UNIT 1
REVISION WORKSHOP

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Today
Session Topic 1 A Viable Business Idea 2 Crunching the Numbers Break 3 Financing the Start-up 4 Understanding the Market Lunch (back for 2.00 p.m.) Quick quiz 5 Why Start-ups Fail 6 Evaluating the Start-up

Session 1

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Some Important Concepts
ENTERPRIS E RETURN RISK OPPORTU NITY COST

Can you define

Have a Go!

One sentence for each

More on Risk
Imagine you decide to invest your life savings of £30,000 in setting up a new Subway franchise outlet

List 3 risks you are taking

Over to You!

More on Opportunity Cost
Whenever a decision is made in business , there is always an alternative that was not chosen This alternative is called the

Why this is important

Over to You!

No point creating a product or service unless people want it

Found a gap in the Market?

But is there a market in the Gap?

Rapstrap Now

Session 2

Crunching the Numbers

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• • • • • •

Revenues (sales) Costs – fixed and variable Profit Contribution & Break-even Cash flow forecasts Market share, size & growth (later)

What You Need to Calculate

Classifying Costs
• Variable costs
– Costs which change as output varies – Lower risk for a start-up: no sales = no variable costs

• Fixed costs
– Costs which do not change when output varies – Fixed costs increase the risk of a start-up

Fixed or Variable?

Fixed or Variable?

Calculating Profit or Loss PROFIT = TOTAL SALES less TOTAL COSTS

An Example
Sales Costs Profit or Loss?

£100,000 £100,000

£75,000 £125,000

£25,000 (profit) £25,000 (loss)

Total sales > total costs = Profit Total costs > total sales = Loss Total sales = total costs = Break-even

Calculating Profit or Loss
£10,000 £6,500 £3,500

Contribution
• Contribution looks at the profit made on individual products • It is used in calculating how many items need to be sold to cover all the business' total costs (variable + fixed) • Contribution is the difference between sales and variable costs

Contribution Formulas
Contribution = total sales less total variable costs Contribution per unit = selling price per unit less variable costs per unit Total contribution can also be calculated as: Contribution per unit x number of units sold

Contribution – Have a Go!

Contribution

4 8,000 11,000 1,250

Breakeven chart
Total sales
100 90 80

Sales and costs (£’000)

70 60 50 40 30 20 10 0 1 2 3 4 5 6 7

Total costs

Fixed costs Variable costs

8

9

10

Units of Output (‘000)

Higher or lower?

Higher or lower?

Cash flow forecast example
Jan Feb Mar Total CASH INFLOWS Investment Sales Total inflows CASH OUTFLOWS Raw materials Wages & salaries Marketing Set-up costs Other costs Total outflows NET CASH FLOW Opening balance Closing balance 4,000 3,500 2,500 3,000 2,000 15,000 -2,500 0 -2,500 5,000 4,000 1,000 1,000 1,000 12,000 -2,000 -2,500 -4,500 5,000 4,000 2,000 0 1,000 12,000 3,000 -4,500 -1,500 14,000 11,500 5,500 4,000 4,000 39,000 -1,500 10,000 2,500 12,500 10,000 10,000 15,000 15,000 10,000 27,500 37,500

Forecast is normally produced by month

Net cash flow is the difference each month between cash inflows and cash outflows Opening balance is the amount the business starts with each month Closing balance = opening balance + net cash flow Negative closing balance suggests business needs bank overdraft or additional financing

Complete the missing numbers

How did you get on?
43 30 6 -5 1 1 8

Session 3

Financing the Start-up

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Q 1

A B

Which of these is a short-term source of finance? Bank Bank overdra loan ft Share Fixed capital assets

C D

Q 2

A B

A bank loan will NOT usually involve which of the following?
Repaymen ts of the loan over its term Payment of dividends out of profits

C D

Interest on the outstandin g amount Security provided to the bank

Q 3

The typical investment by a business angel into a startup is...

A C Anythin B g above D
£5k to £10k £1m

£500k to £3.5m £10k to £750k

Q 4

A B

A startup needs finance to buy fixed assets such as computers. What is this known as?

Capital expendit ure Revenue expendit ure

C D

Workin g capital Startup losses

Q 5

A startup will need to finance...
Cash sales to customer Interest s on cash held at the bank

A B

C D

Dividen ds paid to the bank Pretrading losses

Key Issues for Start-up Finance
• How much?
– Enough v not too much – Safety buffer

Finance needed for…

• When?
– All at once – Drip feed / as needed

• Challenges
– Keeping control – Staying afloat

Main sources of startup finance Internal External
Sources
Founder finance (personal sources of the entrepreneur) Retained profits

Sources
Credit cards Bank loan Bank overdraft Friends & family Business angels Loans & grants

+ Don’t forget “Sweat”

Start-up entrepreneur s usually save cash and costs by working long hours for nothing

Choosing suitable Recommend finance finance for two sources of

Session 4

Understanding the Market

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Some key terms
Demand Elasticity of demand Market share Niche segment

Write a short definition for each

Types of market
A market is anywhere where buyers and Local markets National markets Physical markets Electronic markets

sellers come
together to transact with each other

Factors that affect demand

• • • • • • •

Prices Incomes Tastes & fashions Competitor actions Social & demographic Seasonal Government action

Factors that affect demand

Market segmentation
Segment B
Segmen t A
Segm ent C

Segm ent D

Attractions of niche for a startup
• Smaller & fewer big competitors • Chance to add value = better profit margin • Easier to reach customers • Often higher growth of market

Analysing the market you need There are three calculations
• Market size (volume and value) • Market growth (percentage growth) • Market share (percentage of the market owned by each product or competitor)
to be able to complete in order to analyse market data in Unit 1

Dannii & Cheryl are launching a new fitness club in Chelsea. In the first year, they expect to sell 500 memberships at £2,000 each. Next year, the local luxury fitness market is expected to grow to 2,500 memberships (this year – 2,250)

Have a go!

Evaluating the market opportunity

Watch the video and then plan your answer to the two questions

Session 5

Why Start-ups Fail

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What we’ll cover
• Motives for starting a business • Aims and objectives of start-ups • Business planning • What can go wrong

Over to you!

Motives for being an entrepreneur
• Financial
– Capital gains – Making a living

• Personal
– Proving people wrong – Gaining control – Building something

• Social
– Giving something back

Different Types of Startup

• Two main purposes: • A detailed plan for success • A tool to raise finance

So what can go wrong with a business plan?

Over to you!

• No market in the gap

– Poor market research & unrealistic plan – Competitor response – Wrong people; poor management – Growth is too quick (overtrading) or too slow – Failure to manage cash flow – Economic change (credit crunch, oil prices) – Legal & social change

• Good idea, poor execution • External shocks

Silverjet
Founded: 2006 Product: Lowcost, executive flights to New York & Dubai Price – from £999

Watch the video - then plan an answer

Session 6

Evaluating the Start-up

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• A tale of two start-ups • Which would you invest in? • Which one succeeded? • Which one failed? • Top tips for Unit 1 evaluation

Putting it all together

• Here are two reali-life start-up stories • Imagine you are a potential investor • What would you want to know?

A Tale of Two Startups

Mucky Chips

ItsAWrap

What information would be useful to help you decide whether to invest?

Mucky Chips - Introduction
A new business for potato farmer Bob Mucky His previous business went bankrupt and his existing business is performing poorly supplying potatoes to supermarkets The plan - use their own potatoes to make handfried potato chips

Mucky Chips – The Market
Market size - £4bn; 10 billion packets per year Dominated by Pepsico (Walkers) who have a 50% market share Many other small hand-fried chip makers Investment needed £1m

Mucky Chips – The plan
Small batch production using a own secret, refined traditional recipe Sell direct to independent retailers (e.g. local delis) Packaging - transparent packets so customers can see what is inside Will start small and test samples with customers before investing in full-scale production facilities Existing farm staff to be

ItsaWrap - Introduction
The ultimate wedding service Idea of fashion expert Suzi Bianchi who has obtained backing from a variety of business angels Product - manage wedding gift lists on behalf of couples Focus on high standards of customer service

ItsaWrap – The Market
Market size £200m and growing fast But number of weddings in decline Main competitors are mass market department stores – e.g. John Lewis, M&S

ItsaWrap – The Plan
Strong cash flows – wedding guests pay in advance for their gifts Personal selling via high street showrooms full of stock so customers can browse potential gifts Target customers – 30+ professionals looking for special wedding gifts Expect to manage 2,000 wedding lists p.a - £3,000 each

Mucky Chips

ItsAWrap

Which one do you want to invest in?

Mucky Chips

ItsAWrap

Which one succeeded Which one failed?

Tyrrells

Wrapit