GOT A BUSINESS IDEA??
Being a Successful Business Manager-Entrepreneur – It Ain’t Easy! A Guide for Preliminary Decision Making for People Considering Starting a New Business or Making a Major Change in an Existing Business
By
James R. Nelson Professor of Agricultural Economics University of Idaho Moscow, Idaho November 2001
Revised – November 2003
Department of Agricultural Economics and Rural Sociology A.E. Research Series No. 01-11
College of Agricultural and Life Science University of Idaho Moscow, ID 83844-2334
GOT A BUSINESS IDEA??
Being a Successful Business Manager-Entrepreneur – It Ain’t Easy! A Guide for Preliminary Decision Making for People Considering Starting a New Business or Making a Major Change in an Existing Business
By James R. Nelson When a community embarks on an economic development program through business Creation, Attraction, Retention, and Expansion (CARE), the community’s citizens must evaluate their community and plan, initiate and carry out needed community changes to help the program succeed. Success can be further facilitated if assistance can be made available to managerentrepreneurs who are considering starting a new businesses in the community (creation), moving their business operations from another community or opening a local operation to complement operations elsewhere (attraction), or strengthening and expanding existing businesses (retention and expansion). Such manager-entrepreneurs may need help evaluating the feasibilities of their ideas. It is important to both communities and entrepreneur-managers that feasibility analyses be as realistic as possible. Failed businesses do not benefit communities, and they certainly do not benefit their owners and employees. The objective of this guidebook is to help interested individuals evaluate whether it is worth it to them to embark on the never ending course toward development of the skills and capabilities needed by successful manager-entrepreneurs, and utilization of these skills and capabilities in a business or businesses. As indicated in the title to this guidebook, “It ain’t easy!” In addition, it’s not for everybody. If, after you have worked through this guidebook, you feel the need and desire (passion?) to focus substantial effort toward developing your skills and capabilities as a manager-entrepreneur, you will be directed to other resources, of which there are many. What in the World is a Manager-Entrepreneur? An entrepreneur is a person who sees opportunity, sizes up its value and finds the resources to make the most of it. Entrepreneurs are innovators. Entrepreneurs are usually thought of as people who start businesses. However, entrepreneurs can exist in other environments. Entrepreneurs can be found in large, complex, bureaucratic business firms and in all other types of organizations (government, academic, non-profit). In such organizations, entrepreneurs often make many other employees uncomfortable, because they are looking for new ways to do things and new things to do; and they are pushing their organization to move to follow up on new ideas. Because they are much less constrained by organizational bureaucracies, entrepreneurs are probably most commonly found (or at least most easily identifiable) in small businesses. All owner-operators of small businesses, however, are not entrepreneurs. Many people who run small businesses took them over from someone else (purchased or inherited them). Such individuals may be very content to manage their business with little significant innovation or change. The lives of such business managers, and the lives of their families, are likely to be less
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stressful than the lives of entrepreneurs and their families. However, entrepreneurship will become important in such a business when markets change and the business declines. Then new ideas will be necessary to keep the business viable. Management is the process of identifying and implementing strategies to make a business productive and profitable. Managers direct the use of a business’ physical, financial and human resources to accomplish the goals toward which a business is directed. Management skills include: Technical skills related to producing the products (goods and services)1 of a business. Technical skills related to marketing the products of a business. Organizational and human resource skills to help the people working in a business accomplish as much as they can related to the production and marketing of the products of the business. Financial skills to make the financial resources of the business go as far as possible relative to producing and marketing the products of the business.
Both managers and entrepreneurs need skills such as: Initiative. Abilities to work well with and influence others. Ability to take charge of things. Perseverance. Abilities to organize and plan.
In addition, good managers need some special skills such as: Abilities to break down complicated tasks into simple tasks and to organize simple tasks to accomplish complicated objectives. Abilities to analyze problems with an eye toward finding the most complete and efficient solutions.
While successful entrepreneurs need to have such characteristics as: Passion for what they do. Creativity and ability to innovate. Willingness and capability for taking risks.
Conveniently, the special characteristics of good managers do not conflict with the special characteristics of successful entrepreneurs. In fact, they complement each other. A good entrepreneur will be a better entrepreneur if he or she also has good management skills. And a good manager will be a better manager if he or she has good entrepreneurial skills. In today’s dynamic, competitive economic world, business decision makers must have both good management skills and good entrepreneurial skills. In different specific situations, one type of
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The term “products” is used throughout this paper to mean goods and services produced by businesses.
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skill may be more critical than the other. However, over the long term, for most businesses, both types of skills are needed in roughly equal proportions. So the people who successfully start-up, manage, grow, and initiate and carry out change in today’s businesses tend not to be just managers or just entrepreneurs, but rather versatile manager-entrepreneurs. Full development of the skills of a good manager-entrepreneur is a never ending process. Substantial development of such skills involves a long and steep learning curve. However, suchsubstantial development of skills is a practical requirement for success in: Creating a business. Expanding a business. Carrying out the substantial changes in a business that are often necessary to insure its survival (relocation, new products, new markets,…).
Diagnosing Entrepreneurship – Personality Traits of ManagerEntrepreneurs
All people that society accepts as normal have pretty much the same personality traits. However, who we are as individuals is often defined by how those “normal” personality traits are weighted within ourselves. We all have some creativity. We all have some things about which we are willing to be assertive. We all have some things that we like to do so much that we have no problem sticking to tasks, as long as they are within the set of things that we really like to do. Good manager-entrepreneurs can be defined by some of the normal human personality traits that are weighted most heavily in their individual personalities. Manager-entrepreneurs tend to be self-starters. They have lots of initiative, and don’t mind jumping into projects with minimal guidance. In fact, when manager-entrepreneurs are told how to do something, they may be challenged to try to find a way to do it different and better. They are energized by working with people. Consequently, they are generally good at organizing people to get jobs done, and they are often good leaders. Manager-entrepreneurs don’t mind taking responsibility. This probably goes along with their initiative. They are willing to decide how something should be done, then move forward. They are good decision makers (or they are at least comfortable making decisions). They don’t mind being assertive, especially when they think they know how to overcome obstacles. Manager-entrepreneurs tend to be willing to take risks (at least calculated risks). This characteristic matches up with initiative, assertiveness, and willingness to take responsibility. Each of these often involves risk. A worksheet that you can use to evaluate your personality traits as they relate to being a manager-entrepreneur is shown in Worksheet 1. This worksheet is used in an entrepreneurship course that is taught at Oklahoma State University (Stanforth and Muske). Individuals who have never created a business from scratch or have never expanded a business or made other major changes in a business to insure its survival will get some sense from the worksheet for how well their personalities equip them for such activities.
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Personal and Family Considerations for Manager-Entrepreneurs
Small entrepreneurial businesses usually involve families, either directly or indirectly. Family members commonly work together in such businesses. Alternatively, some family members may work in the business while others work elsewhere to make money to support the business or to support the family while the business develops toward profitability. In addition, small businesses, especially those that are new or changing, take lots of time and attention. So people involved in such businesses may not have as much time for traditional family activities as do their non-entrepreneurial neighbors. Families considering entering into small entrepreneurial businesses or making major changes in existing businesses should consider how their family lives will be affected, and whether they are prepared to deal with these effects. Worksheet 2 is used in a comprehensive business planning course for entrepreneurs (Wold, et al.). This worksheet can be a useful tool to get family members’ concerns about the implications of starting or making major changes in a small business entrepreneurship “on the table” for discussion before business decisions affecting all family members are made. To use this worksheet, each family member should fill out a separate copy indicating their personal feelings (there are no wrong answers). Then results can be summarized and discussed. Remember, there are no wrong answers.
Focus! Focus! Focus!
By their nature, entrepreneurs are creative people. They have lots of ideas -- usually more than they can carry out. So it can be very important for entrepreneurs to focus on just one, or at most, a very few good ideas. If you are considering going into a new business, or making major changes (such as adding product lines) in an existing one, and you are trying to decide on what enterprise or enterprises that business should be based, focus on what you know you can produce and what you are pretty sure you can market. It’s even better to focus on what you know you can market, but that is difficult to know until you know costs of production, thus minimum breakeven prices of products. A procedure to help you focus your ideas should include the following steps: Make a list of the products you are considering for your business. Put check marks by those products you know you can produce (you have tried it, or you have seen others do it, and you are sure you can do it also). Put a second check mark by those products you are pretty sure you can market (you have tried it, or you have seen others do it, and you are sure you can do it also). o If you don’t have two checks by any of the products you have listed, you need to do further research on those products before you even consider adopting them as part of your business product line. o If you have checked products as “producible,” but not as “marketable,” go look for examples of how these products are marketed. o If you can find no marketing examples of products you know you can produce, you may want to use information in the Market Before You Produce section of this paper, and from other sources (maybe a U. S. Small Business Administration
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Business Information Center near you (see References) to help you with market analysis of producible alternatives listed. If you have checked both “producible” and “marketable” for some of the product alternatives on your list, select one (or very few) of these with which you are most comfortable, and proceed through the steps outlined in the rest of this paper.
Worksheet 3 is a worksheet to help you use the procedure specified above to focus on one (or a few) best ideas.
Market Before You Produce
As you worked through the section above (Focus! Focus! Focus!), you considered a number of marketing issues. That is very appropriate, because marketing can be defined as everything you do to ready your goods and services for the marketplace. The reason a business exists is to sell goods and services to customers, or in other words, to meet the needs of customers. So good marketing is really about customers and their needs, not about products. Products are planned and produced in a business only to meet the needs of customers. As you think about how to market your products, think about customer needs first, then think about products, competition, place (Where are the customers? Where is the competition? Where are your products -- goods and services?), pricing, packaging, and promotions. As you consider how to market your goods and services, consider each of the marketing issues listed above both separately and as each issue relates to each one of the other issues. Now, on Worksheet 4, try to write a statement specifying the customer needs you plan to satisfy with each of the goods and services you plan to market. Then, for each good and service you plan to market, answer each question specified below. Do not hesitate to write a few paragraphs if you think it is necessary to do so to finish a statement or answer a question. In order to best meet customer needs, my products must have what specific characteristics? In order to best meet customer needs, my products must be available where? In order to best meet customer needs, I must do a better job than my competition at what? How should I price my product in order to best meet customer needs? How should I package my product in order to best meet customer needs? How should I promote my product in order to best meet customer needs?
Positioning your Firm The success or failure of your business idea will be dependent on how your firm is perceived in the minds of customers relative to their needs and relative to competition. This general perception of customers about your firm is referred to as your position in the marketplace. One position you probably do not want for your firm is “stuck in a commodity market.” In a commodity market, your products cannot be differentiated from the products of your competitors. In a commodity market, firms are “price takers,” the only way to compete is to 5
reduce prices, small scale firms are disadvantaged because their costs per unit of output are probably higher than for larger scale firms, and there is no room for your firm to “shine.” You want a special niche for your firm. You want to position your firm so that it is differentiated from the positions of others. You want to separate yourself from the competition in the minds of customers. You want to insulate yourself from price competition. To do these things you must make your products different in some special way from similar products sold by your competitors. Some things that might differentiate your products are special quality, variety, additional processing, special service, special information available with your products, convenience, and location. Such differentiating aspects of products are often called value added, because they can make products more valuable to customers than similar but less special products of competitors. On Worksheet 5, write a statement of how you want you firm to be positioned in the marketplace. Use your thoughts about customer needs and how they relate to product characteristics, competition, place, pricing, packaging, and promotions from Worksheet 4. The statement of position should indicate what niche your firm will fill in the market. Pricing Your Products Finally, think about the price for which you think you can sell each of the products you are considering, and the average number of units of each product you think you can sell per year for each of the first few years of your plan. Worksheet 6 is a worksheet to help you address the pricing questions specified above, and to help you use that pricing information to estimate your annual cash revenues for each of the first few years of your plan.
Build Good Estimates of Costs of Production and Compare Them with Expected Revenues from Doing Business
It is critical that you have the best information you can put together about costs (including startup costs) of any products that you are considering producing and marketing in your business. It is equally critical that you have the best information you can compile about the costs associated with any changes you are considering for an existing business (relocation, expansion, changing product lines, …), including “front-end” costs that must be invested before production can begin. The steps in the process of estimating costs are: Describe, with as much detail as possible, all of the steps that will be necessary to get each product of the new or changed business you are considering, to the market. Estimate the costs of the capital items (buildings, equipment, …) that must be purchased before beginning to do business. Estimate annual costs of doing business for each of the first few years of your plan, including: o Annual operating costs -- costs of all variable inputs needed to produce the number of units of each product you plan to sell each year.
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o Annual principal and interest on capital items (buildings, equipment, …), amortized over the lives of the items. This a real cost of doing business, even though all capital items may not be purchased with borrowed funds. Paid for items (as opposed to financed items) tie up cash, which could be invested elsewhere (with at least the return of bank certificates of deposit) if it were available. Economists call this opportunity cost. Now compare expected annual revenues with expected annual costs. Are expected annual revenues enough greater than expected annual costs for each of the first few years of your plans to make you still think that your idea is a good one? If so, do your estimates show that there will be enough cash left over to meet your personal needs? If it will not be necessary for you to borrow money to pay for capital items used in your business, your actual annual cash costs may be less than calculated above, because you will not be making principal and interest payments on these capital items. However, if the success of your business idea depends on not having to make such principal and interest payments, you should be sure to do a detailed financial analysis as a part of a full business plan. Otherwise, you may find that you cannot afford to replace the capital items when they are worn out or become obsolete. You can use Worksheet 7 to help you develop cost information needed to complete a practical preliminary feasibility study of a potential new business or a potential change in an existing business, and to compare estimated costs and cash needs with estimated revenues.
So, Do You Still Think Your Idea is a Good One?
After thinking through and working through all of the issues discussed above, do you still believe your business idea might work? If you can answer this question in the affirmative, it’s now time to get serious help to do some in-depth analysis and planning. You need to develop a comprehensive business plan. This effort, if you do it right, will take 50 or more hours, and will work best if done over a 10-15 week period. This may be a lot of work, but you are thinking about risking your life savings, your kids’ college educations and maybe your marriage. Developing such a comprehensive business plan is critically important to the success of your business for two reasons: 1. It will help you thoroughly analyze every aspect of your business idea. You will know as much about what you are thinking about getting into as you can, without actually having run the business for some time. 2. It will provide you with the necessary documentation to sell your business idea to bankers, and maybe to venture capitalists and other sources of special assistance and funding (government agencies, foundations). Your business plan, when completed, will probably include sections on the following: business concept, mission, and goals background information
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organizational matters marketing plan financial plan conclusions
Help for small businesses, including special courses for manager-entrepreneurs working to write business plans, can be obtained from many sources including Cooperative Extension, other entities associated with colleges and universities, the U.S. Small Business Administration (www.sba.gov), the state agency in your state that has primary responsibility for economic development, regional Small Business Development Centers (search the SBA website), local chambers of commerce and economic development districts, and other economic development associations and organizations. Excellent training courses, generally in cooperation with the types of entities specified above, are available from the NXLEVEL™ Training Network (www.nxlevel.org) and through the Southern Rural Development Center. You can write your business plan on your own if you wish to do so. If this is your intent, you should look for information from the organizations specified above. You may be especially interested in information from a Business Information Center. These are libraries of reference information, operated by an arm of the U. S. Small Business Administration for people interested in small businesses. These centers make available all types of references on all types of topics, from video tapes and computer compact discs to leaflets and fact sheets to multi-volume text books on a multitude of general and specific topics related to small businesses. To find a Business Information Center near you, search the Small Business Administration web site (www.sba.gov), for “business information centers.”
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Worksheet 1.
Personality Traits for Entrepreneurs Rating Worksheet* (Make extra copies of this worksheet, as needed.)
Test yourself by checking the following questions. There are no right or wrong answers. Circle the answer that indicates what you feel or comes closest to it. Be honest with yourself.
1.
Initiative/Self starter a) I do things on my own. No one has to tell me to get going. b) If someone gets started, I keep going all right. c) Easy does it. I don’t put myself out until I have to. Attitude Toward Others a) I like people. I get along with just about anyone. b) I have plenty of friends; I don’t need anyone else. c) Most people irritate me. Leadership a) I can get people to go along with me if I start something. b) I can give orders if someone tells me what we should do. c) I let someone else get things moving; then I go along if I feel like it. Responsibility a) I like to take charge of things and see them through. b) I’ll take over if I have to, but I’d rather let someone else be responsible. c) There’s always some eager beaver around wanting to show how smart he or she is. I say let them. Organizer a) I like to have a plan before I start. I’m usually the one to get things lined up when the group wants to do something. b) I do all right unless things get too confusing; then I quit. c) Just when I’m all set, something comes along and presents too many problems, so I just take things as they come.
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Industrious a) I can keep going as long as I need to. I don’t mind working hard for something I want. b) I’ll work hard for awhile, but when I’ve had enough, that’s it. c) I can’t see that hard work gets me anywhere. Decision Maker a) I can make up my mind in a hurry if I have to, and it usually turns out okay, too. b) I can, if I have plenty of time, make good decisions. If I have to make up my mind fast, I think later I should have decided the other way. c) I don’t like to be the one who has to decide things. Sincerity a) People can trust what I say. I don’t say things I don’t mean. b) I try to be on the level most of the time, but sometimes I just say what’s easiest. c) Why bother if the other fellow doesn’t know the difference. Stick to it/Perseverance a) If I make up my mind to do something, I don’t let anything stop me. b) I usually finish what I start if it goes well. c) If it doesn’t go right, right away, I quit. Why beat my brains out?
2.
7.
3.
8.
4.
9.
5.
10. Physical Energy a) I never run down. b) I have enough energy for most things I want to do. c) I run out of energy sooner than most of my friends seem to.
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Worksheet 1. (Cont.)
11. Independence a) Independence is important to me. b) At times I like not having to make decisions. c) I don’t want to be in charge. 12. Assertiveness a) I am confident that I can meet and overcome obstacles. b) Usually obstacles do not block me from achieving what I want. c) I often run into things that block me from achieving my goal. 13. Creativity a) I enjoy trying new ideas and experimenting to improve the situation. b) Innovation is helpful at times but being too inventive often wastes time. c) There are good reasons to stick to current ways of doing things. 14. Realistic a) I generally find myself able to complete my plans. b) My plans get done some of the time. c) My plans are rarely accomplished. There is never enough time or resources.
15. Entrepreneurial Spirit a) I am willing to take calculated risks with my property when I have a chance to gain by doing so. b) I take risks when the odds are highly in my favor. c) If I have any chances of losing, I won’t take a chance. 16. Self Awareness a) I understand my potential and myself. b) I am hesitant about what I can do, but I try to push myself. c) I don’t try anything. 17. Ability to Work with Others a) I enjoy working with other people. I find I can be a team leader. b) I sometimes find it hard to work with others. c) I do my best work alone.
Now count the number of times you circled either “a,” “b,” or c.” Record that number in the spaces provided below. Answer “a” __________ Answer “b” __________ Answer “c” __________ If you circled “a” twelve or more times, you probably have lots of entrepreneurial skills. If you checked “c” nine or more times, entrepreneurship may not be your strong suit. *This worksheet was adapted from a worksheet in Standforth, Nancy and Glenn Muske. An Exploration of Entrepreneurship: Turning Your Passion Into a Career, Oklahoma State University, Stillwater.
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Worksheet 2.
Personal and Family Considerations Worksheet.* (Make extra copies of this worksheet, as needed.)
Personal Considerations I have no problem working 10-12 hour days, six days a week, including holidays. I know I can work productively for long hours and meet deadlines, no matter what it takes. Foremost among my personal goals is the freedom to pursue my own ideas. I am prepared to risk my savings in a good business opportunity. I can go without a vacation for a year. It is important to me to create my own space in which to work. At the expense of professional stability and perhaps higher income, it is important to me to be able to determine when and where I work. When I think about the future, I envision positive, new growth opportunities. I am prepared to sacrifice money and/or time to commit to community, religious or charity obligations during the first five years of my business. If I needed to, I could keep a full-time job and run our new business on the side. I too often sacrifice things I like to do for the sake of the business. My current business or job doesn’t hold my interest or use my skills very well. I wouldn’t mind if our new enterprise took a few calculated risks to make more money. I would be willing to borrow money to finance the new agricultural enterprise. Family Considerations My family obligations rank number one on my list of priorities. My family will tolerate my working 60 hours or more per week. My family is prepared to risk the family savings in a good business opportunity. I have the enthusiastic support of my family to pursue an entrepreneurial venture Our family spends adequate time together. Our family usually has enough spending money. We don’t mind talking business when the whole family is together. Family relations do not get strained when there isn’t enough money. A new business venture is not too much for the family to handle now. Future Considerations It is important to me that the business provides more income in the future. Being my own boss is more important to me than making lots of money. The family should always come before the business. It is very important for the children to work in our business. I would like to have more responsibility in our own business in the future. I am willing to work harder than I do right now. Strongly Agree Agree Disagree Strongly Disagree
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.
Strongly Agree
Agree
Disagree
Strongly Disagree
15. 16. 17. 18. 19. 20. 21. 22. 23.
Strongly Agree
Agree
Disagree
Strongly Disagree
24. 25. 26. 27. 28. 29.
To use this worksheet, each family member should fill out a separate copy indicating their personal feelings (there are no wrong answers). Then results can be summarized and they can be discussed by the family. *This worksheet was adapted from a similar worksheet found in Wold, Cameron, et al. “tilling the soil of opportunity…” NXLEVEL™ GUIDE FOR AGRICULTURAL ENTREPRENEURS, University of Nebraska, www.nxlevel.org.
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Worksheet 3.
Focusing on One (or a Very Few) Good Business Ideas (Make extra copies of this worksheet, as needed.)
List products you are considering.
Check () products you know you can produce.
Check () products you are pretty sure you can market.
Focus on products that have checks in both “can produce” and “can market.”
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Worksheet 4. Meeting Customer Needs
(Make extra copies of this sheet as needed, and answer the questions for each good and service you are considering providing through your business.)
1. Specify the customer needs you plan to satisfy with __________________________. (product)
2. In order to best meet customer needs, my product (__________________________) (product) must have what specific characteristics?
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Worksheet 4. (Cont.)
(Make extra copies of this sheet as needed, and answer the questions for each good and service you are considering providing through your business.)
3. In order to best meet customer needs, my product (________________________) (product) must be available where?
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Worksheet 4. (Cont.)
(Make extra copies of this sheet as needed, and answer the questions for each good and service you are considering providing through your business.)
4. In order to best meet customer needs with my product (____________________), (product) I must do a better job than my competition at what?
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Worksheet 4. (Cont.)
(Make extra copies of this sheet as needed, and answer the questions for each good and service you are considering providing through your business.)
5. How should I price my product (________________________) in order to best meet (product) customer needs ?
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Worksheet 4. (Cont.) (Make extra copies of this sheet as needed, and answer the questions for each good and service you are considering providing through your business.)
6. How should I package my product (________________________) in order to best (product) meet customer needs?
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Worksheet 4. (Cont.)
(Make extra copies of this sheet as needed, and answer the questions for each good and service you are considering providing through your business.)
7. How should I promote my product (__________________________) in order to best (product) meet customer needs?
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Worksheet 5. Positioning Your Firm
(Make extra copies of this sheet as needed) Write a statement of how you want you firm to be positioned in the marketplace. Refer to the section on “Positioning Your Firm” in the guide, and use your thoughts about customer needs and how they relate to product characteristics, competition, place, pricing, packaging, and promotions from Worksheet 4. The statement of position should indicate what niche your firm will fill in the market.
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Worksheet 6. Estimating Revenues
(Make extra copies of this sheet as needed, and answer the questions for each good and service you are considering providing through your business.)
1. In the first year of doing business, I plan to sell ____________ units of my product (__________________________) at a price of $_________ per unit, so my (product) year 1 estimated annual cash revenues for this product will be (planned units sold TIMES planned price) = $_______________________.
2. In the second year of doing business, I plan to sell ____________ units of my product (__________________________) at a price of $_________ per unit, so my (product) year 2 estimated annual cash revenues for this product will be (planned units sold TIMES planned price) = $_______________________.
3. In the third year of doing business, I plan to sell ____________ units of my product (__________________________) at a price of $_________ per unit, so my (product) year 3 estimated annual cash revenues for this product will be (planned units sold TIMES planned price) = $_______________________.
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Worksheet 6. (Cont.)
(Make extra copies of this sheet as needed.)
4. Sum estimated annual cash revenues for all products in each year, to calculate estimated total annual cash revenues for each year.
Estimated year 1 total annual cash revenues from all products = $_______________
Estimated year 2 total annual cash revenues from all products = $_______________
Estimated year 3 total annual cash revenues from all products = $_______________
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Worksheet 7. Conducting a Practical Preliminary Feasibility Study of a Potential New Business or a Potential Change in an Existing Business
(Make extra copies of this sheet as needed.) 1. Describe, with as much detail as possible, all of the steps that will be necessary to get each product (good or service) of the new or changed business you are considering, to the market.
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Worksheet 7. (cont.)
(Make extra copies of this sheet as needed.)
2. Use a financial calculator or amortization tables to estimate annual amortized costs of capital items. [Estimate the initial cost, pay-back period, and annual cost (sum of annual principal and interest costs) for each capital item (buildings, equipment, vehicles) that will be required for you to do business. Then sum the annual costs to calculate estimated total annual amortized cost of capital items.] Capital Item Initial Cost Expected Pay-Back Period Annual Amortized Cost
Annual Amortized Cost of Capital Items
Total
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Worksheet 7. (cont.)
(Make extra copies of this sheet as needed.) 3. Estimate annual costs of doing business. [Estimate variable costs for the first few years of operation. Then add this to Total Annual Amortized Cost of Capital Items (from table above)].
Cost ($’s) YEAR 1 Labor Utilities Equipment. maintenance & repair Fuel Vehicle maintenance & repair Parts for assembly Office supplies . TOTAL VARIABLE COSTS – YEAR 1 TOTAL ANNUAL AMORTIZED COST OF CAPITAL ITEMS TOTAL CAPITAL AND OPERATING COSTS – YEAR 1
YEAR 2 Labor Utilities Equipment. maintenance & repair Fuel Vehicle maintenance & repair Parts for assembly Office supplies . TOTAL VARIABLE COSTS – YEAR 2 TOTAL ANNUAL AMORTIZED COST OF CAPITAL ITEMS TOTAL CAPITAL AND OPERATING COSTS – YEAR 2
YEAR 3 Labor Utilities Equipment. maintenance & repair Fuel Vehicle maintenance & repair Parts for assembly Office supplies . TOTAL VARIABLE COSTS – YEAR 3 TOTAL ANNUAL AMORTIZED COST OF CAPITAL ITEMS TOTAL CAPITAL AND OPERATING COSTS – YEAR 3
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Worksheet 7. (cont.)
(Make extra copies of this sheet as needed) 4. Now subtract total planned capital and operating costs for each of the first few years of your plans (above) from estimated total annual cash revenues from all products for that year (Worksheet 4, Step 9) to get total expected monthly revenues. Year 1 – $______________________. MINUS $_______________ = $______________ (estimated total annual cash (total planned capital (total expected revenues from all products) and operating costs) monthly revenues) Year 2 – $______________________. MINUS $_______________ = $______________ (estimated total annual cash (total planned capital (total expected revenues from all products) and operating costs) monthly revenues) Year 3 – $______________________. MINUS $_______________ = $______________ (estimated total annual cash (total planned capital (total expected revenues from all products) and operating costs) monthly revenues))
5. Are expected monthly revenues enough greater than expected monthly costs to make you still think that your idea is a good one? If you can answer yes to this question, go back to the section of this paper entitled, “So, Do You Still Think Your Idea Is A Good One?” and learn about developing a business plan.
If it will not be necessary for you to borrow money to pay for capital items used in your business, your actual annual cash costs may be less than calculated above, because you will not be making principal and interest payments on these capital items. However, if the success of your business idea depends on not having to make such principal and interest payments, you should be sure to do a detailed financial analysis as a part of a full business plan. Otherwise, you may find that you cannot afford to replace the capital items when they are worn out or become obsolete.
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References
Makus, L.D., et al. Planning Your Business. Idaho Cooperative Extension System CIS 978, College of Agriculture, University of Idaho, Moscow. Rural Development Center. Cashing in on Business Opportunities. SRDC #210, Mississippi State University, Starkville. Standforth, Nancy and Glenn Muske. An Exploration of Entrepreneurship: Turning Your Passion Into a Career. Oklahoma State University, Stillwater. Wold, Cameron, et al. “ tilling the soil of opportunity…,” NXLEVEL™ GUIDE FOR AGRICULTURAL ENTREPRENEURS. USWEST™ FOUNDATION, University of Nebraska, and University of Colorado at Denver. www.nxlevel.org www.sba.gov
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