous sections you have identified target segments and prepared the first cut of marketing actions needed to go-to-market. Make the questions into a table as shown. The user of the website will fill on the site:

Industry Profile

A detailed industry research is necessary to understand the following questions about your industry's marketing and distribution channels:

• What are the most common distribution channels for this industry and why? Do businesses like yours sell directly to their customers, through retail stores that they own, through retail stores where shelf space is purchased such as a consignment store?
• Which distribution channels are the most cost effective for your new business? Are certain channels better suited to you because they do not require a large cash output to start?
• Is there a new channel for your product/service that might reach the customer better or differently than current industry distribution channels? Do platforms offer channels your competitors have not explored?
• What are the typical barriers or challenges for entering this industry? Does this industry require so much resource allocation that it is difficult to enter? Is an exceptional amount of technical knowledge or capital necessary?

Distribution Channels

Setting Prices

Pricing decision affect almost everything about business- your product or service's images, its sales, and your financial projections. Every product or service has a range within which to set your price. The highest price you can ask is called the ceiling price, which is usually set by customers. The lowest price, called the price floor, is determined by your costs. Between the two is the reasonable range of prices you can ask for your product or services. So, how will you know how to set prices? Your pricing strategies will support your Marketing Plan. These strategies can help you break into a new market. To maximize profits, try to price your products or services within the market's price range, to yield a targeted net profit that more than meets fixed and variable costs, and to position your company competitively. Price and sales correlate. Decision you make about price will have an impact on sales. Keep these three general rules in mind when you evaluate your pricing strategies:

The lowest price you can charge depend on your costs

If you or your competitors can develop a product/service for less or have access to resources at lower costs, then the cost provides a pricing advantage in the market.

The highest price you can charge depends on your competitors and your position in the market

If your products or services are not much different from your competitors; you may have constraints on how much more you can charge than they do. If you serve a niche or special market, or have few competitors in the same market, you may have an advantages for pricing and position.

Customers ultimately decide if your price matches the value and benefit your product/service provides

The customer's perceptions of your competitive products or services. Many factors in the market influence how you set your prices, which then affects almost every aspects of your business.

Sales Volume

How you price your product or service has a direct impact on these six factors: Sales volume correlates with the prices being charged or products or services. Higher process often mean lower volume, whereas lower prices generally results in higher volume. Some entrepreneur can charge more because of additional or perceived benefits of their products or services.

Sales Revenue

Prices set for products or services will affect the total revenue projection. If price increase, sales volume may decrease, causing an associated reduction in total revenue. Products or services priced effectively, however, can increase revenue and profit. It's important to know what customers are willing to pay.

Competitive Advantages-

Pricing plays an important role in how companies create and maintain a competitive advantage in the market. Much of the advantages depends on how competitors price their products or services and how they respond to price variances in the market. A strong Marketing Plan answers the following questions and describes marketing and sales activities for your business. The first five questions have been answered in earlier sections. You will tackle question six dealing with pricing and sales.

• What are the significant characteristics of my industry?
• Who is described in my customer profile and target market?
• What is my competitive advantage?
• Where will we spend our marketing resources?
• When will we spend our marketing resources?
• How much sales and profit do we anticipate?

Pricing Process

Determine a preliminary price for your product or service

Pricing Strategy

Industry Profile

Directions

Industry information can be invaluable to you as you learn how to enter the market, position your business in its industry, and respond to trends. Record the information you have been collecting below:

Industry Profile

Competitors' Strengths and Weaknesses Worksheet

Evaluate current competitors based on research about my competition and market. Follow the steps below to compare and contrast your business with its competitors.

Step 1 List critical success factors.

On the first row of the chart, fill in the critical success factors that are important to prospective customers of your product or service. If you do not know what factors are most important to your prospective customers, you may need to collect additional information through surveys or focus groups.

Step 2 Identify current competitors.

Remember that direct competitors are ones who offer the same product or service as your business. List the name of a direct competitor under the labels Competitor A, Competitor B, and following. You have space for five competitors.

Step 3 Rate how well you and your competitors meet each critical success factor.

Using your research about competitors, rate each business including your own, against each critical success factor. A 1 or 2 indicates a weakness in the critical success factor. A 3 indicates adequate performance in that critical success factor. A 4 or 5 indicates superior strength in the critical success factor. For future reference, you may want to write in each box the specific ways each competitor meets that particular critical success factor.

Critical Success Factors

Critical success factors are the basic activities your company must do well to compete effectively in your market. They are the characteristics of businesses that customers look at when they are choosing where to buy. Critical success factors directly impact customer satisfaction. Satisfied customers become loyal customers who prefer to buy from you. To determine the critical success factors in your market, consider the following questions:

• How do prospective and current customers perceive or rate my competitors?
• What factor seems to be the most important to customers who buy this product/ service?
• How do competitors compete for business in the market? Do they compete on price, product/service quality, convenience, location, or other factors?
• What do competitors say is unique about their product/service? How do they differentiate themselves from others?

What factor about my product or service do I think are most important to my customers?

Step 4- Analyze your competitive advantage.

Competitive Analysis

Understanding as much as possible about the competition helps you define your position in the marketplace. When you determine how to enter the market with your product or service, you'll want to feel confident about how you will differentiate your business from competitors.

Competitive Advantage

In any industry, businesses can develop a competitive advantage through price or the market. A price or cost advantage is tied directly to production costs, efficiency, or available technology. A competitive advantage in the market requires you to develop market differentiation-the aspect of your business that sets you apart from the competitors in your industry. Your new business will have many of the characteristics below. Pick the one upon which you will base your competitive advantages. You will use this one element in your marketing materials to separate you from your closest competitors. Explain precisely how you see competitive advantage in the area identified. What specially is different about your product/service in that area?
How will this competitive advantages affect the research you do on your market and competition? Based on this analysis of competitors performance on critical success factor and other market research you have conducted, answer the following question about your competitive advantage

Competitive Analysis

Business Model Canvas

1. What’s the Business Model Canvas?

2. Step 1 (of 9): Customer Segments

3. Step 2 (of 9): Value Propositions

4. Step 3 (of 9): Channels

5. Step 4 (of 9): Customer Relationships

6. Step 5 (of 9): Revenue Streams

7. Step 6 (of 9): Key Activities

8. Step 7 (of 9): Key Resources

9. Step 8 (of 9): Key Partnerships

10. Step 9 (of 9): Cost Structure

What’s the Business Model Canvas?

The Business Model Canvas is a way of understanding and visualizing a business model and its key business drivers. The Canvas has nine elements

Elements of the canvas and the questions they answer: 1. Customer Segments: Who are the customers? What do they think? See? Feel? Do? 2. Value Propositions: What’s compelling about the proposition? Why do customers buy, use? 3. Channels: How are these propositions promoted, sold and delivered? Why? Is it working? 4. Customer Relationships: How do you interact with the customer through their ‘journey’? 5. Revenue Streams: How does the business earn revenue from the value propositions? 6. Key Activities: What uniquely strategic things does the business do to deliver its proposition? 7. Key Resources: What unique strategic assets must the business have to compete? 8. Key Partnerships: What can the company not do so it can focus on its Key Activities? 9. Cost Structure: What are the business’ major cost drivers? How are they linked to revenue?

Preparing the canvas for your business?

Print a copy or use a white board (file is enclosed). Then answer the questions. With the work already done this will be a consolidation of your thinking.

Self-assess:

Step 1 (of 9): Customer Segments

Review the following work already done: 1. Target market characteristics Target market characteristics are the ‘macro’ analysis of the customer segment you have decided to target. Individual customer types as ‘Personas’ is the ‘micro’. 2. Consumer personas Individual customer types as ‘Personas’ are the ‘micro’. 3. Problems, needs, habits & current alternatives You have ascertained what your product will do for the customer (solve their needs and problems) and identified the competing alternatives they consider before choosing. The linkage of Customer Segments and Value Propositions is the driver of the business model.

Step 2 (of 9): Value Propositions

Map the answers to the Customer Segments to identify the Value Propositions of your new business. These Value Propositions are assumptions that will be verified during implementation. Answer the following questions:

Step 3 (of 9): Channels

Channels are entities / platforms through which you sell and communicate your proposition to target market segments. Channels define your interface with the Customer. Think through the customer ‘journey’ using the AIDA.ORLP framework - attention-interest-desire-action-onboarding-retention-loyalty-promote. Channels also give visibility into the user. Answer the following questions:

Step 4 (of 9): Customer Relationships

Map the cost benefits of the delivery of the Value Proposition to the Customer Segments. The different ways of developing and nurturing customer relationships will be verified and established through experiments during implementation to assess how the numbers work. Answer the following questions:

Step 5 (of 9): Revenue Streams

Assess the drivers of revenue and then match perceived value to price for each customer segment. Then use estimates of market potential to identify revenue potential. This will enable mapping Customer Segments to Value Propositions to Revenue potential.

Step 6 (of 9): Key Activities

A business has to do to deliver its Value Propositions to make the business work. List the Key Activities (and/or Key Resources) that drive your Value Propositions. It is important to distinguish core and non-core Activities and Resources.

Step 7 (of 9): Key Resources

Key resources are the strategic assets required by the business to deliver value. Resources are transformed through Key Activities to deliver value. Connect Key Resources to your Key Activities.

Step 8 (of 9): Key Partnerships

The work till now has enabled you to identify Activities and Resources that are important for the business but may not be ‘core.’ Could business partners do some of these activities and / or provide resources? Assess why? And determine

Step 9 (of 9): Cost Structure

Key Activities drive your Cost Structure of a business. You have identified how your Key Activities drive your propositions and hence your revenue. We now answer the following questions to tweak the business model: If major cost components don’t map to a Key Activity, they need to be scrutinized. Each startup cost structure is a variable that can be managed. The goal is to connect each Cost Structure element with their relationship to Key Activities. See the business model canvas with detailed canvas model.

Building an organization - Management and Organizational Plan

Building the organization Legal Structure

Use the steps below to help decide what legal form of business is best for you. Then get help from an accountant or lawyer. In step 1, answer the questions as honestly as you can, given what you know about yourself and your business right now. This will help you think about what is important to you in choosing a legal structure. There are no right or wrong answers, only your opinion on the topic. Then use your answers in step 1 to help you complete step.

Step 1 Answer the questions on the chart below by circling Yes, May be or No.

This section compares three ways of structuring a business – sole proprietor, partnerships, and a corporation. This is to trigger your thinking as you go about the choices you have, and short and long term considerations.

Building an organization – Organization design

Management Function Analysis

Step 1 Determine required business functions. Look at the list of required business functions and determine when your business will need them and who will do each. Add functions that are not listed below.

Required business functions

Step 2 Identify common business functions your business will use. Look at this list of common business functions and determine when your business will need them and who will do each. If a function does not apply to your business (for example, manufacture may not apply to service business), go to the next function. Add functions that are not listed below.

Common Business Functions

Step 3 List your company's most critical business functions. Make a list company's most critical business functions based on the first two charts. Determine who will do them and when

Common Business Functions

Step 4 Write an action plan to meet the demands of three of these business functions.

Your Action Plan

Building an organization – Hiring talent

Recruiting and Hiring Capable, Self-Motivated People

These nine key steps can help you find the right person to fill a position in your company:

• 1. Identify your need to hire a new employee.
• 2. Analyze the job thoroughly.
• 3. Write a job description for the position based on your job analysis.
• 4. Determine the salary for the position.
• 5. Decide where and how to find qualified applicants.
• 6. Collect and review applications and resumes and select the most qualified candidates based on the job description.
• 7. Check references.
• 8. Interview candidates, keeping in mind the interviewing and hiring suggestions below.
• 9. Hire the best person for the job.

Building an organization - Your social Infrastructure

Infrastructure refers to the outside professionals who help you run your business.

Selecting Consultants and Contractors

Legal Professionals

Legal requirements are complex and ever-changing. Lawyers and other legal professionals can help you deal with a myriad of issues, including selecting a legal form of business, human resource issues, health and safety, copyright and trademark, real estate leases, mergers and acquisitions, partnerships, tax and accounting rules, governmental regulations, liability protection, and contracts of all sorts. In short, get yourself a general business attorney sooner rather than later.

Accountants

Accountants can provide these helpful services:

• Setting up an accounting system
• Preparing financial statements
• Advising entrepreneurs on purchasing, financing, and other decisions
• Analyzing financial information against industry standards
• Setting financial achievement goals
• Auditing financial statements for accuracy
• Handling routine bookkeeping functions

Bankers

You will most likely benefit by establishing an early relationship with a banker. Many times, start-up businesses do not qualify for a bank loan because they have no assets or collateral to pledge. The bank can assist you, however, in setting up checking accounts, depositing employee payroll checks, and issuing bank credit cards. They also can work with you to qualify for a commercial loan. Banks provide capital in debt form to companies with an established track record such as a company history, historical financial statements, and a good collateral base.

Business Consultants

You might want to use consultants because they are usually less expensive than hiring full-time staff, especially when you need a specific problem solved or have a project requiring an outside expert.

Marketing consultants

Marketing consultants are particularly useful if you do not have marketing experience. Plus for digital marketing boutique agencies will be required.

Website designers developers

Web sites are a requirement for almost all businesses today. Creating your own website connecting it with other social media platforms requires a holistic understanding of how customers behave, engage and transact. The Web site should reflect the image you want your company to portray it needs to integrate with the overall marketing message. Effective Web sites involve a rare combination of marketing, technical, and graphic-design expertise. The best Web sites require constant updating and attention. Think about costs associated with your business for outside contractors. Put a check by each of the following costs that will or might apply. Then indicate whether you already know these amounts or need to research them further.

Costs of Outside Contractors

Post Startup Fixed Asset Purchases

You will use this Post Start-Up fixed asset purchases worksheet to accumulate notes and information as you research the fixed assets you expect to purchase.

• When do you expect the purchase to take place?
• Why is this purchase necessary?
• From what source did you get your information?
• What is the name of the expected vendor (Whom will you write the check to)?

Startup Costs

Before you start, you need to have some idea of what costs you will incur even before you make your first sale. Identifying the startup costs for a venture helps you know the amount of money needed prior to opening your doors for business.

What Are Start-Up Costs?

Startup costs can be either expenditures- one-time costs for capital assets or deposits or expenses- costs for operations that will continue throughout the existence of the business. You need to understand the difference between expenditures and expenses because you will record them differently on your financial statements, and they can affect your business’s financial position.

Where Do I Find Start-Up Costs?

You need to estimate start-up costs as accurately as possible.

Start-Up Planning

The following questions will help you further define the start-up costs necessary for your particular business concept.

How Do I Keep Track of Start-Up Costs?

Now that you have identified certain aspects of your business concept that will have costs associated with them, you can begin to estimate the actual amounts. Your initial estimates will be a "best guess" based on your past experiences or just a hunch. Avoid projecting a lower start-up amount. Redefine your concept rather than start a business with too little money. If the costs of starting the business under your current business model are too high, consider another approach to starting the business or another business altogether. If you find it necessary to reduce start-up costs, first consider altering your business concept to one that has a more flexible entry.

Business Concept Flexibility

Before you estimate start-up costs, you must have a solid business concept established. As you collect the information you need for this estimate, ask yourself these questions: Even nonprofits must consider profitability. Profits generated from their operations can be re-invested to grow current programs or start new ones.

Estimate Start-up costs

Identify start-up costs to analyze the feasibility of business concept.

Directions

Follow the steps below to fill out the Startup Costs table and identify research necessary to estimate startup costs.

• Estimate expenditures and expenses. Estimate the expenditures and expenses associated with your business concept.
• Record start-up costs on the Startup Costs Matrix
• Research your estimates. Knowing that these costs and amounts must be accurate, think of ways to research your estimates to either corroborate them or to make them more accurate. Fill in each blank next to your estimated amounts with possible research sources.
• Prove the accuracy of your estimates. The final step to complete the matrix is to contact the research sources and prove the accuracy of your initial start-up cost estimates.

Start-Up Cost Matrix

Expenditures	Estimated Amount	Source for Research
Security Deposits
Rent Deposit
Telephone Deposit
Utility Deposits
Other Deposits
Capital Expenditures
Computer Equipment
Equipment & Machinery
Furniture and Fixtures
Vehicle ( Includes mileage)
Leasehold Improvements
Buildings
Land
Other Capital Expenditures
Other Expenditures
Inventory

Expenditures	Estimated Amount	Source for Research
Accounting fees
Corporate Fees & Taxes if applicable
Insurance
Legal & Entertainment
Office Expenses
Office Supplies
Payroll Expenses
Salaries & Wages
Payroll Taxes if applicable
Benefits
Pre-Opening Marketing
Printing
Rent
Permits as may be required
Other Start-Up Expenses
Total Estimated Start-Up Costs

Submit

Costs of Developing and Protecting Intellectual Property

Think about costs associated with protecting intellectual property. Put a check by each one that might apply. Indicate whether you already know these amounts or need more research.

Operating Expenses

Operating expenses are the cost associated with keeping your business up-and-running. They include all of the expenses of operating the business. Sometimes called overhead, these expenses are necessary to support the selling, administrate, and general operations of your business venture. You subtract the Operating Expenses from Gross Margin on the Income Statement to identify Net Income.

Sales - Cost of Goods Sold (Or Cost of Sales)

= Gross Margin - Operating Expenses

=Net Income

What type of expenses do you anticipate for your business?

Operating Expenses

You will use this Operating Expenses Worksheet to collect notes and information as you research the types of operating expenses you expect to have in your business.

• What is the estimated amount of monthly or annual expense? Or if the expense will only be paid once during the year, which month?
• Do you expect a seasonal variation for the amount of each expense?
• From what source did you get your information?
• What is the name of the expected vendor (whom will you write the check to)?

Write My Product/Service Financial Assumption

Project how much money I will need for the product/service aspects of my business. Directions Use the financial facts worksheets to estimate costs for the product or service aspects of your business.

Operating Expenses Worksheet

• Insurance- Product/Service liability, business premises, and general business liability
• Licenses & Fees- Local inspection fees and business licenses, Intellectual property fillings
• Professional Fees- Consultations with attorneys about protecting intellectual property such as obtaining a patent, registering a trade or service mark, preparing non-disclosure and non- compete agreements, or work made for hire contracts. Accountant's fees for setting up accounting records for sale tax and withholding. Attorney or risk management consultant regarding warranties and liability protection withholding. Attorney or risk management consultant regarding warranties and liability protection.
• Rent- Production facilities
• Repairs & Maintenance -To production facilities and equipment
• Utilities- For production
• Other- Research and development for new or improved product/service

Inventory Worksheet

• Insurance- Against casualty loss of raw material as well as finished goods Workers compensation
• Payroll Expenses- Salaries, Wages and payroll taxes of workers involved in production
• Benefits- Health, retirement, and death benefits for workers involved in production
• Rent- Storage of raw material and finished goods
• Rework- Costs to rework sub-standard finished goods or services provided
• Subcontracting- Cost for work performed by others outside the business.

Who Are My Suppliers?

In this portion of your new business development, list your major raw material, inventory, and service suppliers. Describe the relationship you expect with these suppliers. How often will they supply goods and services? What is your contractual agreement with them? What are your contingencies? Who are your backup suppliers and how will you use them?

Inventory Worksheet

You will use the Inventory Worksheet to accumulate notes and information as you research the types of production expenses you expect to have in your business.

• What is the estimated amount of monthly or annual expense? Or if the expense will only be paid once during the year, which month?
• Do you expect a seasonal variation for the amount of each expense?
• From what source did you get your information?
• What is the name of the expected vendor (whom will you write the check to)?

Freight-In & Trucking

Insurance

What are My Production and Facility Needs?

When writing the production and facilities portion of your product/service plan, you will describe the production process, the need for facilities, and the amount of product or services to be produced internally, and the amount to be subcontracted out. You will want to include your production capacity and project the need for future capital to build facilities. Consider selecting competitors with superior performance as benchmarks when designing your production processes. Look at the competitors' production processes to identify areas you can match or surpass their performance. Outline these processes in your business plan. Fill the following table:

Cost For the Production Process

Think about costs associated with your business for production. Put a check by each item that might apply after the doors are open for business. Do not consider start-up costs. Indicate whether you already know these amounts or need more research.

Screening for financial feasibility

As you explore your business concept to determine its financial feasibility, investigate three components- startup costs, profitability, and cash flow. Here are the steps in the process:

• Startup Costs - Determine how much money you need to get your venture off the ground.
• Profitability - Gauge whether the concept is profitable or at least has a profitable future.
• Cash Flow - Understand the cash flow needs of the venture and have funding sources identified to meet those needs.

What Is My Business Model?

Your business model will explain who your customers are, what they value, and how you'll profit from providing them that value in your product or service. In other words, how are you going to make money?

Profitability

One of the primary goals of every business is to become profitable. You may have enough cash to get your business started, but do you have enough to keep it going? Only with adequate profits will you have the cash to pay debts, purchase inventory, fund future growth, and reward investors. Profit is what is left over after the expenses of your business have been deducted from the revenues generated by the business: Revenues - Expenses = Profit or Net Income

Revenue

Revenue is money, or the promise of money, you receive when you provide customers with products or services. You calculate revenue by taking the total number of products or services sold and multiplying them by the price: Revenues = Number of units sold x Price (per unit) The price you charge often affects the number of products or services you can sell. Most often, the lower the price, the more products or services sold. In some cases, however, increasing the price gives the customer the idea of increased value and you sell more products or services.

Revenue and Pricing

Describe the revenue-generating activities of your business.

Expenses

The other major contributor to calculating Net Income is Expenses. Expenses on the Income Statement are classified into two main categories: Cost of Goods Sold and Operating Expenses.

Cost of Goods Sold

Cost of Goods Sold/Cost of Sales includes all costs directly related to a product or service you sell. For example, a shoes business records all the costs of creating the product, including labor, materials and overhead related to production. These costs appear in the Inventory account on the Balance Sheet until the shoes are sold. When the shoes sell, the Inventory amount related to the shoes that are sold is transferred out of the Inventory balance and into Cost of Goods Sold on the Income Statement. Cost of Sales is a term used by service-based businesses instead of Cost of Goods Sold. Cost of Sales usually refers to service labor costs, but may also include costs for materials or supplies. Even if a business is owned and operated by only one person, a portion of the owner's salary relates to the cost of providing that product or service and, therefore, is included in Cost of Sales. When you subtract the cost of Goods Sold or Cost of Sales from Revenues on the Income Statement, the result is the Gross Margin: Gross Margin= Revenues - Cost of Goods Sold (or Cost of sales) Gross Margin is a critical number to understand because it reflects the amount money you have left to cover your operating expenses.

Cash Flow

Profitable or not, your business must maintain a positive cash balance. If profitability tells you about your business's ability to generate income, then cash flow tells you about your business's ability to pay obligations and still maintain a cash reserve. Using your financial statements as a tool, you can forecast the ability of your company to achieve your cash flow objectives. You can use the Cash Flow Report not only for reporting but also for projecting cash activity in your business. When you test your business concept for feasibility, you will want to try to project its cash flow accurately. The Income Statement reports the profitability of the business; however, Net Income does not always result in positive cash flows. For example, If you allow customers to pay for purchase, not at the time of the sale, but ten to forty-five days later, you have just granted them credit terms. You record the revenue from the sale when you deliver the product or provide the services, and you have more than likely already paid for the costs associated with the sale. But you do not receive the cash until later. The delay between when you spend cash to generate a sale and when you receive cash from the customer is called the cash cycle. This interruption in cash flow can have significant impact on the cash available to your business, especially when your business is in startup mode and experiencing significant growth in sales. Many businesses rely on outside cash sources, in addition to profits, to make sure cash is available when they need it.

Business Funding Needs

Business often need different kinds of funding during each stage of development in the business life cycle- startup, operational, and growth. An accurate projection of cash flow over three to five years of business can help you predict your business funding needs at a macro-level. However, monthly cash flow statements are a more appropriate way of managing a business during every phase of the business.

Start-Up Funding

Business generally need startup funding because sales have yet to take place. If you have no sales, then you have no profits or cash generated from those profits. During this time, you’ll need to find funding for the cost of developing your concept, purchasing assets, and paying expenses such as salaries, rent, and marketing.

Operational Funding

Operational funding will cover cash needs during the early stage of operations (post-startup) and when the business enters the maturing stage. During these business stages, cash flow is more predictable, but there may be a need to upgrade equipment or cover seasonal cash flow shortages.

Growth Funding

Business seek growth funding when they experience or expect to experience high growth rates. Growth usually creates significant cash needs. Growth usually requires additional equipment, employees, locations, and inventory to increase the output of product or services to meet increased market demand. In each of these business stages, your funding needs will be unique. Carefully predicting start-up costs and then keeping a wary eye on profitability and cash flow will provide you with accurate information about how much money you will need.

WORKSHEET

Considerations in Setting an Initial Pricing Framework

Building a profitable business - Considering Inventory and Cost of Goods Sold

The second component of profitability is Cost of Goods Sold/Cost of Sales, which reflects inventory that has been sold. Businesses that manufacture or assemble products, as well as those that resell products, must account for the inventory they have on hand. The way your business manages inventory has an impact on both profits and cash flow. When purchased, inventory is an asset because it has value. You record it on the Balance Sheet. At any given time, assuming a customer wants it, you can sell inventory to regain cash. You should carefully monitor your inventory by selling older inventory items, even if it means discounting sales prices. Inventory is worth cash only if it can be sold. Once you sell inventory, you transfer the cost of the items sold to the Income Statement as Cost of Goods Sold. When inventory cannot be sold, it becomes worthless to the business and you should write it off and discard it.

Manufacturing Inventory

In a manufacturing company, inventory goes through several stages before it is ready to sell. It begins as raw materials and is fashioned into work-in-progress before it is considered finished goods ready for sale. You must carefully analyze and estimate these costs to produce accurate projections of Cost of Goods Sold and also to monitor the inventory production process in the future. Let's consider the various elements of manufacturing inventory: Raw materials - If you are going to manufacture or assemble products to sell, you must plan for raw materials inventory. Begin by answering these questions:

• How many types of raw materials does the product use? If you use many types of raw materials, the costs to store or warehouse them will grow.
• How much raw material needs to be on hand? Purchasing larger quantities to lower costs can help increase profits, but it can also reduce cash flow.
• How quickly can raw materials be turned into finished goods ready to sell? Consider ways to streamline the production process. This efficiency allows inventory to be sold more quickly, which can bring cash into the business faster.

Building a profitable business - Production expenses

In addition to raw materials, you will spend money on production. These production expenses become part of the total Cost of Goods. Following are some common production expenses you may incur:

• Freight-in and trucking/shipping costs - Represents a direct cost of having raw materials for production or products for resale.
• Insurance - Can only be included if the insurance applies to the production facilities.
• Payroll expenses - May be the highest production cost. All personnel who play a direct role in producing inventory or supervising the production process should be included. Payroll expenses include salaries, benefits, and employer-paid payroll taxes.
• Rent and utilities - Only includes the costs of the production facilities, which along with payroll could also be a major portion of the production expenses. If the production area is shared with office or retail space, consider only the amount used directly for production. The rest will be included in the operating expenses.
• Repairs and maintenance - Should be taken into account if production equipment must be periodically repaired or maintained.
• Rework - Consider if manufactured products need rework from time to time. This figure should include the costs to rework the products to make them salable.
• Subcontracting - Occurs in companies that subcontract out a portion of the production process.

Inventory (some edits made)

Base these estimates on your research and any industry averages you have been able to identify.

Writing Expense Assumptions

Operating expenses should be estimated based on facts you uncover about the business concept and industry. Your operating expense assumptions should describe how you estimated each expense category. You should also explain the variances between each of the months (for example, seasonal factors, number of sales days in the month, heavy marketing, exposure, repeat business, new product or service release, and expansion plans). Your assumptions should substantiate your expense estimates by including facts and figures. Your assumptions may need to be very detailed.

Creating Financial Projections

You will perform a cursory review of these statements to see if you made any errors when entering your estimates. You should have a fairly good idea of the potential profit of your business. If you are surprised when reading the Income Statement for the first time, you will need to review each line item carefully. Do the individual sales and expense estimates reflect what you expected? Are any of them considerably higher or lower? Since these estimates reflect the yearly total of your monthly estimates, you will need to look back on the worksheets to verify any figures in question. Changes from one month to another are expected, but you should have documented reasons for these changes-seasonal factors, heavy marketing, and other special circumstances.

Reviewing Financial Statements for Accuracy

In reviewing for profitability, the primary question is whether the business will eventually generate an adequate amount of cash to support operations, pay back loans, and pay an adequate rate of return to owners. Module 9 will concentrate on this aspect of financial planning.

Using Financial Information To Make Improvements

Once you have analyzed the profitability of your business, you should always be evaluating it for ways to make improvements, such as retooling your pricing strategy or bootstrapping to reduce expenses.

Keep in Mind Your Pricing Objectives

• Maximize Profits - Setting prices to maximize the amount of unit sales and profits
• Meet a Specific Return-on-Investment - Achieving an overall profit to meet a target ROI on total Net Sales
• Achieve a Target Sales Level - Meeting Revenue projections independent of profit levels
• Gain or Maintain Market Share - Attaining and keeping market share for high visibility
• Meet or Keep Out Competition - Staying within average industry prices and making adjustments to be competitive

Monitoring Profitability

Once you have created your financial projections, do not file them away and forget about them. You can view these projections as your roadmap to a successful future. You need to monitor your business's actual results by comparing them with your projections. We call this process budgeting. Having an annual budget and reviewing it on a regular basis can help you in these functions:

• Provide a basis to manage your business financially
• Control costs
• Reduce spending
• Predict sales
• Estimate production costs
• Set goals for payroll costs

Building a profitable business - To have successful cash management you will need to follow these steps;

• Measure your cash needs. You need to know how much you need, when you will need it, and what it will be used for.
• Seek potential funding sources. You will want to find sources of cash that offer funding terms that match your own goals for those funds.
• Monitor ongoing cash needs. You must establish goals for cash flow and use these goals to monitor your ongoing cash needs.

Cash Flow

Cash flow refers to all the money that comes into your business and goes out of your business. When you think about it, cash in your business will take many forms, loans, revenues, debt payments, payroll, inventory purchases, and expenses. All of these represent elements of the cash flow in your business. When the cash stops flowing in and out of your business, the business dies. You cannot maintain a business without cash.

Cash vs. Profits

Entrepreneurs use cash to start business, support continued growth, and purchase assets that generate revenue, Cash, then, used to build profits. But if cash is used to build profits, then what is the relationship between profit and cash flow? Another way to ask this question is to ask how cash flow is different from Net Income ( or profit module 8 you discovered that Net Income is calculated by subtracting from sales the cost to produce those sales. (Operating Expenses)

Net Income

• Sales
• Cost of goods sold (Cost of Sales)
• = Gross Margin
• Operating Expenses
• = Net Income

The Income Statement reports this equation in details. From the Income Statement you can see whether your business is producing a profit or a loss. If you are producing a profit (Showing a positive Net Income), are you also a producing positive Cash flow?

Net Income:

• What financial transactions are excluded from the Net Income Equation that do not affects cash flow?
• What financial transaction are excluded from the Net Income Equation that do affect cash flow?

Cash Transaction that do not affect net Income

The Income Statement exclude several transactions that may affect your cash flow. These transactions include any cash received or paid out for something other than revenue or expenses. Non-revenue transactions include cash received from funding sources such as lenders or investors. Non expense transactions might include cash paid for the principle portion of debt repayments, purchases of equipment and inventory, and the payments to owners of the business ( dividends and draws). All of these transactions can have a significant effect on the cash flow of your business and will be included in the Cash Flow Report but not on the Income Statement.

Measuring Cash Flow

The first step to healthy cash flow is to measure your cash needs. If you are starting a business, this calculation includes the cash you need prior to start-up, as well as ongoing needs for operations and growth. Traditionally, entrepreneurs have used several different methods to measure cash flow, some more effective than others.

The Checkbook

One of the most common and least effective ways entrepreneur attempt to measure their cash flow is to look at the balance in their checkbook. A positive balance is better than a negative one; however, a positive balance in the checkbook can give you false confidence that all is well. A simple look at the checkbook balance ignores the critical steps of cash flow management that include monitoring accounts receivable, paying bills, accounting for cash shortfalls, investing idle cash, and forecasting cash needs.

The Cash Cycle

A more accurate and useful way to measure and plan for cash flow is to analyze your business's cash cycle. The delay between the time you spend cash to generate a sale and the time you receive cash from the customer is called the cash cycle.

Monitoring Cash Flow and Seeking Funds

Internal Sources

Check the following internal sources of funding you would consider for your business.

Liquidity Ratios

Liquidity Ratios measure the amount of cash or investments that can be converted to cash to pay expenses and short-term debts. Liquidity Ratios determine your ability to meet current liabilities. The two most common Liquidity Ratios are the Current Ratio and the Quick Ratio. The Current Ratio is calculated using Current Assets and Current Liabilities. A 2:1 Current Ratio is usually considered ideal. In other words, your business has twice as many Current Assets available as it has Current Liabilities. The Quick Ratio is the ratio of Current Assets (minus inventory) to Current Liabilities. This information determines if you have sufficient cash, receivables, and marketable securities available immediately to pay off current debts. This number should be at least 1.0. Other types of financial ratios include Risk Ratios and Efficiency Ratios.

Risk Ratios

Risk Ratios measure what portion of the company belongs to people outside the company including how much money the owners could lose to creditors. The Debt Ratio compares your Total Liabilities to your Total Assets. If this number is higher than 1, your company owes too much to outsiders and has a negative net worth. The Debt to Equity Ratio compares what you owe (liabilities) to what you or others have invested in the company (equity). You should strive to have more equity than debt so that this number stays at 1 or below. These ratios can help you understand the level of debt your business should carry. The right amount of debt can be good for your business because it can allow you to finance the growth of your business. But too much debt can drag your business down as you try to keep up with debt and interest payments.

Efficiency Ratios

Efficiency ratio tell how well you are conducting business. These ratio measure how quickly inventory moves( Inventory turnover ratio) How well you collect Accounts Receivable ( Days Sales Outstanding) and what kind of sales your company's assets generate ( Investment Turnover Ratio). How well you establish business policies and follow them can have a significant impact on sales. For example, you may establish a Net/30 payment term for your customers that allow them thirty days before they must pay the net amount on invoice. Amounts in exactly thirty days. Many business that owe you money will stretch the terms as far as they can to improve their own cash flow. In this case, you must stick to your policies and enforce your Net/30 terms with an active collection process. It is not important that you calculate every ratio each time you analyze your cash flow. You may, however, use several ratios to help guide improvements in specific areas of your business. Reviewing and monitoring the cash cycle may be a way you can zero in on specific ratios that indicate a need to adjust operations to improve cash flow.

Cash Cycle

If you are short of time, like many entrepreneurs, you may feel you have a limited time to spend on ratio analysis. If so, try using the cash cycle to evaluate your cash position. The cash cycle measures the time it takes a dollar to flow from Cash through Inventory through Accounts Receivable and back to Cash. The cash cycle is the primary factor in measuring and evaluating a company's cash available to meet current obligations. Combined with profitability analysis, the cash cycle helps indicate a business's long-term ability to meet its obligations. Because of the four accounts involved-Inventory, Accounts Receivable, Accounts Payable, and Payroll-the cash cycle can look deeper into your financial situation than any one of the above ratios. The cash cycle combines these four ratios.

Days Inventory

Days Inventory measures the number of days that cash resources sit unused in the form of raw materials or unsold inventory. Days Inventory compares your average inventory balance to the total Cost of Goods Sold (for product-based companies) or Cost of Sales (for service-based companies). Then, by multiplying this figure by 365 days, you can determine the average number of days raw materials, finished goods, or merchandise are held before they are sold. Since the fewer days you hold inventory the better, a low Days Inventory will benefit the cash cycle the most. When inventory goes unsold, your cash cycle lengthens because your cash is tied up in raw materials and merchandise. Compare your Days Inventory ratio to that of other businesses in your industry to determine if you are reducing your inventory at an acceptable rate. For service companies without inventory, parts, or other merchandise, Days Inventory will be zero.

Days Receivable

Collections on Accounts Receivable are measured by calculating Days Receivable, which is the time it takes customers to pay for products or services. Days Receivable measures how many times your receivables turn over each year by comparing your average Accounts Receivable balance to the total annual credit Sales. Then, by multiplying this figure by 365 days, you can determine the average number of days it takes customers to pay their invoices. An acceptable Days Receivable ratio will reflect your collection policy. For example, if you allow your customers 30 days to pay and your Days Receivable is 32 days, you are doing an acceptable job of collecting cash from your customers. Anytime customers are slow in paying you for products and services already sold, your cash cycle lengthens.

Days Payable

Days Payable measures the time it takes for you to pay your bills to suppliers who have allowed you credit terms. Your Accounts Payable balance represents payments still due to vendors who have allowed you credit terms. These vendors are likely supplying materials or services that you use in offering your products or services (Cost of Goods Sold or Cost of Sales). Days Payable compares your average Accounts Payable balance with the annual Cost of Goods Sold or Cost of Sales and then multiplies by 365 days to determine the average number of days it takes for you to pay your bills. An acceptable Days Payable ratio will reflect your payment policy. For example, if your vendors allow you 30 days to pay your invoices and your Days Payable is 28 days, you are doing an acceptable job of paying your bills. For service companies that do not have Cost of Sales calculated and included within their Income Statement, the Days Payable ratio will be zero. Still, if vendors have allowed payment terms, the delay between the time a service business receives services or products and the time that it actually pays for them represents an estimated Days Payable ratio.

Days Payroll Accrual

Days Payroll Accrual measures the time it takes for you to pay your employees. This ratio assumes that your primary costs for payroll relate to offering your product or service (Cost of Goods Sold). Days Payroll Accrual compares your Average Payroll Accrual with the annual Cost of Goods Sold or Cost of Sales then multiplies that number by 365 days to determine the average number of days in your payroll cycle. Your Days Payroll Accrual should reflect your payroll cycle. For example, a bi-weekly payroll should yield a Days Payroll Accrual of around fourteen days, and a Monthly Payroll Accrual should be around thirty days. For service companies that do not have payroll related to Cost of Goods Sold or Cost of Sales, the payroll cycle is measured in days. For example, a business that writes payroll checks every Friday would have a Days Payroll Accrual of seven days. This estimate should give you a fairly accurate number to compare with your Days Payroll Accrual.

Cash Cycle

To calculate the number of days in the cash cycle for your business, perform the following calculation: Using the cash cycle to measure and analyze cash can help you establish cash management controls. These controls will help you tighten your cash cycle. The shorter your cash cycle, the more efficient your business. Your industry will have certain standards, such as allowing 30 days for customers to pay, that you must consider. Keep in mind these ideas for shortening your cash cycle: Inventory - Your goal is to keep inventory moving as fast as possible.

• Make judicious inventory purchases
• Liquidate slow-moving or obsolete inventory

 

Seek extended payment terms for your purchases of raw materials and inventory

Accounts Receivable - Your goal is to receive payments as soon as possible.

• Offer incentives for prompt payment.
• Aggressively pursue overdue accounts.
• Put unreliable payers on shorter payment terms or COD (Cash on Demand).
• Bill on a timely basis.

Accounts Payable - Your goal is to hold payments as long as possible without incurring past-due charges.

• Buy from firms offering longer payment terms.
• Don't pre-pay without receiving adequate benefit.

Payroll Accrual - Your goal is to keep payroll cash as long as possible without improving your own cash position on the backs of your employees.

• Make sure your paydays are similar to others in your industry.
• Be careful about changing the paydays just to improve the company's cash position; employees take their paychecks very seriously.

Keep in mind that ratios are an important tool for your business, but you should not make decisions based solely on ratios. Use these tools to identify areas of your business where you need to dig into and research unexpected results. By helping you pre-identify those areas where you need early research, ratios can save you a lot of time and energy. According to your Income Statement, is the business profitable? Is there Net Income?

• Yes. Is the level of profit reasonable for a start-up in your industry?
• No. If it is not profitable and a Net Loss is reported, then how much is the loss? Is this loss expected?

Annual losses may be expected during the start-up and early stages of your business. Monthly losses may also be expected during the yearly business cycle. For example, your revenue stream may be very seasonal like many retail stores. These businesses may experience losses throughout the year until the holiday shopping begins in the fall. During that time of year, these businesses will need to generate strong revenues to cover the losses experienced earlier in the calendar year. 1. According to your Income Statement, is your required salary included?

• Yes. Can you reduce your salary requirements if the business does not meet projections?
• No. What adjustments need to be made to provide you the salary you need?
• A business's financial success is directly tied to the financial goals of the entrepreneur. If the business does not meet your personal financial goals, you should consider making changes to the business concept or explore a different concept that will produce more positive projections.

2. According to your Cash Flow Report, is the ending cash balance positive every month?

• Yes. Is there enough cash to support growth opportunities, or unforeseen events such as poor payers, equipment break-down, or additional expenses not estimated?
• No. How much additional cash is needed? Will you be able to obtain that much cash?

When you review for profitability, the primary question is whether the business will eventually generate an adequate amount of cash to support operations, pay back loans, and pay an adequate rate of return to owners. If you are not able to generate enough cash flow to cover these, you should continue your financial statements past the third year to identify whether the business will, at any point in time, generate enough cash flow. 3. According to your Balance Sheet and other financial ratios, are the figures consistent with industry standards?

• Yes. Are there any opportunities to make improvements to the financial performance of your business to improve your Balance Sheet and financial ratios?
• No. Which ratios are inconsistent with industry standards? For the ratios that show deficiencies, will you be able to make adjustments to your Business Plan to bring your ratios in line with your industry expectations?

Although some of the Balance Sheet figures will vary somewhat, be prepared to explain why your balances are significantly different from the industry standards. Looking at the liquidity, risk, and efficiency ratios, how do your ratios compare to similar businesses? You will want to identify areas where improvements are needed.

Funding Sources

Raising money is an art. Fortunately, It's an art you will learn. To become an expert at raising money, you need to know about sources of money, how to find them, and how to evaluate them to determine which source is the best fit for your business. Even if you do not need outside funding in the start-up stage, you may discover a time when outside money is necessary. Whether you can get the money will depend on how well you have prepared for it and how you deal with the money sources. The majority of financing for entrepreneurial ventures comes from the business owner and informal investors- meaning your family and friends.

Equity vs. Debt

All funding for your business will come from either equity of debt sources. During the life of your business. You may use a combination of each of these. Equity Financing - Equity means ownership. To become an owner of business, typically you have to pay money to the business. These are examples of equity financing:

• Entrepreneur contributions
• Private investors, including angels and venture capitalists
• Earning retained in the business
• Initial Public Offerings

Debt Financing - The essence of debt is that the borrower must repay the funds along with agreed-upon service charges such as interest and loan the lender can start collection proceedings. These are examples of debt financing:

• Loans from entrepreneur
• Loans from friend and family
• Bank financing including short-and long-term loans and all lines of credit.

Consider Potential Funding Sources

Determine what types of funding you may need for your business at which stage in operations.

• A. Review your estimated start-up costs. Review the total amount needed to start this business. You will need additional funds to operate and/or grow the business after start-up.
• B. Identify available funds. Identify the amount of money available from each Source of Funding. Most startups use the entrepreneur's own funds.
• C. Classify equity and debt funds. Identify each source as equity or debt.
• D. Record the next action needed. List the action needed for each source, such as research, identifying specific contacts, and comparing sources.

Potential Funding Sources Grid

Balance Sheet Basics Intro

Step 3 Setting Financial Goals

First develop an understanding of financial statements

Balance Sheet

A Balance Sheet reports what the company owns, what it owes, and the net worth that remains for the owners of the business. These classifications are broken into the following categories: assets, liabilities, and owner's equity. The formula in which these categories are used is assets = liabilities + equity. This Balance Sheet formula is also called the accounting equation. The Balance Sheet, or accounting equation, balances the value of the assets with the rights that creditors and business owners have to those assets.

Assets

Assets are the means and resources by which a business produces revenue. When a business begins, the entrepreneur brings in cash into the company. The cash is deployed to build a building, acquire and install plant and machinery, and purchase raw materials. The deployment of cash into assets and resources is an entrepreneurial decision. An entrepreneur entering the business of retail can either build an ecommerce platform or build a store. This is an example of entrepreneurial choices that businesses different. Assets can be described as things in your business with value, such as cash, equipment, inventory, and investments. In the same way you might own your car or house, these items are owned by the business. The business may not have the sole rights to these assets, however, just as you may share the rights to your car or house with the bank that lent you money. On the Balance Sheet, assets are divided into current assets and non-current assets. Current assets include cash or assets that can or will be turned into cash within one year. Examples of current assets include cash, accounts receivable, and inventory. All assets not expected to be converted into cash within one year are considered non-current assets. These include fixed assets, such as land, facilities, equipment, and vehicles-physical assets being held by the business for the purpose of producing revenues. Other noncurrent assets include long-term notes receivable and intangible assets such as goodwill, patents, and copyrights.

Liabilities

Liabilities describe others' rights to the value in the business, such as banks that have loaned the business money and vendors who have allowed the business extended payments. This amount can be compared to the amount of money you still owe on your house or car, which are personal liabilities. Your business may need to borrow money to fund start-up costs or to cover cash shortages from operations as your business is growing. You may also receive credit terms from your vendors (individuals or businesses that you purchase products or services from)-these are called accounts payable. By allowing you to pay for your purchases in the future, they have, in essence, given you a short-term loan.

Balancing Act

When done correctly, the Balance Sheet balances the Total Assets with the Total Liabilities plus Equity. You will see liabilities divided into current liabilities and non-current or long-term liabilities. Current liabilities include those liabilities you expect to pay within the next year. These include accounts payable and other payables you plan to pay within the year. Since lines of credit typically have a renewal provision included in the loan agreement, they are also usually classified as current. Long-term liabilities include notes payable, such as loans from banks or other financial institutions that have payment terms over several years. These loans might be for the purchase of a company vehicle, building, inventory, or equipment.

Equity

Owner's equity is the difference between assets and liabilities. It shows the owner's rights to the value of the company. Depending on the structure of the company, this number could reflect what you as the sole proprietor own in the company or what you and the other stockholders own if your company has multiple owners. One account in equity that seems to stump many business owners is called retained earnings. This account represents the amount of cumulative earnings or net income that has not been paid out to owners in dividends or owner's draw. The amount in retained earnings, however, may not always be equal to the amount of cash the business has on hand. This discrepancy occurs because you may re-invest the earnings of the business in new equipment or even a new building. You may also make a strategic decision to increase the operations of the business and, therefore, need to purchase more inventory. The retained earnings account may also show a negative number if the business has not been profitable or the business owners have taken out more money than the business has generated in income.

Incub8tor LLC

Year-End Balance Sheet (Projected)

In spite of all of the information it reports, the Balance Sheet does not provide details about the financial performance of your business- its profitability. This information is reported in the Income Statement.

Income Statement

The Income Statement shows the net income or loss your business has experienced over a period of time. It is your company's financial grade card. The time period could be a day, week, month, quarter, or year. This report helps you determine if your business is making or losing money. The Income Statement displays the revenue (sales) earned by your company and the expenses it incurred to generate those revenues. Then it records Net Income based on those revenues and expenses for the intended period of time.

Revenue

Revenue can be described as money earned by selling the business products and / or services. It is called Net Sales on the Income Statement.

Expenses

Expenses are costs associated with supporting the business's activities.

Net Income

The ultimate goal of any business is to produce a positive net income or profit over the long haul. Many early-stage businesses expect to lose money for a period of time while they are getting their operations up-and-running and entering their products or services into new markets. In testing the feasibility of your business concept, you should determine how much you expect to lose and for how long, so that in addition to start-up funds, you can plan to find sufficient funding to carry the business until it becomes profitable and your cash flow from operations becomes positive.

Incub8tor LLC

Year-End Income Statement (Projected)

Although the Income Statement does report the profitability of the business, Net Income doesn't always indicate positive cash flows. One reason is that non-cash expenses such as Depreciation and Amortization are included in the income Statement. In some instances, particularly in real estate and other high-investment enterprises, large depreciation or amortization charges can result in a loss-no profit, yet the firm is flush with cash. Another reason for the disconnect between the Income Statement and the actual cash flow of the business is that you might have significant cash outflows for debt repayments, purchases of inventory, and payments to the owners of the business (dividends or draws) and cash inflows from borrowings from banks and other funding sources that will not show up on your Income Statement. Remember, a business cannot have a negative cash balance. These discrepancies between what is allowed to be reported on the Income Statement and what is actually flowing into and out of your business make the third financial statement, the Cash Flow Statement, another crucial financial tool on your journey to business success.

Cash Flow Statements

Entrepreneurs usually use one of two cash flow documents to assist them in financial decision making: the Cash Flow Report or the traditional Cash Flow Statement. Both can be used to report or project the cash that flows in and out of a business for a specific time period. The difference between the two documents is the way in which this information is prepared and reported. Both these documents include the cash flows received and paid out for loans and owner investments, as well as the purchases of fixed assets. But the primary difference is that the Cash Flow Report records cash activity as it relates to the individual revenue and expense categories such as you would find on an Income Statement. The traditional Cash Flow Statement reports cash activity as it relates to the operating, investing, and financing activities of the business.

Cash Flow Report

The monthly Cash Flow Report is one of the most important planning and reporting tools you use during the start-up phase of business. Compare the Cash Flow Report to your personal checkbook register. Every time you deposit money into your account or write checks out of the account you record the transaction and keep a running total. In the same way, the Cash Flow Report records every cash entry into your business and cash payment out of the business or a monthly basis. These inflows and outflows are grouped by categories that will affect the other financial statements, such as equity contributions, inventory purchases, or operating expenses. The advantage of the Cash Flow Report over your regular checkbook register is the way it displays monthly financial activity over time, making it easy to analyze past fluctuations in cash flow during the year and predict future fluctuations. The Cash Flow Report can help you with day-today cash budgeting. You need cash flow analysis because a delay usually occurs between the time you pay out cash to generate sales (for example, purchasing inventory or paying employees' salaries) and the time you actually receive cash from those sales is also called the cash cycle. Since typical sales transactions have a cash cycle of days, weeks, or even months, you will need to locate additional funds to keep the business running while waiting for the cycle to be completed. Fortunately, cash flow planning is simple in concept, although coming up with the numbers can involve considerable diligence. Cash flow is exactly what its name implies: the anticipation of cash as it flows into and out of the company. Only cash transactions are included in this analysis. You can ignore non-cash accounting entries such as depreciation and amortization on the business. The Cash Flow Report lists the sources of cash you expect to receive on a monthly basis. This list includes cash sales, collections from accounts receivables, equity contributions from owners, and loans from either owners or outside sources. The cash you expect to receive is added to the cash balance remaining from the prior month to total the cash available for that month.

Incub8tor LLC

Cash Flow Report (Projected)

You deduct all items paid for with cash from the total cash available to identify the cash balance at the end of the month. This amount must always be above zero. In fact, you should try to maintain a healthy cushion to cover unexpected differences between projected cash flow and actual cash transactions. Your business may have a lot of money coming in next month, but that may not save it from insolvency if you have to pay out a lot of money tomorrow. Prepare to finance any expected negative balances.

Cash Flow Statement

The traditional Cash Flow Statement prepared by accountants reconciles the changes that occur within the Balance Sheet accounts with the cash provided from the operations of the business. The cash flows from investing and financing activities are also reported. These statements are more effective at reporting actual cash activity than, projected activity. Therefore, you may find that the traditional Cash Flow Statement becomes more useful to you after your start-up phase. Instead of projecting a traditional Cash Flow Statement, this program relies on the Cash Flow Report that will help you track the same information in a more user-friendly format.

Incub8to LLC

Statement of Cash Flows for the Year Ending …..(Projected)

Step - Financial_Model_Comprehensive