This part is focused on developing the business idea you generated in Part 1. This part will guide you through the process of making your idea a reality. Like Part 1 part this section is not a linear process; you may need to repeat it a few times to develop a plan with which you are satisfied, before moving on to Part 3. It is your understanding of marketing, operations, accounting, and finance and how each of these impact your business that will allow your product or service to become a reality. It is important to have a plan before jumping into action so that you effectively use resources and are successful. Throughout this section you will be directed to Appendix I to complete different sections of your business plan. By the end of this section, you will have a completed business plan.

This part has two main objectives:

• To help you look at your business idea from marketing, operations, finance, and accounting perspectives

• To develop a feasible and implementable business plan that you are ready to put into action

7. Developing a Marketing Plan

7.1 Product or Service

7.2 People

7.3 Promotion

7.4 Place

7.5 Price

Marketing is an essential component to any business. In Part I, you identified a group of people in your community who shared a need or problem and generated a feasible product or service idea that would fill that need. Once you further develop the unique value that your idea adds, you must think carefully about how to convey that story to that group of people so that they buy your product or service. You will learn to convey that story through a deep understanding of People (whose need are your solving?), Product (what is your solution?), Promotion (how will you communicate your solution?), Place (where can they buy your product?), and Price (at what price can they buy your product?).

Lesson 7.1: Product or Service

In Part I, you went from having an idea on how to solve a community need to verifying, slightly altering, or completely rethinking that idea based on direct feedback from people. Now that you have a solid idea, you will develop a marketing strategy that will help allow you to clearly communicate through everything you do how exactly your idea provides unique value to that group of people. The first part of developing this strategy is being able to clearly state what you are striving to do and why. This is called building a mission statement. This conveys your product or service idea and itsimportance in a short, concise, and powerful way. A well-written mission statement can be the guiding foundation for abusiness.

Exercise 7.1: Your Mission Statement

Based on the information you have from Part I, create a mission statement that describes the idea you developed along with the community need it fills.

“

Once you have completed Exercise 7.1,turn to the back of the guide and write a summary of the following in your business plan:

“Product or Service Solution:
Mission Statement
This section describes your product or service idea in and its importance in a short, concise, and powerful way. Be sure to include in your description your idea, the need you are meeting, and the people who will benefit from your idea.”

Your Business Plan

Lesson 7.2: People

Who are the people who will benefit from your product or service idea? Based on the information you gathered when conducting interviews, you should be able to talk about the following:

• Personal information: Gender, income, age, occupation, education, family, life cycle, geographic region, lifestyle, attitudes

• Problem: Needs/benefits sought by them.

• Purchasing process:What does the decision making process involve? What sources of information are sought to make a decision? What is time line of purchase? Who makes the purchase?

• Product usage: Who is using the product? Why do they use it? When do they use it? How is it used?

It is critical to understand your target market as the picture you have of them will guide all of your marketing strategy decisions going forward. Everything you do should be grounded in information you know about the target market rather than based on gut feeling or what works for another business.

Exercise 7.2: Who are they?

Use the questions above to think about the people in the market for your idea. Find a space to record your answers.

Find another placee, and draw a detailed picture of those people. You may include things they are thinking, saying or doing in your picture or diagram.

Exercise 7.3: How do they use the product?

Provide a description that explains how they interact with the product or experience the service.

Find a space, to illustrate the above description

“

Once you have completed Exercise 7.3,turn to the back of the guide and write a summary of the following in your business plan:

“Marketing Plan:
People
This section describes in detail the people whose need your product or service is meeting. Be sure to include demographic information as well as how they use the product or service”

Your Business Plan

Lesson 7.3: Promotion

Brand is the identity of a specific product, service or business. A brand is everything that your business communicates about itself to others from its name, logo, and color palette to its flyer, signs, and marketing campaigns. A legally protected brand name is called trademark. All your decisions about your marketing strategy should be based in the brand that you have defined. In this lesson will learn how to define, communicate, and promote your brand.

Defining Your Brand

The most powerful way to communicate who you are as a business is by building a strong and thoughtful brand. Every part of your brand whether it be the logo or the colors you use on the flyer, should be decided based on what you know about the people whose need you are meeting through your product or service. Your brand identity is like your business’ personality. For example, a business that sells a soda product might have a fun or “bubbly” personality,so youmight create a mascot oricon that demonstrates that characteristic or character. If your goal is quality, then you may have a more expensive product and your messaging should reflect its benefits instead of its price.

While defining your brand is a crucial first step, it is then necessary that you consistently use that brand in all your messaging. That means if you use a logo, always use the same logo, in the same format, whenever it is printed. If you use a slogan, make sure it is always written in the same way. As you plan for advertising or special promotions, make sure that it is consistent with your image.

One example you may be familiar with is Mr. Price, the clothing group of a South African retailing giant. Mr. Price covers all genders in clothing, intimate wear, footwear and accessories that are aimed towards fashion conscious and value-minded families. As the CEO of the company describes, the company brings fashion at everyday low prices to their consumers. Thus, the name “Mr. Price” is the perfect name to reflect the value that the company provides low cost clothes to its customers.

Exercise 7.4: Branding

Can you give three other examples of branding that are familiar and recognizable in your community? What images, colors, sounds, textures, smells, or words do you associate with that business?

Exercise 7.5: Developing Your Brand

Draw what images, colors,sounds, textures, smells, or words your product or service idea makes you think of. Circle those which you think best communicate your business. Then, based on what you have circled, develop guidelines for your brand identity. What colors, logo, slogan, or images should you use to communicate your business? These guidelines are important as you will reference these as you make decisions about communicating and promoting your brand.

Communicating Your Brand

Now that you have developed a sense of your brand identity, it is important to start thinking about how to communicate this identity. There are many different marketing materials you can make--some which may cost more than others. There are many different ways you can communicate your brand but you will probably only make use of a few of them or maybe none at all--it really depends on what is most in line with your brand identity. Here are some different ways you can communicate yourbrand:

Brochures, Fliers, and other handouts. Producing brochures or fliers is a great way to provide the most information about your product in one document. Fliers are usually one page in size and can be one-sided or two-sided. There is less room for great detail on a flier than in a brochure, so you must choose the most important and significant information to include. Whether you are making a flyer, brochure, or some other handout, it is important to make sure you have a clear message and goal before you start making it. Before you start, consider these elements:

• Who will read the brochure?
• How will the readers get the brochure?
• What do you want your readersto learn from your brochure and do once they have that information?

When considering the use of printed materials, you must keep in mind what it will cost to produce and distribute these items. Printed materials almost always require some form of word-processing software if you plan to create your piece on a computer, a resource for copying or making many copies of the same document, and a large quantity of paper. Although this may seem like it will cost too much when you are first starting-up, be creative about finding resources for these items. Maybe you know someone who can supply you with ink or paper at very low prices, or you can trade services with someone to help you mass produce the items. If you have a computer at school or in your community, you can probably access word-processing software for a very low cost or no cost at all. You should also consider how and where you would distribute each type of printed materials. Community events and public areas are great places to share your information at no cost to you (after printing costs.) You should always find out if you are allowed to display or distribute material in a given location before doing so.

Packaging. If you are going to be selling a product that requires packaging (a box, wrapping, bag or other package type to keep your product in), be sure that your design is consistent with your brand identity. Packaging can be as simple as a square box, or it can stand out with improved resealable elements, recyclable materials, or provide some sort of lasting quality beyond the product’s own characteristics that can be beneficial to customers. Make it stand out. Your choice may be as simple as an attractive color or image, or may be as complex as designing a container that can withstand reuse. If you are going to create a unique package for your product, you should focus on making sure that it is using the least amount of materials possible (while still communicating your brand and protecting the product) so that it is low-cost and consuming less of the earth’s resources. It will also be important to think about how your packaging is different or improved from that of your competitors.

Website and emails. Today, companies are increasingly using the Internet to market their products and services. At a basic level, the web could be used to communicate with your customers and market new product offerings and price information to them. If you have access to an Internet café or have a friend who has a computer with Internet access, you should use that to create an email account for yourself. It is very easy to set up an email account, and it is free of cost. You could collect email addresses of your customers or even prospective customers. You may choose to use their email addresses to send out weekly or monthly information about your business to them. Be sure not to over-communicate, and only email them when you have valuable information that you think they would be interested in learning.

What communication methods you decide to use really all depend on your brand identity. For example, the Metropolis Trash Management team was at first really excited to create a set of flyers, brochures, and signs with lots of details and images describing their business. But after defining their brand, they realized that their identity was all about being clean and protecting the earth. They decided that there will not be a great need to create all these materials as they will likely only really need one simple flyer to explain their business idea that can be passed out. They also want to be sure that they are being sustainable and minimizing the amount of waste that they create.

Exercise 7.6: Brochures and Fliers

Visit some businesses in your community and collect three or four brochures and use them to answer these questions. You may want to save them for reference as you develop your own documents

What elements do the documents have in common (design, information, quality, etc.) that make them effective?

What are the strengths and weaknesses of each brochure?

Where have you seen fliers for products?

List a few places that you might be able to distribute you own fliers for free.

What stood out to you about a flier you might have seen recently? Do you remember what the product or service was that was being advertised?

Exercise 7.7: Communicating Your Brand

What if any of these methods of communicating would you like to use for your business? Find a space to write or draw what you would want your communications to look like. For example, if you plan on making a flyer, plan what information would need to be included as well as how you plan to make it.

Promoting Your Brand

After you have thought about ways to communicate your brand, it is important to think about how to promote your brand. In promoting your brand you will likely make use of any materials you created to help you communicate whether that be a flyer, brochure, website, or email. Some of these marketig methods are completely free to use while othersrequire some resources. What is most cost-effective for you depends on your brand identity and what is the most appropriate for your specific business. Here are some different ways you can promote your brand:

Word of Mouth. Word of mouth is developed when people become aware of your business, have an interaction and then share their experiences with others. Word of mouth could be positive or negative. This means that ensuring a positive experience for your target customers is crucial--especially in businesses that offer a service. Good quality and good service are some ways to generate positive attention. Get your customers to talk about you. You can do this through networking, and playing a role in highly visible events. Tie yourself into a community organization that does something to improve the quality of living in your area, and people will associate you and your product with good ethics and behaviors of those people and organizations.

Networking. Networking is the act of developing new relationships, with the a goal of creating new opportunities. It can take place anywhere; such as in your own community with people you interact with on a day-to-day basis, at trade shows or with people who are involved in your business like customers, friends of customers and people to whom your employees are connected. Don’t ignore a seemingly small discussion - it could lead to a new customer! Use any opportunity in a highly visible public setting to talk about your business to anyone who might be interested. Every experience counts!

Engage with your community. A great, cost-effective marketing method is to participate in events and activities in your community. Sporting events, seasonal festivals, and holiday activities are great examples of low-cost marketing opportunities. Networking at these events allows for direct contact and communication with your target. You want to look out for occasions and events where your target group gathers in large numbers, so as to achieve your greatest reach. Set up a booth, table or cart (any type of mobile display) to showcase your product or service and have some printed materials available for customersto take with them so that they can come back to your regular place of business at a later date. If you don’t have the ability to set up a station, use your team to hand out printed material, give out free samples, and have face to face conversations with potential customers. The awareness of your brand or product will increase dramatically with each interaction you have with your target.

Do something unexpected. Using non-traditional, unconventional method of marketing that is captivating and gains your customer’s attention, while also building awareness of your business or brand can be a great way to get your business known in the community. Most often, these methods are exceptionally creative and resourceful ways of sending a message or grabbing your target’s attention. The key ingredients are time, energy and imagination – rather than large budgets or excessive use of resources. Essentially, the goal of is to generate a buzz about your business or brand, which will then become widely known. Typically, this method of promotion is spontaneous and often interactive. People will become very involved in the random activity or event that happens, and will then spread the word about the event to everyone with whom they communicate. When considering these marketing tactics, you should be careful to retain your original image and not put yourself, your team, or any potential audience members in a dangerous or compromising position. The activity should be fun and entertaining, while also educational and informational – leading customersto want to know more about you and your business. Street campaigns and demonstrations in public venues are examples of this promotion method.

Premium or Referral Program. Customer referral programs and discounts work by rewarding current customers for bringing in some of their own friends and contacts to you as new customers. You can offer rewards to the old customers like discounts on future purchases, or specials when they make a purchase with a friend or other new client (buy one, get the second at half price, etc). Another example would be rewarding a repeat customer by giving them a discount for every third purchase they make. The message you send with your reward program should remain consistent with your brand – giving too much away could affect the perception of quality and it could set an unreasonable expectation for lower prices in the mind of your customers.

Newspapers, Magazines & Community Publications. Do you read the newspaper regularly? Can you think of a well-known popular publication in your community? Chances are that these publications sell space in their issues to companies and brands who want to advertise their products or services. Determine if your target market readsthese publications before moving forward with this method. Print ads may be a great way to market your product to a larger audience. You must very carefully analyze the cost of advertising, as not all forms are inexpensive. But with creativity, you may be able to find cost-effective ways to advertise

“

“My friend Philip works at PrintTech, a local print shop. He produces fliers, brochures and postcards for many businesses in my community. We arranged that Philip would supply the Trash Removal business with a small amount of paper to help them print their first round of marketing materials. In return,we arranged for him to have a few months of free trash removal services.”

"That’s a great way to save money and help other businesses in our community. We could also tell the costumers about PrintTech and their great services. That’s word of mouth in action!"

Grace and Sam

What methods you choose for promotion entirely depend on your specific business and its brand identity. Grace and Sam are trying to help Metropolis Trash Management develop their plan for promotion. Some marketing methods that Grace is interested in adopting are advertising through radio commercials, and putting ads in printed newspapers. Grace believes that being a new business, the initial marketing goal for the Trash Removal business should be to reach and inform a large number of target customers about the business at one time. Grace understandsthat methodssuch as radio and newspaper advertisements can be expensive, and are one-time methods of reaching the customers. However, at these beginning stages, Grace believes that this investment will be worth the money, since it will allow the business to generate awareness and create a buzz. Samuel, on the other hand, does not believe that expensive marketing methods such as radio and newspaper advertisements are necessary to generate awareness about Metropolis Trash Management. Samuel feels that at these initial stages, the business should focus on saving money for day-to-day expenses as well as for any unforeseen or unanticipated costs that might come up asthe business opens. Samuel thinks lower cost methods will bemore effective such as creating brochures and fliers to put up around the community where the target customers will see them. Samuel also believes that leveraging friends, family members, and other members of the community to promote information about the service through word of mouth, would be a good way of creating buzz and awareness of the business. If necessary, people who do a great job of using word of mouth to promote the service might also get some coupons or discounts. Samuel feels that these methods would not only be cost-effective, but will generate repeated awareness and will not just be one-time announcements.

Exercise 7.8: Free Ways to Promote

Can you think of specific events or organized activities where you might have the opportunity to participate and promote your business for free? Below, describe two events or occasions and how you might market your business:

What kind of unconventional methods could you use to promote your business? Describe a situation that might capture your target’s attention in a spontaneous way that will have the wanting to know more. Where and when would this event happen? What materials or resources might you require to accomplish your method? Will you need a team to help you accomplish this effort? Describe below.

Exercise 7.9: Local Advertising

Collect a few printed publications from your neighborhood and find out who the publisher or editor is. Inquire with that person about their advertising rate. You should gather information from two or three publications that tell you how much it would cost per size of ad and number of times it is published. It might be worth comparing the price of your local newspaper, to prices of other newspapers near the area which might allow for negotiating or getting a better price.

Based on your own cost estimates, can you afford any of these ad spaces in your marketing plan?

Does your church or community center publish a weekly newsletter or other informational document? Find out if they offer free or very low cost space for small businesses to advertise

Who reads these publications? Does it make sense for you to advertise this way based on your target market?

Exercise 7.10: Your Promotion Strategy

Now that you have thought about different options for promotion, it is time to make decisions about your promotion strategy. When you first start your business, how do you plan to promote your brand and attract those first customers? How much will the different elements of your promotion plan cost?

“

Once you have completed Exercise 7.10,turn to the back of the guide and write a summary of the following in your business plan:

“Marketing Plan:
Promotion
This section describes your promotion strategy. Be sure to include information about your brand identity as well as information about the costs associated with your plans.”

Your Business Plan

Lesson 7.4:Place

Where will your product be sold? Where will it be made? Is this the same place? Customers might not actively be seeking your product at first, so you should choose a highly visible location when you first introduce your product. If it is successful, you might choose to remain in that location. You must always refer back to what you know about your customers to make decisions such as the placement of your product. Knowing who your customers are and where they spend their time should play a large role in these decisions.

Exercise 7.11: Where to sell?

Where will you sell your product or service and why? If you are selling a product, how does this location relate to where your product is made?

“

Once you have completed Exercise 7.11,turn to the back of the guide and write a summary of the following in your business plan:

“Marketing Plan:
Place
This section describes the location at which you will sell your product or service. Be sure to explain why you have picked this location as it relates to what you know about target customer.”

Your Business Plan

Lesson 7.5:Price

Price is the cost of your product to the consumer. Pricing dictates how your product price compares to the prices of competitors’ products. If your price is more expensive, you might want to focus on marketing the benefits of your product. In addition, forsuch products you might offer an initial discount coupon, or sample to influence your customers’ buying decision. Price promotions should be short term, for specific periods of time and should achieve specific goals (such as attracting new customers or encouraging them to try new products.)

Profit = Selling Price – Cost Price
Selling price = cost price + desired profit.

When entering a market, the following are some pricing strategies:

• Price Skimming: High initial price for higher initial margins, and then lower prices overtime.

• Penetration Pricing: Low price compared to competitorsinitially. This helpsto gain quick market share before competitors. Here, promotional strategies tend to be greater.

Pricing is important because it dictates how consumers will perceive your product’s position in the market place. To understand how to price your product you must understand three things:

• How much is the item costing you to produce or serve? (You’ll learn more about how to assess this in Chapter 7 & 8) You wouldn’t want to sell your product for less than it costs you to make it.

• What will your target pay for this service or product? You should collect information from your feedback.

• What are your competitors charging? It’s okay to have, and you probably will have, a different price structure than your competitors. You must be able to explain why your product or service is more expensive (if that’s the case) or you if your prices are lower, you must understand why you are able to price lower than them.

Remember that your price is set based on the important factors above. Sometimes, depending on your business, you may have to engage in negotiations of your price when someone is trying to get you to sell your product or service for less money. Remember the factors such as cost, competitors and target market if you consider lowering your price in those situations. Also, as described earlier in this chapter, word of mouth is a powerful tool. This means that if someone shares that you lowered your price for them, news of that will travel and other customers will expect the new lower price. Be careful in your negotiation!

Exercise 7.12: At What Price?

Thinking about the competition, your goals and costs, what will your base price be?

Will you offer any special introductory discounts? What isthe offer and time frame?

“

Once you have completed Exercise 7.12,turn to the back of the guide and write a summary of the following in your business plan:

“Marketing Plan:
Price
This section identifies the price at which you will sell your product or service”

Your Business Plan

“

“Our friends decided that they would have a price for a one time pick up and another price for customers who purchased services for a year at a time. Additionally, they could do some custom programs to help local businesses!”

Grace

Reflection: Marketing yourBusiness

Find space and reflect on the following questions: How will you make your target market aware of your product? What are the forms of communication that your target uses most often? What communication tools will you choose? Where will your target market learn about, see and purchase your product or service?

“

“Every good entrepreneur will have to revise their plans over and over again as they gain new insights. Remember to leave some space to come back, revisit your reflection, and add more thoughts as needed.”

Sam

8. Developing an Operations Plan

8.1 Map of Process

8.2 Supply Chain

8.3 Team and Talent

8.4 Developing Your Team

In this chapter you will think about how to efficiently run your business by identifying the materials and tasks you need to produce and distribute your product orservice. This chapter provides you with the opportunity to dive deep into how your company will function. You will examine the creation, distribution and management of your product orservice. Operate your business in the most efficient way possible to maximize the value you add to your customers and in turn the value you create for your business

The best way to explain the operations of your business is by looking at the supply chain. The supply chain provides a picture of what your inputs are, where you will get them, how you will use them to create your product or service, and how you will distribute this product or service to your customers.

Lesson 8.1: Map of Process

Now that you have identified an opportunity to create a product or service that serves a need in your community, it will be critical that you figure out how to make that idea transform from just a thought on paper to a real operating business. In the following exercises you will begin to think about the process by which you plan to produce and distribute your product or service. Mapping out your day to day operations is not only important so that you have a plan when you do start your business, but also because how you distribute your product or service is in itself an opportunity to think creatively, be innovative, and reinforce your business’s strategy. Just as your marketing plan is entirely shaped by your target market, your operations plan should be just as carefully crafted to match the need you are serving. For example, there are two restaurantsthat both serve similarfoods and are both very successful but are completely different in thier strategy and in their operations plan. One restaurant’s strategy is to serve customers quickly and cheaply. Their operations plan reflects this by having customers stand in line and order at a counter, arranging small tables close together, and by providing the option of packaging for food customers want to eat on the go or at home. The other restaurant’s strategy is to serve customers an experience with a nice atmosphere and high quality food. Their operations plan reflects this by having customers sit down, look at a menu, and then order through a waiter. Both restaurants serve similar food, but their services are very different--one meets the need of getting food fast and the other meets the need of having a special dining experience. Because their services are different, their strategies are different and thier operations plans are aligned to reinforce this.

As you map out your operations plan, it will also be important to begin to identify what inputs you will need to produce and distribute your product or service and what characteristics each input should have. Inputs are all ofthematerials you will need to produce and distribute your output--the product or service you are creating. There are a five basic categories of inputs:

• Raw materials:the basic materials needed to make your product or service. Wood is an example of a raw material needed to make a chair.

• Plant: the building or place where you will produce your product or service. A factory is an example of a plant needed to manufacture steel. A painting studio is an example of a plant needed to create artwork.

• Equipment:the tools you will use to produce and distribute your product or service. A hammer is an example of equipment needed to build a house.

• Labor:the people who will produce and distribute your product or service. A cashier is an example of the labor needed to operate a store.

• Skill or Knowledge:the skills or background knowledge necessary to produce and distribute your product or service. Teaching how to read and write requires having knowledge of reading and writing

It can be helpful to categorize your inputs when thinking about what it costs to produce and distribute your product or service. How to keep track of these costs in your accounting records will be discussed in the next chapter. You will most likely end up needing all types of inputs but you might need one in greater quantity than others. You most likely will need different inputs at different parts in your operations process. It will be important to not only identify your inputs, but also to identify where in your operations process you need each input.

It is time for Sam and Grace’s friends who want to start up Metropolis Trash Management to make an operations plan. They know that littering is a problem in their community and they have discovered that there is a need to help homes and small businesses properly dispose of their trash. They have decided to visit people’s homes to pick up their trash, sort it, and deliver it to the correct disposal facility. Furthermore, they realize that when they sort the trash, they can pull out organic items to be composted and then sell the compost to nearby farmers. The Metropolis Trash Management team is really excited about thier idea but they now need to sit down and figure out how exactly they will run this business on a daily basis. Sam and Grace suggested that they start by drawing a map of their day to day operations and include what raw materials, plant, and equipment they will need at different parts of the process.

“

“Remember, not all businesses will need a physical office building or formal ‘plant’!”

Sam

When Metropolis Trash Management first starts up, the team will need to enlist homes and small businesses in the nearby community to hire their trash management services for a monthly fee. The first step in their operations plan is to use two modified bikesto ride to the homes of their clients, pick up their trash, and supply their clients with new trash bags. The team will then bring the collected trash bags back to their plant site which is located in the backyard of the founder where it will be processed. The team will sort the trash, repackage it, and deliver it to the correct disposal facility by bike. Organic items which can be composted will be collected in a small plot of land near the sorting site. This compost can be purchased by nearby farmers. As you can tell from the map, Metropolis Trash Management will need plastic bags as a raw material, two modified bikes for equipment, and the founder’s backyard as the plant site.

Exercise 8.1: Your Map

Draw a map of all the business activities that are required to produce and distribute your product or service. This map should include everything from gathering supplies to delivering your product or service to the customer. After you draw the map, identify the raw materials, plant, and equipment needed at different parts of the process.

Now that you have amap of your process and have written down the raw materials, plant, and equipment that you will need at different points in that process, it might be time to step back and think about what you want versus what you really need to start your business. Because of resource constraints, it is usually not possible to have everything you want for your business, but in order to make sure you can operate you need to be clear on what you absolutely need in order to produce your product or service. At this point it will be important for the Metropolis Trash Management team to re-assess each item identified on the map and ask, “Do we really need this, or is there a way we can design our operations so that we can get started without this item?” For example, Grace and Sam’s friends may think that they want to have five bicycles to start with but they probably only really need two bikes to start with. This exercise will help you be able to start up your business more quickly, on a smaller budget, and with less risk.

Exercise 8.2: Wants Versus Needs

Go back to your process map in the previous exercise and circle all of the inputs(raw materials, plant, and equipment) you absolutely need in order to get started and write a brief statement about each item that explains why you cannot do without it. You may find that you actually need very little of what you put on your map or you might find that you need all of it.

Now that you have a map of your process and you know what raw materials, plant, and equipment you will need, it is time to identify where you will get those supplies from. Suppliers are the people and organizations from whom you will get all of your inputs. You may have one supplier or you may have many different suppliers. Here are some important aspects to consider when evaluating your potential suppliers:

• Cost: Identify how much money your inputs are worth paying for in relation to your finished product. Remember, some costs may not be obvious at first such as delivery costs and set up fees. While it is important to look for ways to reduce cost, it should not be what makes your final decision on which supplier to buy from. It is important to look at all aspects of the supplier both to ensure you are creating a quality product or service experience for your customers as well as to be sure you are maximizing your positive impact on both the environment and society.

• Reliability: It is important to choose a supplier that you know you can trust to be on time and consistent in what they offer you.

•Quality:The inputs you choose will contribute to the quality of your product orservice experience. Just like how you want to buy from suppliers who are reliable, your customers want a product or service they can trust. Research the quality of the inputs you are looking for and seek out a supplier that meets your quality expectations.

• Social and environmental impact:As you continue to develop your plan to start up a business, it is important to remember your core values and that you started this business with the intention of creating a solution for a problem in your community and the world. Your product or service is not actually a solution if in the process it is creating more problems for the community. For example, if you are selling a product that makes your customer’s life easier but you are buying the raw materials to make that product from a supplier which is known for treating its workers unfairly, you may be creating more problems in your community than you are solving. Just as customers can vote with their money what businesses they choose to support, you can vote with your money by choosing which suppliersto buy from. While it may not alwaysseem easy to do, it is important to be a leader in your community by encouraging your customers to support ethical businesses as well as by selecting and encouraging the suppliers you buy from to think about impact. Ultimately, it is all about ensuring your business’s presence makes the world a better place.

After evaluating these different aspects of each supplier, you will need to think about what trade-offs make the most sense in order for you to meet the goal of providing customers in your community with a product or service that makes their lives better. Metropolis Trash Management needs to buy plastic bags for their business and they cannot decide what supplier to use. Grace and Sam have helped the team create a table that will allow them to more easily compare potential suppliers.

Samuel wantsto go with a local business which is well known in the community. Although this supplier is well known, Grace shops for her personal products there and often notices that his products frequently change and his hours are irregular. Instead, Grace would like to go with a larger store located far away from their location. Although this supplier is far away, he could supply consistent products to them as he does others in their city. Samuel does agree the products from that supplier are better quality, but they are also much more expensive and he is nervous that the costs are higher, especially because they are just opening their business. Grace and Sam must help Metropolis Trash Management choose between quality products and consistent hours or convenience and costsavings. Just like Grace and Sam’s friends, you may be faced with trade-offs when deciding on a supplier.

Exercise 8.3: Comparing Suppliers

Now it is time to go out and start looking for suppliers for your business. Use the chart below to list all of the items you will need for day to day operations. Then research the suppliers in your community who will be able to provide you with each item and record what you learn.

Which supplier will you buy this item from? Why?

Repeat the exercises basing on your items.

Lesson 8.2: Supply Chain

A great way to summarize your operations in a picture is through your supply chain. Your supply chain is a chain of activities that captures the movement of the product or service from the supplier to the customer. In this case, your supply chain will be a summary of the process map you previously created. By analyzing the links in the value chain, you can identify ways to reinforce your business strategy and in doing so increase your competitiveness.

After you have mapped out your supply chain, it is important to evaluate your social and environmental impact at every link of the chain. After all, it is no good to offer customers a product or service solution if to do so you need to pollute the earth or treat your workers poorly. Even a business like Metropolis Trash Management which works to help their community properly dispose of trash must always be thinking about how thier operations also create waste or impact society. After mapping out their supply chain, Metropolis Trash Management assessed their potential positive and negative impact on the environment and society at each link in the chain. Then Grace and Sam helped their friends brainstorm ways to increase their positive impact and minimize their potentially negative impact.

After thinking about ways to minimize their negative impact on the environment and society, the Metropolis Trash Management team did some research about what they could do with recyclable materials they collect. They quickly learned from a friend that there is a recycling plant in their community that they can sell recyclables to. The team decided to incorporate this into their operations strategy right away.

Exercise 8.4: Your Supply Chain

Map out your supply chain. Then, at each link in your chain, identify positive and negative social and environmental impacts your business operations might have on the community and world as a whole. After you have identified these potential points of impact, brainstorm ways in which you can increase your positive impact and minimize your negative impact. After brainstorming, circle the ideas that you commit to making part of your operations strategy going forward and, if necessary, update the picture of your Supply Chain.

Lesson 8.3: Team and Talent

Now that you have a sense of what you need to do in order to operate your business, it is time to figure out if you have all the knowledge, skills, and/or labor necessary to do those activities. To figure out what team and what talents they need to have, Sam and Grace suggested the Metropolis Trash Management team make a table. First they need to identify what activities need to be completed as part of daily operations of the business. Then they need to identify what skill, knowledge, or labor is necessary to complete each of those activities. Lastly, they need to assess their own team and figure out who will be responsible for what activities. They may find that there are activities which those on their team do not have the time to do which means they may need to enroll more people on their team. They also may find that there are activities which those on their team do not have the skills or knowledge to do which means they will either need to acquire the knowledge or skills or enroll someone on their team who has the knowledge or skills to complete the task.

“

Once you have completed Exercise 8.3,turn to the back of the guide and write a summary of the following in your business plan:

“Operations:
Production and Distribution
This section describes in detail how you will get your product or service to the customer. Be sure to include a description of each link in your supply chain as well as what inputs you will need and from whom you will get them”

Your Business Plan

Mary and Isaac are excited because they have realized that they almost have all the skill and knowledge already to run thier business. Mary is loves to go on long bike rides and knows the community neighborhoods well so she will handle all the transportation of trash. Mary will be the leader of business operations as she well be responsible for picking up the trash from their customer’s homes as well as delivering the sorted trash and recyclables to the correct disposal facilities. Isaac and Mary will share the responsibility of sorting the trash. Isaac is good at drawing and making signs and flyers. He is also very good at interacting with customers from growing up watching his mother run a tailoring shop. Isaac will be the leader of marketing and sales as he will be responsible for creating promotional materials, recruiting homes and small businessesto buy thier services, and selling the compost to nearby farmers

Mary and Isaac realize that neither of them have any knowledge about how to keep accounting records for the business. They realize that this will either need to be something that they learn or that they recruit someone else on to thier team to do. They decide that while they are just starting up their business Isaac will learn the basics of accounting from their friends Sam and Grace.

Exercise 8.5: Your Team

First, translate your process map into a list of tasks or activities that need to be completed for the daily operation of your business. Then identify what skills or knowledge are required to complete those tasks. Lastly, go through the list and identify which tasks you have the time to do and the talent to do. If you have teammates, identify which tasks each person on your team has time to do and the talent to do. Circle any tasks left which you (or your team) either doesn’t have the time to do or does not have the talent to do.

Is there any skills or knowledge which you don’t have now (and no one on your team has now) that you will need in order for your business to operate? If so, briefly write how you plan to either learn that skill or knowledge or enroll someone on your team with that talent.

“

Once you have completed Exercise 8.5,turn to the back of the guide and write a summary of the following in your business plan:

“Operations:
Team
This section describes the team members who will running the business. Be sure to include a description of each team member's role in the business's operations”

Your Business Plan

Lesson 8.4: Developing Your Team

Whether or not you have found that you will be able operate your business by yourself, you will hopefully at some point need a team as your business grows. In this lesson, you will be introduced to the art of team building and develop core commitments that you and your team agree to uphold as a business. Even if you don’t have a team at this point, it will be important to read through this section and develop your own core commitments as they can always be updated if people are enrolled on your team in the future. Often times we give very little thought to team development and instead jump right into the details of the project we are working on. Building teams that work together successfully, however, takes intentional thought and action. In order to figure out how to build your team, it can be helpful to think of your team’s process as going back and forth between four different modes--forming, norming, storming, and performing.

The first step to using this model of team development is recognizing what mode your team is in and what you can do to help facilitate movement towards performing. Some modes may last longer than others and teams that do not function well might never move out of norming or storming and into performing.

• Forming: This is when the team first comes together to work on the project. It is at this point that team members begin to develop impressions about each other and the project that they will be working on. As a leader, facilitate introductions and encourage teammates to talk about who they are and what they are passionate about. Play games and hang outin informal settings. Share knowledge about this model with your team so they can participate in the team development process.

• Norming:The team begins to develop a culture and rhythm. Have a formal discussion with your teammates about what each of you want to get out of starting this business and develop a list of core commitments to yourselves, eachother, and to the community your business serves. Develop specific actionable ways in which your team can fulfill those commitments. It can be helpful to develop a plan for what to do when feel like you are not fulfilling the commitments.

• Storming:As teams begin to dig deeper into the task they are trying to complete, members will bring different ideas to the table and must confront the disagreement Sometimes storming can be resolved quickly while other times teams are unable to move out of this mode. Tolerance and understanding is key. Rely on the foundation you have set in forming and norming by revisiting your commitments to see if they still hold up or if they need to be adjusted. Recognize that this is a mode and that it is necessary but that it is also important to move towards performing.

• Performing: Teams that work well together can reach a time when they are truly performing. This means they are able to function as a team and find ways to complete tasks effectively and without too much conflict. Diversity of opinionion and discussion is always healthy but it is important that it is always constructive. At this point, team members are knowledgeable about their own role on the team as well as the roles of other team members and able to keep themselves and others motivated. As a leader, help your team reflect on their process and what is working. Even high-performing teams may go back to storming and norming as they are faced with new challenges or changing circumstances such as adding a new member to the team.

If this model of team development shows anything, it is the Importance of communication and establishing shared expectations within the team. This is important so that when you are in the storming mode you have a common ground to revisit that you have all agreed upon at one point. Having open communication and constantly setting expectations and revisiting those expectations allows members of the team to feel engaged and motivated. Open communication and creating an open team culture is the best way to prevent both fallout within the team as well as keeping everyone on the team honest

Metropolis Trash Management definitely needs to start thinking about how to build thier team. Grace and Sam started off by helping the Metropolis Trash Management team take a few minutesto brainstorm everything that they wanted to get out of their experience starting the business. What they expect from themselves as well as what they expect from eachother. At this point because they are just collecting ideas, no idea is wrong and they wrote down everything that was offered in the discussion.

Metropolis Trash Management
What do we expect of ourselves and each other?

After capturing everyone’s ideas, the team realized that many of the ideas were very similar and could be categorized and consolidated. Grace and Same helped the team sorted through all their ideas and refined them into three main ideas that everyone on the team was excited to commit to.

Metropolis Trash Management Core Commitments

Our team agrees to the following core commitments to ourselves, to each other, and to the community our business serves.

Empower each other to be the best we can be individually and as a team.
We will strive to be leaders in our community as we continually grow in knowledge and skill and embrace challenges. We will create a team culture full of positive energy, communication, and honesty. We will always act with conscience and no regrets

Make our community a better place.
We will create solutions to real needs in our community. We will strive to make these solutions self-sustaining and long-term.

Constantly learn and innovate.
We will listen to our community to deeply understand their needs and always think about new solutions. We will embrace opportunities to learn from our own experiences, from eachother, and from others in our community.

If at any point someone on our team feels that we are not upholding these commitments, it is necessary that the team member take action by bringing it to the attention of the other members of the team.

Once the Metropolis Trash Management team created their list of commitments, Sam and Grace suggested that they now brainstorm ways in which they can actively work towards fulfilling those commitments. It is important to not only develop commitments that everyone can agree on, but also to put those commitments into action so that they are not just something that is on paper and never thought about again.

Metropolis Trash Management
How can we act on our Core Commitments?

Empower each other to be the best we can be individually and as a team.Take time to develop team culture by having fun together in our free time.
Take time to do talk about our behavioral styles and our team process.
Hang the list of Core Commitments on the wall whenever we have meetings as a reminder of our agreement.

Make our community a better place.
Find ways to give back to the community by going into schools and giving workshops on how to sort and dispose of trash properly. Sponsor awareness campaigns about the issue of littering.

Constantly learn and innovate.
Meet with customers after they have participated in our services and ask how well we are meeting their needs. Meet with people who have chosen not to pay for our services and ask why. Improve our services based on their feedback.
Do research on other waste management services in our community and in similar communities around the world.
Set upmonthly brainstorming sessions where wemeet and talk about what is working and what we can dobetter

Exercise 8.6: Core Commitments

Brainstorm everything that you (and your team) expect from yourself (and from eachother.) Be specific and remember that at this point there are no bad ideas

After capturing everyone’s ideas, categorize and consolidate your ideas into your core commitments to yourself, to eachother (if you have a team), and to the community your business serves. If you are creating this list with a team make sure everyone agrees to the final list of commitments.

Now that you have a list of commitments, it is time to brainstorm ways to actively work towards fulfilling those commitments. Once you create the list, circle the ideas that you agree to put into action.

“

Once you have completed Exercise 8.6,turn to the back of the guide and write a summary of the following in your business plan:

“Operations Plan:
Core Commitments
This section describes the core commitments to yourself, each other, and the community your business serves”

Your Business Plan

Reflection: Operating your Business

Reflect on the decisions you have made about your business’s operations. Include how you think this will effect or change any of the choices you made when developing your marketing plan.

“

“Every good entrepreneur will have to revise their plans over and over again as they gain new insights. Remember to leave some space to come back, revisit your reflection, and add more thoughts as needed.”

Sam

9. Using Accounting as a Tool

9.1 Why is Accounting Important

9.2 What is Accounting About?

9.3 The Mechanics of Accounting

9.4 Looking to the Future

In this chapter, you will learn how to record, organize, report, and analyze your business’s financial information. In this chapter, you will learn about the accounting process, how accounting information is communicated to you and other interested persons through financial statements, and how to “see into the future of your business” using accounting projections.

Lesson 9.1: Why is Accounting Important

Accounting is often called “the language of business,” because it is the way that you can communicate to others the results of your operations. Without accounting, it would be difficult for you or others to see the financial health of your business. Accounting is the process of recording and organizing transactions to track money earned and spent, reporting the information to yourself, lenders, investors, suppliers, and others and analyzing the financial information to make wise decisions.

You, as the business owner, you need to know how your businessis operating and accounting will provide you that information. Many other individuals and institutions may want accounting information too. Potential supporters who may be interested in your business and could provide you with resources may want your accounting information to help them learn about your business. This could be banks, other kind of lenders orinvestors who own stock in your company. Governments want accounting information for tax reasons, for legistlative and legal reasons and other initiatives related to your business’s impact on the financial, social and environmental community. And finally, the public as a whole may want your accounting infomration because they are your customers, they are your employees and your business effects the entire community around you. The general public will be interested in knowing what you are doing and how you are contributing to the community.

All of these groups, need or want this information that can be provided from accounting.

Lesson 9.2: What is Accounting About?

To run a business, you need resources. Accounting simply keeps track of those resources – where they come from and how they are used.

We capture this in what is called the Accounting Equation. The accounting equation is made up of three types of transaction items – Assets, Liabilities and Equity.

Assets are resources that you use to run your business. They come from one of two sources. One source is from money that you borrow from those sources like banks and other lenders which are called “Liabilities” because you are required to pay it back. The other source for generating resources are things that you put in yourself or money that the business makes – profit from sales of product or services. These are called Equity. Your resources have to come from somewhere. They must come from Liability or Equity. Therefore, we end up with a very fundamental relationship here. Assets have to equal liabilities and equity because they are the only potential source of resources.

That is the accounting equations, Assets = Liabilities + Equity. This will help you to understand most accounting statements from this guide and concepts as we move forward.

             Assets = Liabilities + Equity             

Every transaction of your business relates to the accounting equation and it must always balance.The “Assets” side represents the resources your business owns or controls. The “Liabilities + Equity” side represents where those resources came from. For example, if you go to a bank and borrow $500, your cash (an asset) increases by $500. So too does your debt (a liability) by $500. Let’s also assume you contribute $500 to your business from your own savings. The example below illustrates how the Accounting Equation balances:

$1,000 = $500 + $500
(Cash) (Debt) (Your Contribution)

The accounting equation is the basic for most accounting reports. Understanding this concept, will help you to understand most accounting statements from your book and concepts as we move forward.

Lesson 9.3: Mechanics of Accounting

The mechanics of accounting involve basically understanding a way of capturing information that you can use consistently and that allows you and others to compare information from one company to another so that everything looks basically in the same format. Some of the key things that you need to understand is 1. Transactions. Think of something that increases or decreases the resources of your company as a transaction. Something that has an impact on your business, an example of a transaction might be a sale to a customer – a transaction that increases your resources. So the first thing to think about in building an accounting system is how you are going to capture information about the transactions that occur.

The second term is that you need to be familiar with is the term “accounts” Accounts are a system of organizing transactions that are similar to each other so that you can readily summarize them. In your accounting system, you will create an account for something like sales, one of your resources. The account will be a way that you can put all of the transactions that affect your sales together.

The standard when you create an account such as sales is to set it up in what is called a “T-Account” this is a mechanism for capturing the increases in the account on one side, and decreases in the account on another so that you can readily see where things came from and where they went. You’ll often also hear the words Debit and credit when we talk about accounting systems. These are simply words to help state which side of the T-account transactions are being recorded. A debit means that things are being recorded on the left side of the T-account and credit means that it is being recorded on the right side of the T-account.

For example, if you have a T-account for Family cash. You put in 200 of your own cash, 100 of your family cash, a sale of 75 and an expense of 50, then the T-account would look like this:

In formal accounting, the next step is to summarize all of the entries that are in your T-account. We often call this a general ledger where we summarize all of your accounts.

Exercise 9.1: Understanding My Transactions

What are some common transactions that any business would need to keep track of? Think back to the Marketing and Operations Chapters.

What transactions will your business need to keep track of?

The illustration below shows three T-accounts, and how they fit into the Accounting Equation. For practice, record the transactions mentioned previously in the appropriate T-accounts (you borrow $500 from the bank, and contribute $500 from your own savings, both in cash).

There are many things that the different audiences may want to know about your business and there are standard methods of sharing the information they commonly want. .The following are the basic reports that may be asked of you: the balance sheet, the income statement, the cash flows statement and, when you’re first starting out, the Schedule of start up costs.

The Balance Sheet

People want to know what you owe and what you own at any given time. Think of this as taking a picture of your business. The picture is one that will convey to someone exactly what is happening at your business at the time that the picture is taken. So with accounting, you are trying to capture what you own and what you owe and you do that with a statement called the Balance Sheet. The Balance sheet is the picture of what a company owes and owns at a particular point in time.

The Balance Sheet shows the financial condition of a business at a specific point in time. The Balance Sheet is basically the Accounting Equation (Assets = Liabilities + Equity), only more detailed. Think about the equation and balance sheet this way: all the resources of your business have to come from somewhere, so the summary of your resources (the assets) must equal the summary of how you obtained those resources (the liabilities plus the equity). This concept even applies to huge companies and even their balance sheets must (and do) balance! This is why it is called the “balance” sheet. Below is a balance sheet for Metropolis Trash Management.

Metropolis Trash Management
        Balance Sheet
As of December 31, 2012

Let’s walk through the balance sheet above starting with the assets column. Cash is money that is on hand. This is money the business can use to purchase more assets. The computer is equipment and has a value of $300. The inventory is the $ amount the business paid for their inventory. Now lets look at Liabilities.. Accounts payable is money the business owes. This could be supplies purchased on credit with theirsupplier. Long-Term debt is for loans the business received from a bank. Finally, look at Owners Equity. Contributed Equity is money the owners have invested in their business. Retained earnings is the profits that stay within the business.

“

Once you have completed this exercise, turn to the back of the guide and write a summary of the following in your business plan:

“Projections:
Balance Sheet
This statement shows the assets, liabilities and equity of your business on a specific date.”

Your Business Plan

The Income Statement

People also want to know how the business has been doing. They want to know what is happening as an outcome of your business operations. Think of this as the movie of your business because the movie will show over a period of time, such as one year, what has transpired at your business. We do this in a statement called the Income Statement.

The Income Statement shows the profit or loss of the business for a period of time. There are two important sections of the Income Statement: revenues and expenses. Revenue reflects the resources, usually money, earned from the sale of goods or services. Selling school supplies is an example of a good. Tutoring people in computers is an example of providing a service. Expenses are the costs that a business must pay to operate, like rent expense, wage expense, and purchasing inputs (Cost of Goods Sold).

Revenues minus expenses equals net income for your business. This is an important number. If revenues exceed expenses, the business will have a net income (a profit). If expenses are greater than revenues, you will have a net loss. Tobe successful, your business must generate net income eventually and hopefully consistently. Below is an Income Statement for Metropolis Trash Management.

Metropolis Trash Management
        Income Statement
Year Ending December 31, 2012

Revenues
	Sales:
	Removal Appointments	$400
	Bags and supplies	$70
	Total Sales		$470
Expenses
	Cost of Goods Sold:
	Supplies	$(30)
	Wagon	$(50)
	Advertising Expense	$(100)
	Total Expenses		$(170)
Net Income			$300

Assume that the Trash Removal Business purchased 30 bags for $1 each from a local supply store. They then sold 20 of those bags to their customers for $2 each. The 20 customers paid them a total of $300 for their trash removal appointments. Grace also paid $30 to create fliers to advertise their friend’s business. All of these transactions occurred in the same period. Prepare an Income Statement using this information for the period (year)

At the end of the period, after the financial statements have been prepared, your revenue and expense accounts will be “closed out” to the Retained Earnings account. The Retained Earnings account represents the cumulative profit or loss that has resulted over the life of your business (less some items such as distributions to the owner). Closing out the revenue and expense accounts at the end of each year also ensures that all of these accounts are set to zero and ready to accumulate the transactions for the next year. Thus, the amount recorded as net income on the income statement will be added to the amount already in the Retained Earnings T-account at the end of each year.

“

Once you have completed this exercise, turn to the back of the guide and write a summary of the following in your business plan:

“Projections:
Income Statement
This statement shows how profitable your business was over time”

Your Business Plan

The Cash Flow Statement

The next thing that people are interested in knowing is where is your cash coming from and where is it going. It may the same as an income statement but most times, cash is not the only resource that people provide. What we have to remember in terms of running the business is that you cannot pay the bills unless you have cash. To measure this, you would need to create a different statement that shows how the cash is being used and where it is coming from – this is called the Cash Flow Statement.

There are many different resources that you need and will use in your business, but perhaps the most important is cash. Your business needs cash to survive. Understanding how much cash is coming into and out of your business is very important. If the money your customers owe you (called “Accounts Receivable”) is not collected, but bills, loans, and wages that you owe are due, you have a problem. Even if your business has revenues coming in, if those revenues are not cash, they cannot be used to pay off your debts, purchase materials, or hire workers.

Metropolis Trash Management
        Cash Flow Statement
Year Ending December 31, 2012

Cash is commonly categorized into one of three areas: cash from operations, cash from investment and cash from financing. Cash from operations includes your day to day activities. sales and daily expenses are captured in the Net Income line, your cash decreases when your accounts recievable increases because though you’ve made the sale and it’s recorded in your net income, you have not yet gotten the cash for that sale yet. Similarly, if a supplier has given you materials for your product but you have not yet paid them, your cash increases because you’ve recorded the expense in your net income but you have not yet taken the cash from your account and given it to the supplier. Cash from Investing includes mostly one time or irregular purchases that contribute to your business’s assets. Mostly in From Ideas to Action, you’ll use this area to record purchases or investments in property, plant or equipment. Finally, cash from financing includes any loans you take out or pay back, any money that you or others contribute to the business in exchange for ownership, or equity. The final number, or “total change in cash” should be the amount of cash you have in your business’s bank account

Exercise 9.2: Cash and Cash Flows

How will you keep your business’ transactions separate from your personal transactions?

Where will you keep your business’ cash? Will you use a bank account?

List three ways your business can obtain more cash or save cash.

List some benefits and drawbacks to selling goods or services on account (accounts receivable). What steps can you take to increase the likelihood that your customers will pay you?

Lesson 9.4: Looking Toward the Future

To get someone to invest in your business, you need to be forward looking. Based on past history or even if you don’t have a past history but you have an opportunity to think about what your business might look like, armed with the knowledge of what the income and balance sheets look like, and you can develop a projection of what the business might look like. What is the primary weakness of this? That you may have to guess – with assumptions.

So how can you get someone to believe your guess? It is important to carefully document your assumptions - the guesses that you’ve made in terms of where your resources will come from and how they will be used - because someone can then analyze your assumptions and then see if they agree with you. Despite that it is is a forward looking statement and not a definite truth, it does give a potential investor a look into what your business might become and how it might be successful. Now, you might ask, will these projections come true? The truthful answer is, they will never all come true because things will change. However, they do provide a best guess and a plan for how to move forward.

There are two common reports that others may want you to share. One, the Schedule of Start Up Costs is created only when you are starting your new business or project. The other, the Proforma Income Statementshares your predictions of your business’ssuccessfor the upcoming month or year.

The Proforma Statement or Projections

Another kind of information that people are sometimes looking for is “what is going to happen to this business in the future?” These are called projections or sometimes the word “Proforma” is used. The other three statements - the Balance Sheet, the Income Statement and the Cash Flow – looks at what is happening with the business currently or at a previous period of time but,the future is also of interest to people. You can use the information from the past to get an idea of what will happen and so we would put together financial statements that are put together based on those visions of the future and we would call them “projections”.

To create a Proforma Income Statement, you will first need to estimate your projected expenses and cash disbursements. To do this, think back to the day-to-day operations of your business (the tasks and activities your business will need to perform to sell products and services). How much does each task or activity cost daily, weekly, monthly, or yearly? What specific expenses will be incurred to conduct these tasks and activities? Once you know this, you can use simple math to calculate the expense amounts. If you notice that you won’t have enough cash to handle all of your expenses, you may need to make adjustments to your planned operations. Reevaluate which expenses are really needs as opposed to just wants. If you decide that you can’t make further cuts to your operations and expenses, you may still be able to get additional cash through loans or investors. To do this, you will need to show strong evidence that your business can and will be profitable. As an example, your pro-forma income statementmay look something like the blank chart below before you begin to enter your transactions

Use a template like the one below for Metropolis Trash Management to draft your statement

Metropolis Trash Management
Pro Forma Income Statement
2013

Sales

Cost of Goods Sold

Gross Margin

Operating Expenses:
Advertising
Rent
Wages

Total Operating Expenses

Net Income Before Taxes

Income Taxes

Net Income

If all goes according to plan, the actual revenues, expenses, and cash flows of your business should be close to the budgeted amounts. If there are large differences, you should consider why this might be and make decisions about the business accordingly. You should know that your projects will almost never be exactly as you expected - costs rise, unexpected expenses occur and consumer behaviors influence how well your product does on the market.

“

Once you have completed this exercise, turn to the back of the guide and write a summary of the following in your business plan:

“Projections:
Pro Forma Statement
This statement shows how profitable you predict your business will be”

Your Business Plan

The Schedule of Start Up Costs

Before deciding where your business will get its funding, you must first calculate how much money you will need (refer back to the discussion of “wants vs. needs” in the Operations section), and what specifically that money will be spent on. The schedule of start-up costs shows what expenses your business will incur before operations start, and how much cash will be needed to cover these expenses. This schedule will enable you to understand how much money (or other resources) you must raise to get this business up and running. We will use a few major categories to develop our schedule of start-up costs. They include:

• One-time organizational costs (business license, fees, etc.)
• Deposits and prepaid expenses
• Property and Equipment
• Initial Inventory
• Cash needed for the first few months of operation (called Working Capital)

Exercise 9.3: Preparing a Schedule of Start-Up Costs

• You intend to hire a friend to create a logo for your business, which will cost $100.
• The building you want to rent requires a $100 deposit up front.
• You plan to spend $50 in pre-opening advertising for an ad in Sekondi-Takoradi Times
• Supplies for your business will cost $50.
• You will need a truck, costing $1500, to deliver your product to customers.
• You will need 50 units of inventory for first quarter sales. Each unit will cost you $1.
• You would like to have $560 in Working Capital, as well as a 10% contingency (buffer).

Metropolis Trash Management Schedule of Start-up Costs
2013

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Once you have completed this exercise, turn to the back of the guide and write a summary of the following in your business plan:

“Projections:
Schedule of Start-Up Costs
This statement shows how much money you will need to start your business.”

Your Business Plan

Accounting is a financial reporting tool and is important for you to utilize to ensure you always know of the financial health of your business. Your accounting statements and the records they reflect are the foundation of every business decision you will make, to be coupled with decisions of your business’s values and intentions, its community impact and the business’slong term goals for growth and development..

Reflection: Costs and Record Keeping

After compiling the projected financial figures for your business, you may start to feel overwhelmed about the expenses you will incur as a part the start up or operation of your business. Take a few minutes to revisit Chapters 6 & 7. Are there costs that you may be able to cut down on? What other thoughts do you have about the organization, operation and start up of your business, now that you have learned more about recording the business transactions.

“

“Every good entrepreneur will have to revise their plans over and over again as they gain new insights. Remember to leave some space to come back, revisit your reflection, and add more thoughts as needed.”

Sam

10. Funding your Business

10.1 Non-Monetary Funding

10.2 Loans and Interest

10.3 Equity Financing

10.4 Cost of Capital

10.5 Funding Your Business

In this chapter, you will be introduced to different funding options and learn how to evaluate them to determine the best way to fund your business. While finding the funding for the start-up costs of a business can be a challenging task, entrepreneurs use their knowledge, skills, and motivation to meet this challenge head-on.

Lesson 10.1: Non-Monetary Funding

Many people assume that money is required for all purchases. However, it is sometimes more beneficial to both parties when a direct exchange of goods or services occurs. For instance, if you need to buy soap for your cleaning business, you may offer the local soap seller an exchange of cleaning their office for the products you need. Bartering is the process in which goods or services are directly exchanged for other goods and/or services without the exchange of money. Bartering can be done with businesses, neighbors, friends and community members. Especially when you are just beginning your business, it might be necessary to think of ways that you can barter with others to obtain the resources you need since your cash resources may be very limited. An advantage of engaging in a bartering transaction is that the person you are trading with does not need to rely on a promise from you to make payment in the future. They usually obtain what they want – the goods or services you provide – from you immediately without having to worry that they might end up with nothing from this transaction.

Exercise 10.1: Bartering Examples

List at least three other examples of bartering (one of which could be used by your business).

Lesson 10.2: Loans and Interest

After you have exhausted all bartering opportunities, you may still need to borrow money to start your business. Money can be borrowed from banks, friends, other business people and family. In order to secure loans from others, you must be able to convince them that your business idea will be a profitable one since lenders normally expect the loan to be paid back along with interest. This is where projections become useful. You can show potential lenders that your business will have the ability to pay them back by coming up with realistic and believable projections that show positive operating results.

When considering the option of taking out a loan, check your projections to ensure you can pay back your loan principal with interest in the designated amount of time. Loan principal is the amount of money you borrow. Loan Interest is the expense of borrowing money. Interest is usually stated as a percentage of the principal and usually determined through negotiations between the borrower and lender.

Simple Interest

It is important to understand what simple interest means when you are considering borrowing money. It is likely that a deal with a community member will use simple interest. The following formula will help you calculate simple interest when you know how much you will borrow (principal), the interest rate for your interest expense (a % of the loan’s principal), and how long you’ll take to pay it back (time).

Interest = Principal x Interest Rate x Time

For example, if you borrow $50 for 3 years at 5% simple annual interest and you wanted to know the total amount you would pay for the loan, you would calculate it in the following way:

Interest = Principal x Interest Rate x Time
$7.50 = 50 x 0.05 x 3

Interest + Principal = total amount you will pay for the loan
50 + 7.5 = $57.50

Exercise 10.2: Calculating Simple Interest

Assume you borrow $250 for 1 year at 6% simple annual interest.
What is your principal?
What is your interest rate?
What is the time period?
How much interest will you pay over the time that you have the loan?
How much will you pay in total for the loan?

Compound Interest

If you choose to take a loan from a bank, the bank will likely charge compound interest. With compound interest, the amount of unpaid interest at the end of a period is added to the previous principal balance to calculate a new balance on which interest for the next period will be calculated. In essence, your principal balance is recalculated after each time period - every day, week, month or year. Here’s an example of how compound interest works.

Interest year 1 = principal x interest rate x time
Interest year 2 = (principal 2 = principal 1 + interest1) x interest rate x time
Interest year 3 = (principal 3 = principal 2 + interest2) x interest rate x time

For example, if you borrow $50 for 3 years at 6% interest compounded annually (yearly), the calculation of the compound interest will be as follows:

Interest year 1 = principal x interest rate x time
3.00 = 50 x .06 x 1

Interest year 2 = (principal 2 = principal 1 + interest1) x interest rate x time
3.18 = (50 + 3.00) x .06 x 1

Interest year 3 = (principal 3 = principal 2 + interest2) x interest rate x time
3.37 = (53 + 3.18) x .06 x 1

Interest + Principal = total amount you will pay
50 + 3.00 + 3.18 + 3.37 = $59.55

Contrast this with the total amount you would owe if simple interest is used instead:
$50 x .06 x 3 = $9.00, or a total balance owed of $59.00.

Exercise 10.3: Calculating Compound Interest

You borrow $250 for 5 years at 6% annual interest compounded annually.
What is your principal?
What is your interest rate?
What is the time period?
How much interest will you pay over the time that you have the loan?
How much will you pay in total for the loan?

Lesson 10.3: Equity Financing

Another way to fund your business is through what is called “equity financing.” Unlike a loan where you make regular principal and interest payments until the amount you borrowed is repaid, in equity financing, “investors” or “partners” put money into your business in exchange for a share of its profits and a say in the day-to-day operations of the business. In other words, those who provide equity financing become part owners of the business. The investors receive their profit (return) from distributions of the profits from the business, or when they sell or redeem their ownership interest in your business for more than it was worth when they gave you the money. Investors often contribute money or other resources to your business only in exchange for a share of your profits without getting involved in the day-to-day operations of the business. However, in a partnership, two or more people pool their money and/or services together to form a new kind of entity in which all both own and co-manage the business. Although forming a partnership means that you must give up some control over your business, your partner(s) may bring knowledge, skills, or other needed resources to the business that otherwise might not be there.

Exercise 10.4: Equity Financing

In the space below compare equity financing with borrowing money to start a business

What are some of the advantages and disadvantages of each?

Which do you think will work best for your business and why?

Lesson 10.4:Cost of Capital

“Capital” is a term used to refer to all of the resources you will need to operate your business and generate a profit. This typically includes cash, but also refers to all other types of resources such as inventory and property. As we have seen already in this chapter, there are many funding options available for small businesses to acquire needed capital. However, not all funding options cost the same. A loan from a bank that charges interest will not cost the same as an investor who gives your business money in exchange for a share of the profits. These costs can be calculated. However, interest and profit-sharing are not the only “costs” you need to consider. Giving up some control over your business is a non-financial cost that should also be considered. You must also assess the risk that goes with each source of funding. If your business does not do so well in its first year or two, a bank that requires fixed loan payments may be less forgiving than a family member who invested money. The following exercise helps you to think about some of the things you should compare when considering the cost of obtaining capital.

Exercise 10.5: Comparing Funding Options

To start your business, you calculate that you will need $1,000 to purchase equipment. You go to your local bank and request a loan for $1,000. The bank gives you the following terms:

• Interest Rate: 10% (compounded annually)
• Repayment Time line: 10 years
• Payment will be made annually, with an equal payment each year. The payment will first be applied to the interest due for the year and then to the principal.
• Based on these terms, the bank calculates that an annual payment of $163 will retire the loan at the end of 10 years.

You think that perhaps you can get a lower interest rate than this from another lender, so instead of automatically taking the bank loan, you go to a family friend (an investor) and ask if he would be willing to loan your business $1,000 to start-up. He will do this, but in return he will expect to receive 10% of all the profits made by the business for each of the next ten years. Over the next 10 years, you project that the profits and losses for the business will be as follows:

Using these assumptions, calculate the Cost of Capital for both the $10,000 bank loan and the $10,000 equity investment from your family friend. Don’t worry about calculating cost of the loan for each year below, but using the information above you should be able to calculate the cost of the loan over the entire ten-year period.

How much would the bank loan cost you in total interest? How much would the investment from your family friend cost you? Discuss which option you would be inclined to pursue. Remember to think beyond the numbers and consider ALL factors such as risk and ease of obtaining the money.

After 10 years, your cost for using the investor’s $1,000 is$660. Had you taken the bank’s offer, the total amount of interest would have been $630. So the bank loan is the better deal, right? Well, that depends. Although your financial cost of capital was higher using your family friend’s money, it was less risky than taking the bank’s loan. This is because had your business performed poorly (as it did in Year 4), the investor’s share of profits would have simply decreased to zero. The bank, on the other hand, would have still charged you the same $163 per year, which you may not have been able to pay. And as you might have guessed, failing to pay back a bank loan can mean that your business may actually be shut down.

In the above scenario, the costs were fairly similar between equity (investor) and debt (bank loan) financing. But in the real world, the costs will probably differ by much more. This is why it’s important to calculate the cost of each option, and consider as many factors as possible in your decision.

Exercise 10.6: Revisiting Needs vs. Wants

Part A:At first, Samuel & Grace’s friend has determined that they will need a car to transport the trash, an office for people to come to schedule pick ups, cleaning supplies including bags and marketing materials in order to begin this business. Very quickly, they began to think that they would not be able to start this business, because they could not afford these things.

Not wanting them to give up, Samuel started to think about the difference between wants and needs, which he learned in Chapter 7. Samuel determined that although they might want a car to transport the waste, they did not need it to begin small in their close community. Grace’s brother, Thomas, worked at a cleaning supply store, and helped them understand the pricing of their required supplies. Suddenly, the friend began to see that they also wouldn’t need an office until their business grew significantly – they had learned in their market research that people did not want to come to them but rather preferred that a representative visit the client.

This left them to find funding for the cleaning supplies and marketing materials. This made Samuel and Grace’s friend feels better about the amount of money they would need for startup capital but they still did not have any of their own money to get the business going. Samuel and Grace decided that they would make a list of all possible options for obtaining these things, making sure that they referred back to Part I of this guide to consider their own resources and skills as well as their network’s resources.

What are some options that Samuel, Grace, and their friend might put on their list of possible sources for their needed funding? Make sure you consider who they know and what they need.

How might Samuel or Grace’s friend help? What opportunities for bartering do you see?

Explain why Samuel determined he would not need to fund an office or a truck.

Part B: Samuel and Grace determined that they would be able to solve their friend’s need for marketing materials based on the list in Part A – Grace’s brother was able to talk to his manager and loan the materials to them until they started making money! They now need to determine how they will obtain the marketing materials. Samuel has the option of borrowing the $40 he needs from a friend in the community or going to the bank for a loan. The bank loan would be for a period of 1 year with a 10% interest rate while the loan from the friend would be for 6 months with a 7% interest rate. Samuel is nervous about borrowing money from anyone, so he uses his projections he calculated earlier to make sure that he would be able to pay the loan back in a short amount of time.

Which loan is better for Samuel? Why? If more information is needed, please explain.

What other information might you need to determine if a loan is right for you?

Part C:Samuel has connected with a local business man who is willing to make the loan to Samuel’s friend. Samuel wants to make a contract with this business man to ensure that they both know when payments are due and are clear on any other obligations or commitments to each other.

What information should Samuel include in the contract?

Lesson 10.5: Funding Your Business

Now it is time to apply the lessons you have learned from this chapter to your own business. So far in this chapter we have discussed how to determine what you need to operate your business, some of the possible options for securing the capital you require and how to compare these options. Just like any part of operating a business, obtaining the funding you need is challenging and is not a sure thing. However, just like any part of your operations, careful planning and consideration of all of the possibilities and relevant factors can make obtaining funds easier for you

Exercise 10.7: Advice from Experts

Interview someone in your community who has either borrowed from a bank or an individual who has granted someone a loan. You could also interview someone who works at a local bank since they are in the business of lending money to others. Ask them for guidance on what lenders look for before deciding to make a loan. What kind of information is needed? What are the factors that help someone to decide whether or not to make a loan? Do they have any advice for you based their experiences? Is there anything else that you learned from them about the process of acquiring capital to start and run your business?

The knowledge and techniques covered in this chapter are important and helpful tools to use when trying to obtain capital. However, even with these tools many entrepreneurs find it difficult to raise capital. Think of it this way: if it was easy to raise capital then how would good ideas from motivated and skilled entrepreneurs stand out to potential lenders from all of the possible ways they could invest their money? No one can offer you an easy and certain route for obtaining capital, but there are several pieces of advice that will help you in the pursuit of the resources you need.

Most entrepreneurs start very small by using their own labor and whatever resources they can save on their own or easily acquire from close friends and family. This means that it is very important to design a process for your business idea that relies on as few resources as possible. Perhaps the most important part of acquiring needed capital is to decide what you can live without until the business grows and generates capital itself.

Even seeking resources from family and friends is not an easy task. They may have very limited resources, too. This is why many entrepreneurs actively try to expand their circle of friends. The more friends you have, then the greater chance you have that someone will be interested in your business ideas and consider investing in them. To the best of your ability, seek out friends who are like-minded and try to develop a network that includes people who are interested in business and who are potential investors.

Banks are usually very unwilling to lend capital to new businesses, particularly when the person seeking a loan has limited resources to begin with and very often no experience that proves they can pay the loan back. However, there are many groups and organizations today that are willing to make small loans to start-up businesses. These micro-credit organizations can be sponsored by the government, NGOs, or other entities such as community groups, churches, and universities. They can even be found on the internet, with organizations such as kiva.org supporting small entrepreneurs around the world. You must be very proactive in seeking out and exploring all of the types of organizations that might possibly lend you the resources you need.

No matter where you seek out your needed resources, you will never obtain them unless you can convince others that you have a great idea and the passion and skills to deliver on that idea. This is the true secret to how successful entrepreneurs obtain their needed resources. It isn’t only about your idea and who you are, but it is also about how you communicate your ideas and present yourself to others. There are many ways to communicate your ideas, and the rest of this guide will focus on ways to do this effectively, whether it is with a formal business plan or a quick pitch of your idea to a friend or potential investor. But remember, the most important factor in obtaining resources is YOU. You must develop the idea, you must have the passion and commitment to pursue it, and you must have the skills needed to move that idea into action. If you realize that all of this is under your control and take action, soon resources will come your way because others will want to be a part of something that is successful and creating value.

“

Once you have completed this exercise, turn to the back of the guide and write a summary of the following in your business plan:

“Funding:
This section describes what resources you need to start your business and where you will get those resources from.”

Your Business Plan

Reflection: Funding your Business

Use the space below to think about the funding options available to you. You may think of ideas for bartering agreements, places where friends may have gotten loans or other ideas for how to acquire the start up costs needed for your business idea.

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“Every good entrepreneur will have to revise their plans over and over again as they gain new insights. Remember to leave some space to come back, revisit your reflection, and add more thoughts as needed.”

Sam