Chapters 1-3 Review New Venture Development

You will know… 5 basic functions of a manager Difference between strategic plans and functional plans 3 factors that must be addressed when establishing goals Financial goals of a for-profit company 3-step process to take when using control How to compare and contrast different forms of business ownership The basic components of SWOT analysis What goes into a business plan

5 functions of managing 1.Planning 2.Organizing 3.Staffing 4.Directing 5.Controlling operations

Planning A systematic process that takes from a current state to some future desired state Strategic planning is development of long-term (> 1 year) plans for the business Functional planning relates to the different functional areas that are driven by the strategic plan Financial planning is determining monetary requirements Goal setting forces you to identify measurable objectives that are achievable and have timelines

Organizing Defining structures, responsibilities, and lines of communication This comes from the functional plan: –Who will do what? –What skills they need? –When do we have to accomplish specific tasks? –How do we accomplish them?

Staffing Obtaining the most capable personnel to implement the business plans Each functional plan involves people assigned to specific jobs – you will have to write the job requirements (education, personal skills, training) and the job description

Directing Providing proper guidance and direction to others who will accomplish the organizational mission Good managers and employers have good long-term, loyal employees Directing in the financial arena is done through the budgeting process

Controlling A three-step process that involves: 1.Establishing a standard of measurement 2.Measuring actual performance against the standard 3.Taking corrective action when actual performance deviates from established standard

Starting a business One of the first decisions is legal formation (no “business” until owners establish it) Owner must determine how much money is needed to start the business (owner’s equity, outside financing) SWOT analysis

Strengths, weaknesses, opportunities, and threats Strengths: the core competencies of your business – succeed because you do these better than competitors Weaknesses: areas where your business needs improvement (old equipment, untrained workers, no $)

SWOT analysis Strengths, weaknesses, opportunities, and threats Opportunities: factors that exist in the business environment that will help the business grow Threats: factors…that will impede the business

SWOT analysis Note: opportunities and threats are also shaped by your own strengths and weaknesses “Given my superior ability to write apps for iPhones, I can take advantage of the growing base of iPhone owners who use apps”

The business plan Tend to cover a common format to make it easier for investors to read The executive summary is everything. It is the first thing readers will see, but you should write it last You must convince your audience in two pages or less that they need to read the rest of your plan Autoshop example on wiki space

Stages of business growth Seed/start-up: the initial stage; the company has a concept and is normally < 18 months old Early: less than 3 years old, product or service is commercially available Expansion: older than 3 years old and has high revenue growth, but may not show a profit Later: product or service is widely available; generates revenue and has positive cash flow

Sources of financing Personal assets: savings, investments, credit cards, home-equity loans Equity financing: company-retained earnings and fixed assets of company as collateral Bank loans Angel investors: provide seed money for start-up and early-stage companies Venture capitalists: provide financing at expansion and later stages of business development

Differentiating types of costs Variable costs are directly related to the volume of product flow – the cost you incur for each sale of a unit of product Variable costs X # units sold = total revenues Fixed costs are the operating costs associated with running the business but not directly related to revenues

Income Statement Business Basic Format –Sales, revenues, income from doing business –Less cost of goods sold –Gross profit –Less operating expenses –Operating income –Less interest –Net income (explain)

Statement of Cash Flows Statement of cash flows shows how the company’s working capital flows into and out of the business during the year. Statement of cash flows includes: –Cash flows from operating activities is the difference between all of the cash received by the business and all of the cash paid out by the business in conducting its day-to-day operations. –Cash Flows from Investing Activities: Acquisition or sale of Plant Assets –Cash Flows from Financing Activities: Proceeds from issuance or sale of stock (preferred & common), bonds. Purchase of stock or the payment of long-term debt.

Statement of Cash Flows (continued) –Examples of operating cash flow Receipts: All cash received from sales, changes in accounts receivable, changes in inventory. –NOTE: An increase in accounts receivable or inventory represents a negative cash flow. A reduction in receivables or inventory is a positive cash flow. Payments: All payments made by the company to all accounts (suppliers, employees, rent, utilities, etc.). –Net increase (decrease) in cash plus the cash balance, previous year equals cash balance, current year.

Corporation Types of activities Operating Investing Financing

Balance Sheet (Statement of Financial Position) Total assets –Current assets Cash, accounts receivable, inventory, treasuries Anything in your possession that can be reasonably be expected to turn into cash in 90 days –Fixed assets Land Building & equipment (less accumulated depreciation) Net building & equipment

Balance Sheet (Statement of Financial Position) Total liabilities –Current liabilities Accounts payable, notes payable, taxes payable –Long-term liabilities (debt) Total equity –Preferred stock –Common stock par value –Paid-in capital in excess of par (common) –Retained earnings

Balance Sheet Basic Accounting Equation Individual Sole Proprietorship Partnership Corporation

Family

Balance sheet – “Partners’ equity”

Corporation Assets Current assets Fixed assets Liabilities and SE Equity Current liabilities Long-term liabilities Shareholders’ equity Preferred stock Common stock Retained earnings

Corporation What’s accumulated depreciation?

Depreciation The wearing out of a business asset during its useful life The IRS establishes schedules that businesses use to determine the appropriate method of depreciation Land never depreciates, but equipment does, usually over 10-year period Break down depreciation schedules for each piece of equipment When a fixed asset is sold or disposed of, both its cost and accumulated depreciation go off the balance sheet

Accumulated depreciation on the balance sheet

Pro forma financials 1.Do revenues worksheet and costs worksheet 2.These assumptions feed into your income statement 3.Use the revenues and expenses from your income statement for your statement of cash flows 4.Use the new cash-on-hand value to adjust the balance sheet

Pez Phone Financials