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TOPSIM Startup!

Production
Participants Manual Part I Startup and Business Activity with a special introduction from Abdul Quadir Molvi et al, Institute of Business Management Karachi, of the bicycle industry in Pakistan
Version 4.2

TATA Interactive Systems GmbH. All rights reserved.

TOPSIM Startup! Production

Contents

0 I - VI

Situation and Development of the bicycle industry in Pakistan

6 6 8 8 9 9 10 10 1 Introduction.......................................................................................................................................................11

1 Introduction.......................................................................................................................................................11 1.1 What is the purpose of this manual?................................................................................................................11 1.1 What is the purpose of this manual?........................................................................................................11 1.2 What is TOPSIM Startup! all about?.............................................................................................................11 1.2 What is TOPSIM Startup! all about?......................................................................................................11 1.3 Simulation between Theory and Practice........................................................................................................12 1.3 Simulation between Theory and Practice................................................................................................12 1.4 TOPSIM Startup! Learning Goals..................................................................................................................12 1.4 TOPSIM Startup! Learning Goals...........................................................................................................12 1.5 How the Seminar Works....................................................................................................................................13 1.5 How the Seminar Works..............................................................................................................................13 1.6 Short Description of Your Business Idea.........................................................................................................14 1.6 Short Description of Your Business Idea................................................................................................14 2 Business Plan....................................................................................................................................................15

2 Business Plan....................................................................................................................................................15 2.1 Information Sources...........................................................................................................................................15 2.1 Information Sources....................................................................................................................................15 2.2 Creating a Business Plan..................................................................................................................................15 2.2 Creating a Business Plan............................................................................................................................15 2.3 Using the Business Plan Assistant...................................................................................................................16 2.3 Using the Business Plan Assistant...........................................................................................................16 2.3.1 Step-by-Step Guide.......................................................................................................................................16 2.3.1 Step-by-Step Guide...................................................................................................................................16 2.3.1.1 Management Concept / Business Idea....................................................................................................16 2.3.1.1 Management Concept / Business Idea..............................................................................................16 2.3.1.2 Product Idea / Service Concept...............................................................................................................17

TOPSIM Startup! Production

2.3.1.2 Product Idea / Service Concept..........................................................................................................17 2.3.1.3 Sales Prognosis..........................................................................................................................................17 2.3.1.3 Sales Prognosis.....................................................................................................................................17 2.3.1.4 Market Structure / Competitors.................................................................................................................17 2.3.1.4 Market Structure / Competitors...........................................................................................................17 2.3.1.5 Production and Logistics Planning............................................................................................................18 2.3.1.5 Production and Logistics Planning....................................................................................................18 2.3.1.6 Business Strategy and Marketing Mix......................................................................................................18 2.3.1.6 Business Strategy and Marketing Mix................................................................................................18 2.3.1.7 Future Outlook............................................................................................................................................19 2.3.1.7 Future Outlook........................................................................................................................................19 2.3.1.8 Personnel Planning....................................................................................................................................19 2.3.1.8 Personnel Planning................................................................................................................................19 2.3.1.9 Investments................................................................................................................................................20 2.3.1.9 Investments............................................................................................................................................20 2.3.1.10 Further Expenses Incurred in Starting and Expanding your Company...............................................20 2.3.1.10 Further Expenses Incurred in Starting and Expanding your Company.....................................20 2.3.1.11 Financial Planning....................................................................................................................................20 2.3.1.11 Financial Planning...............................................................................................................................20 2.3.1.12 Debt Service Calculation.........................................................................................................................20 2.3.1.12 Debt Service Calculation....................................................................................................................20 2.3.1.13 Profit and Loss Account...........................................................................................................................21 2.3.1.13 Profit and Loss Account.....................................................................................................................21 2.3.1.14 Budgeted Balance Sheet.........................................................................................................................21 2.3.1.14 Budgeted Balance Sheet....................................................................................................................21 2.3.1.15 Company Value........................................................................................................................................22 2.3.1.15 Company Value.....................................................................................................................................22 2.3.1.16 Entrepreneurial Team..............................................................................................................................22 2.3.1.16 Entrepreneurial Team..........................................................................................................................22 2.4 Data Transfer.....................................................................................................................................................22 2.4 Data Transfer.................................................................................................................................................22 3 3 4 Creation of the Company ...............................................................................................................................24 Creation of the Company ...............................................................................................................................24 Market Entry and Activity on the Market......................................................................................................24

4 Market Entry and Activity on the Market......................................................................................................24 4.1 Sales 24 4.1 Sales 24 4.1.1 Price 24 4.1.1 Price.............................................................................................................................................................24 4.1.2 Advertising.....................................................................................................................................................24 4.1.2 Advertising.................................................................................................................................................24 4.1.2.1 Print Advertising.........................................................................................................................................25

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4.1.2.1 Print Advertising....................................................................................................................................25 4.1.2.2 Sales Promotion.........................................................................................................................................25 4.1.2.2 Sales Promotion.....................................................................................................................................25 4.1.2.3 Corporate Identity Expenses.....................................................................................................................25 4.1.2.3 Corporate Identity Expenses...............................................................................................................25 4.1.3 Wholesalers...................................................................................................................................................25 4.1.3 Wholesalers................................................................................................................................................25 4.1.4 Internet Presence..........................................................................................................................................25 4.1.4 Internet Presence......................................................................................................................................25 4.1.5 Sales Representatives..................................................................................................................................26 4.1.5 Sales Representatives..............................................................................................................................26 4.2 Purchasing..........................................................................................................................................................27 4.2 Purchasing.....................................................................................................................................................27 4.3 Administration....................................................................................................................................................27 4.3 Administration...............................................................................................................................................27 4.3.1 Purchasing and Administrative Personnel...................................................................................................27 4.3.1 Purchasing and Administrative Personnel...........................................................................................27 4.3.2 Administration Costs.....................................................................................................................................27 4.3.2 Administration Costs................................................................................................................................27 4.4 Research and Development..............................................................................................................................27 4.4 Research and Development........................................................................................................................27 4.5 Goods and Services..........................................................................................................................................27 4.5 Goods and Services.....................................................................................................................................27 4.5.1 Production Lines............................................................................................................................................27 4.5.1 Production Lines.......................................................................................................................................27 4.5.1.1 Production Lines Investment / Disinvestment..........................................................................................27 4.5.1.1 Production Lines Investment / Disinvestment..................................................................................27 4.5.1.2 Number of Production Workers ................................................................................................................28 4.5.1.2 Number of Production Workers ..........................................................................................................28 4.5.2 Business Space.............................................................................................................................................28 4.5.2 Business Space.........................................................................................................................................28 4.6 Personnel............................................................................................................................................................28 4.6 Personnel.......................................................................................................................................................28 4.6.1 Personnel Costs and Services.....................................................................................................................29 4.6.1 Personnel Costs and Services................................................................................................................29 4.6.2 Hirings and Dismissals..................................................................................................................................29 4.6.2 Hirings and Dismissals............................................................................................................................29 4.7 Finance and Accounting....................................................................................................................................31 4.7 Finance and Accounting.............................................................................................................................31 4.7.1 Financial Decisions.......................................................................................................................................31 4.7.1 Financial Decisions...................................................................................................................................31 4.7.1.1 Short-Term Loans.......................................................................................................................................31 4.7.1.1 Short-Term Loans..................................................................................................................................31

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4.7.1.2 Long-Term Loans.......................................................................................................................................31 4.7.1.2 Long-Term Loans...................................................................................................................................31 4.7.1.3 Overdraft Credit / Minimum Cash Balance...............................................................................................31 4.7.1.3 Overdraft Credit / Minimum Cash Balance........................................................................................31 4.7.2 Capital Investment / Securities.....................................................................................................................31 4.7.2 Capital Investment / Securities...............................................................................................................31 4.7.3 Taxes 32 4.7.3 Taxes...........................................................................................................................................................32

This is document on Bicycle Industry of Pakistan was provided courtesy of students Sheroz Parrez, Ahsan and M.Shoib of entrepreneurship class of summersession (2012). This report was supervised by class instructor Abdul Quadir Molvi, Institute of Business Management.

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1
1.1

Introduction
What is the purpose of this manual?
You can use this manual to prepare for the TOPSIM Startup! management simulation. The list of contents and Chapter 1 give an overview of the content of the manual. In order to prepare for the seminar, it is advisable to study chapters 2, 3 and 4 in depth. During the simulation you can use the manual for reference and to help you make decisions. Besides the main body of the manual, there is also an appendix, which the instructor will provide you with later. The appendix explains the reports and the decision form, which will help you to approach the simulation systematically later on. The appendix also includes a detailed manual for the initial periods. This gives you a step-by-step guide to help you work through the complexities of the initial periods. In addition, the Startup! Web will provide you with important information for your entrepreneurial decisions. Therefore, the manual does not give all of the answers, such as the exact values for certain influential factors like salary and price. In order to find this information you will have to conduct your own research (just like a real entrepreneur). In reality, almost all important information can be found on the Internet, and the TOPSIM Startup! simulation therefore includes a model of the World Wide Web (WWW) called the Startup! Web.

1.2

What is TOPSIM Startup! all about?


In the TOPSIM Startup! management simulation you and your team members take on the role of an entrepreneurial team. You plan a startup, a small business which produces bikes. As part of the Startup! simulation, you go through the entire process of starting a firm, from coming up with your own business idea, creating a business plan, entering the market, and to subsequently operating your own business. Therefore, you should first collect the necessary information to formulate your business plan. In this phase you have recourse to a business plan assistant, which takes you through the creation of a business plan step-by-step. The particular aim of this phase is for you to learn what the crucial elements of a business plan are, and where the problems lie when drawing up and calculating figures. The business plan you create also influences how the simulation continues. It forms the basis for the instructors decision about how much investment capital your firm should receive, whether you should be given subsidies, and if so, how high this loan amount should be. Approval of your business plan by the instructor is then followed by the startup and subsequent entry into the market. During the eight periods of business activity you will make all important entrepreneurial decisions, taking into account the general economic situation. You will be competing against four other firms on the virtual market. A complex computer simulation programme processes the decisions you make and thereby simulates the competition. Your decisions are evaluated after each round, and you are informed to which degree the measures you have taken have been successful. Thus, you learn how to deal with business tools and understand what effect they have. The virtual market on which your firm is active will seem like a complex system, involving inevitable conflicts of goals which you must resolve.

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1.3

Simulation between Theory and Practice


As a management simulation TOPSIM - Startup! builds a bridge between business theory and business in practice. The game creates a realistic model of a startup and therefore offers the player

fast, risk-free, practical experience with a lasting effect.

TATA Interactive Systems is aware that a simulation cannot recreate reality in its entirety. Nor is this the intention. For didactic reasons, simplifications are necessary to ensure that you are not distracted from what is essential. A simulation which is too complex, would be counterproductive towards effective learning.

1.4

TOPSIM Startup! Learning Goals


The focus of TOPSIM Startup! is on active learning. As with all TOPSIM products, our theme applies:

TOPSIM Startup! learning goals are:

Learning to recognize and deal with problems and important success factors for startups. Finding your way through the information jungle you face as an entrepreneur, and extracting the necessary information for the current decision. Creating a business plan, recognizing the crucial elements, and becoming sensitive to the points and criteria important for a real investor. Learning to clearly see the consequences of decisions you have made. Formulating and implementing management goals. Improving strategic thinking, linking strategies to goals, and using them when making decisions. Improving teamwork and organization.

This Startup! module deals with a startup in the production sector. It also includes the following learning goals for this sector: Interpreting market situations and market results correctly and implementing them in goal-oriented decisions. Critically analyzing complex business management relationships. Recognizing success factors and the relationship between print advertising and sales promotion, reputation, quality of products, prices, and demand generated. Providing sufficient production capacity and avoiding the high costs associated with producing over capacity. Achieving growth and surviving seasonal fluctuation. Holistic thinking: recognizing correlations between decision areas and co-ordinating decisions. Using break-even analysis and production figures for business management.
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1.5

How the Seminar Works


The Startup! simulation consists of the two phases mentioned above creating a business plan as well as startup, market entry and business activity.

Startup Preparation

Business Activity

Business Plan

F o r m a t i o n

Participants' System

Startup! Web

Planning Tool

In the first phase of the Startup! simulation you develop your business concept. A basic business idea is provided to ensure that all participating firms are competing on the same market. To work out a detailed business concept in the form of a business plan you have access to a business plan assistant. This provides you with a structure for your answers, and thus ensures that the information you give can be used. All information and production figures you provide when creating your business plan will subsequently be evaluated by the instructor. As the simulation continues, the most important production figures will serve as a rough indicator used to measure the business development of your firm. After the instructor has evaluated your business plan and made a decision regarding your capital resources, you can set up your company. For this second phase of the simulation you are provided with decision forms. You should fill in your decisions for the periods and hand them in to the instructor, and/or you can feed your data into the computer and then give the instructor a USB stick with the data saved onto it (or your instructor might also be able to access the information via the internet). After starting up your company, you must make decisions for each subsequent period in sales, purchasing and logistics, production, human resources, investments and financing. For the purposes of the management simulation, one period represents one quarter. Based on the data, the computer will simulate all business transactions and activities resulting from the decisions made for the current period. However, periods can only be simulated once all participants have completed the decision forms. Therefore, in order to ensure that the competition is fair, it is important that you keep to the deadlines and hand in your decision forms on-time, even if you need more time.

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After a period has been simulated, each company will receive nine different reports, which will serve as a basis for the next periods decisions. Also at the beginning of each period, you will receive business news which will give you information on the economic situation. This information will provide you with additional clues in assisting you with your decisions. For example, it may prompt you to change price and personnel policies. As opposed to the real business world, the management simulation gives you the advantage of recognizing the effects of your decisions after a short period of time. This overview shows Phase 2 of the simulation as described above.

1.6

Short Description of Your Business Idea


You and your partners are planning a small startup that will manufacture and sell bikes. At the beginning, the bikes will only be sold in your bike shop, which houses both sales rooms and production rooms. For the moment you are concentrating on producing tricycles, and later on you intend to expand your range of products (mountain bikes). In addition to the individual, made-to-measure bike frames, you are thinking of buying ready-made special frames later on which will only require final assembly. In each product category, you determine an average price at which you want to offer your products. As well as the sales from your own bike shop, you could also tap into further sales potential if need be. One possibility would be to cooperate with a wholesaler, who would sell your products under another name, or you could set up an online shop to sell your bikes over the Internet. When working out your business idea, you should first of all think very carefully about the strategy you intend to implement. Should you keep prices and costs (personnel, advertising, etc.) low and sell as much as possible. Or does it make more sense to sell a smaller quantity of higher quality bikes, which would involve high personnel and advertising costs but also yield a higher profit margin per bike. It is of course also worth considering a combination of the two strategies. The Startup! Web also provides you with information about the environment for your new company.

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2
2.1

Business Plan
Information Sources
To help you create your business plan, there are a number of information sources available to you. Here you will find basic information about startups, markets, potential competitors, possible sponsors, and so on: Startup! Web: The Startup! website is intended to complement the Startup! simulation and can be accessed with any web browser. If you have access to the Internet, there will sometimes be a reference to information on the real World Wide Web. However, this is not essential for you to be able to create your business plan, nor to be able to participate in the simulation. News is brought to you in the form of an industry newsletter including current information for each period. However, this information must be interpreted and tested for its relevance. Information Broker: You have access to the following data: market research reports, survey results, technical studies, and other relevant reports. They are of high quality and up-to-date. However, these reports are not free of charge. You can find further information on this subject on the Startup! Web.

2.2

Creating a Business Plan


The business plan assistant helps you to work out your business concept in detail by guiding you through the 18 steps that form the essential components of a business plan and, if necessary, gives you support and explanations. When creating your business plan, you should complete the following steps:

1. Management Concept / Business Idea 2. Product Idea / Service Concept 3. Sales Prognosis 4. Market Structure / Competitors 5. Production and Logistics Planning (I) 6. Production and Logistics Planning (II) 7. Business Strategy and Marketing Mix 8. Future Outlook 9. Human Resources Planning 10. Investments 11. Other Expenses incurred in Starting and Expanding a Company 12. Financial Planning 13. Debt Service Calculation 14. Profit and Loss Account 15. Budgeted Balance Sheet 16. Company Value 17. Entrepreneurial Team Personal Data 18. Entrepreneurial Team Special Qualifications

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2.3

Using the Business Plan Assistant


You should always pay attention to the following: Only fields in yellow can be edited. In the remaining fields, calculations will automatically be made based on the figures you enter. Sometimes you may have to enter blocks of continuous text. If so, the following formatting options are available:

- New line: Alt + Return - Bold: Ctrl + Shift + F - Italics: Ctrl+ Shift + K
- Underline: Ctrl + Shift + U Navigation

Previous Page

Menu

Help

Next Page

Important: When you activate a field and enter values, you must confirm your entry (for large sections of text, you do this by clicking on a different part of the table with your mouse, and for short entries (like numbers) by pressing the return key). If you do not confirm your entry, it is NOT possible to use the navigation buttons!

In reality, creating a business plan takes several weeks. For the purposes of the Startup! simulation you will be working on a simplified business plan which should give you a feel for the crucial elements of such a document. This business plan assistant is not suitable for creating a business plan for a real startup.

2.3.1

Step-by-Step Guide 2.3.1.1 Management Concept / Business Idea


"If you cant recognize the customers benefit, the whole thing is hopeless."
Branco Weiss, Entrepreneur
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First of all, the main concept is described. For a promising business idea the following three points are vital and should be looked at closely:

Clear customer value Sufficient market volume Feasibility and profitability

2.3.1.2

Product Idea / Service Concept


You should explain your main concept in detail. A detailed description of your product idea and service concept, an analysis of your target group/groups, and a precise description of the customer value are very important. All risks, such as the current competition and legal situation, should also appear here. It is also important to tread carefully, because the more realistically you portray the situation, the more credible your business plan will be. Brainstorming could be helpful here for identifying all the important points in each area.

2.3.1.3

Sales Prognosis
Market Volume You must predict the expected market volume of the entire market in units (this must be done separately for each of the two products). From your expected share of the market you can derive the planned sales per unit for your company. All figures you provide should be based on solid arguments. Therefore, it is very important that you make realistic predictions and that you can give comprehensible reasons for them (the reasons for your predictions are the subject of the next page of your business plan). Sales Channels It is also important, of course, to consider which sales channels your products will be sold through. For instance, selling via the Internet would mean additional transport costs. Products delivered to a wholesaler generally have to be sold at lower prices. Detailed sales figures result from a percentage distribution of your sales over the three sales channels (Important: the percentage you give will always be standardized to 100%. This means that if you enter 80% and 40%, your sales will be redistributed as 66% and 33%!). Average Sales Price When you have finished planning your sales figures and set an average sales price, your sales will be calculated in PKS. These estimates will be used again in other parts of the business plan as expected sales returns, so you should thoroughly research the likelihood of your figures. Expected Receipt of Payment in the Current Period To be able to carry out your financial planning, you need to estimate what percentage of the sales from one period are collectible. The remaining payments constitute accounts receivables and are carried over into the next period.

2.3.1.4

Market Structure / Competitors


"A horse never runs so fast as when he has other horses to catch up to and outpace."
Ovid Estimated Market Volume

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Your reasoning behind the market development you have predicted is a central component of the business plan. If you cannot support your forecast with good arguments, all of your figures will seem implausible. Main Competitors What is important for the success of a startup is the fact that the founders know their future competitors inside out. For the purposes of this business plan, try to analyze your competitors, both in the simulation and in the real world. Judge your main competitors by the same criteria, e.g. sales volume / market share, pricing, growth, cost structure, product lines, and customer target groups.

2.3.1.5

Production and Logistics Planning


Production After you have determined how much you are going to produce, you can see how many finished products are in stock when the sales you have predicted are realized. As the next step, you must estimate the purchasing price for inputs (perhaps making use of volume discounts). This will then give you the expected purchasing costs in EURO. Logistics All products sold over the Internet incur additional transport costs, which must also be accounted for in this section, according to product category. All finished products in stock incur storage costs. The amount of storage costs to be expected should be indicated here as part of your logistics planning.

2.3.1.6

Business Strategy and Marketing Mix


"Even the slowest man, who does not lose sight of his goal, goes faster than he who wanders with no goal."
Gotthold Ephraim Lessing Business Strategy To begin, formulate your entire strategic concept, i.e. the management strategy which gives the whole company its general line of action. Put the business strategy in concrete terms in relation to the marketing mix. Product policy Which products should you offer? Which product features are particularly important for the goals at which you are aiming? Pricing policy Are you following a cost leadership or a differentiation strategy? If you want to retain your customers by offering low prices, for instance, you should make sure that you keep your manufacturing costs as low as possible.

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Distribution policy Which sales channels are available to you? Which sales channels are important, and which are not so important?

Promotion policy Which advertising strategy do you want to follow? How do expenses for print advertising, sales promotion and corporate identity, for example, stand in relation to one another? What role does advertising actually play in the strategy you are following?

For your financial and profit/loss accounts it is also important to know which investments you will probably need to make in order to carry out your advertising strategy.

2.3.1.7

Future Outlook
"A mans wisdom can best be measured by the way he considers the future or the end."
Georg Christoph Lichtenberg To start with, think about industry development. Pay heed to your planned sales and other decisions from 2.2.2.4. Market Structure / Competitors. These are some of the important questions concerning industry development:

How will the relevant market develop? How many competitors can be expected in the near future? Are there high barriers to market entry? Is it to be expected that competition will be tough or even that other competitors will be driven out? Can several suppliers exist simultaneously?

Development of your own company compared to the industry: Here it would be interesting to know which expansion opportunities there are, and which of these opportunities you want to seize and when. Here you can also explain your figures. For instance, why is the large investment, which would only bring returns much later, necessary in the early periods, or to what extent is your business dependent on seasonal or economic factors?

2.3.1.8

Personnel Planning
One very important factor with regards to your financial planning is the ongoing cost for personnel. In general it will be difficult to adapt your personnel to your companys needs for the short-term. Furthermore, hiring and dismissals also involve additional costs (e.g. contract negotiations, orientation/training, etc.). Therefore, it is important that you accurately plan the number of people you will need to employ! Information, you may need to know:

Prospective salaries Worker productivity (e.g. how many products a worker can produce per period) etc.

All of this information can be found on the Startup! Web. The expected personnel costs in PKS will then be carried over into your financial planning and planned profit and loss account. Important: A sufficient amount of well-trained personnel is one of the crucial prerequisites for a firm to be successful in the market. The founders themselves are of course usually available as part of the workforce from the very beginning and take on key functions in the
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young company. (This also applies in the Startup! simulation. The individual members of your entrepreneurial team take on different tasks depending on their qualifications (e.g. R&D, sales, production) and therefore also constitute part of your personnel.

2.3.1.9

Investments
Here you plan how much you will probably need to invest in your production lines, office furniture and equipment. Reliable figures and good capacity planning are also very important here. You can find information on prices, etc. on the Startup! Web. The depreciation for office furniture and equipment will be calculated automatically. You will have to enter the depreciation for individual production lines manually, as their lives depend on the types of production lines they are used in.

2.3.1.10

Further Expenses Incurred in Starting and Expanding your Company


Here you have the opportunity to include other expenses in your calculation, which may arise while operating your business. You will find these under Further Expenses in financial planning, and Other Expenses in the profit and loss account.

2.3.1.11

Financial Planning
"If you want to know the value of money, try and borrow some." Benjamin Franklin
Before you start your financial planning, you should complete steps 1 to 11, as the figures predicted there are needed for financial planning purposes. Your financial planning serves to calculate how much financing you need. When you have fed all figures from Steps 1 to 11 into the software, the cash balance will show you how much additional liquidity your company needs in each period, or how much money is left. Generally, there will be a deficit here which indicates how much financing you need. To cover these requirements you have the following two possibilities (which, of course, can be implemented at the same time): Venture Capital In the startup period you can enter the amount of venture capital you expect to receive. Excess financial means should of course be invested so that you can profit from the interest. Venture capitalists want to be a part of your enterprise. The extent to which they are involved is subject to negotiation (See 2.2.2.15 Company Value). Loans / Subsidies If you do not want to give up a share of your company, you will have to finance your investments with standard loans and subsidies. In order to do this, you must find a bank which is convinced by your business concept and awards you the necessary loans. In general, this will be much more difficult than finding a venture capitalist (perhaps even impossible!). Another disadvantage of this method is the additional burden of paying interest on the loan! Dont forget to take into account the forecasted interest rates when making financial decisions (at the bottom of the page)!

2.3.1.12

Debt Service Calculation


To make sure that the bank loans you have planned for are actually granted, you need good collateral. Here you should make it clear what collateral you have for a loan!

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2.3.1.13

Profit and Loss Account


All figures predicted so far will now be combined in the profit and loss account in order to calculate the income/loss from normal business activity. Apart from extraordinary revenues/expenses and taxation, this corresponds to the periods net income.

2.3.1.14

Budgeted Balance Sheet


The balance sheets of the nine periods shown here are also based entirely on values that you have predicted so far in the business plan (e.g. in the profit and loss account). ESE depreciation: The costs incurred in the startup phase (e.g. wages and salaries, hiring costs) are under "Expenditure for Startup and Expansion". They can thus be accounted for in the balance sheet (See 14. Budgeted Balance Sheet, ESE) and will be depreciated linearly over 16 periods. Assets Assets are divided into: FIXED ASSETS (assets which are intended to serve the business long-term) CURRENT ASSETS (assets which are only temporary) Equity and Liabilities EQUITY Equity includes all equity involved in the periods surplus or deficit, and in the accumulated deficit. Equity is categorized as follows:

Share capital: corresponds to stock, i.e. the nominal value of the issued share capital. Capital reserves: arise through an agio when new shares are issued Retained earnings (revenue reserves): result from the excess after tax from the previous periods by not distributing dividends. Profit / Loss carried forward: Deficits from the previous periods do not immediately reduce reserves, but can be set against surpluses that occur later. Net profit / loss for period: The result of the current period will be taken entirely into account by the closing balance. For the accounting department, use of the periods surplus (see the profit and loss account) for distribution, building reserves, or offsetting accumulated deficits can only take place in the new period.

LIABILITIES Liabilities are all obligations towards financial institutions. These include: subsidies, loans with a residual term of over 5 years, loans with a residual term of under 1 year, and overdraft agreements.

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2.3.1.15

Company Value
Calculating Cash Flow Cash flow = result of normal business activity + ESE depreciation + depreciation Company Value The companys value is calculated as the current value of the cash flow, by discounting the cash flow interest with the interest rate expected. As opposed to alternative rates of return, this interest rate should include an industry or company-related risk surcharge! Accepting the premise of the company as a going concern, the cash flow expected for the ninth period is the discounted value for the following periods. You can work out the percentage of investment by investors and founders later in negotiations with your venture capital sponsors. In your business plan you should give a realistic percentage estimation which would suit you.

2.3.1.16

Entrepreneurial Team
"I invest in people, not ideas."
Eugene Kleiner, Venture Capitalist Information on the entrepreneurial team is almost as important for potential investors as the business concept itself. If the founders cannot sell or put into practice their idea, have no business experience, or are no good at teamwork or personnel management, the whole enterprise is generally doomed to fail before it even starts. Therefore, in a business plan for a real startup, it is particularly important that the entrepreneurs qualifications are listed in detail and that all aspects relevant to putting the idea into practice are particularly highlighted. For your Startup! Business Plan it may sometimes be difficult to give useful information here. However, think about all the points made so far and try to show your qualifications for the Startup! business idea in the best light possible. This part of the Business Plan also serves to highlight important aspects to which potential entrepreneurs may not yet have paid attention (e.g. what is my motivation for starting up a company?, etc.).

2.4

Data Transfer
In your business plan, you formulated your companys goals and the resulting strategies and measures to be taken. Therefore, after startup your business plan will be very important: it serves to guide and control your business activity. You could make comparisons of actual/target figures based on your calculations in the business plan, for example. There is a transfer function at your disposal for you to import the actual values from the simulation. Whenever you read your results using the participants system, certain values will be prepared for import into the business plan. To import these values, go to the Business Plan Assistant main menu and select Data Transfer. On the following page, click Update Values. Apart from importing values from the simulation, it is also possible to copy values you have chosen as goals from the planning tool over to the business plan. You can insert these values into the yellow table beneath the transfer table as follows:

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TOPSIM Startup! Production

Important:

Open the planning tool (the business plan stays open in the background) Select the transfer table Click preparing values for export Highlight the yellow boxes by clicking on the box at the top and dragging the mouse downwards Copy the values (with Ctrl + C or select Edit and Copy in the MS Excel menu) Go back to the business plan (go to Window in the menu and select BP Assistant) Select the column in the yellow table in which you wish to insert the values Insert the values (with Ctrl + V or select Edit and Insert in the MS Excel menu)

1. You can also enter values in the yellow table manually at any time. 2. If values are already in the yellow table ALWAYS overwrite these (manually or by copying them from the planning tool), i.e. values imported from the simulation. Therefore, to be able to import values for a certain period you must ensure that the relevant column in the yellow table is empty before you click update values. 3. You can delete the imported values (in the blue table) manually at any time. 4. You can click update values as often as you like. Each time the values prepared by the participants system will be read and then replaced, if necessary with values from the yellow table.

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TOPSIM Startup! Production

Creation of the Company


The moment the company is established is simulated separately from the market entry. In your inbox you will receive the final approved form of your business plan and an up-to-date bank statement giving you information about the liquidity you have available. Now you will have to make basic decisions like:

Withdrawing money and applying for subsidized loans Leasing business space Buying machinery, office furniture and equipment, etc. Hiring workers Training workers

Expenses incurred will be capitalized as ESE (Expenditure for Startup and Expansion, see the Profit and Loss Account in the business plan).

Market Entry and Activity on the Market


In TOPSIM Startup! the economic development of your company can be influenced by numerous decisions. In this chapter you will be shown which decision factors are at your disposal. When taking measures, you should always consider the decisions and reactions of your competitors and the economic situation. The results of your decisions can be taken from the reports following each period.

4.1 4.1.1

Sales Price
First of all, a selling price can be set for every product in the bike shop (in PKS/item). The effect of the price on the market depends on the price level set by your competitors. If you offer your products at a relatively low price, your sales will be higher; but if your price is higher than that of your competitors, you will sell less. You will find an overview of your future sales market and the usual price levels of your competitors on the Startup! Web.

4.1.2

Advertising
To increase your companys publicity, you have three different advertising instruments at your disposal. Advertising affects both your bike shop sales and what you may sell later via the Internet. Here it is important to find the right mix in order to increase your profile and hence your share of the market, which means that advertising costs should stand in reasonable relation to the sales you are aiming at. All advertising methods have different temporal effects and can also influence the markets behaviour as a whole (i.e. heightened advertising activity by all competitors can lead to a general increase in the market volume).

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Take a look at the following tips by marketing strategists: To give your startup a higher profile it could make sense to spend slightly more on advertising at the beginning. Established firms in your industry invest 5-10% of their sales on average. The advertising budget is generally divided up as follows: Print advertising Sales promotion CI 50% 20% 30%

Effect of marketing expenditure for advertising Effect ... Print advertising Sales promotion CI ... current period Strong Strong Neutral ... following periods Lasting Little Lasting

4.1.2.1

Print Advertising
Print advertising includes advertising in print media or on billboards. According to advertising experts, this classic form of advertising is excellent for sales promotion in the current period, but also has a lasting effect on sales in subsequent periods. In the initial phase, this would be a good way for your company to gain a profile in your region and to motivate customers to come and have a look at your bike shop.

4.1.2.2

Sales Promotion
Sales promotion is a very effective method of acquiring new customers. It includes all expenditures like gift vouchers, coupons, raffles and so on. They have a strong effect in the period in which they are used.

4.1.2.3

Corporate Identity Expenses


Creating a company image by using a public relations strategy also contributes to sales promotion. These expenditures have a strong effect in the following periods. Examples of this method are sponsorship, and having a presence in the media. Outlets such as newspaper or magazine articles on the company, concerning new developments, events, and so on are great way to increase awareness of your company. By setting a budget here you have another opportunity to differentiate yourself from your competitors.

4.1.3

Wholesalers
Apart from selling bikes in your bike shop you may also be able to cooperate with large chain stores. These wholesalers buy large numbers of products and sell them under a different name (and generally at a lower price). This also gives you the opportunity to seize new sales potential. However, in general it will be necessary to promise wholesalers prices lower than those in the local sales market. The prices are each set by the wholesaler. You can then decide how many bikes you want to deliver at this price.

4.1.4

Internet Presence
In the first period there will be no demand for bikes over the Internet. However, experts expect that consumer behaviour will change significantly over the next few months. In a year or so, it may already be possible to sell bikes over the Internet. This, of course, also gives small local firms the opportunity to sell their products to a wider circle of customers. An entirely new market could also be opened up by an e-commerce offering to include customers from all over the world.

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You can influence the quality of your e-commerce solution by how much you invest in your Internet presence. Good quality (characterized, for example, by the speed of your website and a high standard of security) leads to more trust and greater satisfaction on the part of your Internet customers, and thus to more sales via the web.

4.1.5

Sales Representatives
The job of the sales representative is to advise the customers in your bike shop. The better the support provided by competent sales personnel, the more likely the customer is to buy a product.

Note: On the decision form you should give the number of sales representatives working at the end of the period (not including appointments and dismissals).

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4.2

Purchasing
The purchase price is a determining factor as to whether the contribution margin can be generated with one article (compare the comments on break-even analysis in the appendix). It is therefore important to carefully consider how much input material should be purchased per period. With a higher purchase order quantity, you can profit from economies of scale. However, you should take into consideration that any surplus input materials which are not needed for manufacturing will be put into storage. This causes your company to incur storage costs and fixed capital costs.

4.3

Administration
No decisions can be made regarding administration. The system automatically takes into account the necessary number of employees and other costs incurred in the administrative area.

4.3.1

Purchasing and Administrative Personnel


The number of employees is based on the sales from the previous period. The following guidelines must be considered: Sales in th PKR No. of employees (admin.)
0 15.000 25.000 40.000 60.000 90.000 120.000 160.000 320.000 500.000

10

12

One administrative employee will automatically be employed for the startup period.

4.3.2

Administration Costs
Also incurred are administrative fixed costs of 120.000 PKR per period and sales dependent administrative costs of 1% of sales (e.g. for office supplies).

4.4

Research and Development


To be able to meet customer demand and keep up with technological progress, it is important that you constantly improve your products. Here you can employ your own engineers to work on product development, or you can use external firms to do so. The more people you have working on each product and the higher your investment in research and development, the higher the quality of your product, e.g. higher quality gear change, etc. (measured by the technology index).

4.5 4.5.1

Goods and Services Production Lines


With your decisions concerning technology, you determine how many production lines you wish to run. Your production site capacity will be given in units per quarter. You can find more detailed information on the Startup! website.

4.5.1.1

Production Lines Investment / Disinvestment


You can adapt your production site capacity by investment and disinvestment. For each investment decision you have three different alternatives, which differ in price, current costs, productivity, etc.
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The production lines are depreciated linearly per quarter (i.e.: depreciation = purchasing price/useful life). The disinvestment of production lines causes you to incur extraordinary costs amounting to the residual book value and receive extraordinary revenues from the sale of scrap. If you wish to disinvest a site, please provide the number of the site on the decision form. The site will be scrapped in the same period.

4.5.1.2

Number of Production Workers


To manufacture the bikes you need skilled, reliable production workers. How to determine the number of products one worker can produce per period depends on how technical the product is. You can find further information on this topic on the Startup! Web. You can train your workers to improve the level of productivity. If you do not have enough worker capacity for the planned volume of products, temporary workers from a temporary employment agency will automatically be employed. The cost of employing these workers can be found on the Startup! Web.

4.5.2

Business Space
With regards to the site of your company, you have three different options. At all sites, expanding your business later on is relatively unproblematic, as plenty of additional space is available. The leased properties differ in terms of the lease amount, surface area, incidental costs, etc. The site location is also important, as a suitable location can have a positive influence on sales. Some of your departments have certain basic needs regarding space. Furthermore, you must also take into consideration the need for additional space depending on the number of employees. Every time you expand your business premises, all additional space will automatically be provided with basic office furniture and equipment (OFE) (e.g. lamps, shelves, desks). These costs depend on the amount of extra space leased. The OFE will be charged at a fixed amount every quarter. Note: The amount of depreciation is a combination of an immediate depreciation of low value fixed assets, five-year depreciation and ten-year depreciation. If you overuse your space, this will affect the productivity of your production workers, who will not be able to perform their tasks effectively because of lack of space. Need for space, effective use of space, and possible declines in productivity will be reported in Participants Report No.3 Use of space.

4.6

Personnel
Your decisions regarding personnel could have an important impact on the success of your company. It is not just about determining your manpower requirements, nor your hirings and dismissals. As has already been mentioned, you can train your production workers. You can also decide how far you want to raise your non-salary staff costs above the legal minimum rate. How many sales/administrative personnel you need depends on sales generated.

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Overview of decisions to make: Number of sales and R&D personnel (at the close of the period) Hirings / Dismissals in production Training methods in production Non-salary staff costs

4.6.1

Personnel Costs and Services


Information on salaries as a main component of personnel costs can be found on the Startup! Web. You must also decide on the level of non-salary staff costs in the form of predetermined and fringe benefits. Here, a legal minimum percentage rate of wages and salaries applies (see Startup! Web). However, you can also allocate further benefits, such as pension subsidies, employee discounts, bonuses, and so on. These added benefits can build stronger ties to your company for particularly skilled workers, and can lead to a low attrition rate. However, you should consider that once you have offered these benefits, you cannot simply revoke them. Further personnel costs can be incurred later in the form of retirement provisions for your employees. However, there will be no retirement provision made in the following few periods because of your relatively young workforce.

4.6.2

Hirings and Dismissals


When making decisions regarding hirings and dismissals in the production department, you must also take attrition into account. WARNING: In your Sales and R&D departments you determine your final number of employees. The system will automatically account for possible attrition. However, you must take hiring costs into account. Attrition will play no role at the start of your business activity. In this small company, management learns right away when employees are thinking of leaving (you will find this out from the scenario!). Yet, in general your company will grow. If the number of employees per department exceeds 10 people, you must expect to not always immediately learn of when an employee would like to leave the firm. In the case of natural attrition, it is not only the job market situation which plays a role, but also the conditions you offer your employees (e.g. the level of fringe benefits). The better the working conditions in your company, the lower the rate of attrition. In this way, you save on hiring costs for new personnel and avoid loss in productivity during the initial training phase. However, there is one component of the attrition rate which you cannot influence: employees leaving for personal reasons such as maternity leave, moving away from the area, finding more attractive job offers, or giving up work altogether. Experience has shown that attrition varies according to the department. Administrative employees are generally less likely to want change than R&D employees. You can increase your companys attractiveness by providing extra benefits, training schemes, and reducing your employees workload. Too few employees could have a detrimental and lasting effect on your operations.

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Every time you hire or dismiss personnel, you incur fixed costs per employee. You will find information about this on the Startup! Web.

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4.7

Finance and Accounting


Overview of decisions to be made: Taking out short-term loans Taking out long-term loans Applying for subsidies Deciding on recapitalization (venture capital) Investing in stocks and shares

4.7.1

Financial Decisions
It is possible to take out short-term and long-term loans and buy stocks and bonds at any time. To apply for subsidies and venture capital, your business concept has to be convincing. The instructor will decide how money is allocated.

4.7.1.1

Short-Term Loans
Short-term loans with a term of one quarter can be taken out in every period. The loan is automatically paid back in the following period. This means that the loan must be reentered on the decision form every period. Interest payments are made in the current period (the period in which the loan was taken out). The size of the short-term loan is unlimited. An increasing debt-equity ratio (measured against private equity) means a clear increase in interest rates due to higher risk. You will find the exact interest rates on the Startup! Web.

4.7.1.2

Long-Term Loans
Long-term loans have a fixed term of 10 years, during which time they cannot be paid off. They have lower interest rates than the other loans. As mortgage credits, these loans are subject to general interest rate fluctuations, i.e. interest rates can change over the periods. Because long-term loans cannot be paid off earlier, they are particularly appropriate for financing large investments which mean a permanent long-term gap in liquidity. However, it is worth considering to what extent an investment should be financed by a long-term loan. If all financing is long-term, the debited interest cannot be reduced at any time during the entire simulation. Possible surplus cannot be used to pay off the loan, which would mean that the operating income would always be reduced by the same interest expenditure.

4.7.1.3

Overdraft Credit / Minimum Cash Balance


At the end of each period you, must show a minimum cash balance (see Startup! Web). If your inpayments plus the opening cash balance for one period are not enough to cover this cash balance (once you have paid all amounts due) you will automatically receive an overdraft credit for the necessary amount. This way you will avoid not only a negative cash balance but also the inability to pay bills. You can find out the amount of your overdraft credit from the financial report at the end of a period. The overdraft will automatically be paid off in the following period, whereas the interest payments will be made in the current period. You should try to arrange your financial planning so that you require as little overdraft provision as possible, since this is relatively expensive.

4.7.2

Capital Investment / Securities


Surpluses from a period can be invested in short-term, fixed interest-bearing securities. Repayment will automatically follow in the next period. Interest revenue will be credited to you in the current period. All you have to do is enter the amount to be invested on the decision form. In this way you can invest liquidity temporarily.
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4.7.3

Taxes
Tax is calculated as follows: Result of normal business activity +/= * = extraordinary income taxable income tax rate Tax to be paid

These figures appear in the profit and loss account. The tax rate applicable for your company is on the Startup! Web. Any losses from previous periods will be set against your taxable income. Therefore, you do not pay taxes until you have made a profit over all periods. Taxes are then paid in the current period.

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