Study Guides (238,207)
Canada (115,009)
Economics (352)
ECN 204 (104)

FIN510 - Chapter #2.docx

6 Pages
Unlock Document

Ryerson University
ECN 204
Christopher Gore

Chapter 2 – From the Idea to the Business Plan Various Types of Firms ­ Salary-replacement firms: firms that provide their owners with income levels comparable to what they could have earned working for much larger firms ­ Lifestyle firms: firms that allow owners to pursue specific lifestyles while being paid for doing what they like to do ­ Entrepreneurial ventures: entrepreneurial firms that are flows- and performance-oriented as reflected in rapid value creation over time o Growth-driven subset as entrepreneurial ventures ­ A well-designed entrepreneurial venture begins with an idea that survives an analysis of its feasibility and results in a business plan ­ Once conceptualized, a new idea should be examined for its business feasibility ­ Initial feasibility review o This review focuses on whether it is possible to convert the idea into a product or service meeting a lucrative unfilled need Components of a Sound Business Model ­ Sound business model: a plan to generate revenues, make profits, and produce free cash flows o Attract financing and increase the likelihood that the venture will survive and build value over time o Three components  Generate Revenues (You must have customers and sell them something) • Important component of a venture’s perceived present and future value is its current level of revenues (which may be zero, if the venture is in its development stage or at the beginning of its startup stage) the expected growth of those revenues • Necessary to generate initial sales and growth in sales over time • A venture’s management team must develop and market new products and services to increase sales revenue • Branding the venture’s products and services—to facilitate new product introduction and inhibit competitive inroads  Make Profits (You must eventually have revenues that exceed the expenses of generating those revenues) • Successful venture cannot target sales growth alone. It must target growth in total venture profitability even when prices decrease as sales grow • A venture’s revenues must be large enough to exceed its costs of production and services, as well as pay the venture’s management team, other employees, liabilities owed to its creditors, and tax obligations • A venture’s management team must be capable of managing the firm’s operations efficiently, and of finding and retaining the human resources necessary to carry out production and service functions • Seeking a sustainable competitive advantage on any or all of these fronts is an important component of long-term venture viability. • A basic principle of market economics and capitalism is that capital providers must be compensated for the venture’s use of that capital • Capital can be loaned out to others or otherwise employed; consequently, the venture’s plan must incorporate a return to capital providers over and above simple profitability  Produce Free Cash Flows (You must generate cash inflows that exceed net working capital and capital expenditures) ­ The third component of a sound business model is a future ability to pay accumulated equity capital costs by what many term “free cash flow to equity”—what remains of prof- its after all investment costs have been subtracted ­ A sound business model anticipates the cash flow associated with expansions in the venture’s asset investments ­ The venture’s value to its owners is determined by the size and timing of its future free cash flows (to equity) ­ However, having to wait to receive those future free cash flows imposes the opportunity cost of not having them now. o That is, everyone would prefer to have the cash now rather than in the future. o The opportunity cost of this delay is Income Statement referred to as the time value of money and 2010 2011 is due to the investor’s foregone return on Revenue $ 600,000 $ 1,200,000 current use of the cash. In addition to the Gross Profitx CO GS per U300,000 600,000 time value of money, investors expect to OE + T ax 200,000 480,000 Net Profit $100,000 $120,000 be compensated for risk—that is, the risk that the venture will be less successful Initial specialty equipment and t he renova tion of an ol d warehous e bui lding i n Lower than anticipated, or even a failure. Downtown, re ferred to as LoDo, c ost $450,000 a t the beginning of 2010. A t the same time, $50,000 w as invested in inventories. In e arly 2011, a n additional $100,000 w as spent on equipment to support the increased frozen yogurt sales in 2011. EXAMPLE: Answer: GPM in 2010 = Gross Profit/Sales = 300000/600000 = 50% NPM in 2010 = Net Profit/Sales = 100000/600000=16.7% GPM in 2011 = 600000/1200000 = 50% NPM in 2011 = 120000/1200000 = 10% Total Assets 2010 = Warehouse + Inventory = 450000 + 50000 = 500000 Total Capital Expenditure = 450000 + 50000 + 100000 = 600000 ROA = Net Profit/Total Assets ROA for 2010 = 100000/500000= 20% ROA for 2011 = 120000/600000=20% Asset Turnover = Revenues/Total Assets Turnover for 2010 = 600000/500000 = 1.20 Turnover for 2011 = 120000/600000 = 2.00 ROA = Net Profit Margin x Asset Turnover ROA for 2010 = 16.67% x 1.2 = 20 ROA for 2010 = 10% x 2.0 = 20 Best Practices of High Growth, High Performance Firms ­ Three Areas: o Marketing Practices o Financial Practices o Management Practices  [Note: While Operations/Production practices are not listed separately, they go hand-in-hand with high quality products and services, as well as on-time delivery] ­ Best Practices: Marketing o Deliver high quality products or services o Develop new products or services that are considered to be the best o Offer products or services that command higher prices and margins o Develop efficient distribution channels and superior service support facilities ­ Best Practices: Financial o Prepare detailed monthly financial plans for the next year and annual financial plans for the next five years o Anticipate and obtain multiple rounds of financing as the venture grows o Efficiently and effectively manage the firm’s assets, financial resources, and operating performance o Plan an exit strategy consistent with the entrepreneur’s objectives and business plan ­ Best Practices: Management o Assemble a management team balanced in functional area coverage and industry/market knowledge o Employ a decision-making style that is viewed as being collaborative o Identify and develop managers that support entrepreneurial endeavors o Assemble a board of directors balanced in terms of internal and external members Time-to-Market and Other Timing Implications ­ Business opportunities exist in real time ­ Most ideas have a relatively narrow window of opportunity to become a successful business venture ­ Sometimes ideas are ahead of their time ­ Of course, being “first to market” does not necessarily ensure success ­ Time-to-market, particularly when one is “first to market”, is often important in deter- mining whether an idea becomes a viable business ­ Time is particularly critical when ideas involve information technology because the difference of a few months may deter- mine success or failure ­ Being first to market does not necessarily ensure success Initial “Litmus Test” ­ A viable venture opportunity: creates or meets a customer need, provides an initial competitive advantage, is timely in terms of time-to-market, and offers the expectation of added value to investors ­ SWOT analysis: an examination of strengths, weaknesses, opportunities, and threats to determine the business opportunity viability of an idea o The strengths and weaknesses assessment focuses on the internal aspects of the idea; the opportunities and threats focus on the external or competitive environment ­ SWOT analysis considers (S) and (W): o Unfilled customer need o Intellectual property rights o First mover o Lower costs and/or higher quality o Experience/expertise
More Less

Related notes for ECN 204

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.