The Business Planning Process

1. The Business Planning Process

2. Business Planning and Execution • Market Analysis- TAM, SAM and competitive environment • How to keep score: A=L+OE • Product Costing • Building the Plan • Measuring the Results

3. The Business Process • Start Up Capital, Friends and family, Angel investors • Venture Capital, round 1, 2 and 3 • Business structures – Prop.,LLP, Corp. • A=L+OE • The Business Plan – year to year • Standard Cost Accounting

4. The Marketing Plan • Target market • Market Size and trends • Competition • Estimated Market Share • Marketing Strategy: Sales, Distribution, Pricing, Advertising and promotions.

5. Marketing Challenge • You are in the cell phone business. The TAM(Total Available Market) is $2 Billion in 2002 and your SAM(Share of the Available market) is 5 % each year. Your CAGR (Compound Annual Growth rate ) is projected to be 10% per year. The overall market is growing at 15% each year. • What is your current dollar volume goal for 2003?

6. Assets=Liabilities+Owners Equity • Double entry Accounting- debits and credits. • Assets: cash, inventory, accts Rec., Prepaids , Eqpt., Supplies, property • Liabilities: AP’s, Notes Payable • Owners’ Equity: Investment, retained earnings, Revenue and Expense accts. • Balance Sheet, Income Statement, Cash Flow Statement

7. Accounting Process • Accounting Ledger and chart of accounts • Trial Balance for EOP Income • Closing Entries to period ( PPV, cutoff, inventory valuation changes). • Performance vs. Budget or Plan.

8. Double Entry Accounting – The Balance Sheet Assets = Liabilities + Owners Equity Debit (+) Credit (-) Debit (-) Credit (+) Debit (-) Credit (+) Cash Accts Rec. Equipment Property Accts Pyble Notes Pyble Bank Debt Other Debt Investment Retained Earnings Revenue &Expense

9. A=L+OE Challenge • $1000 is invested in your new company. Describe the balance sheet. • ______= ______+________ • You borrow $500 to expand further, describe the balance sheet. • ______=______+_________ • The company made a profit in year 1 of $100. Describe the balance sheet after year end. • ______=______+_________

10. Terms to Know and Understand • EBITDA- Earnings before Interest, Taxes, Depreciation or Amortization • Income Statement- P&L- covers a period in time, Month, Quarter, or year • Balance Sheet is a point in time picture of A=L+OE • Cash Flow shows EBITDA and changes in working capital ( AR, AP, Inventory) for a period.

11. Business Structures • Proprietorship • Limited Liability Partnership • Subchapter S Corporation • Corporation • Public Company ( Corporation) SEC rules

12. Outline of a Business Plan • Executive Summary- Brief Highlights • Company Description • Product or Service • Market Analysis • Strategy and Implementation • Management Team • Financial Plan

13. The Planning Process- Sales and Marketing • Sales and marketing projects volume of sales by product by month or quarter. • Also project price increases and declines. • The timing of new product introductions is included. • Changes to selling cost: additions /deletions to sales force, changes in commission structure.

14. Product Costing- Variable Cost • Material cost= standard quantity at standard cost. (adjust for usage variance at end of period). • Labor cost= standard hours at standard rate. (adjust for rate variance and efficiency variance at end of period). • Variable Overhead= absorb at standard rate per hour. (adjust for actual at end of period) includes indirect labor, utilities, supplies, etc.

15. Fixed Cost- Overhead • Building Lease or rent • Salaries of all support staff ( typically excludes the “selling, general and administrative” cost.) • Utilities, Inform. Systems cost including software leases.

16. BreakEven Analysis • Selling Cost per Unit less VC per unit= Contribution per unit • Fixed Cost per month= rent, utilities, Salaries, taxes, insurance. • FC divided by Contribution per unit =Units needed to Break even. • Selling, General and Admin Cost is an additional Fixed Cost Category(S,G,&A).

17. Breakeven Analysis Challenge • Product A sells for $5 per unit. • Variable cost is $3 per unit. • Fixed Cost including S, G &A is $80,000 per year. • What is the breakeven point? • You just had a 10% price decline. Now what is breakeven point? • BE Point= FC/Contribution per Unit

18. Planning Process - Operations • Converts sold units to a manufacturing plan by product line or process. • Loads volume into a capacity plan by standard units or hours. • Cost reduction process- Material purchasing( Part of supply chain mgmt.),material usage, labor cost, overhead. • Capital expenditure plan to meet volume and cost goals.

19. The Plan- Income Statement • Sales by product by month= revenue. • Variable cost of goods sold by month. • Fixed cost of goods by month. • Adjust for cost variance in M, L, OH.(in Actual not Plan) • Gross Profit. • S,G, and A. • Operating Profit( sometimes EBITDA). • Net Profit (after ITDA) by month.

20. The Plan – Cash Flow • Cash from Operations • Changes in Working Capital- Inventory, Accounts Payable and Receivable and Capital Expenditures(Capex). • Interest Cost • Taxes due

21. The Balance Sheet • Point in time-End of Period • Changes in Assets, Liabilities, and Owners equity as a result of funding, operations, etc. • Defines borrowing capability and health of company in details.

22. Business Plan • Marketing Plan-“nothing happens until something is sold” • Operating plan or budgets • Cash Flow projection • Knowing your cost • Capital allocation- A limited resource

23. Business Systems - Other • Quality Systems. ( TQM, ISO, SPC) • Information Systems ( client server, real time, web based). • Human resources management. • Global marketing – know the global competition first. • Supply Chain management.( Partnering, Blanket PO’s, joint research, eqpt. Leases)

24. Top Mistakes in Business Plans • Too Long • Unable to explain the market position well. • Lack of Focus- “Swiss Army Knife” Plans • Lack real world Market analysis • No Business “ gauges” to monitor with. • Unclear Business Model- How will you make money? • Weak Team Formation