Ebook Entrepreneurship (Second edition): Part 1 includes the following content: Chapter 1 the power of entrepreneurship; chapter 2 the entrepreneurial process; chapter 3 opportunity recognition, shaping, and reshaping; chapter 4 understanding your business model and developing your strategy; chapter 5 entrepreneurial marketing; chapter 6 building the founding team; chapter 7 the business planning process; chapter 8 building your pro-forma financial statements.
This page intentionally left blank Entrepreneurship Second Edition William Bygrave Babson College Andrew Zacharakis Babson College John Wiley & Sons, Inc To Frederic C Hamilton and John H Muller, Jr., pioneers, entrepreneurs, and benefactors of Babson College VICE PRESIDENT AND PUBLISHER EDITOR EDITORIAL ASSISTANT MARKETING MANAGER PHOTO EDITOR DESIGNER PRODUCTION MANAGER SENIOR PRODUCTION EDITOR GEORGE HOFFMAN LISE JOHNSON SARAH VERNON KAROLINA ZARYCHTA HILARY NEWMAN RDC PUBLISHING GROUP SDN BHD JANIS SOO JOYCE POH Cover image © panorios/iStockphoto This book was set in 10.5/12pt Adobe Garamond by Laserwords Private Limited and printed and bound by RR Donnelley The cover was printed by RR Donnelley This book is printed on acid free paper Founded in 1807, John Wiley & Sons, Inc has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfill their aspirations Our company is built on a foundation of principles that include responsibility to the communities we serve and where we live and work In 2008, we launched a Corporate Citizenship Initiative, a global effort to address the environmental, social, economic, and ethical challenges we face in our business Among the issues we are addressing are carbon impact, paper specifications and procurement, ethical conduct within our business and among our vendors, and community and charitable support For more information, please visit our website: www.wiley.com/go/citizenship Copyright © 2011, 2008 John Wiley & Sons, Inc All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008, website http://www.wiley.com/go/permissions Evaluation copies are provided to qualified academics and professionals for review purposes only, for use in their courses during the next academic year These copies are licensed and may not be sold or transferred to a third party Upon completion of the review period, please return the evaluation copy to Wiley Return instructions and a free of charge return shipping label are available at www.wiley.com/go/returnlabel Outside of the United States, please contact your local representative Library of Congress Cataloging-in-Publication Data Bygrave, William D., 1937Entrepreneurship / William D Bygrave – 2nd ed p cm Includes index ISBN 978-0-470-45037-6 (pbk.) New business enterprises Enterpreneurship Small business–Management I Zacharakis, Andrew II Title HD62.5.B938 2010 658.4 21–dc22 2010027088 Printed in the United States of America 10 CONTENTS Preface vii Opportunity Recognition, Shaping, and Reshaping 83 From Glimmer to Action: How Do I Come Up with a Good Idea? 84 Finding Your Passion 84 Idea Multiplication 85 Is Your Idea an Opportunity? 89 The Customer 89 The Competition 100 Suppliers and Vendors 103 The Government 103 The Global Environment 104 The Opportunity Checklist 104 ‘‘I Don’t Have an Opportunity’’ 104 Conclusion 106 Your Opportunity Journal 107 Web Exercise 107 Notes 107 CASE: JIM POSS 110 The Power of Entrepreneurship Entrepreneurship and Small Business in the United States Entrepreneurial Revolution Web: Three Revolutions Converge Entrepreneurship Revolution Strikes Gold Creative Destruction 11 Causes of the Entrepreneurial Revolution 12 Changes in the Entrepreneurial Framework Conditions 13 Churning and Economic Growth 18 Global Entrepreneurship Monitor 19 Principal Findings from GEM 20 Age 22 Gender 23 Education 23 Financing 25 Job Creation 25 21st-Century Economies: Anglo-Saxon or Social Models? 27 Conclusion 29 Your Opportunity Journal 30 Web Exercise 30 Notes 30 CASE: MALINCHO 36 The Entrepreneurial Process Understanding Your Business Model and Developing Your Strategy 125 The Business Model 125 The Revenue Model 126 The Cost Model 128 The First-Mover Myth 130 Formulating a Winning Strategy 132 The People Are What Matters 133 Entry Strategy 134 Growth Strategy 138 Conclusion 145 Your Opportunity Journal 146 Web Exercise 146 Notes 146 CASE: ADAM AIRCRAFT 149 49 Critical Factors for Starting a New Enterprise 50 Personal Attributes 52 Environmental Factors 52 Other Sociological Factors 54 Evaluating Opportunities for New Businesses 56 The Opportunity 57 The Customer 58 The Timing 58 The Entrepreneur and the Management Team 59 Resources 60 Determining Resource Needs and Acquiring Resources Startup Capital 62 Profit Potential 64 Ingredients for a Successful New Business 66 Conclusion 68 Your Opportunity Journal 68 Notes 68 CASE: ALISON BARNARD 70 Entrepreneurial Marketing 167 60 Why Marketing Is Critical for Entrepreneurs 168 Entrepreneurs Face Unique Marketing Challenges 168 Acquiring Market Information 169 Marketing Strategy for Entrepreneurs 170 Segmentation, Targeting, and Positioning 170 The Marketing Mix 171 Guerrilla Marketing 182 Marketing Skills for Managing Growth 184 Understanding and Listening to the Customer 184 Building the Brand 185 Conclusion 185 Your Opportunity Journal 186 iv Contents Web Exercise 186 Appendix: Customer Interview 186 General Outline: It Needs to Be Tailored to Meet Your Research Needs 187 Notes 188 CASE: COLLEGE COACH 189 Building the Founding Team 199 Power of the Team 200 Where Do You Fit? 201 How to Build a Powerful Team 205 Bootstrapping: Building the Team Based on Stage-of-Venture Life 206 Compensation 208 Equity 208 Salary 213 Other Compensation Considerations 213 External Team Members 214 Outside Investors 214 Lawyers 215 Accountants 215 Board of Advisors 216 Board of Directors 216 Keeping the Team Together 217 Burnout 218 Family Pressure 219 Interpersonal Conflicts 219 Conclusion 220 Your Opportunity Journal 220 Web Exercise 220 Notes 221 CASE: AJAY BAM 222 The Business Planning Process Common Mistakes 306 Financial Statement Overview 307 Building Your Pro-Forma Financial Statements 308 Build-Up Method 308 Revenue Projections 310 Cost of Goods Sold 311 Operating Expenses 311 Preliminary Income Statement 314 Comparable Method 315 Building Integrated Financial Statements 317 Income Statement 318 Balance Sheet 320 Cash-Flow Statement 321 Putting It All Together 322 Conclusion 323 Your Opportunity Journal 323 Web Exercise 324 Notes 324 CASE: P’KOLINO FINANCIALS 325 Financing Entrepreneurial Ventures Worldwide 235 The Planning Process 237 The Story Model 239 The Business Plan 240 The Cover 240 Executive Summary 240 Table of Contents 241 Industry, Customer, and Competitor Analysis Company and Product Description 246 Marketing Plan 246 Operations Plan 250 Development Plan 251 Team 252 Critical Risks 255 Offering 256 Financial Plan 256 Appendices 256 Types of Plans 257 Style Pointers for the Written Plan and Oral Presentation 258 Conclusion 259 Your Opportunity Journal 259 Web Exercise 259 Notes 260 CASE: P’KOLINO 261 Building Your Pro-Forma Financial Statements 305 242 337 Entrepreneurial Financing for the World’s Poorest 338 Microfinancing 338 Microcredit for the Poorest of the Poor 339 Entrepreneurs and Informal Investors 340 Amount of Capital Needed to Start a Business 342 Characteristics of Informal Investors 343 Financial Returns on Informal Investment 345 Supply and Demand for Startup Financing 346 Venture Capital 347 Classic Venture Capital 347 Importance of Venture Capital in the U.S Economy 350 Mechanism of Venture Capital Investing 352 Financial Returns on Venture Capital 354 Venture Capital in Europe 356 Factors Affecting Availability of Financing 357 Total Entrepreneurial Activity and Informal Investing 357 Factors Affecting Informal Investing 357 Factors Affecting Classic Venture Capital 357 Conclusion 358 Your Opportunity Journal 358 Web Exercise 359 Notes 359 CASE: DAYONE 361 10 Raising Money for Starting and Growing Businesses 379 Jim Poss, BigBelly Solar 379 Bootstrapping New Ventures 380 Valuation 381 Earnings Capitalization Valuation 381 Present Value of Future Cash Flows 382 Market-Comparable Valuation (Multiple of Earnings) 382 Asset-Based Valuation 383 Example of Market-Comparable Valuation 383 Contents Asset-Based Valuation Example 385 Financing a New Venture 386 Informal Investors 387 Business Angels 388 Searching for Business Angels 390 Types of Business Angels 391 Putting Together a Round of Angel Investment 392 Venture Capital 393 Candidates for Venture Capital 393 Ideal Candidates for Venture Capital 394 Actual Venture-Capital-Backed Companies 395 Dealing with Venture Capitalists 396 Negotiating the Deal 398 Follow-On Rounds of Venture Capital 398 Harvesting Investments 399 Initial Public Offering 399 Pros and Cons of an IPO 400 The Process of Going Public 402 BFWS Goes Public 404 Selling the Company 404 A Strategic Acquisition: LowerMyBills.com 404 Why Be Acquired? 406 Conclusion 407 Your Opportunity Journal 408 Web Exercise 408 Notes 409 CASE: BLADELOGIC 412 11 Debt and Other Forms of Financing 421 Getting Access to Funds—Start with Internal Sources 421 Start with Credit Cards and Home Equity Lines 422 Cash Conversion Cycle 423 Working Capital: Getting Cash from Receivables and Inventories 424 Using Accounts Receivable as Working Capital 425 The Sales Pattern 426 Cash Versus Credit Sales 426 Credit Policies 426 Setting Credit Terms 427 Collection Policies 428 Setting Credit Limits for Individual Accounts 429 Inventory 430 Sources of Short-Term Cash: More Payables, Less Receivables 431 Cash from Short-Term Bank Loans 431 Cash from Trade Credit 431 Cash Obtained by Negotiating with Suppliers 432 Cash Available Because of Seasonal Business Credit Terms 432 Advantages of Trade Credit 433 Cash Obtained by Tightening Up Accounts Receivable Collections 433 Obtaining Bank Loans Through Accounts Receivable Financing 434 Pledging 434 Pledging with Notification 434 Factoring 434 Recourse 435 Obtaining Loans against Inventory 435 Obtaining ‘‘Financing’’ from Customer Prepayments 435 Choosing the Right Mix of Short-Term Financing 436 Traditional Bank Lending: Short-Term Bank Loans 436 Maturity of Loans 437 Interest Rates 437 Collateral 438 Applying for a Bank Loan 439 Restrictive Covenants 439 General Provisions 439 Routine Provisions 440 Specific Provisions 441 Equipment Financing 441 Obtaining Early Financing from External Sources 442 SBA-Guaranteed Loans 442 Applying for an SBA Loan 442 Planning Cash Flow and Planning Profits 444 Conclusion 444 Your Opportunity Journal 445 Web Exercise 445 Notes 446 CASE: FEED RESOURCE RECOVERY 447 12 Legal and Tax Issues 461 Leaving Your Present Position 462 Corporate Opportunity 462 Recruitment of Fellow Employees 463 Proprietary Information 463 Noncompetition 465 Choosing an Attorney and an Accountant 466 Choice of Legal Form 466 Control 467 Personal Liability 469 Taxation 470 Initial Investment of the Founders 472 Administrative Obligations 474 Choosing a Name 474 Stockholders’ and Operating Agreements 475 Negotiating Employment Terms 475 Disposition of Equity Interests 475 Distributions of Company Profits 477 Redemption Provisions 478 Legal and Tax Issues in Hiring Employees 478 Employees as Agents of the Company 478 Employment Discrimination 479 Other Employment Statutes 480 Employment Agreements 480 Equity Sharing 481 Insurance 482 Property Insurance 482 Liability Insurance 482 Key Person Life Insurance 483 Business Interruption Insurance 483 Group Life, Disability, and Health Insurance for Employees 483 Raising Money 483 Legal Issues in the Sale of Securities to Investors Conclusion 485 Your Opportunity Journal 485 483 v vi Contents Web Exercise 486 Notes 486 CASE: CADENCE DESIGN SYSTEMS AND AVANT! (A) 487 13 Intellectual Property 499 The Basics: What Is Protectable and How Should It Be Protected? 500 Patents 501 Obtaining a Utility Patent 501 Criteria for Obtaining a Utility Patent 503 Drafting the Patent Claims 504 Provisional Patent Applications 506 Design Patents 506 Managing Patent Costs 506 Trade Secrets 507 Trademarks 510 Registering a Mark 511 Ownership of a Mark 512 Copyright 512 Summing Up 513 International Protection for Intellectual Property 513 Patent Filing Deadlines 514 How to Extend Patent Filing Deadlines 514 Licensing and Technology Transfer 515 Common Concerns and Clauses 515 Defining the Property Being Licensed 516 Limitations on Licenses 516 Assigning Value to a License 516 Royalty Rates 517 Negotiating License Agreements 517 Foreign Licenses 518 Software Protection 518 Patents for Software 518 Software Copyrights 519 Software Trade Secret Protection 519 The Internet 520 IP Agreements 520 Preparing Employment Contracts 521 Transfer of Employee Rights to Company Innovations 521 How Employee Moonlighting Might Compromise Confidentiality 522 Noncompetition Clauses 522 Preventing Employee Raiding 523 Employee Ownership of Copyright 524 Rights of Prior Employees 524 Consultant Contracts 524 Confidential Disclosure Agreements 525 Conclusion 526 Your Opportunity Journal 527 Web Exercise 527 Notes 527 CASE: CADENCE DESIGN SYSTEMS AND AVANT! (B) 528 14 Entrepreneurial Growth 531 Making the Transition from Startup to Growth 532 Looking Forward: The Choice to Grow, or Not , or Sell 532 A Model of Driving Forces of Growth 534 The Growth Process 535 Execution 535 Instituting Controls 535 Tracking Performance 537 Managing the Cash Cycle 538 Leveraging the Value Chain 540 Maintaining the Entrepreneurial Organization 540 Opportunity Domain 541 Organizational Resources and Capabilities 544 Obtaining Financial Resources for the Growing Company 544 Intangible Resources and Capabilities 545 Leadership 546 Starting the Delegation Process 547 First-Level Management 548 From Delegation to Decentralization 549 Professional Management and Boards 549 Coordinating the Driving Forces 550 Leading People; Developing Entrepreneurs 550 Conclusion 551 Your Opportunity Journal 552 Web Exercise 553 Notes 553 CASE: LAZYBONES 554 15 Social Entrepreneurship: An Overview Definition 564 Imitative Nonprofit Organizations 566 Innovative Nonprofit Organizations 567 Hybrids 568 For-Profits 569 New Forms of Organizations 570 Getting Started 571 Identifying an Opportunity 571 Forming an Organization 573 Securing Resources 575 Evaluating Results 576 Going to Scale 578 Conclusion 578 Your Opportunity Journal 579 Web Exercise 580 Notes 580 CASE: EARTHWATCH 583 Glossary 597 Company Index 607 Name Index 611 Subject Index 613 563 PREFACE The green shoots of entrepreneurship give an economy its vitality They give rise to new products and services, fresh applications for existing products and services, and new ways of doing business Entrepreneurship stirs up the existing economic order and prunes out the dead wood Established companies that fail to adapt to the changes cease to be competitive in the marketplace and go out of business Within the broadest definition, entrepreneurs are found throughout the world of business because any firm, big or small, must have its share of entrepreneurial drive if it is to survive and prosper This textbook focuses on starting and growing independent new ventures It is based on entrepreneurship courses taught at Babson College and at universities around the world One of the most common questions that entrepreneurship educators are asked is, Can entrepreneurship be taught? Our response is that anyone with a desire to become an entrepreneur will be more successful if he or she has taken a course on how to start and grow a new venture About 30% of the students who have taken the new-venture course at Babson College since 1985 have gone on to start full-time businesses at some time in their careers Many have started more than one While this textbook empowers would-be entrepreneurs to start and grow their new ventures, it’s not only for them Any student who reads this book will learn about the entrepreneurial process and the role of entrepreneurship in the economy We believe that all business students, whether or not they start a new business, will benefit from learning about entrepreneurship After all, entrepreneurship and small business create most of the jobs in the U.S economy and account for almost half the GDP They are ubiquitous, and so integral to the economy that almost every student will work in one way or another with entrepreneurs and small businesses after graduation This textbook will stand students in good stead—not only for starting their own firms, but also for dealing with startups as investors, bankers, accountants, lawyers, customers, vendors, employees, landlords, and in any other capacity An entrepreneurial revolution has transformed the economy since the mid-1970s Central to that revolution is information technology, especially personal computers and the Internet Information technology has profoundly changed the way companies business, none more so than startup companies Today’s students were born after the personal computer came into common use, and they came of age in the era of the Web We believe they need an entrepreneurship text in which information technology is completely integrated all the way through This book combines concepts and cases to present the latest theory about entrepreneurship and relate actual experiences The concepts cover what would-be entrepreneurs need to know to start and grow their businesses, and the cases illustrate how real entrepreneurs have gone out and done it They cover all stages of the entrepreneurial process, from searching for an opportunity to shaping it into a commercially attractive product or service, launching the new venture, building it into a viable business, and eventually harvesting it Chapter discusses the role of entrepreneurship in the U.S economy and looks at the entrepreneurial competitiveness of nations throughout the world Chapter is an overview of the factors critical for starting a new enterprise and building it into a successful business Chapters through look in detail at what budding entrepreneurs need to before they open their doors for business The section starts with searching for opportunities and evaluating them It explains how to build a workable business model and covers marketing, viii Preface strategy, team building, financial projections, and business planning At the end of this section students know how to write a business plan and how much startup capital they need to start their ventures The next section, Chapter through 11, deals with financing businesses Chapter reviews the sources of financing for starting and growing businesses, both in the United States and worldwide Chapter 10 discusses the nuts and bolts of raising money, particularly equity, to start and grow a business Chapter 11 examines debt and other sources of financing Entrepreneurs need to understand the legal and tax issues associated with organizing a new business They also need to know how to protect their intellectual capital Chapters 12 and 13 explore these topics Anyone can start a new venture, but very few new businesses grow into substantial enterprises Chapter 14 discusses what it takes to grow a business into a healthy company that provides financial rewards for the entrepreneur and good jobs for employees Finally, Chapter 15 looks at social entrepreneurship Today, many students are looking at business ideas that may not only earn a profit, but also address a social concern Each chapter is accompanied by a case study of entrepreneurs in action We chose the cases carefully, using these criteria: • • • • The entrepreneurs and their companies represent a spectrum of situations and industries that is as broad as we could make it The judgment point in most cases occurs in the twenty-first century—some as recently as 2008 and 2009 All stages of the entrepreneurial process are covered, from pre-startup through harvest Almost all the entrepreneurs in the cases are in their 20s and 30s; some are recent graduates There’s no substitute for the experience gained from actually starting a business, but we believe that by completing the case studies in this book students will gain wisdom that would take years to pick up by trial and error as entrepreneurs starting and building businesses from scratch Each chapter ends with a unique Opportunity Journal Here students can reflect on the lessons learned and think about how to apply them to their own entrepreneurial ventures, or to managing their careers Finally, a Web exercise builds upon key concepts covered in each chapter New to this Edition The second edition has been thoroughly updated and enhanced throughout Since the first edition, the U.S and world have seen increasing turmoil: the great recession; continuing wars in Iraq and Afghanistan; a major oil spill in the Gulf of Mexico; earthquakes in Haiti and Chile; and an ongoing debate over climate change, just to name a few issues To that end, we’ve noticed that more students than ever before are interested in not only creating great companies, but also addressing social issues Thus, we’ve added Chapter 15 on Social Entrepreneurship, written by our colleague John Whitman John has created a number of cutting edge courses on Social Entrepreneurship In Chapter 15, he uses his expertise to talk about different organization structures and how entrepreneurs can create companies that have a double or triple bottom line We’ve also added some new cases that illustrate ventures with a strong social objective In addition to the Jim Poss case from the first edition, now the text includes a case on Feed Resource Recovery, a business that converts food waste into energy and organic fertilizer, and on Earthwatch, the story of a social enterprise that uses eco/adventure tourism to fund research on important earth science initiatives 322 CHAPTER Building Your Pro-Forma Financial Statements One of the many benefits of this process is that it will help you determine exactly how much you need, so as to protect you from giving up too much equity or acquiring too much (or not enough) debt The bookstore cash-flow statement shows some major outlays as the store is gearing up for operation, such as inventory acquisition and equipment purchases You can also see from the cash-flow statement that the business is incurring some expenses prior to generating revenue [($17,000) listed as net earnings] This net earnings loss is reflected on the company’s monthly income statement and is primarily attributable to wage expenses to hire and train staff You can see that in the first six months, the cash position hits a low of just over −$316,000 This is how much money you need to raise in order to launch the business For a new venture, most of the money will likely be in the form of equity from the entrepreneur, friends, and family However, the entrepreneur may be able to secure some debt financing against his equipment (which would act as collateral if the business should fail) In any event, once you recognize your financing needs, you can devise a strategy to raise the money necessary to start the business To provide some buffer against poor estimates, you might raise $350,000 This amount would show up on both the cash-flow statement and the balance sheet Putting It All Together Once you have completed the financial spreadsheets, write a two- to three-page explanation to precede them Although you understand all the assumptions and comparables that went into building the financial forecast, the reader needs the background spelled out Describing the financials is also a good exercise in articulation If your reader understands the financials and believes the assumptions are valid, you have passed an important test If not, work with the reader to understand her concerns Continual iterations strengthen your financials and should give you further confidence in the viability of your business model This section of the business plan should include a description of the key drivers that affect your revenues and costs so that the reader can follow your pro-forma financials This description is typically broken down into four main sections First, the ‘‘overview’’ paragraph briefly introduces the business model The first subsection should discuss the income statement Talk about the factors that drive revenue, such as store traffic, percentage of store visitors that buy, average ticket price, and so forth It is also important to talk about seasonality and other factors that might cause uneven sales growth Then discuss the expense categories, paying attention to the cost of goods sold and major operating expense categories, such as rent, interest expense, and so forth Based on your description, the reader should be able to look at the actual financials and understand what is going on The key focus here is to help the reader follow your financials; you don’t need to provide the level of detail that an accountant might if he were auditing your company The next subsection should discuss the cash-flow statement Here, you focus on major infusions of cash, such as equity investments and loan disbursements It is also good to describe the nature of your accounts receivable and accounts payable How long, for instance, before your receivables convert to cash? If you are spending money on leasehold improvements, plant and equipment, and other items that can be depreciated, you should mention them here Typically, the discussion of the cash-flow statement is quite a bit shorter than the discussion of the income statement The final subsection discusses the balance sheet Here, you would talk about major asset categories, such as the amount of inventory on hand and any liabilities that aren’t clear from the previous discussion Your Opportunity Journal Going through these exercises allows you to construct a realistic set of pro-forma financials It’s a challenge, but understanding your numbers ‘‘cold’’ enables you to articulate your business to all stakeholders, so you can build momentum toward the ultimate launch of your business Just as we said in the last chapter that the business plan is a live document, so too, are the financial statements a set of live documents They are obsolete immediately after they come off the printer As you start your launch process, you can further refine your numbers, putting in actual revenues and expenses as they occur, and adjusting projections based on current activity Once the business is operating, the nature of your financial statements changes They not only help you to assess the viability of your business model but also help you to gauge actual performance and adjust your operations based on that experience Although most entrepreneurs tell us that drafting the financials induces some pain, they also concede that going through the process is gratifying and rewarding They learn to master new management skills, build their business, and protect their investment So dig in Reflection Point What are your revenue sources? How can you influence these revenues (what are your drivers)? Identify some companies that you can benchmark What are their revenue sources? How they drive revenue? Refine your projections Who can you talk to that is knowledgeable about your business (customers, vendors, competitors)? What secondary sources can you find (Hoovers.com, Robert Morris and Associates database)? Compare your common-sized financials to those of your benchmark company Can you validate or explain differences between you and the benchmark company? Are there other metrics you can use (sales per employee or sales per square foot) to verify your projections? What happens to the viability of your business when you run some scenario analyses based on the different metrics you’ve identified? Your Thoughts 323 CONCLUSION YOUR OPPORTUNITY JOURNAL 324 CHAPTER WEB EXERCISE NOTES Building Your Pro-Forma Financial Statements Look for some comparison metrics (the Business Week site www.businessweek.com/smallbiz/ bizminer/bizminer.htm is useful, but see if you can find others) How your sales per employee figures match the benchmark reports? How does your pro-forma balance sheet match up to some of the presented ratios? Can you explain any differences? By minimum wage, we mean that the money the entrepreneur can take out of the business is less on an hourly basis than the minimum wage Tracy, John How to Read a Financial Report Sixth edition Hoboken, NJ: Wiley 2004 1999 ABACUS Financial Survey Annual Survey conducted by the American Booksellers Association http://bookweb.org Look for publicly traded companies on your favorite database, such as http:// SEC.gov http://bizstats.com/otherretail.htm Case: P’kolino Financials P’kolino Financials We revisit the P’kolino business plan in this chapter Study the financial projections and evaluate how realistic you think they are These financials were prepared by Antonio Turco-Rivas and J B Schneider in support of their business The original drafts were prepared in the Entrepreneur Intensity Track taught by Professor Andrew Zacharakis.© Copyright P’kolino and Babson College, 2005 CASE 325 326 CHAPTER Building Your Pro-Forma Financial Statements Case: P’kolino Financials 327 328 CHAPTER Building Your Pro-Forma Financial Statements 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Retail Direct Year 23% 77% Year 26% 74% Year 17% 83% Year 14% 86% Year 10% 90% Feb-07 Dec-06 Oct-06 Aug-06 Jun-06 Apr-06 Feb-06 Dec-05 Oct-05 Aug-05 Jun-05 Apr-05 Units Case: P’kolino Financials 700 600 500 400 300 200 100 329 330 CHAPTER Building Your Pro-Forma Financial Statements Case: P’kolino Financials 331 332 CHAPTER Building Your Pro-Forma Financial Statements Case: P’kolino Financials 333 334 CHAPTER Building Your Pro-Forma Financial Statements Equipment and Supplies 4% Operations 21% R&D 21% Sales and Marketing 19% Working Capital 21% Inventory 14% Case: P’kolino Financials $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 Year Year Breakeven Year Year Revenues Year 335 336 CHAPTER Building Your Pro-Forma Financial Statements Preparation Questions How the common-sized income sheet ratios compare to industry standards? Can you explain the variances in a way that makes the projections seem sound? How the revenues per employee compare to industry standards? Again, can you explain the variances? Do the financial projections accurately capture all the expenses that are implied in the written plan (refer back to previous chapter)? Is the proposed financing sufficient to cover the company’s cash flow needs? What happens if sales are not as high or quick to materialize as expected? ... 20,000,000 1, 338, 612 ,968 307, 212 ,12 3 12 7,078,679 1, 156,897,766 19 8,739,269 82,329,758 61, 113 ,205 62 ,15 0,775 14 0,0 41, 247 48,508,972 58 ,12 6, 212 40,525,002 11 1, 211 ,789 76,805,524 240,2 71, 522 33,487,208... 2.30% 2.20% 1. 70% 1. 70% 1. 60% 1. 60% 1. 50% 1. 40% 1. 40% 1. 30% 1. 20% 1. 20% 1, 274,862,230 394,008 ,17 8 1, 668,870,408 4, 317 , 514 ,564 2,450,290,644 6,767,805,208 29.50% 16 .10 % 24.70% 76.40% 23.60% 10 0.00%... Entrepreneurship and a Century of Growth Journal of Business Venturing, 1( 2): 14 1? ?14 5 19 86 Notes 10 11 12 13 14 15 16 17 SBA Office of Advocacy Frequently Asked Questions September 2009 www.sba.govg/advo