MGT 3300W Final Exam Study Guide
MGT 3300W Final Exam Study Guide MGT 3300W
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Final Exam Study Guide MGT 3300W: Entrepreneurship Spring 2016 2 Business Models The Three Ss Scalable Sustainable Significant impact on the problem Ways to Evaluate Business Models Customer Value Propositions Profit Formula Key Resources Key Partnerships Four Core Groups of Decisions for Business Models Revenue Streams - Number of streams - Sources of streams - Likelihood of stream’s growth - Size/Importance of stream Sources - Single, Multi, Interdependent, Loss leader Models - Advert based, Unit/volume, subscription/membership, licensing/syndicating, Transaction fees Cost Drivers - Type of cost - Impact on cost structure - Size/impact - Will it change over time? Cost Structures - Payroll (direct/ indirect), Inventory, Space/rent, marketing/ advertising Investment Size - Timeline for cash needs - Amount needed to start up - Working capital needed to run business Critical Success Factors - Will they change over time? - Most difficult to execute - Elements most critical to success of business plan Sources and Types of Business Models Unbundling: Company with different lines of business selects one/ more as focus and sells the others Long Tail: Selling more for less... Free Business Model: One or more customer segments benefit from free product/ service offering Multi-sided Platform: Two distinct but interdependent segments. Value is provided to one only if the other is present 3 Open Business Model: Focus on openness and transparency using tools such as open source, open tools, etc. Cost Drivers and Cost Structures - Most important costs in business model - Most expensive key activities and resources Cost structures - Value-driven - Cost-driven Characteristics of Cost Structures - Fixed costs - Variable costs - Economies of scale (cost advantage) - Economies of scope (distribution advantage) Elements of a Solid Business Model 1. Value a. Newness b. Accessibility c. Brand/ Status 2. Customer Segments a. Diversified b. Mass market c. Niche market d. Multi-sided e. Segmented 3. Channels a. Partner: Wholesalers, partner stores b. Own: Workforce, web sales, own stores (lower margin) 4. Customer Relationships a. Personal assistance b. Dedicated personal assistance c. Self service d. Automated service 5. Revenue Streams a. Rent/ Lease/ Lend b. Asset sales c. Subscription fees d. Usage fees e. Advertising f. Brokerage fees g. Licensing 6. Pricing Mechanisms a. Fixed: List price, volume-based, customer segment based, product feature based b. Dynamic: Auction, negotiation, real-time market, yield management 7. Key Partnerships a. Risk and Uncertainty reduction 4 b. Acquiring a particular product/service c. Economies of scale and optimization 8. Key Resources a. Human b. Intellectual c. Physical d. Financial 9. Key Activities a. Production b. Problem solving c. Platform/ Network The Marketing Plan Understanding the Marketing Plan A statement of marketing objectives, strategies, and activities to be followed in the business plan - Where are we? - Where do we want to go? - How do we get there? Characteristics of a Marketing Plan 1. Be based on facts and assumption 2. Provide Strategy 3. Provide long and short term continuity 4. Describe organization for implementation 5. Be flexible 6. Be short and simple 7. Provide specific criteria for control Marketing Mix Product Features, brand name Price List price, quality image, quantity Channels of distribution Wholesaler/ retailers? Length of distribution channel, coverage, inventory Promotion Sales promotions, mass coverage, mass budget, the message Promotion- Six Degrees of Separation A theory that states that one person on earth can be connected to another by no more that 5 intermediaries. Creating Viral Messages- ● Stickiness Factor: How effective a product/idea that stays in the mind of viewer or consumer 5 ● Art of Persuasion: H ow to convey the message in a persuasive but non-manipulative way ● Power of Group: The collective capacity of a group of people to create influence. Organizational Plan Legal forms of business 1. (Sole)Proprietorship: One owner who makes all the decisions, earns all profits, with unlimited liability 2. Partnership: Two or more owners, with unlimited liability who pool resources together to run business 3. Corporation (C Corp): Taxed as a separate legal entity for tax and liability purposes. Regulated by statute. New Business Formations 4. Limited Liability Company: Hybrid partnership and corporation, taxed as partnership/sole proprietorship with the limited liability of a corporation. 5. Limited Liability Partnership: One or more members have limited liability, each partner is responsible for his/her own misbehavior or negligence. 6. S Corp: Members report losses/income on personal income tax to avoid double taxes. Profits and losses are divided and passed through shareholders. Comparison between S Corp and LLC S Corp LLC Growth of S corps are flatlining due to VCs prefer LLCs increase acceptance of LLCs Popular for new ventures and small Changing regulations allow LLCs to be businesses taxed as partnerships Profits are distributed to shareholders LLC has members and taxed as personal income Status of S Corp must be maintained and No shares are issued, each member owns monitored interest Liability does not exceed member’s capital contribution Laws differ from state to state Transfer of interest requires unanimous consent 6 Advantages and disadvantages of alternative legal forms of organizing a new venture Advantages Disadvantages LLC 1. Most states do not 1. If a member leaves, tax LLCs the LLC no longer 2. No limit to exists individuals, entities, 2. Confusion about etc. specific roles 3. Members share 3. Subject to profits, income, self-employment losses, equity taxes 4. Members can add their shares to partnership interest S Corp 1. Gains and losses 1. Max 100 are treated as shareholders personal income/ 2. Restrictions for losses qualification 2. Limited liability 3. Net loss is limited protection to stocks and loans 3. Not subject to to business minimum tax 4. One class of stock 4. Stock may be voting is permitted or nonvoting LLP 1. Liability protection 1. Not recognized in 2. Credits and every state deductions are 2. Partners are not passed to partners obligated to consult to file on their with other partners personal taxes to make business 3. Flexibility in agreements ownership and organization Role of board of advisors and board of directors Board of Directors Board of Advisors 1. Conflict resolution 1. No legal status 2. Ensuring proper use of assets 2. Meet less frequently 3. Supporting daily activities 3. Useful in family businesses 4. Developing strategic plans for 4. Compensation: Per-meeting, stock, 7 growth and expansion or stock options 5. Developing networks of 5. Service in advisory capacity information services for entrepreneurs 6. Budget reviews (capital and operating) Protecting Intellectual Property Rights Trademarks Service marks Patents Copyrights 1. Protects 1. Signifies the Exclusive rights to 1. Exclusive logo, slogan, source of a inventor to make, rights that name, trade service use, or sell the protects the dress a 2. Noted by SM invention in the US creator or company symbol. for the next 20 original uses to years works of distinguish authorship itself such as 2. Signified by musical, the ™ symbol literary, and 3. When dramatic registered works. with PTO, 2. © denotes companies copyrighted use the work symbol Financial Plan Role of budgets in preparing pro forma statements Operating and Capital Budgets: developed before the pro forma income statements 1. Capital Budget: Expenses that will impact business for more than one year 2. Operating Budget: Fixed expenses regardless of sales volume, variable expenses linked to strategy in business plan Sales Budget: Expected sales volume per month Understand why positive profits can result in negative cash flow Companies may spend more in cash than what was expensed by the accounting system - Buys $100x10 realms of paper, but only uses 50 realms in that financial period. - Outlays $1000 in cash, expenses $500 in financial reporting period. Sales revenue of $1000 but 50% of those were credit sales. The company only receives $500 in this period and the rest in future periods. - Profit for period (x) = $1000 revenue- $500 expenses = $500 profit - Cash flow for period = $500 cash sales- $1000 cash out = -$500 cash flow 8 How to prepare pro forma cash flow, income and balance sheet Pro Forma Income Statement - Sales by month - Projected operating expenses (by month) for Year 1 - Projections for Years 2 and 3 should also be made NOTE: - Increasing sales mean increasing sales expenses - Changes in expenses in Y1 can necessitate monthly illustrations - Increase in individual expenses need to be reflected Pro Forma Cash Flows Take monthly projections of cash - If disbursements are greater than receipts, borrow or have money in the bank - If cash inflow is large, invest or save in a bank NOTE: - Sales is not Cash - Not same as profits - Using profit to measure a company’s success may be deceiving if the company has significant negative cash flows - The difficulty is in determining exact amounts of disbursements and receipts, based on best estimates. Pro Forma Balance Sheet - Assets - Liabilities - Owner’s Equity How to calculate break even point Sales volume where the venture neither makes a profit or incurs a loss. B/E (q) = T.F.C. / SP- VC per unit Pro Forma Sources - Operations - New Investments - Long-term borrowing - Sale of assets Applications/ Use of Funds - Increase assets - Retire long-term liabilities - Reduce owner/ stockholder equity - Pay dividends 9 Funding the venture Types of financing available Debt Financing: Obtaining borrowed funds for the company - Asset-based financing: requires some asset as collateral, paid back with added interest. Equity Financing: Funds in exchange for ownership - No collateral requirement , investors are offered some form of ownership Internally generated funds: profits, sale of assets, working capital reduction, accounts receivable used to reduce short-term assets and extended payment terms for suppliers External Funds: - Personal Funds: Least expensive in terms of cost and control, essential in attracting outside funding. Level of commitment is reflected in the percentage of total assets entrepreneur committed/ - Typical sources: Savings, mortgage, life insurance - Family and Friends: Likely to invest due to personal relationships with entrepreneur - Advantages: Easy to obtain money, more patient than other investors - Disadvantages: Direct input into operations of venture. - Formal agreement must include: amount of money involved, terms of the money, rights and responsibilities of the investor, steps to be taken if the business fails Role of commercial banks Types of Asset-based Bank Loans - Accounts receivable, equipment, real-estate Types of Cash flow financing (Conventional Bank Loans) - Installment loans, straight commercial loans, long-term loans, character loans. Bank Lending Decisions 1. Based on quantifiable informative and subjective judgements 2. Decisions are made according to five C’s of lending- character, capacity, capital, collateral, and conditions 3. Review of past financial statements and future projections 4. Questions are asked regarding ability to repay loan. Bank Shopping Procedure 1. Complete application (mini business plan) 2. Evaluate alternative banks 3. Select one with a positive loan experience in the business area 4. Set an appointment 5. Carefully present the case for the loan 6. Borrow the maximum amount possible SBA loans, R&D limited partnerships, government grants, private placement Role of Small Business Administration - Primary guarantor of loans made by private and other institutions. 7 (a) loan is SBA’s primary business loan program - Proceeds can be used for: 10 - Working capital, Machinery and equipment, Furniture and fixtures, Land and buildings, Leasehold improvements, debt financing (conditions apply). - Eligibility Criteria: - Repayment ability, Five C’s, Size, Type of business, Use of proceeds, Availability of funds from other sources, owners of 20 percent or more are required to personally guarantee SBA loans. - $2 million max, $1 million min exposure - Max guarantee by the SBA is 50 percent - Interest is negotiated: subject to max, pegged to prime rate, fixed or variable - Guarantee 85 percent of loans of $150,000 or less, 75 percent of loans above $150,000 to a max of $1 million. 504 Loan Program - Fixed rate financing to acquire, machinery, equipment or real estate. Max $1 million. Takes various forms including Community Development Company loan backed by a 100 percent SBA-guaranteed debenture SBA Microloan ( 7 (m) loan program) - Short-term loans of up to $35,000 for working capital, purchase of inventory, furniture, fixtures, machinery, or equipment. Cannot be used to pay existing debts. Research and Development Limited Partnerships: Money given to a firm for developing technology that involves a tax shelter ● Major elements ○ Contract: Liability for loss incurred is borne by the limited partners. Tax advantages to both parties ○ Limited partnership: A partner that usually supplies money and has few responsibilities ○ Sponsoring company: Acts as general partner, has base tech but needs funds to develop it ● Procedure ○ Funding stage: Contract, investment, documenting terms/conditions, scope of research ○ Development Stage: Sponsoring company performs actual research ○ Exit Stage: Tech is fully developed, sponsoring company and limited partners commercially reap benefits through equity partnerships, royalty partnerships, or joint ventures. ● Benefits ○ Provides funds with min amount of equity dilution ○ Reduces risks ○ Strengthens sponsoring company’s financial statements ● Costs ○ Expending of time/ money ○ Restrictions on tech can be substantial ○ Exit may be too costly Government Grants 11 Small Business Innovation Research (SBIR) program was created as part of SBID Act - Federal agencies with R&D Budgets over $100 million must give a portion to small business through SBIR program - Uniform method by which each participating agency solicits, evaluates, and selects research proposals for funding - Phases - One: Awards up to $100,000 for six months of feasibility-related experimental or theoretical research. - Two: Awards are up to $750,000 for 24 months of further R&D. Money is used to develop prototype products/ services - Three: Does not involve direct funding from the SBIR program. Commercialization of technology through funds from private sector or regular government procurement contracts. - Procedure - Government publishes solicitations describing areas for funding - Company/ Individual submits proposal - Screening proposals - Evaluation of proposal on a tech basis - Granting awards based on potential for commercialization NOTE: Research findings are owned by company, not government. Small Business Technology Transfer (STTR) program was est. by STTR Act of 1992 - Departments of Defense, Energy, Health and Human Services, NASA, National Science Foundation participate in STTR program - Procedure same as SBIR Private Placement Types of Investors: - Influence nature and direction of business - May be involved in business operation, consider degree of involvement. Private Offerings - Formalized method for obtaining funds from private investors. - Free and less costly Regulation D contains: - Broad provisions designed to simply private offerings - General definitions of what constitutes a private offering - Rule 504 - Sale of up to $500k of securities investors in any 12 month period - No general advertising/ solicitation through public media - Rule 505 - Sale of $5 million of unregistered securities in the private offering in any 12-month period. - No general advertising/ solicitation through public media - Additional information must be disclosed if issuance involves unaccredited investors. - Rule 506 12 - Sale of unlimited number of securities to 35 investors and an unlimited number of accredited investors and relatives of issuers - No general advertising/ solicitation through public media Funding the venture- 2 Stages of venture funding Informal risk capital market ● It consists of a virtually invisible group of wealthy investors (business angels). ● Provides funding, especially in startup (first-stage) financing. ● Contains the largest pool of risk capital in the United States Nature of VC industry and investment decision process ● A long-term investment discipline, usually occurring over a five-year period. ● The equity pool is formed from the resources of wealthy limited partners. ● Found in: ● Creation of early-stage companies. ● Expansion and revitalization of businesses. ● Financing of leveraged buyouts of existing divisions of major corporations or privately owned businesses. ● Venture capitalist takes an equity participation in each of the investments. Venture Capital Process ● Objective of a venture-capital firm - Generation of long-term capital appreciation through debt and equity investments. ● Criteria for committing to venture: ○ Strong management team. ○ A unique product and/or market opportunity. ○ Business opportunity must show significant capital appreciation. ● Primary Stages ○ Stage I: Preliminary screening – Initial evaluation of the deal. ○ Stage II: Agreement on principal terms - Between entrepreneur and venture capitalist. ○ Stage II: Due diligence - Stage of deal evaluation. ○ Stage IV: Final approval - Document showing the final terms of the deal. ● Locating Venture Capitalists ● Venture capitalists tend to specialize either geographically by industry or by size and type of investment. ● Entrepreneur should approach only those that may have an interest in the investment opportunity. ● Most venture capital firms belong to the National Venture Capital Association. Aspects of valuing a company ● Factors in Valuation ○ Nature and history of business. ○ Economic outlook- general and industry. ○ Comparative data. 13 ○ Book (net) value. ○ Future earning capacity. ○ Dividend-paying capacity. ○ Assessment of goodwill/intangibles. ○ Previous sale of stock. ○ Market value of similar companies’ stock. ● Ratio Analysis ○ Serves as a measure of financial strengths and weaknesses of the venture but should be used with caution. ○ It is typically used on actual financial results. ○ Provides a sense of where problems exist in the pro forma statements. ● General Valuation Approaches ○ Assessment of comparable publicly held companies and the prices of these companies’ securities. ○ Present value of future cash flow. ○ Replacement value. ○ Book value. ○ Earnings approach. ○ Factor approach. ○ Liquidation value. 14
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