presented by the university of hawaii’s pacific business ... center & honolulu minority...

Hawaii Entrepreneurship Workshop

Presented by the

University of Hawaii’s Pacific Business Center &

Honolulu Minority Business Development Center

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Workshop Presenter David M. Gillespie – UH Project Advisor

•Mail Boxes Etc. (UPS Store) - Hawaii Area Owner

•Hawaii Pacific University – Instructor in Finance, Marketing and Franchising

•HEI, HawTel & Gasco – Fin. Admin. •Arthur Young & Price Waterhouse –

Management Consultant •University of Hawaii - BBA & MBA

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Entrepreneurship

The process of identifying and starting a business venture, sourcing and organizing the

required resources and taking both the risk and rewards with

the venture.

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Hawaii Entrepreneurship Workshop Outline – Researching,

Starting, Growing, Improving and Exiting from an Enterprise •Introduction •Researching your Start Up Idea

or Expansion Plan •Start Up/Expansion Decisions •The First Year •Growth & Improvement •Exit Strategy

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Introduction In Business Already? •Type of Business? •Size and Number of Employees? •Main Problems?

Thinking About Starting A Business? •Type of Business of Interest? •Start Up, Existing, Franchise? •Main Concerns/Issues?

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Researching Your Idea

“Entrepreneurship is the last refuge of the trouble making

individual” Natalie Clifford Barney

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Researching Your Idea Do you meet Psychological

Profile? •What’s Right For You? What are your interests? Your Passion

•Can You Do It Day-In And Day-Out? Hot Dog Stand

•Lack of Administrative Support Cashier, Cleaner, Banker, All-around

•Hours and the Effort – 24/7 Job

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Researching Your Idea Reality of the Entrepreneur •Average Hawaii Small Business Profile 1/3 are Profitable, 1/3 Break-Even, and

1/3 Lose Money •Must Be People Person Constant Customer & Employee Contact

•Can You Handle the Financial Risk? Investing With Savings Collatarized Debt – 2nd Mortgage Borrowing from Friends & Family

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Researching Your Idea Business Plan – Must Do Process • Description – A document that presents your

Start Up/Expansion idea in a complete, well thought out & logical format.

• Purpose – To be a road map to show where you want to go, how you will get there, and the results expected. Covers all business processes.

• Users External – Potential Lenders & Investors Internal – Owners, Mgt. & Employees

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Business Plan Structure

• Cover Page

• Executive Summary

• Project Description

• Start-up Requirements

• Marketing Analysis

• Marketing Plan

• Management Plan

• Operations Plan

• Financial Plan

• Assumptions & Milestones

• Other Information

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Business Plan Structure •Executive Summary – Briefly cover the

Marketing, Management, Operations and Financial aspects of the Plan – Your ‘Pitch’ TV’s Shark Tank

•Project Description Background – Past History of the Business Objectives – Specific goals to Accomplish Purpose – Overall Objective of the Firm

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Researching Your Idea Business Plan Structure •Start-Up Requirements – Expenses,

Inventory, Cash • Tasks to be Completed Before You Open the

Doors

•Marketing Analysis & Plan Industry Analysis & Target Market Competition & Promotion Strategy Pricing Strategy & Sales Projection

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Researching Your Idea Marketing Analysis – Key to the

Future Cash Flow of the Business •What is the Customer Base? – Profile of

Your “Target Market” Buying Habits & Shopping Patterns Demographics – Age, Location,

Occupation, etc. of Customers • Is the Customer Base Growing? • Is Market Changing & How?

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Marketing Analysis – Key to the Future Cash Flow of the Business

•Competition – Profile: Location, Capabilities, Image, Advertising/Promotions

•Product/Service’s Life Cycle? Start-Up Stage – Few Competitors Growth Stage – Rising Sales & Expenses Mature Stage – Battle for Market Share Declining Stage – Caretaker Business

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Researching Your Idea Business Plan Structure •Operations Plan Space Needs – retail, office, storage, parking Equipment – machines, vehicles Technology – computers, software

•Management Plan People, Positions, Duties, & Responsibilities Organizational Structure

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Researching Your Idea Business Plan Structure • Financial Plan – Forward Looking: 3 Yrs. Income Statement – Revenues, COGS,

Operating Expenses, Other

Balance Sheet – Inventory, Loans, Equipment, Cash, A/R, A/P

Cash Flow Statement – Cash from Operations, Financing & Invest. Activities

Return on Investment (ROI) – Payout Schedule

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Researching Your Idea 3 Things A Business Plan Must Show • Evidence of Focus – Personal and financial

commitment to the business

• Understanding of Target Customers – Show you know your potential customers inside & out

• Appreciation of Investor/Lender – Assurance & schedule of return/payback

Researching Your Idea Financing Sources

•Internal Options Savings, Investments Life Insurance (Borrow/Cash-out) IRA’s & Retirement Funds 3F’s – Family, Friends & Fools Charge Cards

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Financing Sources •External Options Bank Loans – Guarantees Required 2nd Mortgages – Collateral Required Seller Financing - For a Current

Business - Terms and Conditions SBA – Loan Guarantees Required Investors – What % equity to give up

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Researching Your Idea Buying a Business or Building From

Scratch • New Business – Many Unknowns Build the Way You Want It Difficult to Project Sales & Expenses Start-up Costs Difficult to Estimate Funds Needed Until Break-Even Can Develop Your Unique Image Harder to Get External Financing

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Researching Your Idea Buying a Business or Building From

Scratch •Current Business – Known Entity Assets to Inspect, Customers Revenue Stream Already In Place Financial Statements to Analyze Easier To Get External Financing Seller Financing a Major Advantage

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Buying a Business - What’s It Worth?

• 5 X Annual Net Income; 3X Annual Revenues • Return on Investment – 15%, 20%, 25%, ? • Real Estate – Separate Valuation •Deal often structured to purchase assets only •Washing The Income Statement of Unusual or

Owner Related Expenses •Due Diligence – Verifying the Revenues,

Expenses, Inventory levels, A/R, Debt, etc.

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Researching Your Idea Franchise/License - The Good and Bad

• Uniform Franchise Offering Circular-UFOC • Franchise/License Agreement – Contract • Franchise Fee, Royalties, Other Fees • What Level of Support Can You Really Expect in

Hawaii? • Restrictions – Products, Services, Activities • National & International Name Recognition • Exclusive Territory? Length & Renewal • Can’t ‘Scale’ the business

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Break-Even Analysis: Simple/Powerful • Does the Business Model Make Financial Sense? • What is the Revenue and Cost Structure of the

business Cost Classification

Fixed Costs: Constant Expenses Expenses that are not dependent on the amount of business activity –Rent, Salaries, Depreciation, Interest, Utilities, Bookkeeper, etc.

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Researching Your Idea Break-Even Analysis - Does the Business Model

Make Financial Sense?

Variable Costs: Vary With Activity Level Expenses that increase or decrease in relation to the business activity - Cost of Goods Sold, Wages, Direct Labor & Material

No Expense is completely fixed or variable

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Break-Even Analysis – Simple Yet Powerful

BE In Sales $ = _____Fixed Costs____ 1 – (Variable Costs/Revenues) How much sales must be generated to

cover all period fixed & variable expenses. Income Statement Approach

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Researching Your Idea Break-Even Calculation Exercise • Bookstore Monthly Break-Even Monthly Fixed Costs = Rent = $5,000 Average book costs = 40 cents for each $1 of

sales (revenue). Calculate how much sales the bookstore must

generate each month to cover their total monthly costs.

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Researching Your Idea Break-Even Analysis – Calculation

• Fixed Costs = (Rent) = $5,000/Month • Variable Costs = (Books) = 40¢ for every $1

of Sales = COGS • BE In Sales $ = _____$5,000_______ (For the Month) 1 – ($0.40/$1.00) • Break-Even = Sales of $8,333/month

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Break-Even Graph

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Break Even Pt. = $8,333 in Sales

$

Sales Volume

Fixed Costs ($5,000/period)

Researching Your Idea Last Shot - Test It/Try It Out • Hang Out at the Business (If buying) or at a

competitor’s enterprise (If possible) Evaluate quantity & quality of customers during

different days and different times • Check with the SBA, SBDC, Industry Sources • Trusted Business Associates • Make sure you have your Family’s support • Get Banker, Attorney, Bookkeeper’s Opinion

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Researching Your Idea Go or No-Go Decision Time • Don’t be afraid or embarrassed to walk away

from the idea/deal if it’s not right for you. Don’t let your ego/pride decide. Timing must be right for you Deal must be structured right for you There will be other Deals/Businesses It’s Your Decision – stay in Control Don’t Force the Timing—Be Patient

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Start Up/Expansion

Decisions

“An entrepreneur tends to bite off a little more than he can

chew hoping he’ll quickly learn how to chew it”

Roy Ach

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Start Up/Expansion Decisions

Risk Mitigation/Reduction Tactics – Hope For The Best, But Prepare For the Worst

•Space Leases – Minimum needed space and minimum time – difficult to obtain

•Space Improvements – Keep it simple, can improve later.

• Inventory Requirements – Get what you need, but don’t overstock.

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Risk Reduction Tactics – Hope For The Best, But Prepare For the Worst

• Fixtures and Furniture – Basic is fine in the beginning.

• Equipment Leases – Keep them short • Long-Term Commitments – Keep them to a

minimum, when possible

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Landlords And Space Leases

•May Be One of Your Most Important Decisions – personal guarantee required

•Due Diligence on Your Potential Landlord • Legal Review of the Lease •Operational Review of the Lease •Renewal Terms and Termination Clauses •Sub-leasing and Sale of the Business

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Equipment Financing Options

• Purchase or Lease? Your Funds Availability Equipment Supplier Leasing

• Lease: Long-Term or Short Term Long-Term = Higher Risk/Lower Costs Short-Term = Lower Risk/Higher Costs Personal Guarantees Will Be Required

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Outside Services • Legal – Contract Review, Lease Review

• Accounting – Accounts Set-Up & Taxes Bookkeeping: In-House or Outside Automated Accounting Packages & Spreadsheets

• Marketing/Promotions Advertising Agencies – Media & Message Fit Build Customer Data Base Promotions Expert – Logo, Flyers, Connections Web Page Development & Social Media Presence

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Budgeting & Banking •Working Capital – Need to budget to

always have a certain cash level on hand. Major Start Up Weakness

• Cash Budgeting – Do all your revenue and expense budgeting on a cash basis.

• Bank Selection – Pick a bank that knows you & will get involved in your business.

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The First Year

Once you become an entrepreneur, you find the

company of non-entrepreneurs a lot harder to be around. You’ve

seen things they haven’t; the wavelengths alter, it’s that

simple” Hugh MacLeod

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The First Year Push For Break-Even ASAP

•Cash Burn – Monthly negative cash flow •Capitalize on the ‘Newness’ of Your Business •Budget for Start-Up Promotion Funds •Concentrate on the Key Products/Services that

will Get You to Breakeven Quickly •Build Your Customer Data Base ASAP •Use the Personal Touch Up-Front – Small

Businesses Greatest Advantage over Big Box

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The First Year

Growth Planning: By Steps - Not Leaps • Marketing - Advertising & Promotion

Prepare & Stick to a Six Month-Long Monthly Plan Web Page & Social Media – Impact, placement

• Plan on Expansion - Long before you need to Physical Facilities – Space, equipment, vehicles Support Activities - Suppliers, professionals

• Increase Sales/Profit Before You: Add Personnel, Buy New Equipment, Increase Physical

Facilities, Upgrade Fixtures

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The First Year

Take a Macro & Micro View of Your Firm • Macro View – The Big Picture: Review and

analysis of the Income Statement , Balance Sheet & Cash Flow Statement

• Micro View – The Details: Pricing strategy, Retail mark-up, Product/Service cost analysis, Product/Service margins

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The First Year Macro View – Income Statement Revenues: Generated from Sales Activity - COGS: Cost of Goods Sold=Inventory Expense/period = Gross Profit - Operating Expenses: Rent, Wages, Admin.,Dep. = EBIT: Earnings Before Interest & Taxes (Op.Inc.) - Interest: Interest Expense on any debt = EBT: Earnings Before Taxes - Taxes: Corporate taxes on earnings = Net Profit: Funds available for owners

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CDA Corp. CDA Corp. Balance Sheet Income Statement Assets Liabilities Sales 1,450 Cash 175 Accts Pay 115 COGS 875 Accts Rec. 430 Note Payable 115 Gross Profit 575 Inventory 625 Cur. Liabilities 230 Operating Exp. 45 Cur. Assets 1,230 L-T Debt 600 Depreciation 200 Equipment 2,500 Equity EBIT(Op.Inc.) 330 Less Dep.(1,200) Common Stk. 300 Interest Exp. 60 Net Equipt. 1,300 Paid-In Cap 600 EBT 270 Ret. Earnings 800 Taxes (40%) 108 Total Assets 2,530 Total Equity 1,700 Net Income 162 Dividends 100 Total L & E 2,530 Add to R.E 62 44

The First Year Income Statement – Margin Analysis

•Gross Margin = Gross Profit/Sales Overall gross margins of the business What’s left over after COGS deducted

•Operating Margin = Operating Profit/Sales Amount of operating income per $1 of sales Measures effectiveness of management’s control over

administrative expenses

•Net Profit Margin = Net Income/Sales Ability to convert sales into net profit

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Margin Analysis Exercise Income Statement

Sales 1,450 COGS 875 Gross Profit 575 Operating Exp. 45 Depreciation 200 EBIT(Op.Inc.) 330 Interest Exp. 60 EBT 270 Taxes (40%) 108 Net Income 162 Dividends 100 Add to R.E 62

• Gross Margin

Gross Profit Sales

• Operating Margin EBIT Sales

• Net Profit Margin Net Income Sales

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The First Year Margin Analysis Exercise • Gross Margin = Gross Profit = $575 = 39.7%

Sales $1,450 Overall gross margins of the business; Profits before

overhead/fixed costs • Operating Margin = EBIT = $330 = 22.8% Sales $1,450 Amount of EBIT generated from each Sales $; a good measure

of variable cost control • Net Profit Margin = Net Profit = $162 = 11.2% Sales $1,450 Ability to convert sales into bottom line profit

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The First Year Four Types of Financial Ratios •Profitability – how effective the firm is in

generating profits • Liquidity – firm’s ability to meet short

term financial obligations •Efficiency – how effective the firm is in

using its resources • Leverage – how much of other people’s

money is used to finance the firm’s assets

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Inc. Stmt. 1993 1992 1991

Sales 100.0% 100.0% 100.0% COGS 54.2% 57.1% 60.2% Gross Profit 45.8% 42.9% 39.8% Op. Exp. 21.2% 20.0% 18.8% Depreciation 5.2% 5.3% 5.3% EBIT 19.4% 17.6% 15.7% Interest Exp. 1.8% 1.9% 2.0% EBT 17.6% 15.7% 13.7% Taxes 4.0% 4.0% 4.0% Net Income 13.6% 11.7% 9.7% Dividends 7.0% 6.0% 5.0% Add to R.E 6.6% 5.7% 4.7%

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Inc. Stmt. CDA Co. Ind. Std. Variance

Sales 100.0% 100.0% 100.0% COGS 54.2% 40.1% U 14.1% Gross Profit 45.8% 59.9% U 14.1% Op. Exp. 21.2% 33.0% F 11.8% Dep. 5.2% 7.3% F 2.1% EBIT 19.4% 19.6% U 0.2% Int. Exp. 1.8% 1.9% F 0.1% EBT 17.6% 17.7% U 0.1% Taxes 4.0% 6.0% F 2.0% Net Income 13.6% 11.7% F 1.9% Dividends 7.0% 3.0% 4.0% Add to R.E 6.6% 8.7% 4.7%

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The First Year Macro View – Asset Management

Balance Sheet – Values at a specific date – Month-end or Year-end •Assets, Liabilities, & Equity • Inventory Management - Turnover •Accounts Receivable Management •ROI – Return on Investment •Accounts Payable Management

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The First Year

Macro View – Sources & Uses of Cash

• Cash Flow Statement

Cash From Operations – regular business activities

Cash Used For/From Investing Activities – buying and selling LT assets

Cash Used For/From Financing Activities – selling stock, issuing and retiring debt

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The First Year Industry Financial Information

Sources – all are pay sites •BizMiner www.BizMiner.com

•RMA ebiz.rmahq.org

•S & P Net Advantage Netadvantage.standardandpoors.com

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The First Year Micro View – Pricing & Mark-Up

• Pricing Strategy – What’s in consumer’s mind? High – Assumption of High Quality - Gucci Low – Value Oriented Business – Price Busters Match Market - Industry Go-Along – Sears

• Product Life-Cycle Pricing Environment Start-Up Stage – Few Competitors Growth Stage – Rising Sales & Expenses Mature Stage – Battle for Market Share Declining Stage – Caretaker Business

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The First Year

Micro View – Pricing & Mark-Up • Margins – Overall Gross Margin of the firm is

determined by your retail markup strategy

• Overall Retail Markup %=Revenue – COGS (Same as Gross Margin) Revenue

• Retail Price = _____Cost______ (1.00 – ORM-Up %)

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Pricing Exercise Income Statement

Sales 1,450 COGS 875 Gross Profit 575 Operating Exp. 45 Depreciation 200 EBIT(Op.Inc.) 330 Interest Exp. 60 EBT 270 Taxes (40%) 108 Net Income 162 Dividends 100 Add to R.E 62

• Overall Markup or

Gross Margin = Revenue–COGS (GP) Revenue

• Retail Price = Assume a cost of $10 a

book

Cost_______ (1-Gross Margin %)

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The First Year Pricing Exercise • Gross Margin (Actual or Target) = Revenue – COGS = $1,450 - $875 = 40.0% Revenue $1,450

• Retail Price = Assume a $10 cost

Cost_______ = ___$10___ = $16.67 (1-Gross Margin %) (1.00 -.40)

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The First Year Product/Service Review

•Know Your 20/80 Rule Common that 20% of your products or

services generates 80% of your sales

•Don’t Compete With Yourself Have a full “product mix” But don’t duplicate your product line unless

there is competitive reasons.

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The First Year

Planning Guidelines •Marketing – Advertising and Promotions

Should be in Proportion to Expected Sales % of Sales – As a % of expected sales Targeted Sales Levels – Promotion

campaign sized to meet sales goals Position in terms of Competition –

Match or beat competition

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The First Year

Planning Guidelines

•Financial Growth - Easier if you’re a proven entity. Line Of Credit SBA Expansion Loan Factoring Bank Loans Bookkeeper to Accountant to CPA

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The First Year

Planning Guidelines •Internet Consideration – World Market Does Your Product/Service fit to sell on

the Internet? Is there a market? Web Page Build-Out & Support Social Media Presence – Who & How Internal Processing of web orders or

Out-Sourcing

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The First Year

Human Resources

• Hiring – Legal, Relations & Referrals Temporary Hiring Firms, Payroll Processing

• Directing – Clear, Firm, Consistent & Fair Training for Employees on Legal/Appropriate Behavior

• Motivating – Cost & People Effective Get creative; What motivates employees, not you

• Termination – Document, Firm & Consistent Keep “Memo to the File” notes & document

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Growth & Improvement

“In business, the competition will bite you

if you keep running, if you stand still, they will

swallow you.” Victoria Kiam

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Perform A Constant Operations Review & Develop Improvement Ideas •Prices – Below, At, or Above Market •Variable Costs – Areas for Reduction •Fixed Costs – Downsizing if feasible •Promotions – Stay in the customer’s face •Competition – Stay on top of Changes •Efficiency – Improve processes & systems

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3 P’s Business Review (The Profit) Perform A Periodic Review & Correct •People – Enough?, the right ones? •Process – Marketing, Management,

Operations, Financial systems review •Product/Service – Still meets target

market needs? Change or new elements required?

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Growth & Improvement Five Ways to Improve Net Profit 1. Decrease Variable Costs – Ex: Find a lower cost

supplier for your products & supplies 2. Reduce Fixed Costs – Ex: Move to a smaller

space to reduce rent 3. Increase Prices – Ex: Raise prices where you can 4. Advertising & Promotions – “Invest” in

advertising, build a brand name. 5. Increase Efficiency – Invest in equipment,

improve processes.

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Fixed Costs

Five Ways To Improve Profit 1. Decrease Variable Costs

2. Reduce Fixed Costs

3. Increase Prices

4. Advertising/Promotion

5. Increase Efficiency

$

Sales Volume


Improvement Tactics •Develop Your Uniqueness Owner’s Personality makes a big difference

•Keep Yourself Motivated Join Small Business Org., Pet, Charity

•Stress Relationship Selling Small Businesses Best Weapon

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Growth & Improvement Improvement Tactics Up Selling, Cross Selling

•Up Selling – Upgrading to a higher value and higher profit product. Add-on options, Supersize meal

•Cross Selling – Selling a related product with the initial purchase, good customer service Socks w/ Shoes; Fries w/ Burger

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Growth & Improvement Improvement Tactics • The Right Product/Service Mix and Amount Too Much Stock – No clear view of who

you are, Image problem Cluttered Store, Too many service options

Too little Stock – Lost sales to competition, Lose Repeat Business Narrow product/service line, Missing

Items, Too few selection choices.

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Constant Reminder To Yourself • Stay Motivated – Do what ever it takes to

keep yourself interested & focused • Always Look for Ways to Expand Revenue

– New products, new lines of business. • Always look for ways to Cut Cost – Review

of cost structure, eliminate products/services that lose money.

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Your Primary Role/Focus Should Be Changing •Shift View from COO to CEO COO - "how best to get it done" CEO - "what is best to do”

•Working ON your business and not just IN your business

•Set aside time to wear CEO hat

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Exit Strategy

“There’s no reason to be the richest man in the

cemetery. You can’t do any business from there.”

Colonel Sanders

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Exit Strategy Plan For Termination •Age •Death – Ownership passing issues •Health Issues •Family Issues

•Market Conditions Changes

•Attitude/Lifestyle Changes

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Exit Strategy Exit Tactics & Planning

• Emotional Factors • Business Brokers • Family Member Takeover • Financing Part of The Purchase Price • New Owner Training • Space, Equipment & Other Leases

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Exit Strategy Selling The Business – What’s It Worth

•5 X Annual Net Income •3 X Annual Revenues •Rate of Return – 15%, 20%, 25%, ? •Expect to Provide Some Level of Seller

Financing Business or Other Collateral Strong Sales Contract Covering Default

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Exit Strategy

Getting On With Your Life – But don’t Rush It •Working For Some One Else •Take Some Time Off •Buying Another Business •Like a Divorce - Don’t Rush major

Decisions - Give It Time

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Workshop Conclusion

•Questions?

•Discussion

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University of Hawaii’s Pacific Business Center

& the Honolulu Minority Business Development

Center

• Email: [email protected]

• Phone: (808) 351-2930

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mailto:[email protected]

presented by the university of hawaii’s pacific business ... center & honolulu minority...

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