ENTREPRENEURSHIP: CREATING NEW VENTURES

SECTION 2.       IDEA DEVELOPMENT & TECHNOLOGY

THE BASICS OF TECHNICAL ENTREPRENEURSHIP

                        Technical entrepreneurship is defined as the application of engineering to a new scientific discovery followed by commercialization of that technology. One of the Caribbean’s more unique entrepreneurs is Gregory Richardson who founded 1337 (Leet) Networks Inc , (www.1337networks.com). The company offers a fascinating service that has been designing, defending and deploying networks for more than 10 years. The company offers the services of its own ethical hackers who protect corporate LAN systems, for example and then go after the illegal hackers who attempted to break in to the company’s data base.

            Speaking of his experience Greg makes the observation “During my stint at college I quickly saw there was some money to be made by designing and building my own computers and selling them to classmates.  I did so and my first part-time business was born.  At the time (1987) there was no internet, but there were some other networks of computers.  One such network was called BBS’s (or Bulletin Board Systems).  BBS’s functioned on an individual’s PC which had some special software running on it Needless to say before long I had an extra telephone line installed in my dorm room and was running a pretty decent sized BBS right from my dorm.  People would log on and upload and share applications and games for other people to download.  It was quite an interesting experience.”

             “After several failed attempts at starting up other companies, I now own and operate Secure Tech International, a network security consulting firm with clients throughout the North Eastern Caribbean.  Secure Tech started in a spare bedroom and has since grown to our current state with a staff of qualified technicians and network security engineers as well as our administrative support staff.” The company does network design and creation, it manages large corporate networks as well as providing the full slate of white hat hacking services including penetration testing.

Entrepreneurship is Commercialization

                        Entrepreneurs take a good idea and make it happen. Very much like the bumblebee. At one time there was a happy myth that declared this member of the Apidae family, given its wingspan to weight ratio and air speed cannot generate sufficient lift as to keep it in the air. But the bumblebee doesn’t know this and flies anyway. Entrepreneurs are people who do things! They take an idea and have a vision as to what that concept will do for the world. They become enthused with the project and bring it into the world. These dynamic individuals make an economy happen.

                        But you need a system that supports and encourages the entrepreneurial movement.

          How Do Entrepreneurs Find Good Ideas?

                                    Most good ideas are born in the workplace. A thoughtful individual working in a business or factory sees a new way to produce a product or how to apply it and he or she develops the process to do that. The founders of Sierra Wireless Inc. in Vancouver believed that wireless technology and the computer were a natural fit. They left Motorola Corporation to form their own company to produce wireless units for laptops and PCs. Apple Computer’s Steven Jobs and Steve Wozniak incorporated many of the features we now take for granted into Wozniak’s compact PC invention. It may be of interest to know that their features were based on Xerox Corporation’s computers. For almost a decade Xerox had employed the mouse, the menu driven systems and other features on their computer terminals. But Xerox identified their business as being the copying machine business and, unlike Steven Jobs, they saw little future for the PC.

                        The McCain brothers wondered how they could expand their market for potatoes. Ed Werner and the inventors of Trivial Pursuit wondered if there was any money in a new kind of board game. Canadians are very inventive. They have filed over one million patents. For example the electron microscope was invented by Eli Franklin Burton, Cecil Hall, James Hillier and Albert Prebus in 1937 in Canada. The telephone was invented by Alexander G. Bell in Brantford Ontario. And did you know that the first commercial oil well was developed by a Canadian in Petrolia, Ontario? The world’s first commercial radio station opened in Montreal and the man responsible for the successful application of radio broadcasting worldwide was Reginald Aubrey Fessenden, a Canadian who proved Marconi was wrong. He also patented a first television system in 1927. And Edison did not invent the light bulb. It was a Canadian who unfortunately could not raise money in Canada to launch the product and sold the patent to Edison. The rest is history.

                        Here’s part of the Trivial Pursuit story.

             

How To Be Successful: Trivial Pursuit®[1]

            “I guess we are a success story. I keep reading about it in all the newspapers. The media image is ‘four guys who got lucky’. It’s an appealing image and therefore one that we have not hurried to correct. We aren’t businessmen. We don’t want to be businessmen. I like to go to work in blue jeans and a sweater. And I don’t consider myself to be an entrepreneur, nor do I know what it takes to be one. If I had a formula I guess I’d patent it, market it and make more money. But I really don’t know what I might say to you.  The Trivial Pursuit® game is an exceptional situation. It happened. We like to think we made it happen. We made a lot of things happen, but a lot of things happened to us and it just got rolling.

                Actually two guys had the idea: Scott Abbott, we called him Scooter, and Chris Haney...the Horn—that’s where the company name came from, Horn Abbot. Both these guys were journalists...one for the Montreal Gazette and the other for Canadian Press...definitely not buffoons.

                One afternoon they decided to play Scrabble, but could not find the game. ‘Boy,’ said Chris. ‘I’ll bet I’ve gone through four or five of these games. There must be a lot of money in the games business.’

‘Well let’s invent one.’ said Scott.

‘Okay, but based on what?’

‘How about trivia?’

                And there it was. By morning they had the concept and the basic board design. In February of 1980 they put on their press passes, went to Montreal Toy Fair where they interviewed the presidents of Parker Brothers, and Milton Bradley and came away with a picture of a market that appeared to be very profitable. They hired an artist to actually design the board details, and began to look at writing the questions.

                They got me involved because they needed legal advice and financing. John, Chris’ brother, a former professional hockey player, also joined us. They needed a place to write questions and since Chris had already quit his job in Montreal and was familiar with the south of Spain, that’s where they went. They claimed a warm climate would stimulate the vital creative juices. They had a great time, and gathered tons of information, but had finalized no questions. When they finally got home they set up two typewriters on my dining room table and started to write. This “home invasion” continued until the game was complete. 

                Meanwhile, I was organizing the company. We decided we needed other people’s money — our net worth actually was about zero, and we went to our friends and relatives. Most of them said ‘no’. The university faculty I worked with all said no. But we persevered and managed to raise $40,000. But it actually cost us $60,000 to put together 1,000 games —— that’s $60 per game which we sold for $16.00 each so they could retail for about $35.00, not a tidy profit. During that time from the outside looking in it looked pretty exciting but from the inside, it looked pretty bad. We assembled, sold and delivered the games ourselves and three weeks later they were all sold out. This wasn’t just good luck, we really had a hand in this. There were about 40 people who had invested in the company at this point and we convinced them to go out, with friends, relatives and acquaintances to buy the game. We had recalled that the novel “Love Story” had been promoted that way. There was an item in the publisher’s budget to be used to buy back a number of the books in the first issue. The idea was to create the impression of a rush in sales at the very beginning and hence, create a demand for the product.

                Now we were ready. We were successful and off we went to the Montreal Toy show, looking for 10,000 orders. We got 350. Then we said let’s go to the New York show. America is where the action is. And so we did. We finally got a booth on the third floor of a secondary building at the tail end of miles and miles of new toy products. And we got another 500 game orders.

                But by the time we got back the Ontario retailers came through and we had orders for 5,000 games. Now we needed $120,00 to produce a forecasted 20,000 games. We went to the banks. They said no. Go to the FBDB. (Now the BDC).  But we reckoned that by the time we went through the hoops we’d be six months late and out of it.

            Well. Here’s a lesson you might want to think about. Remember the people you know. Six months earlier we’d given our local banker a game to play with. He became convinced of its potential when he saw how much his kids enjoyed playing it. After his regional office rejected our request, he gave us a loan at his limit. That, coupled with a loan from Scott’s father gave us the 20,000 games we needed.

                But here again we weren’t out of the woods. The games were starting to move, but to get the momentum going we called on Scott and Chris’ friends in the media. We gave them games and wrote articles and pushed the media wherever we could. By October 1981 we were selling at an alarming rate.[2]

                And now we had a production problem. The boxes would come in and fill the warehouse...boxes of card sets, boxes of plastic pieces, boxes of boards, boxes of dice, boxes and boxes...And now we had to worry about other things, like making deliveries. After processing 10,000 games, we approached Chieftain Products, a distributor in Toronto who, in return for Canadian exclusivity financed the manufacturing in advance. They also arranged for the printer to take on the whole assembly process. What attracted us to Chieftain was the fact they also distributed Scrabble. So, we reasoned, they must be calling on the same customers as we were looking for. By January 1983 we had sold 120,000 games across Canada.

                In 1983 we entered the U.S. with Selchow & Righter, and sold 1.6 million games the first year and 20 million games the next.

                Well, there’s the story. We made some money, so I guess we’re entrepreneurs. But really, in the final analysis we’re just four guys who, like Dorothy and her friends in The Wizard of Oz, set off down the Yellow Brick Road, dealt with obstacles as they occurred, and finally reached The Emerald City.”

*************

Comment:  1984 Worldwide sales of Trivial Pursuit® games topped $1 billion retail.  Dividends to the 32 special shareholders averaged $100,000 for each $1,000 share purchased.

Brain Storming and Such

Every day thousands of individuals look at life around them and wonder if there is a better way to do things. The mark of the entrepreneur, however, is that she/he does something about their thoughts and speculations. They develop their ideas. People very often come up with a concept for something unique and after a while will see it on television or in the newspapers. The immediate reaction is to tell everyone that someone stole his or her idea! But an idea is not worth a penny until it is developed and an investment is made to create a product or a prototype.

            Where do good ideas come from? Where does the entrepreneur find her new concept for her new venture? Walter Good1lists five areas in which the first—time venturist might search for concepts or initial ideas that will lead to a new company.

·         Ones job — The experience an individual acquires about a business and, perhaps more importantly, about the networks, sources of supply and markets, are often the wellspring for new ventures. One estimate has it that 85% of new business startups originate from this source.

·         Hobbies— The avocation one has can lead to a new business.

·         Casual Observation — an individual may visit an exhibition or her/his daily life experience may suddenly reveal a new need, the “eureka” syndrome.

·         Deliberate Search — patent searches often prompt notions or ideas for new innovations, particularly from those individuals who are inventive.

·         Attending trade shows, newsletters or trends, trade publications, conventions to get ideas about a business or product.

            Being creative is hard work. There is a quote that says “Creativity always dies a quick death in rooms that house a conference table.” The inference is that a group of people sitting around a table will have a difficult time coming up with good ideas. That may be the case in a corporate setting and it is a challenge to Shads. Each year the Shad Valley Program sets a theme for an innovative product or service that Shads must develop. One year it was ‘Youth and Safety’ another year it was ‘The Environment.’

Creating a new idea is not really simple. In a group effort it becomes even more challenging. Individuals just have to work at it with their teammates. Discuss all the different ideas you can think of. Try to dream up a number of solutions to people problems there may be in terms of the shortfall existing products might have. Let your mind run with it. Toy with it for a few days. Often the best solutions come in the middle of the night during a good deep sleep. An individual’s best resource is her or his intuition. Successful business executives and entrepreneurs rely on their intuition to solve problems and run their enterprises. There is a technique from the University of Buffalo you might try on the next page. It can be found at the following URL:

:(http://www.art.buffalo.edu/resources/classnotes/art250/projects/brainstorming.html)

            What is important and should be at the forefront of your creative effort is that your idea must appeal to the market, to the customers who will benefit from the idea. The focus for any solution needs to be on the needs of the buyer, his or her wants or desires and, as importantly, their behaviour in using the product. If it does not address a need and is not consistent with usual behaviour, the chances are it is not a good idea.

You might also try www.innovationtools.com/resources/brainstorming.asp

Doing a Patent Search

            Once you have an idea or concept that appears answer market needs, it is prudent to do a patent search. Go to http://strategis.ic.gc.ca. While you are there you can browse through the many programs the Canadian government has brought to the site to help business and new entrepreneurs. There is an entire section to business plans and starting a small business that will be of interest to Shad participants too. But to do a patent search for Canada, go to http://patents1.ic.gc.ca/intro-e.html and conduct an in depth study of patented products that might, or might not, be the same as the concept your team has discovered. Strategis also has links to foreign patents for Shads who are interested in expanding into the US and the world.

How Good is the Technology?

Not long ago it was observed by Time Magazine that over 90 percent of all the scientists and engineers who have ever lived since the beginning of time, are alive today.  The world abounds with inventive capability. What is also taking place is that the supporting systems for new technologies are also available today for just about any new concept. A technology is only as good as the ability to use it and integrate it into society.

A new venture has a perceived initial value if a patent an industrial design patent, a copyright or a trade-mark is owned by the company. These intellectual property registrations do not guarantee success, nor will they stop anyone else from copying them and competing illegally with the original inventor. In fact a patent or any other intellectual property is only as good as the ability to police the market and bring legal action against any transgressor. But a good technology, one that is well protected with a number of claims (other uses or add-on features that broaden the patent coverage) assures potential investors that there is something of value to the project. It is an asset and can be recorded as such.

However, many entrepreneurs like to hold off for as long as possible before patenting since the patent application will let everyone in the business world know the details about the new invention or innovation. It usually takes one to two years to file a patent and can cost in the order of $10,000 for a relatively simple design.

Shads should make notes about their idea or concept and develop sketches and drawings to specify the new product as you go along. These should be recorded in a journal. You are expected to develop good working drawings that can be used for costing purposes and to assist in designing the manufacturing process. Keeping a record of your ‘technology’ is an important matter.

Why Do We Need a Prototype?

A prototype tells the investor that the concept is doable. Some companies are started on the strength of a ‘proof of concept’ test, where the idea essentially is bench tested as in a laboratory. But that is not as strong as an actual prototype that demonstrates the idea does work. Furthermore, the prototype becomes the model that is used to generate costs to manufacture the item and to set out the manufacturing process as well.

            Shads will spend a good part of their time working with the university technical faculty to design and perfect drawings for the project. All activities pertaining to the technical aspect should be recorded in the notebook or journal. This is an important part of the project since it represents the team’s intellectual property and records its development. Be sure to record the time and the date of each change or modification that is made as you proceed from concept to prototype construction.

A Marvelous Lost Opportunity           

The inventors of a new cell phone for the deaf had an incredible concept. People who are ‘hearing impaired’ rely on American Sign Language, a communication method using hand signs first introduced by Thomas Hopkins Gallaudet in France. The “proof-in-concept” took place in Victoria BC in 1998 when the inventors set up a PC with a special video stream program they had developed to a PC located in Calgary AB. Two hearing impaired people, operating the PCs enjoyed a marvellous one hour discussion and immediately signed on for the first units. The initial business plan was a hyped, unsupported document with little due dilligence and no prototype.  The inventors had not even made an acceptable video of the “proof in concept.” They had designed a special motherboard for what they expected would be a wireless Sign Language Cellular about half the size of a small laptop. They had contracted for an elaborate codec program to assist the video streaming and now needed funds to start the venture. But they did not have a prototype. They had spent all their reserves on hiring a garulous fund raiser who did not deliver and had nothing to show potential investors. The venture never got out of the lab and soon the concept was fulfilled by video cam communication over the Internet.

The Feasibility Test: Can It Be Commercialized?

            A very important procedure is the test to determine whether an idea or a potential product is feasible and worth the time and effort to commercialize it. It tells the inventor and entrepreneur what the potential might be in the market and if it will be profitable. There are five sections to this examination;

1. Determine the market. Is it households, individuals, companies, geography and so on?
2. Estimate on average how many products might be sold in the market in any given year, a rough forecast of sales in units, (this is a tough one. You may have to ask knowledgeable people to help you with their estimates.)
3. Estimate how much it will cost to produce each unit. Multiply the cost by five. Will it sell at that price?
4. Calculate your total sales based on the number of units you reckon you might sell in a year.
5. You need a profit, after taxes, of about 20 percent of sales, minimum, to encourage investors. Does your project have this profit? Would you be happy with the amount of profit to justify starting the business?

A standard analytical tool is a breakeven analysis. This method helps to analyze the number of units that must be sold to begin making profit as well as to make changes to pricing and costs and examine the effect on the volumes of sales that are needed. (See the breakeven example at the end of the manual)

You may have to expand your market size or find ways to cut costs to bring your feasibility into line with expectations. Perhaps you may have to come up with another idea.

SECTION 3.       THE BUSINESS PLAN

THE IMPORTANCE OF A BUSINESS PLAN

            Starting a new venture is a risky undertaking. The statistics suggest that, on average, most new ventures do not last. Out of 100 new businesses that will start up in any one year half of these will close the doors before the year is out and four years later another 30% will follow suite. Some of the remaining firms will be taken over by other firms and eight years later only 5 will still be in business. But the good news is that the new entrepreneur does not need to be one of those failures. A solid business plan is the difference between winning and losing. A business plan serves in three ways. It is the planning tool that forces the entrepreneur to examine all of the elements and factors that must be dealt with in building a new venture. Secondly it leads to an estimate of the net worth of the venture. It shows how much revenue and profit can be expected from the new idea. Thirdly it becomes the instrument most entrepreneurs use to raise money for the new business.

As a Planning Tool

            Every new concept warrants a business plan. This is a document that is a well thought out plan based on as much factual information as can be mustered. It serves two very important purposes for the entrepreneur. The first is that it forces the entrepreneur to assemble as much information as can be obtained about the proposed venture. It then permits him/her to make very important decisions regarding the use of assets and resources. This pre-planning and planning activity does five things.

1. It forces a review of the environment, the economic, physical and social factors that may have an impact on the venture.
2. It encourages realism in examining the project. There is often a euphoric and/or overly zealous enthusiasm for a new concept that may hinder a realistic review of what one is doing. The plan forces an orderly, procedural test of all the elements of the new business.
3. It requires a serious examination of how to position the new product/service in the environment and market.
4. It imposes on the entrepreneur a discipline as she/he assembles the necessary resources and enlists the support personnel to help build the organization that will carry out the venture and
5. It sets out a plan of action to accomplish the desired objectives that becomes the company’s initial operating plan.

To Evaluate Risk and Worth of the Project

                        Shortly after the fall of the former Soviet Union and the emergence of new democratic republics, the Canadian government launched an initiative to assist the Baltic nations in adjusting to the free enterprise system and to learn about entrepreneurship. In one program in Estonia, students were required to complete a business plan by the end of their course of studies. One group had come up with a ‘sure-fired’ idea for a travel service within the country and they were convinced that a fortune was to be made. But over the weeks that followed and as the plan was researched and tested, their enthusiasm waned and changed to frustration and then defeat. It was, it turned out, not at all profitable. Nor could much be done to make it profitable.

            On the final day of the project, the group that had come up with the travel service business was awarded top honors for their plan. Imagine their delight when, in accepting the prize, it was established that they had fulfilled a major purpose of a business plan, and done so in good style. They had proven, at little cost and effort, that the business would fail, and without having to wait one to five years to find out first hand. A business plan works both ways. It shows a profitable venture as well as the venture that has no future.

            Beyond serving as an opportunity assessment tool, the plan provides the entrepreneur with two financial outcomes. First it lays out the amount of funding needed to carry the venture through to break-even. During the early days of the startup the operation consumes cash until revenues start coming in to offset the outflow. Secondly, taken over a selected period of time, usually three to five years, it establishes the worth of the project, answering the question as to payback.

The key to Raising Funds for the Venture

                        The business plan is used to raise money for the new venture. It gives the potential investor a reasonably clear picture of what the entrepreneur expects to accomplish. Essentially the investor wants proven evidence of:

                        a)         A viable product or protected technology

                        b)         An attainable market

                        c)         A methodology to deliver goods/service at a profit

                        d)         Confidence in the management team/entrepreneur

                        e)         Return on investment

            The business plan is a very serious document. It needs to be well thought out and well supported by research and reference documents. The key theme in developing the business plan is due diligence! Every fact and estimate must be backed by research and credible sources. Otherwise the business plan becomes a “blue sky” venture, a notion plucked from the air and supported only by dreams and wishes.

The Key Elements of the Business Plan

            There are dozens of sources that illustrate and advise entrepreneurs on how to build a business plan. The “Strategis” site on the Internet has a number of good examples and a search on Google will produce hundreds of sources for developing a business plan. One of the more comprehensive is the website for the US Small Business Administration at www.sba.gov/library/pubs.html. This site has numerous references on small business issues from start up to financing.

You are encouraged to examine this and other sources. A guideline is provided for Table 1. Business Plan Outline. This is a generic and comprehensive list for a business plan. Naturally you do not need to follow the format in detail. Your business plan should be based on your innovative concept and should be consistent with its special needs.

            It is important to note that business plans are not strictly for new business startups. They are also a requirement, although with a different emphasis, in the justification of new ventures within existing organizations. The fact is that entrepreneurs who plan their new ventures are more likely to succeed 20% to 80% of the time, a probability that improves with ones education, training and experience.

            The following table is for a technical product that requires a manufacturing plant. The contents of your business plan outline will vary with the type of business being established. Retailing would not necessarily have R & D or a production plant. A Service business would not have a plant and all the costs, but it would have an office and office equipment and so on.

Table 1.   Business Plan Outline For Innovative Product

I           Executive Summary

                        A.        Description Of Concept, Innovation or Opportunity

                        B.        Background in Brief vis a vis Technology, Patents

                        C.        Competitive Advantage

                        D.        Market-Consumer Summary

                        E.         Forecast & Five Year Display of Revenues & Profit

                        F.         The Team

G.                The Financial Terms Sought. (The Deal)

II         Environmental Factors

III        Introduction To The Company

A.                The Company History and the Concept/Innovation

B.                 The Industry & Environment

C.                 Technology, Intellectual Property

D.                Product/Services & Unique Features

E.                 Vision and Proposed Direction

IV        Market Analysis & Evaluation

                        A.        Customer Base

                        B.        Market Size, Trends

                        C.        Competition, Brands, Technological Advantages

                        D.        Market Share Estimate

                        E.         Surveys, Research Studies, Primary Demand

IV        Marketing Plan

                        A.        Overall Strategy & Targets

                        B.        Product & Pricing Policies

                        C.        Distribution & Promotion

                        D.        Sales Organization, Incentives

                        E.         Growth & Control

V         Operations, Manufacturing

                        A.        R & D, Product Life Cycle

                        B.        Technology, Ongoing Innovation, Patents

                        C.        Location & Expansion

                        D.        Layout, Equipment, Processes

VI        Costs, Budgets & Supplies

                        A.        Suppliers, Material Costing

                        B.        Plant Overhead, Operating Costs

                        C.        Accounting Systems, M.I.S.

                        D.        Break Even Analysis

VII      Financials

                        A.        Cash Budgets, Receipts vs. Costs

                        B.        Working Capital Requirements

                        C.        Five Year Cash Flow

                        D.        Net Worth

E.                 Pro Formas, Dividend Payout

F.                  Risk Management

G.                Financing Requirements

VIII     Management team

                        A.        Purpose, Philosophy, Mission

                        B.        Organization and Contracts

                        C.        Management, Key Team Members

                        D.        Bonuses, Incentives

Appendices & Documentation

One of the great references for small businesses and entrepreneurs can be found at http://www.toolkit.cch.com This URL has hundreds of business tips, including business plan construction that you might want to investigate.

Due Diligence

The important aspect of a business plan is not in the way it is organized or how well it is written. The most important part of the business plan is what is not written. It refers to the tests that a future investor will apply to the business plan. These should be kept in mind as a guide in building the business plan. It is only as good as the due diligence that has been incorporated into it. The term ‘due diligence’ refers to a scrupulous examination of the facts that are set down in the business plan. Information in the plan is scrutinized and double checked in regard to:

a.      The credibility of the technology - Can it work?

b.      Reliability of intellectual property - Is it patented or can it be patented?

c.       Market data sources – Is there a sound evaluation of potential?

d.      Marketing Research. Is it professional, unbiased?

e.        Market forecast reliability – Is there an accurate and realistic estimate of the market the firm can develop and that sales can actually attain?

f.         Cost sources – Does the plan have solid, hard costs from suppliers and others?

g.       Cost standards, engineered facts.

h.      Integrity of the pro forma financials – Do they meet or exceed accounting standards?

i.        Capabilities of management this is the most important factor. Who will make it all happen?

j.        Risk management. Is management aware of the risks and threats that face them?  Are contingency plans in place?

            The scrutiny of the business plan pits the judgment of the investor or a financial analyst against that of the entrepreneur in which case the observations of the former are accepted more readily than those the latter. The point is that a business plan, with ‘solid facts’ is more easily accepted by the potential investor than one that is developed from hopeful estimates. It is also advisable to have an accountant check over the financials to assure their integrity and conformance to standards.

ENVIRONMENTAL FACTORS

            The new venture will operate in a larger community, a macro-environment that will have a considerable effect on its success or failure. Dozens of institutions and organizations, all external to the entrepreneur’s field of operation, will have a considerable play on the way in which sales are made, financing is arranged, taxes paid and people employed, to mention but a few issues that are associated with the external system.

            The following article from CNN shows how government can have an impact on new ventures.

Government wiretap plans may chill innovation Monday, March 22, 2004 Posted: 11:20 AM EST (1620 GMT) SAN JOSE, California (AP) -- Before 8x8 Inc. launched an Internet phone service in late 2002, it drafted a business plan, set up its equipment, posted a Web site and began taking orders from customers. As with most online ventures, U.S. government approval wasn't needed. That would change if the Department of Justice succeeds at persuading federal regulators to require new online communications services -- such as Internet calling -- to comply with wiretapping laws. Critics, including some online businesses that are working with authorities to make their services wiretap-capable, say the DOJ proposal isn't just unprecedented and overzealous but also dangerously impractical. It would chill innovation, they say, invade privacy and drive businesses outside the United States. "No one in the Internet world is going to support this," said Bryan Martin, chief executive of 8x8, which sells the Packet8 phone service. "It's counter to everything we've done to date in terms of building the Internet as a free, anonymous and creative place." Copyright 2004 The Associated Press. All rights reserved.

 

DEVELOPING A MARKETING PLAN

            The market and an estimate of the potential number of customers who may be willing to buy the new product are the most important part of the business plan. Without a customer there is no business. The eminent management consultant Peter Drucker states that there are only two important functions in an organization, innovation and marketing. Everything else is a cost. Marketing is the process of:

1.      Identifying customers,

2.      Determining what they want or need in a product,

3.      Delivering it to them even as you

4.      Communicating to them that you have such a product at

5.      A price they find of acceptable value.

                       

Identifying the Market Potential

            The key words here are demographics and geography and they provide answers to six basic questions.

            a) How many potential customers are there?

            b) Where are they?

            c) Do they have the money to pay for the product/service?

            d) How do we identify them?

            e) How are they segmented and,

            f) To whom do we want to sell to? Who is our target customer?

.

Demographics refer to published information about a population of people, businesses and organizations. The most common source of data about the population is collected every ten years by the federal government. It is the National Census, compiled for the public by Statistics Canada. This is the primary source of information that permits the entrepreneur to identify a market.

            Census data is readily available in public libraries and there is extensive population information including location, households, incomes, age groups, culture and family size.

            For example Stats Canada catalogs have information on:

            - The number of households in an area

            - Annual household income

            - Percentage of income spent on products and services and so on.

With this information in hand, the researcher can estimate the potential for sales for just about any product the consumer might need. Of course there is a very large difference between potential and actual sales and that will be discussed later.

           

Marketing Research & Forecasting

            Shads have their work cut out for them. This is the second most serious investigation following the selection of a new product idea! The purpose is to define the market, your customer, in as much detail as possible. Market research leads to the customer and identifies how you must design your marketing plan to effectively sell your product to him or her.

            Two types of research define the customer and identify her or his profile. Exploratory research is carried out using secondary data from libraries, the Internet and so on and when it is combined with the Survey research or primary research with information obtained directly from the customer it leads to an understanding of the segments in the market from which a specific target can be selected.

            A forecast is based on the potential number of buyers in a market. The marketer then uses his/her best judgment or the results from a survey to estimate how many of these potential customers might need the product. Finally taking into account the competition and an estimate of how effective the marketing strategy will be, a forecast is made for each month of the next year and for the next three to five years.

The example used is for a hypothetical computer company. The Bio-Computer Company Limited, (B-CC) has a developed a unique product based on a bio-chemical chip. The chip combines the biological function of a human brain synapsis with the chemical molecules formed using nanotechnology to build a complex and highly efficient micro-chip. It has a creative memory component that allows the unit to ‘learn’ from its own processes and mistakes. In other words it develops its own experience data base and is able to multi-task calculations involving the most complex problems. The inventors built a few prototype chips, which were much larger than the expected production units would be, and installed them in five computers that were beta tested in five settings; a medical lab, an academic research office, a police lab, a corporate R & D lab and in the planning office of a major tech firm.

Here we see an example of technology leading the market place While the market already has computers and presumably is generally satisfied with their performance, the inventors are looking to see if their new technology might have an appeal that meets new needs or introduces advanced productivities. In this case the beta study convinced the company to initially target the corporate segment for two reasons. A decision to buy a bio-computer could be quickly made, funds were usually available, and the computers offer an advanced level of productivity. This factor shows there is a quick “pay back” or saving that would justify purchasing them.

The company found that corporations generally relied on a specialized retail store to supply its smaller computer needs and that the decision-maker was a manager who ran the research lab or was the director of the planning operation. These individuals would be targeted for communications about the new technology.  The company estimated there were 100,000 companies in Canada that could use the new bio-PC. The young president, a 26 year old MBA from IBM who had helped develop the computer with his father, a retired biochemist from Monsanto, estimated he could sign up 30 to 50 stores across the country, mostly in Ontario and Quebec, each of whom should be able to sell ten to twenty units per year. In the following years they would open up in the US and then globally.

The following table shows a forecast based on units and an estimated selling price of $3,300 per unit. (See Pricing Strategy, page 32)

Table 2.           First Year Sales Forecast for Bio-Computer Company Ltd.

(1,000s of dollars)

 

	Jan	Feb	Mar	Apr	May	June	July	Aug	Sept	Oct	Nov	Dec
Units	-	-			5	20	40	50	60	70	80	90
Sales*					$16.5	$66	$132	$165	$198	$231	$264	$297

* See section on Pricing, page 30

Table 3.          The Five Year Forecast

	Year 1	Year 2	Year 3	Year 4	Year 5
Units	415	1500	4000	6000	6000
Sales	$1,370	$4,950	$13,200	$19,800	$19,800

Identifying the Target Customer

            A market is made up of many segments. A segment can be an age group. It can be a lifestyle group and even an educational group. A high school could be segmented into students who were academics, geeks, slackers, party animals and jocks. Each of these has a unique characteristic and product need. If you are selling computer products your target market would be the geeks and possibly the academics. The key issue is to relate the product to the way in which a homogenous group would use it. A product is characterized by its usage and not by its physical aspect.

Typical targets could include:

                        Lifestyle – party goods

                        Parents – safety needs

                        Social Teens – beauty aids

The Innovation Adoption Curve

The adoption of high tech products by companies and consumers follows a bell curve as shown in Figure 4.  The concept, which is a reasonable approximation of how customers accept a new technology is based on a study by Everest Rogers, [3] in 1995. 

The initial acceptance takes place with 2.5 percent of the identified target market. If one assumes there are 100,000 companies who might avail themselves of the product and marketing research shows that one third of them would actually buy it, the potential is 33,300 companies and the innovators would number just over 8,000 in Canada.  As the product begins to be accepted by the market it begins to escalate in sales and should it pass through a critical mass stage it grows quite dramatically.

The following table provides an outline of each of the new technology or product adopter segments.

Table 4. Technology Innovation Buyers

Innovators (I)	The enthusiasts who like technology for its own sake.
Early Adopters (EA)	Those who have the vision to adopt an emerging technology to an opportunity that is important to them.
The Chasm (C)	Time gap in technology adoption, which is between the early adoptors and the pragmatists.
Pragmatists (P) Early Majority	Early majority pragmatists are the solid citizens who do not like to take the risks of pioneering, but are ready to see the advantages of tested technologies. They are the begining of a mass market.
Pragmatists (P) Late Majority	Late majority pragmatists, who represent about one-third of available customers, disklike discontinuous innovations and believe in tradition rather than progress. They buy high-technology products reluctantly and do not expect to like them.
Traditionalists (T)	Traditionalists (laggards) do not engage with high technology products - except to block them. They perform the valuable service of pointing out regularly the discrepancies between the day-to-day reality of the product and the claims made for it.

Developing the Product

            Once the customer is identified, the product can be adapted more closely to fit the needs of that individual. Again if one is selling computer equipment there could be two product lines or more. One would be developed for the geeks by having a number of features that would interest them in terms of speed, memory and storage. On the other hand the academic would be interested in a lower cost product, yet one that would permit good Internet activity, games capacity and communications. So a company can have a number of product lines, each of them appealing to different segments of the market. (See attached notes on product liability.)

Market Distribution and Retailing

            The distribution system is already well stocked with successful products that provide the wholesalers, the distributors, the jobbers and retailers—middlemen—with a good level of sales and profits. So why would they want to change or add on more products? The challenge is to prove to these middlemen the worthiness of a new product. On the one hand the entrepreneur requires sufficient funds to advertise and create a primary demand that will literally “pull” the product through the distribution system. Alternately there is the technique of using promotions in the form of coupons, sampling, deep discounts and in-store displays that will encourage the middlemen to “push” the product.

            A distribution plan requires planning that considers four items:

1.                  Market exposure - presenting the product at a point where customers will be exposed to them. Shelf position becomes important as does market coverage.

2.                  Timing - products where they should be, when needed.

3.                  Appropriate middlemen - the distribution system, the retailer should be in a business consistent with the market being served. Tires are not sold in paint stores. In Canada six major chains cover more than 80% of the retail market for household goods; Canadian Tire, K-Mart, Wal-Mart, Zellers, Sears and Home Hardware. Introduction through one of these outlets provides a considerable opportunity.

4.                  Geography - location and orderly growth are important. In retailing it is vital. A good introductory program would include sufficient margins to distributors and/or retailers.

The new company will have to work with retailers directly or it can save time by convincing distributors and wholesalers to introduce the product to market. Consumer goods are usually handled through these middlemen while more technical products, especially those for industrial and corporate markets is done by direct salesperson activities.

Promoting the Product, Advertising, Selling

            The usual approach to marketing by the founding entrepreneur is to sell, sell, sell. He/she is the only sales person for the enterprise and at startup she/he wears the hat of sales person in addition to being president, production chief, financial officer and service manager.

            But while selling is a primary focus, this activity requires other means of communication with customers to support it. These promotional activities include five activities, not all used at once; publicity, advertising, as well as personal selling, sales promotions, direct marketing. In addition to these the creation of a website is an important promotional tool. All these channels convey information to the customer about the goods and services produced by the enterprise. Each promotional type plays a vital role in creating a market for the new venture. The producer of a new product must communicate, broadcast, advertise and promote the product. And the competition is keen. A company competes in a very noisy commercial environment where thousands of messages each day are broadcast to consumers, urging them to try this, buy that or go there.

Startup Promotions

            There is a procedure that new ventures (or the introduction of new products) can follow in developing a reputation for its service/product, (Figure 5.). Initially the entrepreneur should obtain as much free publicity as can be arranged. Introduction of the Trivial Pursuit game began with an effective media campaign organized by the founders of the company. The purpose of the promotions campaign is as follows:

1.         Create an awareness of the new product in local and selected markets. This “primes the pump” for all else that follows/

2.         Capture the interest of the consumer so that he/she will be prompted to seek more information about the product.

3.         Provide information, which is of particular importance concerning big-ticket           items and commercial/industrial products.

4.         Stimulate the desire to learn more or to see the product first hand and then

5.         To encourage the customer to action, to purchase or at least give the product a trial run.

Publicity

            Small firms can obtain the most return for their investment in using the media to introduce their new products and services. Three vehicles are available to the entrepreneur in promoting her/his venture.

            Press Releases—connections are made to local, regional news managers in radio, newspaper and television. These media are always on the lookout for free, interesting and timely information that will help the consumer.

            Talk Shows—radio and TV hosts have many hours of programming to fill during a week. A new, innovative product, particularly with a good entrepreneurial personality is often looked for by these agencies.

            Trade News—the appropriate trade magazines are usually interested in new, improved products/services. The new venturist can usually persuade a magazine to carry an article about the enterprise and its innovation if the entrepreneur also buys advertising space in the magazine.

Advertising.

            Wrigley, the chewing gum king was once asked by a news reporter on a flight to Chicago why he spent millions on advertising, rather than cutting the price of gum. “What would happen”, asked Wrigley, “if the pilot shuts down the engine on this plane?” “Why we’d crash!” exclaimed the newsman. “Yes”, said Wrigley, “and that is what would happen to my business if I stopped advertising.”

            Advertising, as with all marketing activity, is an investment. Many new business people look on advertising as an expense, something to be suffered, rather than creating an opportunity, which it is.

            Advertising pays. The new entrepreneur will want to pursue both advertising and news coverage, as exposure from either can translate to increased buyer awareness.. Advertising should be a portion of every business budget, and there are seven vehicles a small company should consider using:

            a. Newspapers provide a flexible, timely source of credible information, excellent in local markets.

            b. Radio has a wide reach and is suitable for mass selling to a whole market concerning a pending or ongoing selling campaign.

            c. Television is costly and not often a first choice of media. As with radio it is not as specific as the new venture requires for startup, unless there is a good budget available.

            d. Magazines are excellent, particularly if accompanied by articles or stories about the new venture and its product. This lends credibility to the selling effort.

            e. Outdoor Billboards are good in local markets and in making an appeal to automobile drivers for big-ticket items.

            f. Telephone directories - Yellow pages are a must for retail operations, although not necessarily industrial, commercial products.

            g. Brochures and catalogues - the most important ad piece for the entrepreneur. It should look professional and fully explain the product/service offered.

            h. Direct Mail - often the most effective technique when accompanied by sales follow - up for commercial products and services.

Personal Selling

            The entrepreneur is the sales person for the new enterprise. She/he is the spokesperson, the ambassador, and the representative that makes it all happen. The new venture will succeed as the entrepreneur succeeds in selling the vision to his backers, selling the need for cooperation to employees, suppliers and publics and convincing customers to buy the new product, innovation, service.

            In the “professional” sense the new venturist is often a poor manager but in terms of selling a product they are often enormously successful because of their belief in the worth of the product or invention.

            In retailing the sales person is a merchandiser who becomes the sole determinant as to whether a customer purchases the product. By the time a customer walks into a retail store, they have moved part way through a seven-step decision process and can be persuaded to make the purchase at that time, assuming the sales person is reasonably competent and well trained. Regrettably the major flaw with new venturists is their omission in training their staff. As with sales representatives for manufacturers, distributors or other businesses, it is not unusual for the entrepreneur to trust to luck in hiring and employing this most important employee in the enterprise.

             “These days you don’t ‘sell to’ people, you ‘partner with’ them. At the rhetorical frontiers of the new sales force, even the word ‘salesman’ is frowned upon; the preferred title is ‘relationship manager,”

            Sales people need to be problem solvers who bring to the customer a service or product that facilitates their operations, increases their productivity, profits or safety.

Setting a Price

            .

            The pricing policies that will be established by the new venture are very important. The profit for the company is included in the selling price. The higher the price beyond the cost of manufacture or, as the ‘cost of goods sold,’ the higher the profit there is. Marketing is used to strategically add value to the product so as to maximize the price. The design of the product to meet needs is a value added function. The promotional strategy adds value through branding or exciting demand and locating the products in stores or at places where the buyer can easily access them adds value. So price is the last part of the mix that is examined.

The concept of price is shown in the following formula:

                        Value (or price) = Cost to the customer plus Expectations

                        where

                        Cost = what is paid for the product

Expectations = anticipated product satisfaction, quality, image (brand), seller acceptance or reputation.

            The utility of having the product at a place and time is important, but in the context of being of value, it is more a qualifying dimension, even as it is an expectation. Promotional efforts enhance value through image building brought about by brand identification, while product quality, packaging and other attributes enhance the value. Thus, even before the entrepreneur places a price on a product (cost to the buyer) there are mix ingredients that can be applied to enhance the perceived value. This being the case, the price becomes almost a secondary consideration. Above all the objective is to set the price at what the market will bear.

Cost Versus Market Pricing.

            A price level should be established on what the market will bear. Typically entrepreneurs’ will be persuaded to use a cost plus approach, perhaps associated with break—even analysis, to set prices. This is not usually an appropriate place to start. A low price selected by this process will likely have an effect on perception and decrease the value of the product, thus inhibiting sales. Then too, the price might be set too low and the product becomes popular at the diminished price thus losing the entrepreneur much profit. A final point is that it is more difficult to increase a price than it is to reduce it. In the latter case the buyer perceives a deal, in the former a certain dissatisfaction.

            These observations lead to five basic facts about pricing.

            1.         Pricing is a component of overall strategy.

            2.         Pricing is tied to the price - performance - value equation.

3.         Pricing is best established as the basis of what each segment will bear, not averaged across an entire market.

            4.         A good brand image commands a higher price.

5.         Pricing strategy should incorporate flexibility to allow appropriate discounting schedules.

           

In the last point the idea is that a price list be used and then can be discounted for individual distributors, volume buyers etc., thus allowing a certain flexibility in dealing with the market.

A typical consumer good might be priced out using the following structure:

                       

Manufacturers suggested list price                                                     $ 9.95

                                    Retailer Cost                                                   $ 5.50

                                    Wholesaler Cost                                              $ 4.70

                                    Allowance for Brokers                                         .25

                                    Marketing costs, co-op                                       1.00

                                    Manufacturers Price                                        $ 3.45

           

In the case of the hypothetical company, the Bio-Computer Company Limited (B-CC) it reckons the initial target market will be corporations and laboratories. Later on it expects to develop a model for the consumer market. Here there would be a small target market of computer geeks and innovators who would likely buy it at the price they wish to maintain. On the other hand they might have considered lowering the price and entering the consumer market with a scaled down version, perhaps starting with a laptop version, since the unit is quite small. In this case the marketing strategy would be quite different and the retail stores would not have been specialist, but the more consumer oriented types such as London Drugs, Future Shop and so on.

Assuming the company did a bit of research with the corporate market they found that they could easily charge upwards of twice any competitors cost. Assuming Dell is selling their top line PCs for $2,600 CAD, places B-CCs list price in the order of $5,200 plus printer and peripherals. Again for ease of developing the plan we’ll assume the software and O/S can be handled by either Microsoft or Unix. As to peripherals, printers, monitors etc., company recommends a number of sources, but leaves that to the retailer to bundle into her/his selling strategy.

Marketing and Positioning Strategies

           

            When customer has been identifies as to the group that will likely buy the products/services, one of the widely advocated market strategies is to apply a positioning strategy.

            The concept of positioning, first introduced in 1981 is grounded on the observation that the human mind likes to organize itself around hooks or slots. These are mental positions that the brain assigns to things; to products or services to assist in the recall process. Using this faculty a company caninstitute a communications campaign that will create a slot about the perception the consumer has for its product and brand identification.

            The argument is that once the position is filled, occupied by a brand that dominates it, all subsequent considerations are measured against that brand which, if strong enough gives preference only to the main brand that occupies the site where, for example, a desire for a beverage or a toothpaste is held.This positioning then becomes the basis for all communications - branding, advertising, promotions, packaging, sales force development, merchandising and publicity.

            There are a number of positioning strategies that serve as a guide for the new venture market strategy.  Firstly there must be a clear association between the customer and product satisfaction. The product must be needed. It must do the job and it must make the customer happy. Secondly, the product/service needs be analyzed in contrast to the competitor brands and the product features they offer. Are there differences that can serve in the interest of the new product? Are they significant? Needed? Finally, certainly in regard to consumer products, there must be an “inherent drama” or ‘sizzle’ that can assist the perception -  positioning process. Pillsbury, for example, took a common product, essentially flour and water, turned it into a “dough—boy” and established a position in prepared flour products market that has lasted for decades.

Types of Positioning.

            The new venture is constrained to some degree in establishing a position in the market. It has no history to speak of so it does not need to be concerned about re-positioning strategies in response to competitor and environmental changes. But in order to create even a partial barrier the enterprise needs to make a substantial investment in promotion as to create the dominant perception and occupy a spot in the mind of customers. Essentially the startup venture is likely best served with one of two strategies.

Product Difference Position

            Most new, innovative products are sufficiently unique as to command this approach. The customer accepts the product, because of its newness or technological superiority, and takes on a differentiated identify. Intel’s Pentium processor illustrates the point.

            As the product matures, the entrepreneur will make changes to it, perhaps offering variations of the same product in which case the position is broadened to include a product line made up of a number of sub—positions by key attributes or benefits. This can be as simple as different sizes of cereal boxes to stereos with and without Dolby performance.

Behavioral Positioning

            Depending on how, why or when a product is used, the entrepreneur can relate the usage or product behavior to a position. Many consumer products apply this to lifestyle positioning. Molson’s for example positioned Golden Ale at one time as the party fun refreshment.

Websites

The Internet allows an excellent medium for effective communications with customers. Moreover it leads to the creation of the company’s Supply Chain Management (SCM) system with customers, suppliers and service providers. SCM plays a strong and increasingly important role in marketing and supplying the company with goods and services.

The website is an excellent B2B marketing tool, since business to business marketing works very well on the “Net.” The B2C form has yet to attain the levels of success that were expected during the halcyon days at the turn of the century. A website offers information and support and is a viable medium when coupled with other forms of advertising and sales promotions. There are four levels of website marketing; pictures and words, operational, interactive and virtual malls. Pictures and words is nothing more than a static site with pictures, words and menus that offer information to the visitor about products, solutions, addresses and so on.

            The operational site is a bit more interactive, much less like eBay, where the visitor registers on the site, asks for and obtains information about a variety of items and options, makes an offer, or a purchase as in shopping online and arranges to pay for the purchase.

The interactive site gives information, exchanges information, modifies information, conducts searches and consummates an exchange, much less like booking a holiday to an exotic place.

The virtual malls are still at the introductory stage, but these present a full pictorial presentation and exchange procedure to the shopper. They work best with virtual goggles. One day they will account for as much as thirty percent of retail sales.

Many people are invited to create their own website and the following URL offers a considerable amount of support. You can have your own website in five minutes!. Go to http://www.webs.com/

Marketing Budgets

            The creation of a marketing plan, for an ongoing business or a new venture, requires some attention to scheduling and budgeting. It is important to develop a schedule of promotional activities that match the organization of distributors and retailers for consumer goods, at least, along with mileposts against which the entrepreneur can measure performance. It is important to have sales targets and market share objectives, but equally so is there a need for goals in promotion and distribution.

            The schedules should include:

            a.         Hiring of sales personnel

            b.         Hiring of sales support staff

c.         Opening up of distribution and/or retail outlets, including expected inventory levels.

            d.         Publicity schedule

            e.         Advertising schedule

f.          Sales promotion activities—exhibitions, shows, etc

The following table offers and example of the promotional and distribution process..

Table 5.          The Promotion Process

First Period (Week 1 to Week 6)	Publicity: Articles in news media - appropriate ‘environmental’ magazines, (See C.A.R.D.) Weekly newspapers, etc. (Spokesperson) Ontario, New York & B.C. Distributors development.
Second Period (Week 6 to Week 10)	Advertising - Newspapers, weeklies & regional magazines, Stage I.* Finalize broker and retailer arrangements.
Third Period (Week 10 to Week 16)	Advertising - Live media. Stage II* Product in stores. Promotion, shelf talkers.
Fourth Period (Week 16 onwards)	Co-op, weeklies, spokesperson. Intermittent live media. Stage III.*
* Stage I	Awareness campaign for Ontario urban centres - Toronto and Golden Horseshoe, some New York and B.C., 20 - 30 weeklies. Tied to distributor support program and rep training.
* Stage II	Continue awareness campaign to match product availability in stores. Two for one consumer offer via weekly coupons (test) Button campaign in stores (if possible) “ASK ME! Weather Channel and/or Global live media campaign. (Option)
* Stage III	On-going promotions including exhibitions, shows - Weekly adverts - Co-op advertising - Season appropriate live media

Note:      This introductory campaign will be the model for west coast expansion in the first year and other regional markets later.

            Budgeting is also a detailed requirement. The typical cost for a sales representative is $30 - $50,000 annually plus commissions on business. Straight commission sales persons run about 10% on sales. Support staff can cost $20 - $25,000 and should have extensive PC skills, since the sales force is becoming more automated through laptops and PC management in the control of sales orders, customer calls, quality of customer relationships, shipping dates and so on.

            A typical marketing budget might look like the following:

           

Table 6.          The Bio-Computer Company Ltd.  Marketing Budget

($ 000’s)

ITEM	Year 1	Year 2	Year 3	Year 4	Year 5
Manager	$50	$60	$70	$70	$70
Sales force	$30	$60	$90	$120	$120
Clerical	$25	$30	$40	$50	$60
Office Expense	$15	$20	$30	$40	$40
Travel	$40	$100	$140	$150	$150
Promotion	$230	$560	$3,100	$4,130	$4,130
Miscellaneous	-	$10	$20	$30	$30
TOTAL	$390	$840	$3,490	$4,590	$4,590

PRODUCTION AND OPERATIONS

            The business plan requires a detailed analysis of the operations system. This part of the venture is important since it accounts for making the product or providing a service. In the case of buying the product from a custom manufacturer or an offshore company, there is still the process of purchasing, storage, shipping and so on. The operations section must detail each part of the process including:

1. Volume Variations—the ability to meet a variable market demand.

2. Source of Supply—availability and supply of materials, at competitive costs.

3. Labour—the pools of skilled and willing employees

4. Productivity, Efficiency—competitive, profitable products and services.

5. Managerial Skills—comprehension in running the operations profitably

6. Standards & Costing— cost controls and measures of output.

7. Information System—flow of administrative communications customer—company—suppliers

8. Human Resources—motivation, appropriate training, rewards.

9. Purchasing and inventory control

10. Accounting systems and control

            Whether the new venture is a retailing, service or manufacturing operation, all throughputs from the operations begin with the demand or sales order from the market place. The organization is in business to serve the market and its needs, and it continues in business as long as it recognizes that it is there to serve the customer.

                                                Warehousing & Delivery

Manufacturing and Production Costs, Benchmarks

Shads should examine the manufacturing process and decide on how they will produce their product. If they decide to do their own production, they must consider the following:

§  Where to locate the plant

§  Buy or lease a building

§  Determine the equipment needed to manufacture

§  Select handling equipment, fixtures

§  Plant layout

§  Type of services needed, power, etc.

§  Shipping and delivery

§  Government codes for labour, safety and security

§  Costing for all of the above.

Contracting Out

            Sometimes it is more convenient to outsource the production. One popular method is to have it produced in China or a low wage country. There are some pitfalls that can cause grief for the new venture in shopping offshore. Firstly it requires a lot of up-front money to source offshore. A new venture does not have a credit standing and so one would need to pay for the entire order up front. A second problem is how to assure quality control. A new product must have superb quality built into it. Both these considerations rely on knowing which supplier to work with and that too is a problem. Where does one find a reliable source. Then there is the problem of security. Some offshore companies, and countries too, do not share the same security and regard for intellectual property, as do the more developed nations. It does happen that unscrupulous producers quickly copy new ideas.

            If the group decides not to set up their its company manufacturing operation; buying equipment, leasing a building, hiring people and so on, then outsourcing in Canada is one way to go. The simplest method is to show the prototype to a custom manufacturer and develop a cost to produce it locally. However, there is still costing to be developed for warehousing, shipping, administration, warranties and so on.

Purchasing, Suppliers, Inventories

            Should the shad team decide to manufacture their product themselves then the product must be broken out into different components and a costing developed for each item, plus the cost of labour for each step of the manufacturing process. Here there will be a need to conduct a search of the potential suppliers who will supple the company with its components as well as the services to run the business, such as cleaning, repairs, installation of equipment and so on.

            The major effort will be to find good suppliers for the components the company needs to produce its products including electrical parts, steel sheeting, screws, motherboard and so on. Often these would be tendered out to four or five likely suppliers based on quantities needed to meet the forecast, and one would be selected. Here again the company, because it is unknown, will likely be required to pay C.O.D. for just about everything it purchases.

Cost Budgets

            The starting point is an examination of what it will cost to produce the new product. What accountants would develop is referred to as the Standard Cost of a product. Typically it includes material, estimate of labour, overhead costs and so on. The following Table outlines the procedure:

Table 7.            Standard Costing Budget for Bio-Computer Company Ltd.

ITEM	No. Units	Supplier Cost/unit	Labour In hours	Hourly Cost	Material/Labour Cost
Bio cpu Chip	1	498.45			498.45
Motherboard	1	189.88			189.88
Components	33	Var.			266.00
Base Plate, steel	1	0.67	.20	22.50	5.17
Cover, steel	1	1.22	.30	22.50	7.97
Assemble Section A			.70	30.00	21.00
Assemble Section B			2.20	30.00	66.00
Package			.10	15.00	1.50
Boxes	1	2.50			2.50
Overhead	.002 times annual Plant cost	50.00			50.00
Total Mfrg. Cost					$1,108.47

Assumes $50,000 supervision, $25,000 annual lease, inclusive, $10,000 power, utilities etc., $15,000 depreciation on equipment and/or lease of equipment…$100,000 over 2,000 units per year.

            Many new businesses avoid the problem of production by having a custom builder manufacture the product or they go to offshore sources to presumably buy the cheapest product. Both methods are acceptable, but there are a number of issues the entrepreneur should be apprised of.

            The cost to purchase the product will be tied to the number of units that are ordered at one time. Using the above example, the cost for 1,000 units would be in the order of $2,500 from Canadian sources and perhaps $2,000 from offshore sources. Note that labour is not a really big part of the cost.

            The second issue is that you would likely be required to pay for the full amount up front. You have no credit status, are unknown and will need to cover the costs that would amount to about $2.2 million plus shipping and insurance, etc.

            The third consideration is quality control. You will need to travel back and forth a number of times to be sure that what is being supplied to you is top quality. This is critically important for a new product.

The fourth factor is that much of the new technology comes from being involved in the manufacturing process. That is an advantage that the contract manufacturer will have, should he become a supplier to a competitor

The fifth issue, and there are many more, is the secrecy and intellectual property issue. Many offshore companies were noted for passing on the new technology to others who would make a “knock-off” and compete with the new firm.     

Operations Budgets

            In our example the company elects to do its own manufacturing for quality control purposes and protection of its intellectual property. We will assume the company will purchase $75,000 worth of equipment to form the computer cabinet, handle the inventory and supplies, purchase a fork-lift and small truck. This will be depreciated on a straight-line basis of 20% per year. The budget would look something like the following:

Table 8.          The Bio-Computer Company Ltd.  Manufacturing Budget

($000’s)

Item	Year 1	Year 2	Year 3	Year 4	Year 5
Supervision	$50	$50	$50	$75	$75
Building	$25	$25	$35	$50	$50
Utilities	$10	$15	$20	$25	$25
Standard Cost*	$456	$1,650	$4,400	$6,600	$6,600
Supplies	$10	$20	$30	$40	$40
Shipping	$10	$20	$30	$40	$40
Depreciation	$15	$15	$15	$15	$15
TOTAL	$576	$1,795	$4,680	$6,845	$6,845

* Material costs less plant overhead, rounded to $1,100 each

 MANAGEMENT

            Business failures are usually attributed to bad luck. The failed businessperson may blame his/her failure on factors outside the company’s control; the weather, bad suppliers and so on. But it is a fact that most failures occur because of bad management. In a survey of companies only 9% concluded they failed because of bad luck. The majority stated was either bad analysis or bad judgment that caused them to fail.

            One author[4] lists 13 errors of commission including environmental change, over-expansion, inadequate control systems, and problems with the “team,” all of which could have been offset by good planning and management.

            The following table offers an interesting comparison of the chances for a success or failure in business.

Table 9.          Probabilities of Fatal Failure[5]

Drive ten races at the Indy 500                                    5%

Parachute jump 1,000 times                              6%

Go on ten NASA Space Missions                              20%

Climb Mt. Everest                                                       30%

Go over Niagara Falls in Barrel                                  33%

Lasting Three Years in a New Venture                      38%

                        When it comes to investing in a new company many venture capitalists look at the company’s management team first. Their reasoning is that the business plan may be well and good, but who is going to make it happen? Who will sell the product, manage the company and assure the profits? As a result, the business plan may account for a lesser percentage of the investment decision than the strength of the managing team.

Mission and Purpose

            Every company needs to have a mission statement. This declares the company’s purpose. Why are we in business? And the answer is not about money. It should address the real reason, which is that the company believes its new product is going to provide a very necessary function and service for its customers. Secondly the mission statement should consider the shareholders and the people in the organization.

            The mission statement is also an expression of the vision the founder[s] have for their company. What it does (purpose) and more importantly, where it is going. What the mission statement then does is it conveys the vision and the values of the founder[s].

            The following item is from the CCH Tool Kit for Small Business.

The most successful company missions are measurable, definable, and actionable project statements with emotional appeal that everyone knows and can act upon. For example, a mission to "be the best health-care provider in the world" for a multi-national HMO organization sounds good. But a simple mission statement from Honda — "beat GM!" — is better because it's a project statement that can be measured every day by every employee. Mission statements can also affect company strategies and tactics. If Honda Motors were to change its mission to "Beat Toyota," different strategies would be called for, along with different geographic tactics in sales, advertising, and distribution of cars.
How important is it to define your company's mission? Consider a famous U.S. refrigerator manufacturer whose sales were growing only at the rate of new home building during the 1950s. They undertook a years-long project to define whether they were in the business of building refrigerators to preserve food or in the business of food preservation. They decided they were in the business of food preservation, which got them eventually into new product and business areas such as artificial atmospheres (e.g., nitrogen for fresh fruit preservation, freeze-drying technologies) and increased their sales from hundreds of millions of dollars to several billion dollars by the 1980s.

Objective and Goals

            There are four important topics that require objective and goal treatment. These are:

·         Sales and market share

·         Operations and assets

·         People in the organization

·         Shareholders and finance

            An earlier section developed a forecast for the Bio Computer Company. In effect the forecast makes a goal statement for the years ahead. In time it should include market share goals, as well as profit and earning goals, and return to the shareholders.

Key Managers

            This section should briefly list the key managers in the company and their principle strengths. It can also indicate the manager and her/his strengths that the company will hire to help achieve the firm’s goals and objectives.

            Above all this section should stress why these individuals will accomplish the business plan projections.

Organization and Administration

            Some business plans will include this section at the beginning of the document. Here the entrepreneur lays out the structure of the company as well as the history of the firm to date. Organization diagrams are sometimes included; although these are less important than assuring the investor that there is flexibility, open communications and a smooth network, which would also account for the external professional the company can call on to assist in managing the venture.

            The chart shows an “organic” company where the authority is really an authority to do the job and not necessarily a boss telling someone what to do. It is more in keeping with the Information age and a stakeholder organization, rather than one of authority and delegation.

            A company takes the form of one of three legal types, the single proprietor, the partnership and the limited liability company.

The Proprietorship

            The simplest business organization is the sole proprietor. The individual who owns the venture keeps all the profit and all the liabilities. There are important tax advantages to being a single owner, but usually after some profit level, say about $40,000 there is little tax incentive. A proprietorship does not need a lawyer to set up the business. All that is required is for the owner to register her or his business with a local authority, usually the city. The provincial government will help organize the company name, but if one uses the family name there is usually no difficulty in registering the name. Because the business depends on one individual it is prudent to have insurance coverage on life and the business.

The Partnership

            The advantage of the partnership is that there are more people involved to share the workload and bring additional talent to the business. However, the liabilities remain the same. They are all personal, including the liability that one partner may commit the company to since it also becomes the liability of the other partner(s). It is important to have an agreement before the business begins as to how one partner will be able to buy out the other or leave the business. As with the proprietorship, all that is required is to take out a business license, register the name. An insurance policy can be used to buy out one partner in the event of disability or loss of life, as well as to protect the assets of the firm.

The Limited Liability Company

            Companies that are incorporated are referred to as limited liability companies because all that any creditor can claim is the amount of money that each partner or investor has put into the company, and the assets it might have acquired. It is a separate legal entity and not associated with the people in the business, unless they sign their names to guarantees at the bank or with suppliers.

            The incorporated company has three classes of capital; common shares, preferred shares and debentures or shareholders’ loans. The highest risk stock is the common shares and these are paid out last when the company winds down. Before them are the preferred shareholders and before them are the debt holders.

            Each individual who is a founder and works in the company should have an employee contract that details her or his responsibilities and objectives. This permits the company to deal with the individual separately since they are not a part of the legal structure of the company.

            Usually a lawyer is required to set up the company, although self-incorporation is available. Regardless of what form of organization is used it is prudent to have legal counsel look over the agreements and structure. But of course, be sure these are already in hand before seeing the lawyer, otherwise it may waste his time to steer you through agreements and such, or he will charge you by the hour as you discuss things with other parties.

Administration Budgets

            The administration costs are associated with management and the company’s office. The company must keep records of everything they do and files, as well as bank records, accounts payable, accounts receivable and such must be maintained.

            A typical budget for the BCC would be as follows:

Table 10.        The Bio-Computer Company Ltd. Budget for Administration ($000’s)

ITEM	Year 1	Year 2	Year 3	Year 4	Year 5
Management	$30	$50	$70	$100	$100
Accountant		$40	$50	$60	$60
Clerical	$30	$60	$80	$90	$90
Office Supplies	$10	$15	$20	$20	$20
Furniture & Computers*	$7	$12	$15	$20	$20
Communications	$10	$15	$20	$20	$30
Travel	$10	$20	$30	$30	$30
Insurance, Misc	$5	$10	$20	$20	$20
R & D** - % Sales	$100	$320	$900	$1,350	$1,350
Bonuses etc.*	$50	$160	$450	$680	$680
TOTAL	$252	$702	$1,655	$2,490	$2,490

                        ** Includes legal costs for patents of about $10 - $30,000 per year

                                * Bonuses to staff and employees, profit sharing expense

FINANCIAL PROJECTIONS

            The financials are the place where the rubber hits the pavement. Everything in the business plan leads to this point with the summary of expected income and costs. The statements that flow out of this development will be the ultimate test as to whether the new venture has promise. Not only that, but the better the earnings, the better the return on investment and the better the chances to obtain financing.

           

Developing an Income Statement

            The Pro Forma Income Statements, as they are titled, portrays the expected profit the new venture will realize, assuming the costs and forecasts are all reasonably accurate.

Table 11.        Bio-Computer Company Ltd. Pro Forma Income Statement ($000’s)

	Year 1	Year 2	Year 3	Year 4	Year 5
Units	415	1500	4000	6000	6000
Sales	$1,370	$4,950	$13,200	$19,800	$19,800
Expenses
Manufacturing	$576	$1,795	$4,680	$6,845	$6,845
Marketing	$390	$840	$3,490	$4,590	$4,590
Administration	$252	$702	$1,655	$2,490	$2,490
Total Expense	$1,218	$3,332	$9,825	$13,925	$13,925
Gross Profit	$   152	$1,612	$3,375	$5,875	$5,875
Less taxes*	30	646	1,350	2,350	2,350
Earnings	$   122	$  966	$2,025	$3,525	$3,525

·         Taxation on first $million of earnings is 20% for manufacturer, 40% thereafter

            It appears this venture will be profitable and has much promise, assuming the assumptions are sound and the costs and pricing is accurate.

Cash Flow and Working Capital

            While the income statement shows excellent promise, the real test comes when determining how much working capital the new venture will require. This analysis begins with a monthly projection of sales and costs. In this case, however, it is entirely based on a cash basis.

Table 12.        Bio-Computer Company Ltd. Working Capital Requirements ($000’s)

	Jan	Feb	Mar	Apr	May	Jun	July	Aug	Sept	Oct	Nov	Dec
Units	-	-			5	20	40	50	60	70	80	90
Sales*					$17	$66	$132	$165	$198	$231	$264	$297
Receipts	-	-	-	-	-	-	$17	$66	$132	$165	$198	$231
Expenses
Manufactrg*	$  9	$  9	$  9 5	$  9 20	$  9 40	$  9 50	$  9 60	$  9 70	$  9 80	$  9 90	$  9 100	$  9 100
Marketing**	20	20	20	30	30	30	30	30	30	50	50	50
Admin	10	10	20	20	20	20	20	20	20	30	30	32
Total Expense	$ 39	$ 39	$54	$79	$99	$109	$119	$129	$139	$179	$189	$191
Profit(Loss)	(39)	(39)	(54)	(79)	(99)	(109)	(102)	(63)	(7)	(14)	9	40
Cumulative	(39)	(78)	(132)	(211)	(310)	(419)	(521)	(584)	(591)	(605)	(596)	(556)

* Cost of parts and material brought in two months before

** Some costs not expensed until later in year

The cash flow projections show that the company will spend progressively more money than it is able to bring in until October at which point the expenses become less than the cash coming in. The table makes two very important points. The first is that money will take about 60 days to come in after the sales have been made. Customers will want to pay on invoices and usually look for a minimum of 30 days to pay and more. Secondly, the new company has no credit standing and will have to pay cash for all of its expenses. It may be possible to convince some suppliers to wait thirty days, but that is not likely for a new, unproven company.

So it is that Bio-Computers will need at least $605,000 to handle their cash flow. To this must be added the $75,000 the company will spend on the plant for fixtures and equipment. Allowing for unseen problems and other considerations it is likely the new venture will need close to $ 1 million to assure the startup.

But cash flow management works both ways. It shows the shortfall that a firm might experience as it starts into business and it can also show the danger of large changes to sales and/or costs. Consider what might be the cash flow problem if sales greatly exceed the forecast. What is the company’s cash flow position if it is called on to produce 20,000 computers?

Assets, Liabilities and Equity

The company acquires assets, liabilities and equity as soon as it starts doing business. The assets can be tangible, such as buildings, machinery and office furniture to intangible such as the value of patents and R & D.

In developing the first Balance Statement the company needs to make some assumptions about what levels of debt, cash and so on they will accept. The following assumptions apply to Bio-Computers Company Ltd.

1.      Cash in bank will be no more than 5% of sales

2.      Surpluses will be invested in short term investments

3.      Accounts receivable will average no more than 45 days

4.      Accounts payable will not exceed thirty days, assume company now has credit.

5.      Inventories will not exceed 25% of monthly manufacturing cost

6.      Work in progress will not exceed inventory levels

7.      Intellectual property will be valued at cost of legal work

The Balance Sheet

The Balance Sheet is a summary of the value or worth of the company. It shows the value of the assets the company will accumulate and equalizes it to the liabilities plus the net worth of the investors. Table 13. indicates the return on investment that the hypothetical investors would realize. The assumption is thsat they placed $ 1 million in return for $100,000 worth of shares and the issue of a note for Share Holder Loans totaling $900,000. At the end of the five years their investment would be worth a portion of the $4,194,000 after being paid back the shareholder loan of $900,000. Now, they were given $100,000 in common stock and the two founders have $200,000, or 66.7% of the company. The investor has one-third of the total common stock equity that would be worth $1,398,000. In effect his return on investment is 13.98 to 1 on the $100,000 worth of shares, or a return of almost 1400% over the five years, roughly averaging 280 percent per year.

The assets of the company have grown substantially and show very positive ratio analysis. The “acid test” is almost 3 to 1, which is very good for the first year. In the fifth year the company’s borrowing power is superb. The debt – assets ratio is just over 30%, well below the 50% ration that is considered to be very good.

Shads will have to develop their own statements. These will take into account the kind of financing they will arrange. If shares are sold or the company goes public, the treatment can become quite complex and might require some discussion with an accountant.

Table 13.        Bio-Computer Company Ltd. Pro Forma Balance Sheet

($000’s)

	Year 1	Year 2	Year 3	Year 4	Year 5
ASSETS
Current Assets
Cash	$68	$270	$330	$400	$500
Short Term Investments	-	$100	$210	$300	$400
Accounts Receivable	$561	$500	$1,140	$2,400	$2,900
Inventory	$27	$100	$440	$550	$900
Work in progress	$27	$100	$220	$370	$600
Total Current Assets	$683	$1,070	$2,340	$4,020	$5,300
Fixed Assets
Land & Buildings	-		$3,000	$2,990	$2,789
Equipment*	$60	$280	$460	$440	$510
Office furniture	$20	$23	$50	$60	$55
Development Costs, Patents	$10	$15	$70	$110	$140
Total Fixed Assets	$90	$118	$580	$3,600	$3,484
TOTAL ASSETS	$863	$1,318	$5,920	$7,620	$8,784
LIABILITIES
Current Liabilities
Accounts Payable	$120	$400	$870	$1,230	$1,330
Wages Due	$5	$20	$40	$60	$70
Taxes Payable	$1	$33	$70	$110	$130
Line of Credit	$107	$200	$200	$400	$400
Total Current Liabilities	$232	$653	$1,180	$1,800	$1,830
Long Term Liabilities
Loans	-	$200	$367	$450	$560
Mortgage	-	-	$2,800	$2,500	$2,200
Total Long Term Liabilities	-	-	$3,167	$2,950	$2,760
Shareholders Equity
Common Stock	$300	$300	$300	$300	$300
Shareholders Loan	$900	$900	$400	$100	-
Retained Earnings	($569)	($735)	$873	$2,470	$3,794
Total Shareholders Equity	$631	$465	$1,573	$2,870	$4194
TOTAL LIABILITIES	$863	$1,318	$5,920	$7,620	$8,784

Financial Ratios

            The financial statements are the principle documents for analysis of the company’s performance. It is widely used by the banks, accountants, financial analysts and investors. The following ratios are the more commonly used tests for a company’s financial strength and the value of a new venture.

1. Acid or quick ratio: Displays the liquidity of the venture on a very cash basis

      =        current assets—inventory

current liabilities.

2. Current ratio:        As in the “acid” test, but includes inventory. Typically a 2 to 1 ratio is good.

=      current assets

current liabilities.

3. Inventory turnouts:             Indicates the use of material and resources. Good level of 12:1 or more is looked for, depending on just-in-time (J.I.T.) delivery  and other methods.

=   sales         

inventory

4. Assets turnover:   Indicates the use of equipment and other resources, efficiency of output.

=   sales         

total assets

5. Average Collection:            The ability to mange cash flow, collecting revenues.

     =         accounts receivable

daily sales

6. Net Sales: Leads to issues of profitability on a product, customer or territory basis

=      net profit

sales

Depends on industry. Retailing is 1-5% Manufacturing is 5-10% High Tech is 10% plus.

7. Return on Investment: R.O.I. The value of the venture against the amount invested. Initially this is low, but at full stride investors look for 35% in high tech applications.

=       net profit             

invested capital

8. Return on equity: A measure of the value of the enterprise from the perspective of the established firm, at maturity.

=      net profit

net worth

9.             Debt to assets: A picture of the ability of the enterprise to carry long term debt.

A rule of thumb of 50% is considered safe.

=       total   debt

total assets

10.     Debt to equity: Referred to as a ‘leverage’ ratio. A preferred level of 1:1

=      total debt

net worth

            Potential investors, and bank managers too, use these ratios to estimate the potential of the new company and its financial performance. Here we see the reason why venture capitalists prefer to evaluate companies that have been in business a while since the ratios will reflect solid performance and an experienced management.

Risk and Threats

            Investors like to know if the entrepreneur is prepared to deal with threats and risks that may arise in the future. They would be very much concerned with competitors and their reaction to the new venture’s entry into the market. They may wonder about the technology and how fast it would become obsolete, and so on. There are many threats that may come from the environment in the form of governmental regulations, changes in the economy, the bank rates, export laws as well as shifts in consumer demand. Each of these must be weighed and a response or contingency plan set forth.

There are also internal threats that need attention. How stable are the sources of supply and relations with suppliers? Is there a good source for workers and professional people? Does the company need access to specialized training programs? What about relations with the bank? Are there any “key person” situations that would cause problems if someone left the company?

A third area is the “what if” situation. What if sales expectations are not realized? What if sales double, or triple? What happens if the company becomes certified with a new union?

            Above all the potential investor needs assurances of risk management by the entrepreneurs. These can be summarized in five areas that pose concerns about risk.

a.         Threats posed by the external environment, particularly in terms of competition and market potential

b.         Capabilities of the entrepreneur or team to carry out the venture

c.         Risk arising from management and its experience in the industry. Proven experience or leadership tends to offset this concern

d.         Is the business secure, in that the product has            protected proprietary values, is well along in its development?

e.         Ability to recover some or all of the investment if the business does not fulfill its objective. Liquid assets that can be cashed-in.

Valuation of the Company

            Entrepreneurs raise money for a new venture on the basis of the expected or the anticipated value of the company at some point in the future. The Pro Forma Income statement is an estimation of the company’s performance if nothing interferes with the plan and all goes well. But there is no guarantee that these projections will be met, so there is always an element of risk to the investment. The valuation of the firm is one method that shows a company’s potential worth from which an investor might gauge whether they should invest and is so, when and how might they expect a return on their investment. Indeed an astute business plan will have a Schedule of Investor Repayment in the case of repaying a loan made to the company, or an “exit strategy” for those who want to cash-in their investment through a capital share repurchase or sell-off.

            The company is evaluated in one of two methods; by its balance sheet or its stream of future earnings. The balance sheet suggests a good return in five years of 280 percent per year. Another approach is to use the asset value of the company and allow for goodwill. Here one might make the claim the company will have a goodwill worth $3 million at the end of five years which, when added to the expected value of fixed assets of $3,840,000 gives a price of $6.84 million for the company.

            When the company looks at going public the valuation takes into account the string of future earnings in the valuation. It estimates the potential for the value of share in the third, fourth and even fifth year of operations. For example if we make the assumption the firm wants to go public after the second year, it would use the earnings projections from the Pro Forma Income Statement as the basis for evaluation. It would raise money at that time by assuring those who might invest in the firm that their opportunity to cash out and take their profit will occur by the fifth year of operations. For this example we would take the fifth year profit as earnings, and using a P/E (price /earnings) ration of ten, which is common when evaluating stocks, we would determine that the company has a valuation of  $35.25 million. So, if Bio-Computer Company Ltd. were on the stock market the ideal asking price would be $35 million for all the company’s shares. Now, if the hypothetical investor owned one-third of the company’s shares, then his investment would be worth $11.75 million.

Raising Capital

         One raises capital for a new venture on the promise of future valuation and earnings. The Shad program has a limited investment procedure and you will be required to follow that procedure.

THE APPENDIX: DUE DILIGENCE AND DOCUMENTATION

            The appendix is the depository of the references and documentation that support the key facts in the business plan. If the appendix is large, it should be a separate text from the plan       with a Table of Contents referring to the Appendix in the Business Plan document. The following might serve as

            APPENDICES (List of possible Examples)

                       

                                                             i.      Technology, Patents

                                                           ii.      Marketing Research Report

                                                        iii.      Competitors

                                                        iv.      Product & Packaging

                                                           v.      Break Even Analysis

                                                        vi.      Promotion Advertisements

                                                      vii.      Company Brochure

                                                   viii.      Management Resumes

BREAK-EVEN ANALYSIS

                The following information is found at :
  http://www.tutor2u.net/business/production/break_even.htm

introduction

Break-even analysis is a technique widely used by production management and management accountants. It is based on categorising production costs between those which are "variable" (costs that change when the production output changes) and those that are "fixed" (costs not directly related to the volume of production).

Total variable and fixed costs are compared with sales revenue in order to determine the level of sales volume, sales value or production at which the business makes neither a profit nor a loss (the "break-even point").

The Break-Even Chart

In its simplest form, the break-even chart is a graphical representation of costs at various levels of activity shown on the same chart as the variation of income (or sales, revenue) with the same variation in activity. The point at which neither profit nor loss is made is known as the "break-even point" and is represented on the chart below by the intersection of the two lines:

Fixed Costs

Fixed costs are those business costs that are not directly related to the level of production or output. In other words, even if the business has a zero output or high output, the level of fixed costs will remain broadly the same. In the long term fixed costs can alter - perhaps as a result of investment in production capacity (e.g. adding a new factory unit) or through the growth in overheads required to support a larger, more complex business.

Examples of fixed costs:
- Rent and rates
- Depreciation
- Research and development
- Marketing costs (non- revenue related)
- Administration costs

Variable Costs

Variable costs are those costs which vary directly with the level of output. They represent payment output-related inputs such as raw materials, direct labour, fuel and revenue-related costs such as commission.

A distinction is often made between "Direct" variable costs and "Indirect" variable costs.

Direct variable costs are those which can be directly attributable to the production of a particular product or service and allocated to a particular cost centre. Raw materials and the wages those working on the production line are good examples.

Indirect variable costs cannot be directly attributable to production but they do vary with output. These include depreciation (where it is calculated related to output - e.g. machine hours), maintenance and certain labour costs.

Semi-Variable Costs

Whilst the distinction between fixed and variable costs is a convenient way of categorising business costs, in reality there are some costs which are fixed in nature but which increase when output reaches certain levels. These are largely related to the overall "scale" and/or complexity of the business. For example, when a business has relatively low levels of output or sales, it may not require costs associated with functions such as human resource management or a fully-resourced finance department. However, as the scale of the business grows (e.g. output, number people employed, number and complexity of transactions) then more resources are required. If production rises suddenly then some short-term increase in warehousing and/or transport may be required. In these circumstances, we say that part of the cost is variable and part fixed.

Online Learning Resource of the Year - 2003 BETT Awards Highly Commended in the UK Online for Business Awards 2003 Many tutor2u resources can be purchased using e-learning credits

Break-Even Analysis  (Refer to http://www.businesstown.com/accounting/projections-breakeven.asp This type of report is not one that is automatically generated by most accounting software, nor is it one that is normally produced by your accountant, but it is an important analysis for you to have and understand. For any new business, you should predict what gross sales volume level you will have to achieve before you reach the break-even point and then, of course, build to make a profit. For early-stage businesses, you should be able to assess your early prediction and determine how accurate they were, and monitor whether you are actually on track to make the profits you need. Even the mature business would be wise to look at their current break-even point and perhaps find ways to lower that benchmark to increase profits. The recent massive layoffs at large corporations are directed at this goal, lowering the break-even point and increasing profits. Break-Even Is the Volume Where All Fixed Expenses Are Covered You will start a break-even analysis by establishing all the fixed (overhead) expenses of your business. Since most of these are done on a monthly basis, don’t forget to include the estimated monthly amount of line items that are normally paid on a quarterly or annual basis such as payroll taxes or insurance. For example, if your annual insurance charge is $9,000, use 1/12 of that, or $750 as part of your monthly budget. With the semivariable expense (such as phone charges, travel, and marketing), use that portion that you expect to spend each and every month. For the purpose of a model break-even, let’s assume that the fixed expenses look as follows: Administrative salaries $1,500 Rent 800 Utilities 300 Insurance 150 Taxes 210 Telephone 240 Auto expense 400 Supplies 100 Sales and marketing 300 Interest 100 Miscellaneous 400 Total $4,500 These are the expenses that must be covered by your gross profit. Assuming that the gross profit margin is 30 percent, what volume must you have to cover this expense? The answer in this case is 15,000—30 percent of that amount is $4,500, which is your target number. The two critical numbers in these calculations are the total of the fixed expense and the percentage of gross profit margin. If your fixed expense is $10,000 and your gross profit margin is 25 percent, your break-even volume must be $40,000. This Is Not a Static Number You may do a break-even analysis before you even begin your business and determine that your gross margin will come in at a certain percentage and your fixed expense budget will be set at a certain level. You will then be able to establish that your business will break even (and then go on to a profit) at a certain level of sales volume. But your prestart projections and your operating realities may be very different. After three to six months in business, you should compare projections to the real-world results and reassess, if necessary, what volume is required to reach break-even levels. Along the way, expenses tend to creep up in both the direct and indirect categories, and you may fall below the break-even volume because you think it is lower than it has become. Take your profit and loss statement every six months or so and refigure your break-even target number. Ways to Lower Break-Even There are three ways to lower your break-even volume, only two of them involve cost controls (which should always be your goal on an ongoing basis). 1. Lower direct costs, which will raise the gross margin. Be more diligent about purchasing material, controlling inventory, or increasing the productivity of your labor by more cost effective scheduling or adding more efficient technology. 2. Exercise cost controls on your fixed expense, and lower the necessary total dollars. Be careful when cutting expenses that you do so with an overall plan in mind. You can cut too deeply as well as too little and cause distress among workers, or you may pull back marketing efforts at the wrong time, which will give out the wrong signal. 3. Raise prices! Most entrepreneurs are reluctant to raise prices because they think that overall business will fall off. More often than not that doesn’t happen unless you are in a very price-sensitive market, and if you are, you really have already become volume driven. But if you are in the typical niche-type small business, you can raise your prices 4 to 5 percent without much notice of your customers. The effect is startling. For example, the first model we looked at was the following: Volume $15,000 direct cost 10,500 70% gross profit 4,500 Raising the prices 5 percent would result in this change: Volume $15,750 direct cost 10,500 67% gross profit 5,250 You will have increased your margin by 3 percent, so you can lower the total volume you will require to break even. The Goal Is Profit You are in business to make a profit not just break even, but by knowing where that number is, you can accomplish a good bit:   You can allocate the sales and marketing effort to get you to the point you need to be.   Most companies have slow months, so if you project volume below break-even, you can watch expenses to minimize losses. A few really bad months can wipe out a good bit of previous profit.   Knowing the elements of break-even allows you to manage the costs to maximize the bottom line. Once you have gotten this far in the knowledge of the elements of your business, you are well on your way to success.

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[1]Extract from a speech by Ed Werner, President of Horn Abbott, the Trivial Pursuit Company,  October 1985 to the Brock University Entrepreneurs’ Club.

[2]Johnny Carson, host of the successful N.B.C. late night show in the 1980s, was given a game and spent ten minutes of national air time talking about this incredible new game.

1 Good, Walter S., “Building A Dream.” 2nd Edition, McGraw—Hill Ryerson, Toronto, 1993

[3] Rogers, Everett. (1995). Diffusion of innovations. Fourth edition. New York, NY: The Free Press.

[4] Gary Goldstick, Business Rx; How to Get in the Black and Stay There, John Wiley & Sons, N.Y. 1988

[5] R. K. Augustine, Augustine’s Laws, Viking Penguin Press, NY. 1986