SMALL BUSINESS MANAGEMENT

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SMALL BUSINESS MANAGEMENT

• Chapter 3
• Evaluation of a Business Opportunity

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CHAPTER OBJECTIVES

• 1. To review the nonquantitative aspects of
  evaluating business opportunities.
• 2. To introduce the methods by which an
  entrepreneur can enter a market with a product or
  service.
• 3. To discuss the types of information available
  to assist in the quantitative analysis to select
  a small business and illustrate how that
  information can be used.
• 4. To discuss ways that the entrepreneur can
  develop a strategic competitive advantage.
• 5. To provide a systematic way to quantitatively
  assess an industry and evaluate the financial
  feasibility of a specific small business
  opportunity.

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Class notes
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Personality Characteristics

• Achievement Orientation
• Risk Taking
• Independence, Self Confidence, Self Assurance
• Innovativeness
• Strong Verbal and Numerical Skills

• Problem Solving Abilities
• Strategic Planning
• Perseverance
• Selling Skills

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Non-Quantitative Assessment of Business
Opportunities

• Goals
• Financial and occupational status
• Content of Work
• Lifestyle
• Capabilities
• Good health
• management fundamentals
• financial base
• Experience
• Fou Fou --How are above factors illustrated in
  his case

Fou Fou
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Breaking Into The Market

• Three Ways
• offer a totally new product
• bright lights
• offer an existing product to a different market
• mukluks
• offer a product or service similar to those
  existing in the same market
• Oil change specialists
• How did they break into the market ?
• Java nook, barman, Fou Fou, Bread man
• American Clothing, bright lights

Mukluks
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Developing a Strategic Competitive Advantage

• the right industry
• Owners attention to daily operations
• Contact with employees
• Demand is small or local
• Require flexibility
• More labor less capital
• Govt. encouragement
• the right business
• Growth areas ----------------------- gtgtgtgt
• the right aspect of the business
• Flexibility, innovation, location , price etc

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the right business

• Growth areas
• Organic foods
• Consulting
• Wireless products
• Products that cut energy us pollution
• Anti aging products
• Computer interface products
• Home products for seniors
• Technology training health
• International marketing consulting
• Products that promote

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Collection of Information

• Sources of Information
• Secondary data
• Appendix 3A
• Agencies such as BDC
• Govt appendix 3B
• Universities
• Professionals
• incubators
• Primary data
• observations
• surveys
• mail surveys, telephone surveys, personal
  interviews, focus groups
• test marketing

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Design a simple mail questionnaire to assess
demand for a carpet cleaning business in your
city.

• 1. How often do you normally have your carpets
  professionally cleaned? If your answer is never,
  end of questionnaire. If answer is yes, fill out
  the rest of the questionnaire.
• Never _____
• Less than once a year _____
• Once a year _____
• Twice a year_____
• Three times a year _____
• More than three times a year_____
• 2. The last time you had your carpets cleaned,
  what was the approximate cost?
• 3. Are you going to have your carpets cleaned
  again in the near future?
• Yes _____
• No _____
• Demographic Information

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• Once the Qualitative analysis is done ------?
  do quantitative analysis
• Is it financially feasible?????
• Beermits case how to determine feasibility

Beer mits
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Quantitative Assessment of Business Opportunities

• Preparing the Feasibility Analysis
• Step One - Calculate the Market Potential
• Step Two - Calculate the Market Share
• Step Three - Calculate the Net Income and Cash
  Flow

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Step One - Calculate the Market Potential

• Determine the market area and its population
• Obtain revenue , (sales) statistics for the
  product or service in the area
• Adjust the market potential total as necessary

potential revenues for the total market

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Step Two - Calculate the Market Share

• Retail Firm
• Estimate the total amount of selling space in the
  market devoted to the merchandise the new
  business will sell
• 2. Estimate the size of the proposed store
• 3. Calculate the market share based on selling
  space
• 4. Make adjustments to reflect any competitor
  strengths and weaknesses regarding the proposed
  store
• 5. Multiply the revised market share percentage
  by the market potential estimate obtained in step
  1.

Our Market Share
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Market share in
Our Market Share
X
Total market Potential ( step 1 )
Market Share in

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Step Three - Calculate net income and cash flow
Market Share in

• Subtract
• cost of goods sold
• gross profit percentages
• cash operating expenses
• interest and depreciation
• net income (Projected for 1st year)

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Pharmacy example ( in Text )
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Quantitative Assessment of Business Opportunities

• Step One - Calculate the Market Potential
• Determine the market area and its population
• Obtain revenue , (sales) statistics for the
  product or service in the area
• Adjust the market potential total as necessary

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Quantitative Assessment of Business Opportunities

• Step Two - Calculate the Market Share
• Retail Firm
• 1. Estimate the total amount of selling space in
  the market devoted to the merchandise the new
  business will sell
• 2. Estimate the size of the proposed store
• 3. Calculate the market share based on selling
  space

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Quantitative Assessment of Business Opportunities

• Step Two - Calculate the Market Share
• Retail Firm (cont)
• 4. Make adjustments to reflect any competitor
  strengths and weaknesses regarding the proposed
  store
• 5. Multiply the revised market share percentage
  by the market potential estimate obtained in step
  1.

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Quantitative Assessment of Business Opportunities

• Step Two - Calculate the Market Share
• Manufacturing Firm
• 1. Estimate the total productive capacity in the
  market for the product to be manufactured.
• 2. Estimate the total productive capacity of the
  proposed manufacturing plant.
• 3. Calculate the market share based on productive
  capacity.

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Quantitative Assessment of Business Opportunities

• Step Two - Calculate the Market Share
• Manufacturing Firm (cont.)
• 4. Make adjustments to reflect competitive
  strengths and weaknesses the competitive plant
  may possess
• 5. Multiply the estimated market share percentage
  by the market share potential estimate obtained
  in Step One.

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Quantitative Assessment of Business Opportunities

• Step Two - Calculate the Market Share
• Service Firm
• 1. Estimate the total capacity of the service
  available in the market area.
• 2. Estimate the service capacity of the proposed
  business.
• 3. Calculate the market share based on the
  capacity base.

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Quantitative Assessment of Business Opportunities

• Step Two - Calculate the Market Share
• Service Firm (cont.)
• 4. Make adjustments similar to those made for a
  retail store.
• 5. Multiply the revised market share percentage
  by the market potential estimated in Step One.

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Quantitative Assessment of Business Opportunities

• Step Three - Calculate net income and cash flow
• 1. Using the market share from Step Two,
  calculate the expenses expected
• cost of goods sold and gross profit percentages
  cash operating expenses interest and
  depreciation
• 2. Subtract expenses from revenue to determine
  projected net income in the first year and
  subsequent years.

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Petite Shop A B
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Self Assessment for a Small Business Opportunity

• Personality
• Nature
• Abilities
• Experience
• Financial base
• Feasibility

WIKES
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Concept Checks

• 1. What non-quantitative factors should be
  considered in the selection of a small business?
• 2. What are three ways of entering the market?
• 3. What are two methods of collecting
  information? In what situations would they be
  most useful?

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Concept Checks

• 4. What are the three methods of collecting
  primary data? Which is the most relevant to a
  small business?
• 5. What steps are involved in determining the
  financial feasibility of a retail store?

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PETITE SHOP "A"

• Using the information provided, prepare an
  estimate of the market potential for the target
  market Alice Wood is aiming at.
• What portion of this market potential could Alice
  expect for Petite Shop's market share?
• What non quantitative considerations should be
  brought into this analysis?

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Question 1. market potential for the target
market Alice Wood is aiming at.

• Solution
• Women's clothing expenditures in Prince George
  29,200 X 1,000 29,200,000
• Share for Sizes 3 to 9 29,200,000 x .20
  5,840,000
• Therefore market potential for this target market
  is approximately 5,840,000.

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Question 2. What portion of this market
potential could Alice expect for Petite Shop's
market share?

• Market Potential 5,840,000
• Total Square Footage Devoted to Target Market
• Clothing stores 180,000 sq. ft. x .10 18,000
  sq. ft.
• Dept. stores 6,500 sq. ft.
• Total 24,500 sq. ft.
• Market Share (1000 sq ft)/(24,500 1,000)
  3.9
• 3.9 x 5,840,000 227,760 Market Share

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Q 3. What non quantitative considerations should
be brought into this analysis?

• There are several negative and positive factors
  which could conceivably cause Alice to alter her
  proposed sales figure.
• Negative
• a. The fact that Petite Shop is new and will
  require several months to build up this proposed
  market share.
• b. The existing stores may have better locations
  and an evaluation of the proximity of competition
  to her proposed store should be done.
• c. The established shops and department stores
  may be more price competitive because of buying
  volume and established supply networks etc.
• Positive
• a. Alice is planning to specialize in clothing
  for this target market - this should give her
  store some "competitive edge" in terms of
  service, expertise, etc.
• b. Prince George is the centre of a trading area
  so the market potential figure should be adjusted
  to reflect people living outside Prince George
  that will make purchases within the city.

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PETITE SHOP "B"

• Question 1. Using the information presented in
  Petite Shop "A" and this case prepare an
  estimated income statement and return on
  investment calculation for Petite Shop's first
  year of operation.
• Question 2. What areas has Alice overlooked in
  her investigation?
• Question 3. Given your analysis, what would you
  recommend to Alice?

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Q 1. prepare an estimated income statement and
return on investment calculation for Petite
Shop's first year of operation.
Give handout
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Question 2. What areas has Alice overlooked in
her investigation?

• 1. As mentioned in the solution to question one
  she has made no provision for her own drawings.
  As she is working full-time a figure should be
  shown for this.
• 2. Some of her expenses such as advertising,
  miscellaneous and cost of goods sold will
  probably be higher in the start-up phase than for
  an existing business.
• 3. She should perhaps investigate borrowing from
  a government lending agency where the rates may
  be slightly less.
• 4. She should also prepare a cash flow statement
  to check debt servicing capability of the
  business.
• 5. She should prepare more than one year's income
  statement to get long term indication of the
  business' performance.

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• Question 3. Given your analysis, what would you
  recommend to Alice?

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Sales Estimation Methods

• Industry or Association Data
• Market Potential/Market Share
• Customer Counts
• Similar Business in Similar Location
• Indicator Variable ( sq ft )
• Sales of Existing Competitors
• Costs and Break-Even

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Wheelbarrow man

• Which method is the WM entering a market?
• Evaluate the WM in terms non qualitative factors
  of goals, experience,, lifestyle content of
  work
• Does the WM have a competitive advantage?

Wheel barrow man