Book of Lesson Scripts (English)


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Book of Lesson Scripts (English)

  1. 1. Novus Business and Information Technology Training Program Lesson Script BookNovus is a comprehensive training course designed for small business owners, college and university students,and other interested individuals to acquire skills related to opening and operating a small business, usingcommon computer software programs in a professional setting, and applying the skills and knowledge through aseries of critical-thinking exercises and an interactive business simulation software program.The Novus Business and IT Training Program was designed and developed by Peace Corps Volunteers inArmenia through a collaboration with USAID and the Gyumri Economic Development Foundation.
  3. 3. BUSINESS CURRICULUM LESSON 1: VISION AND MISSION STATEMENTSSlide 1What if Coca Cola started making cars? Would that be the best choice for Coca Cola? Would it make sense? Would thecompany still be the same? Probably not. So, why doesn’t Coca Cola start making cars? There are a number of reasons,but one important reason is that Coca Cola has a vision and a mission. Imagine going through life without a simplestrategy. You have no aim in your life. You see other people around you accomplishing great things, but you are neverable to even come close to accomplishing such great things. You’ve never thought about what you want from your life.Now imagine living your life according to a strategy. Suddenly, if you focus, everything you do contributes to achievingyour goals and dreams. The same is true in business. If you start a company but do not have a vision and a mission forthat company, then your company could have lack direction and fail. Fortunately, there are two great tools we can use togive a business the focus and purpose it needs for success.Slide 2These tools are the vision statement and the mission statement. But what are they exactly? • A vision statement defines your long term dream. • A mission statement defines the purpose of your company.Why are they important? The vision and mission statements inspire and motivate staff. They guide the way a companyuses resources in a focused and consistent way. They also form the basis for a company’s strategic plan. They act as a mapfor an organization. They are guiding principles for how a company operates. Vision and mission statements give acompany financial and emotional benefits, if properly written and followed. Besides those benefits, just by creating thestatements a business leader will ask important questions about what the business should be.In this lesson you will learn what makes a vision statement and mission statement, how they’re different, common mistakesin writing and using vision and mission statements, and suggestions for creating them and using them.Slide 3The vision statement is your dream for the future. It is okay if the vision is very ambitious or even seems impossible. Bycreating an ambitious vision statement, you create something that you can always search for. The vision statement shouldnot be easily achievable or else it would no longer be a vision. If your vision is an unreachable dream, then your businesswill always be working towards reaching it. Having a big challenge to work towards will motivate your business.A vision statement can be about the industry your company operates in. It can also be about a social issue that yourcompany aims to address. A social issue can serve as extra motivation for employees. They will feel like they are part ofsomething bigger than just a job. They will be working towards making the world a better place and solving the problemyou’ve addressed in your vision. The vision statement should be clear and simple. It is important not to use too manywords. The clearer the statement, the more encouraging it is for the company’s employees to make the vision a reality. Aclear message will focus the company on the goal.Slide 4 • Ford (from the early 1900’s): Democratize the automobile • Honda (from 1970): We will destroy Yamaha • Sony (from the 1950s): Become the company most known for changing the worldwide poor-quality image of Japanese products • Boeing (from 1950): Become the dominant player in commercial aircraft and bring the world into the jet age • Avon: To be the company that best understands and satisfies the product, service and self-fulfillment needs of women – globally.Slide 5 Creating a Vision StatementSo, how do you create a vision statement exactly? Let’s take a look at the process. When creating a vision statement, youshould:
  4. 4. 1. Have conversations – You need to discuss the future in your organization. Gather employees from across the organization. If you have a big organization or company, you can use representatives from each part. Then, with those employees, discuss a future that your employees and management want to create together. 2. Have insight – You need to see your situation clearly. Think about what is going on inside your company AND what is going on in the outside world. 3. Include people – The vision should not be created by 1 person after a meeting with all the staff. It should be a team effort among many people. You should build the vision together.Since a vision statement is about the future, it should be worded accordingly. Most vision statements begin with “Tobecome” or “To be”. The statement should make people want to be a part of your company. When employees read it,they should be proud to work there. When job-seekers read it, they should want to work there. And when your customersread it, they should feel good about doing business with you. Thus, you can use words like “safest, best, premiere” in orderto inspire. For example, the phrase, “To be the safest…” is a good start. The statement should define what business youare in. It should be related to who you are as a company. The vision should be one sentence long. You should be able toremember your vision. If you make a vision longer, it may not be used effectively.Slide 6When you create a vision statement, you should be careful. While it seems like an easy, simple task, it actually requires a lotof work and thought. You must think about what is important to your company and its employees. Here are somecommon problems to avoid: • Is it actually de-motivating? – Because a vision statement is about the future, employees might think that it is too distant, unreal, or irrelevant. Also, when creating a vision statement, there can be frustration because of the differences of the ideal future and the current reality. • Only management is involved in creating the vision – Sometimes a vision statement can create tension between management and staff. If the staff is not included in creating the vision, the vision might not accurately represent reality. Worse, the staff might not feel like the vision is their own. They might not be willing to work towards the vision. When creating a vision, you need the ideas of everyone on your team. • It is too long – Ideally a vision statement is just one sentence about what you want the future to be. If it is longer than one sentence, the message will be lost. If you try to make everyone happy, you may make the sentence long and unclear. If it is not clear, the message will be confusing and less effective. • Visions that don’t say anything unique about your company – Don’t make your vision “To be the global leader in profit.” Is that really what you want to do? In that case, you’ll be competing against all other companies from all other industries. Instead, include something specific to your situation in order to make the vision relevant and focused.Slide 7The mission statement is your company’s purpose. Why does your business exist? The mission statement should explainwhy. A mission statement can explain what your business does, who your customers are, or what the company’s corevalues are.Mission statements can be different lengths. They usually contain things like the type of products and services the businessprovides, company values, location, and position in the marketplace. While there are no strict rules for creating a missionstatement, it should give an outsider a good idea of what your company is like.Many people confuse mission statements and vision statements. While a vision statement talks about future hopes anddreams, a mission statement tells us what your company does. The mission statement is what you do best every day. Thevision statement is what the future will look like because you do that mission so well.Slide 8Coca Cola • To refresh the world... • To inspire moments of optimism and happiness... • To create value and make a difference.Pizza Hut: We take pride in making a perfect pizza and providing courteous and helpful service on time all the time. Everycustomer says, "Ill be back!" We are the employer of choice offering team members opportunities for growth,advancement, and rewarding careers in a fun, safe working environment.
  5. 5. McDonald’s: To provide the fast food customer food prepared in the same high-quality manner world-wide that is tasty,reasonably-priced & delivered consistently in a low-key décor and friendly atmosphere.Courtyard by Marriott: To provide economy and quality minded travelers with a premier, moderate priced lodging facilitywhich is consistently perceived as clean, comfortable, well-maintained, and attractive, staffed by friendly, attentive andefficient peopleSlide 9When creating a mission statement, again, you should include people from across the organization in the conversation.Then, ask yourself: 1. Who is your target client/customer? 2. What product or service do you provide? 3. What makes your product or service unique?These three points should be the basis of your mission statement.It’s important to also think about things that excite you about your business. Think about why others would get excitedabout your business too. Try to include these exciting ideas in your mission statement. Also, make sure to think about yourbusiness from your customers’ view.Next, think about what is important to your company. What is important to you? Although mission statements can bedifferent lengths, try to not write a long mission statement. Think about your customers. Will they want to read what youhave just written? If your mission is short, clear, and exciting, your customers and employees will have an easier timeremembering it.Creating the mission statement sounds simple, but it can be difficult. You should not hurry when creating a missionstatement. Maybe the first version you write will be revised several times before you have a great mission statement. Is itinspiring? Does it describe your business? Does it explain why your business exists? Finally, make sure several peoplereview the mission statement before you finish. You may need to change or improve the language of the missionstatement. It’s best to have other people read the statement to see if it is clear and gives the correct message. The missionstatement should focus your organization, but it should not lock you in a certain direction. If your business is growing andchanging, then you should rethink your mission. It’s okay to change your mission over time.Slide 10 • Length: Perhaps the biggest mistake people make when writing mission statements is making them too long. Your goal is to write something that people will read and remember. A long mission statement does not accomplish that goal. • Boring: Many mission statements are just boring. People will not read a boring mission. A boring mission statement leaves a bad impression of your business. • Too general: The mission statement should be specific to your company. Do not make it too broad. It should reflect what a great company you have. • Not clear: Too many mission statements use technical words that people outside the organization don’t understand. Avoid using popular, meaningless business words. Find a way to write a message that everyone can understand. • Unbelievable: While it’s okay for your vision statement to be ambitious, the mission statement should be more realistic. If your employees or customers don’t believe your mission, then it will not be effective.Slide 11Mission statements are important to give your company a strategic direction. However, they are often poorly used.Researchers once asked managers of leading North American companies about their mission statements. Here are somecommon problems they found with using mission statements as tools to guide organizations: • Poor statements: Many companies use statements that do not follow the rules above. There are many statements that have no value because they are poorly written. • Mission impossible: Most managers admitted that they were not achieving the goals in their statements. • Unclear: Only 8 percent of managers believed their statements were clear. This fact could be the reason why the goals were not being achieved. • Dissatisfaction: Many managers were not happy with the content of the statement and the process of creating it. Many statements are approved even though they are not ideal.
  6. 6. • No influence: The statements had a positive influence on behavior in only a very small number of companies. • No involvement: The writing process included many more top management employees than lower level employees. • Writing for the wrong reasons: Only 35 percent of companies said they use mission statements to inspire and motivate their employees.Clearly, mission statements are misunderstood and misused in many major companies.Slide 12Besides avoiding the problems described on the previous slide, there are other things your business can do to ensure yourmission statement is productive. The same study found several important connections. The influence of a missionstatement over the behavior and actions of organizational members is much greater when: • More various stakeholders are involved in developing the mission statement • Organizational structure matches the mission • The mission is satisfyingIf you follow these guidelines and avoid the mistakes previously mentioned, you can help your company create a missionstatement that will lead you in a positive direction for years. LESSON 2: MARKET ANALYSIS AND SWOTSlide 1A very important step in starting a business is to analyze the “market” in which it will operate. While a “market” may be aphysical place, in business terms it refers to a non-physical collection of businesses and customers. And before you enterthat market as a business, it is necessary to understand the market, how you can operate in it and how others are operatingin it.Market Analysis is an important step to perform before starting a business. While there will always be someone willing tobuy something, you need to see if there may already be too many people competing in that area. Basic things to considerare: • Market Size. Some markets (food, clothing) are based on basic necessities and will always be large because people will always need them. Others (flowers, hair salons, restaurants) may not perform as well when the economy is bad and people have less to spend or do for themselves. There are many ways to measure the size of a market. You can look at the total of all the sales from companies operating in the market. You can also look at the number of customers in a market and how much they usually spend on that product or service. For a young women’s clothing store, you might find how many live in the area, how often they shop, and how much they usually spend. • Market Share. The portion of sales in a market that you think your business can support and the portion of customers who will buy from you when others are selling the same thing. If one company has a monopoly in a market, you would need to give customers a very good reason to buy from you instead of that company. • Market Trends. Is the market getting bigger or smaller? While more people are buying mobile phones every year (a growing market) fewer are buying phones for their homes (a shrinking market). Are people starting to wear jeans instead of skirts? Are leather coats becoming more popular than fur coats? Is the cost of food at a café going up? • Market Growth Rate. If it is a growing market, will is stop growing at some point? A few years ago, everyone was buying notebook computers but now many prefer iPad “tablet” devices. Currently the market growth rate for notebooks is lower than the growth rate for iPads. Many things can influence the growth of a market, including inflation, population, consumer choices and price changes.As you analyze the market, you need to decide whether the market can support another business. While the single grocerystore in a village may be profitable, opening a second store in that village may not be profitable if the market does not needtwo. Similarly, opening a business in a market that is getting smaller may not be a good idea.Slide 2Once you have decided that a market is big enough that your business can be part of it, a helpful tool to help understandhow well you can compete is to look at four factors: • Strengths – What you and your business are good at. • Weaknesses – What you and your business don’t do as well as others.
  7. 7. • Opportunities – Conditions in the market (or changes you expect) that can help your business if you take advantage of them. • Threats – Conditions in the market (or changes you expect) that can hurt your business if you don’t protect yourself.In English, this tool is called a “SWOT Analysis” and it is a tool for reviewing an organization and its environment. It isthe first stage of planning (for either a new business or for an existing business to plan for a future period) and helpsbusiness people to focus on key issues.Slide 3The SWOT analysis begins by making a list of internal strengths and weaknesses in your organization. You will then list theexternal opportunities and threats that may affect the organization, based on your market and the overall environment.Don’t be concerned about detailed descriptions of these topics at this stage; bullet points may be the best way to begin.Capture the factors you believe are relevant in each of the four areas. As you develop a marketing plan, you will want toreview what you have noted here. The main purpose of the SWOT analysis is to identify and assign each significant factor,positive and negative, to one of the four categories, allowing you to take an objective look at your business. The SWOTanalysis will be a useful tool in developing and confirming your goals and your marketing strategy.As you perform a SWOT analysis, remember that the strengths and weaknesses you identify are factors specific to yourcompany (internal factors). Opportunities and threats come from other sources – competitors, government, nature,society, etc (external factors). You can start with either the internal or external factors. But if you start with the internalfactors, you may need to add to that list if your list of external factors makes you realized you overlooked some.Slide 4It is important to focus upon the part of the market you will operate in (the “market segment”). If you are planning tooperate a clothing store for young women, you should focus on that market segment – young women’s clothing. Thingsthat do not affect the buying and selling of young women’s clothing (for example, the price of coffee) should not beconsidered unless they can have a direct impact on your business (for example, if everyone in your town makes moneyselling coffee and a lower price may mean less money to buy clothes).Slide 5Once you are focused on your market segment, you then ask “What is important to a buyer in that segment when he or sheis deciding whether to spend money?” and identify the ones that are most important. When considering your strengths andweaknesses, you need to take the consumers’ view. You also must think about the customers’ opinion of your businesscompared to your competitors. Opportunities and threats should also be specific to a segment of the market. That is,while a projected increase in tourism may be an opportunity for your country, it should only be considered if your locationis a tourist destination and your business is one that tourists may buy from (for example, a café near a tourist attraction).Slide 6Strengths describe the positive things, tangible and intangible, about your organization that are within your control. Whatdo you do well? What resources do you have? What advantages do you have over your competition? You may want toevaluate your strengths by area, such as marketing, finance, manufacturing, and organizational structure. Strengths includethe positive things about the people involved in the business, including their knowledge, background, education, contacts,reputations, or the skills they bring. Strengths also include things such as available capital, equipment, credit, establishedcustomers, copyrighted materials, patents, information and processing systems, and other valuable resources within thebusiness.Strengths capture the positive aspects internal to your business that add value or allow you to compete better (a“competitive advantage”). This is your opportunity to remind yourself of the value existing within your business.Examples of strengths for a SWOT analysis could be: • Your clothing store has a brand that others do not have. • You have a deal with a supplier so that you pay a lower price than your competitors pay. • The location of your business is on a main road and people see it all the time. • The cook in your café has a reputation for preparing delicious food. • You are well known and trusted in your community.Slide 7
  8. 8. Note the weaknesses within your business. Weaknesses are factors that are within your control that reduce your ability tobe competitive. Which areas might you improve? Weaknesses might include lack of expertise, limited resources, lack ofaccess to skilled workers or technology, inferior service offerings, or the poor location of your business. These are factorsthat are under your control, but need to be improved to run your business in the best way.Weaknesses capture the negative aspects internal to your business that reduce the value you offer, or place you at acompetitive disadvantage. These are areas you need to improve in order to compete with your best competitor. The moreaccurately you identify your weaknesses, the more valuable the SWOT analysis will be for planning your business.Examples of weaknesses for a SWOT analysis could be: • You have the same products or services as your competitors. • You competitor has a deal with a supplier so that you pay a higher price than he pays. • The location of your business is not very visible. • The quality of your goods or services is not good. • You have a damaged reputation • You are new to the community and unknown.Slide 8Opportunities are the external factors that represent the reason for your business to exist and do well. These are external toyour business. What opportunities exist in your market, or in the environment, from which you hope to benefit?Opportunities are sources of additional profits you can earn by implementing your marketing strategies. Opportunities maybe the result of market growth, lifestyle changes, positive market perceptions about your business, or the ability to offergreater value that will create a demand for your services. It is important to think about the timing of the opportunities.Does it represent something that will continue for a long time, or is it something that may occur only once? How quicklydo you need to act?Opportunities are external to your business. If you have identified “opportunities” that are internal to the organization andwithin your control, you will want to classify them as strengths.Examples of opportunities for a SWOT analysis could be: • A factory will be opening near your café and workers will need a place to eat. • A competing business is not doing well and may soon close. • The lack of young men’s clothing stores may allow you to expand your business beyond young women’s clothes. • A new trade deal by your country’s government will mean that you can buy your inventory less expensively.Slide 9What factors are potential threats to your business? Threats include factors beyond your control that could place yourmarketing strategy, or the business itself, at risk. These are also external – you have no control over them, but you maybenefit by having plans to address them if they do occur.A threat is a challenge created by an unfavorable trend or development that may lead to reduced sales or profits.Competition – current or new – is always a threat. Other threats may include price increases by suppliers that you can’tafford, governmental regulation, economic downturns, unfavorable media coverage, a shift in consumer behavior thatreduces your sales, or changes in technology that may make your products, equipment, or services obsolete. Whatsituations might threaten your marketing efforts? List your worst fears. Part of this list may be very unlikely, but it couldstill add value to your SWOT analysis.It may be valuable to classify your threats by asking “how serious is it?” and “how likely is it?” The better you identifypotential threats, the more likely you can plan for and respond to them. You will be looking back at these threats when youconsider your contingency plans.Examples of threats for a SWOT analysis could be: • The factory near your café is going to close and many of your customers may no longer be in the area. • A nationally known business opens a store in your town and you have new competition. • Your town is becoming more conservative and young women may not buy the clothes you are selling. • Taxation is introduced on your product or service and buying inventory will become more expensive.Slide 10Once you have identified all four groups, you can then match your strengths to opportunities and rank those opportunitiesthat are most profitable or that will last. Then you need to look at the impact of threats and which create the biggestproblems when looked at together with your weaknesses. The internal strengths and weaknesses, compared to the external
  9. 9. opportunities and threats, can give you information about the condition and potential of the business. How can you useyour strengths to better take advantage of the opportunities ahead and minimize the harm that threats may introduce ifthey become a reality? How can weaknesses be minimized or eliminated? The true value of the SWOT analysis is inbringing this information together, to assess the most promising opportunities, and the most crucial issues.Analysis of these factors will play a part in developing strategic plans for the business, which should take into account howto take advantage of the opportunities and prepare for the threats to the business. LESSON 3: STARTUP CAPITAL AND FINANCINGSlide 1Each type of business requires different resources. A clothing store does not require plates and spoons, while a café willnot require clothing racks. In general, there are two types of costs for a new business: one-time costs and recurring costs.One-time costs are purchases that result in the business owning a piece of equipment or other item. Recurring costs areexpenses that the business will continue to pay during its operation. Both types are equally important for a business ownerto consider.Once you have decided what type of business you want to start, you need to determine what kinds of resources you willneed to operate the business. The cost of items such as equipment, physical space, and inventory need to be taken intoaccount. The total cost for all of these things is referred to as startup capital and is a key component of your business plan.Most people will not have all the money they need to successfully start their business. Further, many busi nesses donot make a profit in the first few years of their operation, so the calculation of startup capital should be carefully analyzedin order to prevent your business from running out of money. Once you have figured out the total cost of opening yourbusiness, you need to consider how to pay for them.For new businesses, there are two main forms of capital: debt and equity. In this lesson, you will learn about the mostcommon types of resources needed for businesses and different methods for financing them.Slide 2Many one-time expenses are paid before a business opens its doors. Common examples of one-time expenses are: • Renovation of a room or building where your business will operate. • Purchase of machinery needed to manufacture your product or deliver your service. • The cost of registering your business with the local authorities. • Purchase of office furniture and computers for your staff to use. • Purchase of a delivery truck for transporting your products.For a café, examples of one-time expenses might include the tables and chairs where the customers will sit, the ovens andrefrigerators where food will be prepared and stored, and the sign that will be posted outside your business so yourcustomers can find your café. For a clothing store, one-time expenses might include renovating the interior of a building tocreate rooms where customers can try on clothes or purchasing display racks for your inventory.It is important to carefully analyze your market and prospects for growth before determining how much and what kind ofequipment you need. For example, if you are opening a café and expect 100 people to come eat every day, you might onlyneed one refrigerator. However, if you expect this number to grow to 300 within the next two years, you might want toinvest in two or even three refrigerators.Slide 3There are many costs that a business will have to pay on an ongoing basis. Common examples of recurring costs includethe wages you pay your staff, the monthly rent for your business’s office, and expenses for selling and promoting yourproduct or service. For a café, recurring costs might include the ingredients for the food you prepare or the monthlyamount you pay for electricity, gas, and other utilities.In the beginning, many businesses do not make a profit, so it is common to include theses costs in your startup capitalcalculation for the amount of time you believe it will take for your business to become profitable. If you believe that yourbusiness will be profitable after three months, then you should include three months of recurring costs in your startupcapital calculation. Once a business’s profit is more than these recurring, or operating, costs, the business is self-sustainable.However, until it reaches that point, a business needs to have enough cash to continue operating.
  10. 10. Slide 4Once you have totaled your one-time expenses and the amount of recurring costs that will be incurred before yourbusiness is self-sustainable, you need to consider what financing options are available. If you can pay for all of the startupexpenses with your own savings, you are in a much better position than most, if not all, people who start businesses.Typically, a business requires external money to start.Remember to remain conservative in your estimations for one-time and recurring costs. If you are too optimistic abouthow much of a profit your business will make and then your actual performance is much worse, you will find yourselfwithout enough cash to operate. In that case, you either have to find more capital or shut down.The two most common types of external financing are debt and equity. We will now explore the main characteristics ofand differences between debt and equity. However, it is important to remember that the availability and attractiveness ofexternal financing is largely dependent on the city, region, and country in which you start your business. Some peoplestarting businesses will have no access to debt while others might be completely reliant on it.Slide 5In its most basic form, debt is simply money that one person borrows from someone else to be paid back at a set time inthe future. Typically, a financial institution such as a bank provides debt capital to businesses in the form of loans. Thereare many different types of loans, but the three main aspects of a loan are the amount borrowed, when and how thatamount must be repaid to the bank, and the annual interest cost of the borrowed money. We will explain each of theseaspects: 1. Amount: The amount borrowed, also referred to as the principal amount, is how much a bank lends to a business. Some organizations will provide loans as small as $50, while others have the ability to lend billions of dollars. 2. Payback Period: When a business borrows money from a bank, the bank will say when and how the business must repay the principal amount. This is called the payback period. The length of the payback period depends on the size of the loan, what it is being used for, and how easily the bank thinks the business borrowing the money can pay it back. Sometimes, a payback period may be as short as a few months, though it is more common for it to be many years. Further, some banks might require the principal to be paid back in small installments over time, which is referred to as loan amortization, or paid back in a lump sum at some point in the future. 3. Interest Rate: The bank charges the borrowing business an annual price for the use of its money. This is called the interest rate and it is a percentage of the amount of money borrowed. For example, if a bank charges a 10% interest rate on a $1,000 loan, the borrowing business will have to pay $100 each year in interest. Similar to the payback period, interest rates vary widely and can be as high as 25-30% in some places.There are many other features, requirements, and restrictions to debt that are much complex and variable. For now, justremember that these are the three main factors to consider and that they are intertwined.Slide 6There are many advantages to using debt capital. • Debt is easy to understand. Many banks provide loans to businesses and have standard legal contracts that outline the main terms and features of the loan. The borrower has the ability to review and negotiate certain terms. Once a contract is signed, a business owner knows when and how much money will be paid back every year, making it easy to budget. • In many countries, interest payments on debt are tax deductible, meaning that the payment of interest reduces the amount of taxes that a business must pay. • Debt does not result in loss of control in your business. As will be explained later, using equity to finance your business typically results in giving up a share of ownership in the business. By taking out a loan from the bank, a business does not give the bank any operational control or influence on the strategic direction of the business. • Debt is “cheaper” than equity. In finance, each type of capital has a cost or price to it. For debt, this cost is the interest rate that a business pays to a bank. For equity, the cost is much more complicated to calculate since it includes the future profits of the business as well as the operational control given through ownership to other investors. This is an advanced lesson in finance that will not be covered here, but it is important to note nonetheless.While debt has its advantages, there is one main risk to consider, which is the threat of bankruptcy as a result ofnonpayment. Most banks require some type of collateral, or security, for a loan. For a small business, collateral might bethe equipment and machinery purchased, any existing cash the business has, or even the assets of the business owner. Thiscollateral is the bank’s protection from lending money to a business and then not receiving its principal back. A loan
  11. 11. contract typically gives the bank the right to take these assets from the business and sell them if that business is unable tomake the required payments on the loan.If a business does not make the required payments and the bank seizes these assets, it might be very difficult for thebusiness to continue operating. Further, in many countries, a business’s lender often has the legal right to force thebusiness into bankruptcy if they do not receive the interest and principal payments on schedule.While debt capital is more widely available than equity, businesses need to consider the potential dangers that an unpaidloan might have on their business. Banks that serve small businesses know about the challenges many new businesses willface and will sometimes work to restructure the loan. However, this will depend on the particular bank and theperformance of the business.Slide 7Equity, or investor equity, is capital obtained from investors in return for an ownership stake in the business. Equity maybe contributed from friends, family members, and investor groups. Raising equity capital is accomplished by selling stock,which is a legal document granting an investor a certain ownership percentage in return for some amount of money.For example, if someone is attempting to open a clothing store and needs to raise $100,000 of equity capital for startupcosts, the owner might grant a 50% ownership position in the clothing store to a wealthy friend for contributing the$100,000. The percentage of ownership given to investors will depend on how much equity the business needs and theestimated value of the business. For example, if a business’s potential future value is $1,000,000 based on profitprojections, a $100,000 investment might be worth far less than a 50% ownership stake.This ownership stake gives the investors two main rights. First, it entitles them to be involved in the strategic direction ofthe business and may, depending on how much they own, let them overrule management on certain decisions. In otherwords, it gives them some control over the business.Second, investors are entitled to a portion of the business’s profits and will be able to control whether those profits areinvested back into the business or paid out to investors as cash. As will be explained later in this lesson, profits that arereinvested in the business are known as retained earnings, which represent an additional financing option not typicallyavailable to new businesses.Slide 8Raising capital in the form of equity provides one key advantage over debt: it does not require repayment. Whereas abusiness is obligated to pay back both the principal amount of a loan as well as interest payments, equity capital stays in thebusiness. In its first few years, a business often needs to keep as much cash as possible to pay for operating costs. Makingmonthly payments to a bank can be very difficult if cash flows are uncertain and irregular for the new business. Recall thata bank might seize control of a business’s assets after missing only one interest payment and it has the option to force thebusiness into bankruptcy. Since there is often no guarantee of repayment with equity, there is a reduced threat ofbankruptcy.Further, if a business receives equity from an experienced investor or investment firm, that person or group might be ableto contribute significant knowledge and strategic advice as the business grows.The main drawback of equity is that it requires giving up a percentage of your business, which reduces the control theentrepreneur has over the business’s strategy as well as the profits. Equity investors take a larger risk than banks, since ifthe business fails they could lose their investment. Thus, many equity investors take a very active role in the companiesthey invest in. They might force a manager to make certain decisions that he or she disagrees with, depending on whatpercentage of the company they control.In the previous example, the investor would have control over 50% of the business’s profits. Given the loss of control overthe business and the right to this much of the business’s profits, equity is considered a more expensive financing optionthan debt.Slide 9After deciding on how much startup capital your business needs, the next difficult decision is how much debt and howmuch equity to use to finance the business in its early years. In summary, let’s review some of the main advantages of bothoptions.
  12. 12. The main advantages of debt are it is easily understandable with predictable repayment terms, interest payments that oftenreduce how much a business must pay in taxes, and it does not result in any loss of control over your business as long as itis paid. The main disadvantage is that debt requires repayment. This can be especially hard for a new business that shouldbe trying to conserve cash. Most importantly, if the business does not perform well and does not make its requiredpayments, the bank might seize the assets of the business, force the company into bankruptcy, or even sue the businessowner.The main advantages of equity are that the investors might be valuable sources of strategic advice, the terms of theinvestment are very negotiable, and that the business does not need to repay the equity investment if it fails. The maindisadvantages are that equity requires the firm to give up some control over the business as well as a percentage of thebusiness’s future profits.As both debt and equity have positives and negatives, many companies use a combination to finance their business’sstartup costs.Slide 10The concepts noted throughout this lesson apply not only to new businesses, but existing businesses that are expanding orpursuing new opportunities. These often require additional financing and the business’s management will have to evaluatewhether it is better for the business as a whole to take on additional debt, equity, or a combination of both.However, there is one additional resource that existing businesses may have that new businesses usually do not, which iscash accumulated through historical profits. This is called retained earnings. Once a business becomes profitable, it candecide whether to pay out its profits to investors or to reinvest it in the business. Many businesses will reinvest it into thebusiness by saving it. They will gradually build up a significant cash reserve that is kept in a savings account with a localbank. These funds can be used to grow the business without having to borrow money or appeal to equity investors. Thisreduces the need for external financing, increases the business’s sustainability, and provides flexibility to take advantage offuture opportunities. LESSON 4: ESSENTIAL ECONOMICS PRINCIPLESSlide 1There are many people in the world and each wants different things. Some of the things people want are plentiful, whileothers are not. In total, the things that people want usually exceed what exists to satisfy what we want or need. As a result,we can say that resources are limited – also referred to as “scarcity”. Economics is the study of how we make decisionsabout using these limited resources. While each of our individual resources and desires may differ, people tend to makedecisions in similar ways.Slide 2There are different types of economies. In a planned economy, the government decides what is available to buy and howmuch of each thing. In a market economy, people and businesses decide what is available to buy and how much. Manyeconomies today are mixed – meaning that people and businesses decide what is available for most things, but thegovernment is involved in certain areas such as transportation, health care, police protection and other areas. In mixedeconomies, the government may also limit the prices that may be charged by businesses or impose other forms ofregulation.Slide 3Market and mixed economies are based on how things that people want are provided to them. Businesses exist to provideeither things, also known as goods, or services – both of which are what we call outputs. Businesses need resources inorder to do that and these resources are what we call inputs. Inputs may be natural resources such as wood or electricity,human resources which are workers, and equipment such as machines or trucks.Slide 4There are two basic participants in economics – suppliers and consumers. Any time that you purchase something, you area consumer in the transaction and any time you sell something you are a supplier. Most suppliers are also consumers sincethey need to purchase the inputs for their businesses, such as a baker who needs to buy flour so that he can then sell bread.
  13. 13. As a worker, you are also a supplier since your skills are your output and your salary is what your employer pays for thoseskills. You then use the salary you earn to buy food, clothing, medicine and whatever else you need.Slide 5The idea that there are always two sides to a transaction is a fundamental concept in economics. Keeping this in mind,another concept, the flow of income, can be easily explained. There are two main exchanges in the flow of income: theflow of money and the flow of resources. As noted above, people are a critical input for most business as they supply thelabor and skills to provide different goods and services. These goods and services, otherwise called the outputs, are thensold to other people, or consumers. In exchange for their time and work, people are paid wages or salaries. They then usethis money to purchase other goods and services.For example, let’s assume you own a café. You pay your waiters, waitresses, and cooks to come to prepare and serve foodto your customers. Your staff uses their wages or salaries to purchase other items that satisfy their personal needs, such asrent for their house or schooling for their children. On the other side of the flow of income, your customers pay your caféfor the goods and services they receive.Slide 6The most basic concept in economics is the concept of supply and demand. Defined simply, supply is what is available in amarketplace and demand is what consumers want. In a perfect situation for both suppliers and consumers, supply anddemand would be equal – that is, everyone can buy something that they want because it will be available, and suppliers cansell all that they produce. Unfortunately, nothing is perfect and various factors influence both supply and demand.Slide 7Demand is a combination of all consumers’ desire and their ability to purchase. In its simplest form, demand for a good orservice increases as price goes down and demand decreases as price goes up. This chart illustrates what is called a demand“curve” showing this relationship. As we will discuss shortly, many other things affect demand, but price is almost alwaysinvolved since money is a limited resource and people make decisions in ways that maximizes the utility of this scarceresource.As you can see in the chart, the supply curve is the opposite of the demand curve. That is, as price increases, suppliers inthe market will produce more because doing so can lead to higher profits. While the goal of consumers is to use money aswisely as possible, the goal of suppliers is to maximize their business’s profits. On the other hand, if the market pricedeclines, many suppliers will not find it profitable to sell that item and will decrease production, thereby decreasing supply.To better explain how the behavior of consumers and suppliers differ, let’s look at a simple example. Let’s assume that youown a clothing store that sells women’s dresses. There are two types of dresses: Italian and French. For each Italian dressthe clothing store sells, it makes a profit of $100. For each French dress it sells, the profit is $50. If the demand for eachtype of dress is the same, the owner of the clothing store will try to sell as many Italian dresses as it can, since the profit ishigher. In other words, the clothing store will focus on the higher-profit dresses. From the consumer’s perspective, let’sassume that the Italian dress has a selling price of $200 and the French dress has a selling price of $150. If the consumerhas no preference for either type of dress, he or she would choose to purchase the French dress since it is cheaper. Bypurchasing the French dress, the consumer retains $50 of their limited money supply to use on other goods or services.What is important to note in the chart is where the demand curve and the supply curve meet. That is the point of“equilibrium”, meaning the price is such that consumers want the same amount as businesses are willing to provide. In aperfect market, this would be the price of the good or service you are analyzing. In the real world, though, equilibrium doesnot happen often; either the price is too high for consumers or quantity is higher than consumers want. In real life, thedemand and supply lines are constantly shifting up and down.Slide 8So what determines demand? What can make consumers want something and, more important to a supplier – what canmake consumers want more of something? As we said earlier, market demand is the sum of individual consumers’ demand.Besides price, these are some factors that influence individual demand: • Income – whether a person can afford something or not, especially if he loses his job • Preferences – coffee will always be in demand, but not everyone likes it • Weather – demand for umbrellas always increases when rain start to fall • Time of year – warm clothing is more in demand in winter than in summer
  14. 14. • Relative price to other goods – if two shirts are identical except for price, the less expensive one will likely be more popular • Consumers expectation – if prices are expected to increase, people may buy more before the increaseSlide 9Some factors that can influence the aggregate or market demand are: • Distribution of wealth in community – if there are no wealthy people in a community, luxury goods will not sell well • Community common habits – in a conservative community, more “fashionable” clothing may not sell well • Number of buyers in market – in a small community, you cannot expect to sell a large number of things needed only once per year • Growth of population – baby food will sell better in a community with a high birth rate than in one with a falling population.Understanding how demand changes is very important when running a business because a change in demand can alsochange the equilibrium price. Many businesses plan for changes in demand by increasing or decreasing supply and thesepredictions are sometimes not correct.Slide 10As a general rule, the following can be expected: • If demand increases and supply remains unchanged, then it leads to higher equilibrium price since there are more consumers demanding a good or service than the current suppliers can produce. • If demand decreases and supply remains unchanged, then it leads to lower equilibrium price since suppliers will have to lower the price of their good or service to motivate consumers to purchase what is available. • If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity since, like the previous example, the suppliers will lower their price in an effort to attract customers. • If supply decreases and demand remains unchanged, then it leads to higher equilibrium since consumers with more resources, or money, will be willing to pay more in order to acquire the good or service.Slide 11The first of these rules is shown in the chart. As an example, residents of a village need wood to heat their homes in thewinter. In a winter that is colder than normal, the demand will increase but the supply stays the same because there are nomore trees to cut. As a result, the equilibrium point moves up along the supply curve and the market price increases.These representations of supply and demand are simplified examples to illustrate the concept. In reality, businesses maynot be able to increase supply to meet higher demand and consumers will not always purchase more if prices decline. Thegeneral concept, however, remains valid and some businesses will reduce production to increase prices – by makingsomething harder to find, they may affect consumer behavior.The concept of supply and demand is not limited to things that consumers purchase. It is also true with salaries in casessuch as when doctors are needed (employer demand) but few are trained to be doctors (population supply). It can alsoapply to rental costs for property and equipment, or any other case where there are willing buyers and sellers.Slide 12Another basic economic concept is “opportunity cost”, which is sometimes defined as expressing the relationship betweenscarcity and choice. Said another way, when you only have enough resources for one of two things, you must choose oneand your opportunity cost is not having the other. This is different from the actual cost of something – meaning moneythat you spend. Opportunity cost is not having something because you chose something else instead.This applies to both consumers and suppliers. In the case of a consumer, one might have $20, which is enough money tobuy a dress or a pair of shoes but not both. If the consumer buys the dress, her actual cost is the $20, and the shoes areher opportunity cost. In the case of a supplier, the manager of a business may decide to make dresses instead of shoes.The cost of material and labor are some of the actual costs to run his business, while the profit he might earn from sellingshoes is his opportunity cost because he chose not to make and sell them.Another way to think about opportunity costs is to remember that, because our resources are limited, we have to makedecisions about how we use these resources. Each decision usually requires people to think about the trade-off of thatchoice. Should I purchase the Italian dress or the French dress? Should I sell coffee or tea? When making decisions, most
  15. 15. people will consider the trade-offs of how a particular decision will affect how they could use those limited resources in adifferent way.Slide 13One final concept important to market and mixed economies is the importance of trade and specialization. Simply put, ifpeople are able to provide the goods or services for which they are best suited, that is they possess specific skills or abilitiesthat allow them to more efficiently or effectively provide that product, they should specialize in the production of thatspecific good or service. The easiest way to understand this concept is through a simple example.Let’s assume that you and your neighbor both own dairy farms. Both of you can make and sell butter or cheese. Bothproducts are sold by the kilogram and are the same price. In the past, both you and your neighbor have produced and solda combination of butter and cheese in your community, competing against each other. Let’s assume, though, that it takesyou one hour to make one kilogram of cheese and three hours to make one kilogram of butter. Your neighbor, on theother hand, can make one kilogram of butter in two hours, but it takes him four hours to make one kilogram of cheese.Does it make more sense for you each to spend your entire day making both cheese and butter? Or would it be better ifyou specialized in the production of cheese and your neighbor specialized in the production of butter? By specializing inwhat you both excel at, you could produce more butter and more cheese, thus increasing your profits by selling morekilograms of both.Slide 14It is important to understand that these concepts do not exist independently. For example, understanding opportunity costcan help you decide whether to expand your current business or enter a new one. In the example of a café, you may have achoice of producing more coffee or starting to sell tea also. If you choose to sell more coffee, the potential profits fromtea are your opportunity cost. But if you see growing demand for tea, and the equipment you own allows you to expandand to sell both tea and coffee, you may lower your opportunity cost by providing two products that customers want.As you can see, managing a business involves many decisions – most of which are complicated and most of which canimpact other decisions you must make. But if you gather enough information, and think about how the decisions relate toone another, you can use these managerial economic principles to better understand what your business should expect, andmore informed decisions can help to make a better business. LESSON 5: MARKET RESEARCHSlide 1When you are starting a business, it is important to analyze your environment. An earlier lesson explained how to do aSWOT analysis, which is a helpful tool for outlining the opportunities for you and your business. In an ideal world, peoplewill be able to use their skills and interests to succeed in business. However, before starting a new business, it is importantto make sure that your idea relates to a need your customers have. For example, if you love to cook, you might think aboutopening a café in your town. But if there are already three other cafes that don’t have enough customers, opening a newcafé is likely to fail.How do you determine whether your business idea has a good chance of succeeding or failing before you begin operating?The answer is market research.In this lesson, we will discuss the differences between products and services, what market research is and how to do it, andkey considerations to help guide your business’s strategy to improve your chance of success.Slide 2There are two main types of businesses: those that sell things (also referred to as “goods”) and those that provide services.Goods are things you buy to use once or many times. Soda and sandwiches bought from a store are examples of goods, asare refrigerators and cars. Goods are tangible things. Services, conversely, are things someone else does for you. Examplesof service businesses include hair salons, accounting firms, and taxis.While goods and services might seem like complete opposites, many businesses actually provide a combination of goodsand services. For example, when you go to a café, you are paying for goods (the food you eat) as well as a service (a waiteror waitress serving you the food).
  16. 16. Further, goods or services may fall into one of three categories: 1. Existing product – is your good or service identical or very similar to another product currently available to customers? For example, is your idea for a clothing store the same as one your neighbor has? 2. Modified product – is your good or service a modified version of an existing product? For example, does your clothing store offer customers the chance to not only purchase new clothes, but also have them altered while they wait? 3. New product – are you inventing a good or service that is currently unavailable? Innovation is one of the biggest drivers for success. Companies like Apple and Microsoft have created many products that did not exist previously and it has made them very successful. Think about what the iPod has done for Apple’s investors!Regardless of whether your business would sell strictly a good or service or a combination of the two, the purpose andmethods for performing market research are the same.Slide 3Successful businesses all have one thing in common: their product matches an unmet customer need. Customers will onlybuy your good or service if it is something they need or something they believe they should have. In order to create abusiness that accomplishes this, you need to gather information about your potential customers, your current and futurecompetition, and the overall profile of your target market.Market research is the process of collecting and analyzing information about your customers, competitors, and industry tohelp you understand what products your customers want and need, and how you can differentiate yourself from thecompetition. After performing market research, you should be able to create a solid business strategy that allows you tocomplete the statement, “Customers will buy my product because…” For example, a café might develop a strategy to useonly fresh ingredients purchased from local farmers. Their unique idea might be “Customers will eat at my café because Iam the only restaurant in the area that uses all-natural ingredients while also supporting the local agricultural economy.”In general, market research helps managers make informed decisions about their business. This will help reduce the risk offailure by helping the manager identify the best markets to operate in, identify the right good or service to fulfill customerneeds, and execute the best marketing plan. Market research can also help managers identify potential future problems orareas for growth in the market. It can also help identify potential sales opportunities and help managers create the mosteffective strategic plans for entering a new market.In general, market research can be divided into two categories: primary research and secondary research.Slide 4Primary research is market research that you do yourself. Primary market research is also called custom research, since it isoften done with a specific goal or question to answer. There are five main steps in primary research. 1. The first step is to define the problem or goal of the research and what you want to accomplish. A business manager first needs to decide what specific questions he wants answered or clarified by the market research. For example, the manager of a café might want to learn more about what customers want before he opens the café. The main goals of the research might be to determine whether customers are satisfied with the current cafes in the community, how often they go to cafes, how much they typically spend at a café, and what types of food and drinks are most popular. 2. The second step is to design the method for collecting the information. There are many easy methods that businesses use frequently, including: • Conducting surveys of target customers. Surveys can be done in-person, over the phone, or online through special websites or email. • Holding in-person discussions, called focus groups, with customers from your target market. • Visiting and observing your competitors’ stores or locations. • Interviewing customers from your target market.Using the example of the café manager, the best methods to use might be interviews of customers that frequently visitcafes and actual visits to the competing cafes. 3. The third step is implementing the chosen methods and managing the information collection processes. This includes creating schedules for performing the market research, assigning specific people to certain jobs, and setting deadlines.
  17. 17. 4. The fourth step is analyzing the results of the market research. The type of analysis will depend on the type of research conducted. Both primary and secondary research can be divided into two categories: quantitative and qualitative. • Quantitative research typically involves some type of specific information that can be easily summarized. Surveys that include questions based on rating scales, lists, and other questions with a limited number of answers are quantitative. The possible answers for each question on the survey have a limited number of potential responses to choose from. For example, a question on a survey might ask customers to state how many times they eat at cafes every month. In this example, while peoples’ answers might differ, you could easily figure out the average amount of times a customer typically eats at a cafe. This can sometimes be a very difficult process if you have a lot of information. Many managers use computer programs, such as Microsoft Excel, to analyze large amounts of data. This decreases the time analysis will take and increases the manager’s ability to use the information to make business decisions. After the analysis, the manager should look for trends or patterns. For example, after surveying 100 café customers, a manager might find that 70 are unhappy with the quality of customer service at the other cafes in the community. • The other type of research is known as qualitative research. Qualitative research includes less structured methods, such as focus groups and conversations with customers. In many cases, there are no specific questions to be answered; instead, the manager uses these methods to learn about patterns or what customers think is important. Often, a manager will not be able to analyze qualitative information in the same way he or she might analyze quantitative information. However, qualitative research can be a helpful starting point for defining the goals, objectives, and methods for doing quantitative research. 5. The final step of the process is to use the information to make better business decisions. Having this market information is not enough; a manager needs to use this information to improve his business strategy. Market research can help increase a business’ chance of success, if it is defined, designed, implemented, analyzed, and utilized in the correct ways.Slide 5Depending on a business’s target market and particular goods or services, there might be existing sources of informationthat can add to primary market research. Secondary research is market research that is conducted and published by otherorganizations or researchers.Common secondary research sources include: • Articles in trade journals and industry publications • Market research reports completed by research organizations • Information on the internetOne important thing to remember when using secondary research is to think about how reliable the source of theinformation is. While the internet is the largest and most valuable source of secondary research, there are many sources ofinformation that are not correct. There is no one responsible for checking the accuracy of all information on the internet,so a business manager must decide whether the information seems logical and based on intelligent sources. If you decide touse information from the internet, you need to be careful to avoid sources that might be biased. If many different sourcesor websites present the same facts or information, you can be confident that the quality is good.Some secondary research is free for public use but other sources, such as market reports, often need to be purchased. Ingeneral, the most reliable sources of market research will be government agencies and market research firms that specializein conducting research to sell. Since the reputation of these organizations depends on the quality of their research, theinformation they provide is usually good.Slide 6Let’s look at the basic differences between primary and secondary market research.Primary research requires more time, since you need to design and do all the work yourself. Secondary research is usuallyavailable right away, but might not be as current since the information is based on historical data. For example, a marketresearch report might include information based on consumer preferences from two or three years ago.Primary research is usually more expensive, since you are doing all the work yourself. However, local market research canactually be done with little or no expense. Secondary research might be free, though you will have to purchase most high-quality research reports.
  18. 18. Primary research can be designed to answer a specific question. It can be customized based on the particular situation andresources available. Secondary research might provide useful information about the industry, but may not contain thespecific information a business manager needs to make a certain decision.Because there are many differences between primary and secondary research, many businesses use a combination of thetwo approaches.Slide 7Whether a business uses primary or secondary market research, most market research typically focuses on one of threeareas: the company’s target market and customers, the company’s competition, or the company’s industry in general. Allthree areas are important to consider for a business’s strategy.For a company’s target market, information needs to be gathered about the customers themselves, such as the average age,and if they are married. Information about their income and how much they spend on things like what your business willoffer is also very important. You can also research how they usually acquire your product.Information about competitors is also very important. You need to know who your competitors are, how big or small theyare, where they are located, and how profitable they are. If you determine that none of the cafes in your community areprofitable due to increasing prices for food ingredients, you might conclude that opening a café now is not the best option.You can also use this research to determine industry averages for sales growth and profit margins. These will be helpful ifyou decide to open a similar business as you can determine whether your business is successful based on your profit levelsin comparison to your competitors’.Further, you need to look at each particular competitor’s strategy. Many businesses also perform SWOT analyses for theircompetitors as well as their own business. The reason to do that is to identify your competitors’ weaknesses and find thingsthat your business can do better. This may be selling a different type of women’s clothing or focusing on customer serviceat a café. As we will discuss in other lessons, the practice of choosing a strategy while thinking about your competitors’strategies is known as competitive positioning. The idea is to make sure your company’s goods or services are differentthan other businesses so you can attract more customers to your business. Focusing on the factors that make you differentis also known as identifying a business’s competitive advantages.Finally, market research should include information about the broader market for your goods or services. This can helpdefine the particular opportunities and threats to include in your SWOT analysis. Market research can help identifyimportant trends and patterns in the industry and help a manager predict the future direction of the industry.Slide 8The information in this lesson has been about the importance of market research and how to do it. The goal of marketresearch should be to help a business identify customer needs and market trends, then develop a plan to decide whichspecific goods or services are best to take advantage of these opportunities. Many times, a business will have to change itsstrategy or provide a completely different product based on market research. However, the following eight points will helpa manager determine what goods or services are the most important for their business. 1. Fit to Mission: Does the good or service you think would be most successful fit with your business’ overall aim? Coca-Cola does not sell computers or offer financial services, despite them both being potentially good business opportunities. 2. Profitability: Is the good or service generally profitable? Do competing businesses seem to be making profits or are the profits declining? 3. Accessibility: Would customers pay for the good or service if you offered it? Introducing a new product into the market might be very successful, but people might not actually need it or have the money to pay for it. 4. Competitive Advantage: How many competitors exist in your market? Is there enough demand that an additional provider is needed in your market? Is there a way you can change the good or service to make it more appealing to your target customers? 5. Scalability: Can your product or business grow with the market? If your business cannot grow as the market increases, other competitors are likely to take your place and the larger customers are likely to go somewhere else with their business. 6. Distribution: Can you get your product to the customer in a timely and profitable manner? Perhaps you are considering offering a delivery service with your café. With the added expense of a driver and transportation expenses, can your business still sell food profitably?
  19. 19. 7. Supplier Control: Do the businesses that would supply your business have significant control over the market? For example, do all the cafes in your town purchase their fruits and vegetables from one farmer? If so, the farmer has significant control over the prices and supply of these products, which exposes your business to more risk. 8. Customer Control: Do the customers in your particular market have a high degree control over what price you sell your good or service for? If customers can influence the price, a manager should consider the minimum amount he can sell for and still make money.These last two items will be discussed more in a future lesson.In general, market research is as important for a new business as it is for an existing business. Managers need to constantlymatch their product offering to the conclusions gathered from market research. The overall goal of market research is toensure that a business’s goods or services are profitably fulfilling a real customer need in a strong market in a way that isdifferent than the competition. LESSON 6: OPERATIONS MANAGEMENT - SIMPLE FORECASTINGSlide 1If you were running a business, how would you determine the correct amount of inventory to purchase for the comingmonth? How much cash do you think you need to have on hand for next period? To answer these questions, you wouldhave to use some method of forecasting. While forecasting can be difficult to do well, it is an essential skill for anentrepreneur. Almost all forecasting methods use historical information. For example, if you are trying to forecast sales,you might use quarterly sales revenues for the past three years. Properly gathering data is important for getting good,consistent results.Slide 2Here are a few characteristics that define good data: • Sufficient Quantity – The more information you have, the easier it is to identify trends and understand the system you are trying to forecast. • Objectivity – Factual, relevant data that accurately measures what you are attempting to forecast is necessary to avoid biased and irrelevant outcomes. • Representative – It is often impossible to gather all of the information for a population. For example, finding the height of every human on earth would be very difficult. In these cases, we rely on a sample or sub-group of observations. It is important that the sample data is broadly representative of the population. • Consistency – Data that is highly variable will produce less precise results than consistent data. Often times, observations that are very different from the others are removed from data sets because they are not representative of the broader trends you are attempting to capture when forecasting.Slide 3Measures of average can often be helpful in determining the expected value of an outcome. There are three commonmeasures of average: • The Mean – Commonly referred to as the “simple average”, the mean is found by taking the sum of all the data observations, and then dividing by the number of observations in the data set. The mean is a good way to determine an expected outcome when you have consistent data. However, the mean may be strongly influenced by anomalies in the data set. In the data set {0, 0, 1, 1, 1, 2, 7}, the mean would be (0+0+1+1+1+2+7) / 7, or 12 / 7, or about 1.7.Slide 4The Median – If you were to plot the points in a data set on a number-line, the center-most observation would be themedian. The median is a good way to determine an expected outcome when a data-set includes a few very unusualobservations, but maintains a strong central tendency. In the data set {0, 0, 1, 1, 1, 2, 7}, the median would be the fourthobservation, or 1.Slide 5The Mode – The mode is simply the observation that occurs most frequently in a data set. It is particularly useful indescribing repetitive data sets. In the data set {0, 0, 1, 1, 1, 2, 7}, the mode would be 1.Slide 6
  20. 20. While measures of average can be useful for determining expected outcomes, it is important to know the range of possibleoutcomes. Having a good idea of probable high and low outcomes is sometimes more useful than the actual forecast. Forexample, a business would use a high sales estimate to plan inventory and staffing levels. This is because they don’t want tomiss out on sale opportunities because of insufficient product or staff. The same business would use the low sales estimateto ensure that they will maintain adequate operating capital if there is a slump in demand.The simplest method of predicting the range of possible outcomes is to assume some margin of error. The specific margin,at least with this method, is something you will have to decide. You may make this decision based on your experience orhistorical outcomes. While the margin may be an absolute value, it is most often measured as a percentage of the forecast.To apply a margin of error, we simply calculate the margin itself, then add and subtract the margin from the actual forecast.The two resulting values will give us high and low forecast estimates. Let’s try an example with the Fancy Gift Company.For 2012, Fancy Gift Company has forecasted $92,000 in sales. They predict a 10% margin of error. The first step for uswould be to calculate the margin. In our case, the margin would be $92,000 times 10%, or $9,200. Next we add andsubtract the margin from the forecast value. Adding $9,200 to $92,000 gives us a high forecast estimate of $101,200.Subtracting $9,200 from $92,000 gives us a low forecast estimate of $82,800.There are many statistical tools for measuring distribution. Some are very simple and some are very complex. A discussionof these measures and methods are beyond the scope of this lesson, but a good understanding of basic statistics can bevery helpful when performing forecasts.Slide 7Many businesses are affected by seasonality. Retail stores often have higher than average sales during the winter due to theholiday season. Agricultural output is highly seasonal, and may generate almost all of its revenue during one or two seasons.When this is the case, you must take seasonality into account when forecasting.To illustrate the most common seasonal adjustment method, we will use quarterly sales information from the Fancy GiftCompany for 2011. During 2011, the company had $80,000 in sales. First, we find the average quarterly sales, which were$20,000 ($80,000 divided by 4).Slide 8To find the seasonal adjustment ratios, we take the actual sales in each quarter, and divide them by the average quarterlysales. For the fourth quarter of 2011, the seasonal adjustment ratio is 1.3.Slide 9Now let’s use our seasonal adjustment ratios to help with next year’s forecast. Through rigorous forecasting, the Fancy GiftCompany expects it will have $92,000 in sales for 2012. The first thing we need to do is figure out the average quarterlysales. Dividing $92,000 by 4 results in a quarterly sales estimate of $23,000.Slide 10To get our seasonally adjusted forecasts, we would multiply 23,000 by the seasonal adjustment ratios for each quarter. Forthe first quarter, we would multiply 23,000 by 1. For the second quarter, we would multiply 23,000 by 0.8. For the thirdquarter, we would multiply 23,000 by 0.9. For the fourth quarter, we would multiply 23,000 by 1.3. The resulting quarterlyforecasts will still total our 2012 sales estimate of $92,000, but will have accounted for seasonal differences.An even better method would be to average the seasonal adjustment ratios for multiple years. This captures moreinformation, and helps minimize the impact of non-representative data.Slide 11Most forecasting data sets use time series data, which are records of some activity over a period of time. A very simplemethod of forecasting is to simply analyze the changes from one period compared to the same period in the prior year.This is sometimes called a Delta Analysis. In this case, “Delta” is used to mean change. By analyzing the historical changes,we can gain idea of what might happen in the future.To illustrate this technique, we will again use data from the Fancy Gift Company. The chart shows the annual sales for theFancy Gift Company for the past five years. If we take the year-to-year changes in sales, we see that, on average, the saleshave increased by an average of $2,500 per year. We might use this as the starting point for our forecast, and assume that itwill hold true for the following year. This would give us a 2012 sales estimate of $82,500.
  21. 21. Slide 12Sometimes you only want to include recent data points in your analysis. Perhaps you think that information more thanthree years old is not useful. As a result, you would only include data from the most recent three years. This method isreferred to as a Moving Average function. It’s still taking a simple average, but the data you include moves over time.To illustrate the moving average method, we will once again revisit the Fancy Gift Company. Again, we want to forecastthe change in revenue for the coming year. We have year-to-year sales revenue changes for four years. However, let’sassume that we only want to use the past three years to calculate our forecast. If we are trying to calculate the sales revenuechange for 2012, we would find the average of the sales revenue changes for 2011, 2010, and 2009. This would give use aforecasted sales revenue change of $2,500. Adding this to the sales revenue from 2011, our forecasted 2012 sales revenuewould be $82,500.Slide 13Often times more recent data should weigh more heavily on your forecast. To adjust the impact of past observations onyour estimate, you can use a weighted moving average method. Let’s take another look at the year-to-year changes in salesfor the Fancy Gift Company. Perhaps we decide that only the past three years are relevant. Furthermore, we decide that the2011 year-to-year change should be weighted at 50% (perhaps because it is the most recent and came after changes weremade to the store); the 2010 year-to-year change should be weighted at 30% (perhaps because it was before the storechanges); and the 2009 year-to-year change should be weighted at 20% (perhaps because it is the oldest data used). It isvery important to note that the sum of your weights must equal one-hundred percent. First we multiply each of theseobservations by its assigned weight. Next, we sum the results. The result is a weighted average of $2,600, which would giveus a sales forecast of $82,600 for 2012.Because this is a moving average, next year we would only include the year to year sales differences for 2012, 2011, and2010. However, we would still apply the same weights to each observation.Slide 14Often times, forecasting is done for an entire financial report, such as an income statement or a balance sheet. A veryuseful tool for this is called “Common Size Analysis”. Rather than look at absolute year-to-year changes, a common sizeanalysis shows everything as a proportion of some baseline. When performing a common size analysis on an incomestatement, you would take everything as a percentage of total sales. On a balance sheet, you would take everything as apercentage of total assets.Slide 15Once again, we’re going to look at the Fancy Gift Company. To common size the 2011 income statement, we would divideeverything by total sales. Simply doing this can be a helpful analytical tool, because it provides useful statistics like the grossmargin, operating margin, and profit margin, which we discuss in more detail in another lesson. To gain useful insights forforecasting purposes, we need to do the same thing to income statements for at least two more years. Again, the moreinformation you have, the better.Slide 16Looking at the common sized income statements for 2009, 2010, and 2011, we can immediately see some common trends.First, Cost of Goods Sold has steadily decreased as a proportion of total sales at a rate of -1% per year. Second, the Selling,General, and Administrative operating expense has consistently been 12% of sales. Finally, Other Operating Expenses havebeen climbing quickly as a percentage of sales at about 2% per year. Barring any change in the way these costs aregenerated, it might be appropriate to assume that their general trends will be maintained in the following year. This wouldmean our estimate of cost of goods sold would be 35% of sales, our estimate of Sales, General, and Administrative wouldbe 12% of sales, and our estimate of Other Operating Expenses would be 7% of sales.Slide 17Now, let’s take Fancy Gift Company’s earlier 2012 sales forecast of $92,000 and come up with a projected incomestatement. To find the forecasted Cost of Goods Sold, we would multiply our sales forecast by 0.35 or 35%. The 2012Sales, General, and Administrative expense would be 0.12 or 12% multiplied by the sales forecast. Finally, Other OperatingExpense would be found by multiplying the sales forecast by 0.07 or 7%. By performing a common size analysis, we havegenerated an entire projected income statement for the coming year.Slide 18
  22. 22. All of the methods we have talked about are useful for forecasting expected results. However, they only provide a startingpoint. When forecasting, you also have to apply all of your knowledge about the outside world to logically modify theforecast. In other words, you must use information about what you expect in the future to supplement information aboutwhat you know happened in the past.For example, you’ve been reading articles and reports indicating that the economy is strengthening and that consumerspending is projected to rise. As a retail store owner, it would be logical to incorporate this into your estimate and increaseyour sales forecast for the coming year.Or, after talking to the accountant at Fancy Gift Company, you know that Other Operating Expenses are expected toplateau at 5% of sales. You would obviously use information like this when creating a projected income statement.Developing the right forecasting system for your business is a process. However, over time you can find the method thatworks best for you. One of the ways you can test the accuracy of a forecasting method is to forecast things that havealready happened. If you have, for example, historical sales data for the past 15 years, you could compare the forecastingperformance of two models at predicting the results of the past five years. This type of exercise can be useful indetermining which forecasting model is right for you. Finally, it is worth repeating that high and low estimates can be moreuseful than forecasts. They allow you to evaluate and recognize potential opportunities and risks. LESSON 7: INTRODUCTION TO MANAGERIAL ECONOMICSSlide 1This session is to give students an overview of Managerial Economics and how it can be applied to a small business.Managerial economics is how the owner of a business applies economic theory to his business. Managerial economics issometimes called business economics, and focuses mostly on microeconomic applications - that is, things that apply toindividual consumers, businesses, and industries. Macroeconomic factors also need to be considered but, for this lesson, wewill focus on small business issues and we will discuss macroeconomics in a later lesson.Slide 2Although Managerial Economics is concerned with many things that managers do and decide, the two primary areas areDemand Analysis and the Production Decision.Demand Analysis means studying a market to figure out how much of something customers want to buy from you. Forthe Production Decision, you need to answer four basic questions - what to produce, how to produce and how much toproduce and for whom to produce.These areas are closely related and may be circular. For example, when deciding what and how much to produce, you needto understand the demand for that product or service. Even if there is a lot of demand in the market, you may not be ableto produce or buy it at a cost low enough to allow you to make a profit. As you analyze both of these areas, you may findthat your business idea needs to change. As an example, assume that you are a good cook and also know a lot aboutclothing. Also assume that you want to open a café. If your demand analysis tells you that there is not enough demand foranother café in your town, changing your plan to open a clothing store might be a better idea. Of course, that decisionshould be made by analyzing demand for clothing.Slide 3In another lesson, we spoke about Supply and Demand in general. Now we will talk about how those concepts apply to aspecific business.As we discuss in the other lesson, supply and demand curves can be used to find what economics would call the perfectprice for a good or service in a market – that is, where the supply and demand curves meet. When looking at a specificbusiness, though, many things need to be thought about to determine your individual demand curve. These can include theprice you want to charge, how your competitors behave, the time of year, your business hours, your location and anythingelse that can affect whether a customer wants to do business with you.Slide 4