The Small Business Resource Center
SBRC -- Our mission is to help you meet your business goals.

(not affilitated with any other SBRC)

Home

Learn  More

Our Services

FAQs

Our Network  of Professionals

Topic of the Month

Regional Small Business Support Network

Contact Us     

Tips

What Angels are Saying -- Be Focused                                     copyright 2001 Wyn Lydecker

I heard an angel speak a few mornings ago at the Westchester Venture Group. As I expected, he said that investors are no longer throwing money at concepts. But he also had several pieces of very good advice. Entrepreneurs who heed these words of wisdom and can answer the questions listed below will be well ahead of the pack in securing funding.

Regarding focus, he said that too many entrepreneurs want to do too much. This is not a viable way to start a business. Focus on your core business and branch out once you have built that as a foundation.

1. Always be ready to present. Have your elevator pitch honed.

2. Be able to explain your business model succintly -- be focused.

3. Know what your value proposition is -- What benefits do you offer to your target market that others don't?

• In other words, who is your target market?
• What niche or need do you fill?

4. How big is the market you are operating in, and what are the trends?

5. Who is your competition? How do you differentiate your business from your competitors?

6. What barriers to entry are there to keep new players out? Patents?

7. How will you produce, market and distribute your product or service?

8. Who is on your management team? What are their credentials and what skills do they bring to the company that will make the investors feel comfortable that they are the people who can implement the plan successfully or modify it so that you reach your goals?

9. Do your financial projections show how your business will reach profitability in 18 months? If not, what milestones must you reach first? How much financing do you need?

10. What valuation do you have in mind? Is it reasonable in today's climate?

11. What is your exit strategy?

The Importance of the Business Plan                                                        copyright 2000 Wyn Lydecker

The Importance of the Business Plan                                                        copyright 2000 - 2001 Wyn Lydecker
by Wyn L. Lydecker

Your business plan is a road map that will guide you in running and building your business. The type of business plan you write will depend upon the business you are starting or running, the purpose of the plan and the audience for the plan. But no matter what type of plan you write, the process you go through as you prepare the plan is actually more important than the plan itself. That's because the process will make you really think about your business.

The Process -- As you prepare to write your plan will need to ask yourself questions. How you answer them will guide you in writing the plan.
What is your ultimate goal?
Why are you going to be a success?
What will it take to be a success?
What is success? How do you define it?
What will success be for you personally and for your business?
Can you achieve it?

What is your mission? To help people? To make money? To fill a     need in the marketplace?
Your business
What is your business model?
What business are you in? What is your business’s purpose? Can you state this in one to two succinct sentences?

Your reason for being -- your value proposition
Why should anyone want to buy your product or service? Is it unique?
What are the primary benefits your business offers?
Who is your consumer or your primary audience?
How do your business’s benefits benefit this primary consumer?
How are you going to produce your product or service?

Manufacturing and Distribution
How are you going make or acquire the product?
How are you going to get it to market?
To the end user?

Marketing
Who is your true target market -- the store that will sell the product or the end users?
How are you going to let people know about it?
What are you going to tell them?
What will it cost to market it?

Making Money -- the financial story
What does your product or service cost to make?
How much can you charge for it?
How much do you need to charge to breakeven?
How much will people pay?
How much do you need to sell? How much can you sell? How much can you produce?
How are you going to make money? (earn a profit?) (generate revenues?)
What are your projections for growth over the next three years?
In sales
In costs
In profits
What assets do you have? What liabilities?
What is your capital structure? Or what kind of capital structure would you like to have?
What will be the engine for that growth? What assumptions are going into it?
Are you thinking of going public?
How will you pay back your loan or ensure that your equity investors will get the rate of return they anticipate? What rate of return on investment do you anticipate?

Your Market
Is your market local or national or global?
Who is your competition?
Who is your direct competition?
What are the barriers to entry?
What is happening in the industry? What are industry trends? How do industry trends benefit you and your business?
What are the dynamics of the industry and its suppliers and consumers?

Management and Business Structure
Who are you? Why should anyone want to buy your services/products? Why should anyone want to invest in your business or loan you money?
What legal structure will you have? (inc., llc, etc.)
When you have answered these questions, you will find that even more questions start to come up. How you answer the questions is important.
A venture capitalist may ask you: Where did you go to school? What have you done previously? What is your experience and the experience of your management team? What's to stop others from doing the same thing?
When you have the answers, you need to write them all out in a solid form. Different companies and organizations recommend different formats. You need one that tells investors or lenders what your business is all about, who you are, and why you will be successful. Why should this organization of professionals give or lend you money? You are telling the story of your business. Be passionate without hype. Be sincere. Be logical. Be persuasive. Back up supposition and prediction with fact and research. Quote respected sources.
One thing you can count on is that your business will evolve and you will never follow your plan exactly. Still, it is very useful to have because writing a business plan brings discipline to the business planning process.

-----------------------------------------------------------------------------------------------
Copyright 1999 Wyn Lydecker and John Rhode

Understanding Financial Statements and the Financial Decisions You Make in Business
Or the power of financial statements. A practical approach to using and understanding the numbers of your business.
By Wyn Lydecker & John Rhode

The three main financial statements every business needs to produce are:
The Balance Sheet, The Income Statement and The Cash Flow (or Sources and Uses of Funds) Statement.

Financial statements are important for you to understand and use because:
They tell you about your business's health -- its ability to carry on business.
They tell other people in the government (like the Internal Revenue Service) and in banks how you conduct your business -- how money flows through, what it owns, what it owes and what it uses to create value which it sells to others.
They enable you have documents to show, use and discuss when you go to borrow money or attract investors. The statements contain the language of business -- a common language that all accountants and bankers as well as most business owners and investors understand.

The Balance Sheet gives a snapshot of the business's financial position at a specific point -- usually at the end of the year and at the end of each quarter.

The Income Statement tells you how much profit or loss you earned during a specific period, and it shows how that profit or loss came about by showing sales and expenses details.

The Cash Flow statement ties the two other statements together, showing how money flowed through the organization – how cash was used and where it came from -- over the same specific period.

All these statements are also very useful for individuals and/or families to have to help them understand their personal financial situation.

The Balance Sheet tells you how many assets, liabilities and owners’ equity a business has.

ASSETS = LIABILITIES + OWNERS’ EQUITY

Or looked at another way:
OWNED - OWED = OWNERS’ EQUITY

ASSETS are the economic resources of a business. They represent expected future economic benefit.

Assets are listed from the ones with the surest, most quickly realized value to the ones with most risky or slowest to realize value.
Current Assets are liquid assets, i.e., assets that are cash or can be turned into cash quickly.
Fixed Assets are not liquid, i.e., they would take a longer time to turn into cash.
A word about assets: Sometimes assets wear out. To reflect the fact that as they get older and do not contribute as much to the business, assets are depreciated. That means that a portion of the assets' value is subtracted each year. A car can be depreciated over 6 years. That means one sixth of its value goes away each year. In the seventh year, the business does not show the value of the car on its balance sheet.

Liabilities are obligations which require settlement in the future by conveying assets or performing services. (Anything the company owes and must pay for in the future).

Liabilities are listed in order from the most current -- the ones on which the business must make good first, down to the ones that are paid last. So, you have current liabilities and long-term liabilities or long-term debt. The long-term debt is part of the capital of the firm. It can be money the firm borrowed so that it could start or grow.

Owner's Equity is the residual interest in the assets of the business -- the difference between Assets and Liabilities. Owner's equity can include money the owner(s) or investors have paid into the business to help it grow or to get off the ground. When the firm is running well, it earns a profit or net income (as shown on the Income Statement). Net income that is not paid out to owners or investors is called retained earnings and becomes part of the owners’ equity. In a corporation, the book value of the shares of stock outstanding is also part of the owners’ equity. Usually, retained earnings are used to fund product development and growth.

A BALANCE SHEET USUSALLY LOOKS SOMETHING LIKE THIS:

ASSETS:
Current Assets:
Cash and cash equivalents -- (money in the bank, certificates of deposit, govt. securities, etc.)
Accounts Receivable (A/R) -- money owed to your business. If you have sent out an invoice, then you have a receivable until the invoice is paid.)
Inventories – (raw materials, work in progress and finished goods that are ready for sale.)
Short-term prepayments -- (Insurance, taxes, rent, etc.)
Fixed Assets or Long Term Assets
Property, plants, and equipment (the big investments that enable the business to produce its goods and services and to sell them and ship them.)
Intangible assets (Patents, trademarks, good will or reputation, if these things were purchased or have a cost which can be attributed to them.)

Liabilities
Current Liabilities
Notes payable (IOUs that will be paid within 60 days)
Accounts payable (amounts payable to suppliers, to credit cards, to utilities, to the landlord, etc. within one year)
Long-term Liabilities
Long-term debt (debt that is not due to be paid during that year -- bonds, mortgages, other debt that is secured by long-term assets)

Owners’ Equity (Residual value or the net assets)
owners’ investment in the business less the amount the owner withdraws.
Net income for the period less any cash distributions paid out to owners or investors, yielding Retained Earnings, which are usually reinvested in the business.
Corporations will also have stock carried at book value -- not the value established by trading of the stock in the stock market and listed in the stock market prices in the newspaper or on CNBC or on the Internet.


A healthy business should be able to cover its current liabilities with its current assets.
Financial people call the excess of current assets over current liabilities working capital.

A business should also have about twice as many total assets as total liabilities.

---------------------------------------------------------------------------------------
UNDERSTANDING PRICE, PRODUCTION AND PROFIT
BY
JOHN RHODE AND WYN LYDECKER

When you own or start a business, you have to answer a lot of questions.
One question that everyone wonders about is how to price your product or service.
Others are: How much product can you produce and sell?
How much do you need to sell to break even -- to cover your fixed costs?
Is it possible to make a profit in this business?

These are marketing questions, but they are also finance questions. The key to answering them lies in the concept of contribution and variable cost. These concepts tie to both the balance sheet and the income statement.
To figure out your contribution for each unit of your product or service sold, take the price for one item and subtract the direct cost of making the product -- the cost of the raw materials and labor or its cost of goods sold -- its variable costs.

Your can find these costs by taking your beginning inventory, adding your purchases for the period and subtracting your ending inventory (the stuff you didn't sell yet.) That enables you to match this period's sales with this period's costs of making your product or service.

Now, take your sale price less the variable cost. That's your contribution. Let's say you sell a scarf for $10, and it took you $4.00 of labor and materials to make the scarf. That means the sale of one scarf contributes $6.00 to your firm. That's your gross profit or gross margin. For each sale, you can pour $6.00 worth of water into the container.

Now, you want to know how many scarves you have to sell to cover your fixed costs (also known as operating costs).
Suppose you've got $3,000 in fixed costs every month. How many scarves do you need to sell just to break-even? (Just to cover the rocks in the container with water?)

3000 divided by 6 or 500! But what if you can't make that many scarves? How about if you raise the price? What if you charge $20 for each scarf? Your contribution would shoot up to $16.00! Then you'd only have to sell 187.

Could you lower your overhead? Well, what if you work at home instead of renting a place to work? You could save $1500 per month!

Then, at $10, you'd only have to sell 250 scarves. And at $20, you'd need to sell 94 to break even! This is beginning to sound more reasonable.
So, after all this calculating and messing around, you decide to work at home and charge $20 for each scarf, hoping to sell 100 scarves and keep a few dollars for yourself. (The amount of water that is just above the rocks.)
It is important to understand how such calculations help you make sound business decisions. All you need is a calculator, paper and pencil and an understanding of what your costs are -- both variable and fixed -- and what your sales price could be.

This analysis helps you with Break-Even analysis.
Break-even is the point at which you earn zero profit.

Break-Even Point In Units = fixed costs divided by contribution margin.

Break-Even Point in Dollars = ______Fixed Costs_____
Contribution Rate

Example: Company Bee sells honey for $10 per unit
Its variable (production costs) are $7 per unit
That means each unit contributes $3 toward fixed costs
Fixed costs are $2400
To cover fixed costs, the owner Ms. Bee must sell 800 units. (2400 /3 = 800)

Contribution rate is the price less the variable cost divided by the price.
(10 - 7) / 10 = .3 = 30%

From this, we figure out the Break-Even in dollars:

__2400__ = $8000 (This makes sense since 800 units sell for $8000)
.30 (800 units x $10 = $8000)

From here you can figure out how much honey you'd have to sell to make a certain amount of money or profit.


Understanding these concepts helps with marketing because it helps you understand what price, quality of your raw materials, quality of your sales and customer service, promotion and distribution all do to your revenues, and costs and profit.

----------------------------------------------------------------------
THE INCOME STATEMENT
By
Wyn Lydecker and John Rhode

The Income Statement reports the results of operations of a business during a specific time, usually a month, quarter or year.

In an income statement you are showing how much you spent to produce the sales in that period.
It helps you match revenues and expenses.
An accountant or bookkeeper needs to help you keep track of expenses and revenues so that you can ensure that the expenses you are showing really helped produce the sales you had.

All of this can become more complex than it may seem at the beginning. That is why it will pay you to try to understand it now and to get help from a professional when you need it.

When writing a business plan, be sure to create income statements monthly for the first year or so, and then quarterly for the third year, as this shows that you have thought through sales ramp up and also how start-up costs start to go away as the firm becomes more efficient.
____________________________________________________________________________________________________________
Sample Income Statement

Sales revenues
Less returns and discounts
Net sales(money you actually take in from selling your services or products)

Cost of goods sold:
Beginning inventory (inventory left over from the previous period)
Purchases (Raw materials you bought to create your product or perform your service)
Transportation in (money you paid to get the materials shipped to you)
Delivered cost of purchases (total cost of raw materials)
Less: returns and allowances and discounts
Goods available for sale (cost of products that are all assembled and ready to ship out)
Less: ending inventory (cost or value of anything not sold)
Cost of goods sold
Gross profit on sales (net sales less cost of goods sold)*

Operating Expenses: (also known as overhead)
Selling expenses:
Sales force
Advertising and promotion
Product delivery expense
Building occupancy expense
Other selling expense
General and administrative expenses
Administrative salaries
State and local property taxes
Depreciation of office equipment
Other admin. Expenses
Total operating expenses
Operating income **
Other revenue
Interest
Dividends
Other expenses
Interest expense
Income before income tax
Federal and State income taxes
Net Income (This net income goes over to the balance sheet in the owner's equity section)
__________________________________________________________________________________________
*Gross profit on sales is important because it indicates your gross markup on sales. This money is available to cover selling and administrative expenses. ** Operating income is a measure of operating results.
Net income is important because that is your profit for the period. It increases the worth of your business.

Five Tips for Marketing Your Business
By
Wyn L. Lydecker
1. Set your Strategy
What is your mission?
What is your goal?
What is your benefit, or what special value do you offer (value proposition)?
Who is your audience? Do you have more than one?
How do you propose to reach them?
What sort of image should you project to them that will highlight your benefits?
2. Communicate Your Strategy
Fine tune the words to convey your benefit succinctly.
Don’t dilute your story.
Focus on one or two points in any message to customers/clients.
3. Create an Identity
Work with professionals to get the right words and graphics to identify you to clients immediately.
Make sure the identity fits your strategy.
Don’t let the words get in the way or the graphics or the graphics get in the way of the words. Words and graphics have to work together.
4. Use the Media Judiciously
Can you afford to advertise?
Which media will be most effective?
Could public relations work better than advertising to help you meet your goals?
Does the Internet make sense? What type of site is best to accomplish your goals?
Do you have money set aside to take advantage of sudden opportunities?
5. Review Your Plan Regularly
Are you meeting your goals? Why or why not?
Should you change anything?

You can reach Wyn Lydecker via e-mail at: sbrc@sbrc.net