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TodaySession Topic
1 A Viable Business Idea2 Crunching the Numbers
Break3 Financing the Start-up4 Understanding the Market
Lunch (back for 2.00 p.m.)Quick quiz
5 Why Start-ups Fail6 Evaluating the Start-up
More on Risk
Imagine you decide to invest your life savings
of £30,000 in setting up a new Subway franchise outlet
List 3 risks you are taking
More on Opportunity Cost
Whenever a decision is made in business , there is always an alternative that was not chosenThis alternative is called the opportunity cost
No point creating a product or service unless people want it
Found a gap in the Market?
But is there a
market in the Gap?
What You Need to Calculate• Revenues (sales)• Costs – fixed and variable• Profit• Contribution & Break-even• Cash flow forecasts• Market share, size & growth (later)
Classifying Costs• Variable costs
– Costs which change as output varies
– Lower risk for a start-up: no sales = no variable costs
• Fixed costs– Costs which do not change when
output varies– Fixed costs increase the risk of a
start-up
An ExampleSales Costs Profit or Loss?
£100,000 £75,000 £25,000 (profit)
£100,000 £125,000 £25,000 (loss)
Total sales > total costsTotal costs > total salesTotal sales = total costs
= Profit= Loss= Break-even
Contribution• Contribution looks at the profit made on
individual products• It is used in calculating how many items need to
be sold to cover all the business' total costs (variable + fixed)
• Contribution is the difference between sales and variable costs
Contribution - FormulasContribution = total sales less total variable
costs
Contribution per unit = selling price per unit less variable costs per unit
Total contribution can also be calculated as:
Contribution per unit x number of units sold
Profit = Contribution less Fixed Costs
Breakeven chartSa
les
and
cost
s (£
’000
)
Units of Output (‘000)
10
0
30
20
50
40
70
60
90
80
100
1 2 3 4 5 6 7 8 9 10
Fixed costs
Variable costs
Total costs
Total sales
Cash flow forecast - exampleJan Feb Mar Total
CASH INFLOWS
Investment 10,000 10,000
Sales 2,500 10,000 15,000 27,500
Total inflows 12,500 10,000 15,000 37,500
CASH OUTFLOWS
Raw materials 4,000 5,000 5,000 14,000
Wages & salaries 3,500 4,000 4,000 11,500
Marketing 2,500 1,000 2,000 5,500
Set-up costs 3,000 1,000 0 4,000
Other costs 2,000 1,000 1,000 4,000
Total outflows 15,000 12,000 12,000 39,000
NET CASH FLOW -2,500 -2,000 3,000 -1,500
Opening balance 0 -2,500 -4,500
Closing balance -2,500 -4,500 -1,500
Forecast is normally produced by monthForecast is normally produced by month
Net cash flow is the difference each month
between cash inflows and cash outflows
Net cash flow is the difference each month
between cash inflows and cash outflows
Opening balance is the amount the business starts
with each month
Opening balance is the amount the business starts
with each month
Closing balance = opening balance + net cash flow
Negative closing balance suggests business needs
bank overdraft or additional financing
Closing balance = opening balance + net cash flow
Negative closing balance suggests business needs
bank overdraft or additional financing
Which of these is a short-term source of finance?
A
Q1Q1
BCD
Bank overdraft
Bank loan
Share capital
Fixed assets
A bank loan will NOT usually involve which of the following?
A
Q2Q2
BCD
Repayments of the loan over its term
Interest on the outstanding amount
Payment of dividends out of profits
Security provided to the bank
The typical investment by a business angel into a startup is...
A
Q3Q3
BCD
£5k to £10k
£500k to £3.5m
Anything above £1m
£10k to £750k
A startup needs finance to buy fixed assets such as computers. What is this known as?
A
Q4Q4
BCD
Capital expenditure
Working capital
Revenue expenditure
Start-up losses
A startup will need to finance...
A
Q5Q5
BCD
Cash sales to customers
Dividends paid to the bank
Interest on cash held at the bank
Pre-trading losses
Key Issues for Start-up Finance
• How much?– Enough v not too much– Safety buffer
• When?– All at once– Drip feed / as needed
• Challenges– Keeping control– Staying afloat
Finance needed for…
Business Set-up
Day-to-day trading
Growth
Main sources of start-up financeInternal Sources External Sources
Founder finance (personal sources of the entrepreneur)
Retained profits
Credit cards
Bank loan
Bank overdraft
Friends & family
Business angels
Loans & grants
+ Don’t forget “Sweat”Start-up entrepreneurs usually save cash and costs by working long hours for nothing
Choosing suitable financeRecommend two sources of finance for each business
Be prepared to justify your choices
Some key terms
Demand Market share
Elasticity of demand Niche segment
Write a short definition for each
Types of market
A market is anywhere where
buyers and
sellers come together to
transact with each other
A market is anywhere where
buyers and
sellers come together to
transact with each other
Localmarkets
Nationalmarkets
Physicalmarkets
Electronicmarkets
Factors that affect demand• Prices• Incomes• Tastes & fashions• Competitor actions• Social & demographic• Seasonal• Government action
Attractions of niche for a startup
• Smaller & fewer big competitors• Chance to add value = better
profit margin• Easier to reach customers• Often higher growth of market
Analysing the market
• Market size (volume and value)• Market growth (percentage growth)• Market share (percentage of the
market owned by each product or competitor)
There are three calculations you need to be able to complete in order to analyse market data in Unit 1
Have a go!
Dannii & Cheryl are launching a new fitness club in Chelsea. In the first year, they expect to sell 500 memberships at £2,000 each. Next year, the local luxury fitness market is expected to grow to 2,500 memberships (this year – 2,250)
Dannii & Cheryl are launching a new fitness club in Chelsea. In the first year, they expect to sell 500 memberships at £2,000 each. Next year, the local luxury fitness market is expected to grow to 2,500 memberships (this year – 2,250)
What we’ll cover• Motives for starting a business• Aims and objectives of start-ups• Business planning• What can go wrong
Motives for being an entrepreneur
• Financial– Capital gains– Making a living
• Personal– Proving people wrong– Gaining control– Building something
• Social– Giving something back
Business planning
• Two main purposes:• A detailed plan for success• A tool to raise finance
So what can go wrong with a business plan?
Why Business Plans go wrong• No market in the gap
– Poor market research & unrealistic plan– Competitor response
• Good idea, poor execution– Wrong people; poor management– Growth is too quick (overtrading) or too slow– Failure to manage cash flow
• External shocks– Economic change (credit crunch, oil prices)– Legal & social change
Building a good example answer
SilverjetFounded: 2006Product: Low-cost, executive flights to New York & DubaiPrice – from £999
Putting it all together• A tale of two start-ups• Which would you invest in?• Which one succeeded?• Which one failed?• Top tips for Unit 1 evaluation
A Tale of Two Start-ups• Here are two reali-life start-up
stories• Imagine you are a potential
investor• What would you want to know?
Mucky Chips - IntroductionA new business for potato farmer Bob Mucky
His previous business went bankrupt and his existing business is performing poorly - supplying potatoes to supermarkets
The plan - use their own potatoes to make hand-fried potato chips
Mucky Chips – The MarketMarket size - £4bn; 10 billion packets per year
Dominated by Pepsico (Walkers) who have a 50% market share
Many other small hand-fried chip makers
Investment needed - £1m
Mucky Chips – The planSmall batch production using a own secret, refined traditional recipe
Sell direct to independent retailers (e.g. local delis)
Packaging - transparent packets so customers can see what is inside
Will start small and test samples with customers before investing in full-scale production facilities
Existing farm staff to be trained in all aspects of chip production
ItsaWrap - IntroductionThe ultimate wedding service
Idea of fashion expert Suzi Bianchi who has obtained backing from a variety of business angels
Product - manage wedding gift lists on behalf of couples
Focus on high standards of customer service
ItsaWrap – The MarketMarket size £200m and growing fast
But number of weddings in decline
Main competitors are mass market department stores – e.g. John Lewis, M&S
ItsaWrap – The PlanStrong cash flows – wedding guests pay in advance for their gifts
Personal selling via high street showrooms full of stock so customers can browse potential gifts
Target customers – 30+ professionals looking for special wedding gifts
Expect to manage 2,000 wedding lists p.a - £3,000 each