Chapter 4_The Viability of a Business Idea PDF

COPYRIGHT PERMISSION FORM – CP241CB4 LEGAL SERVICES: COPYRIGHT 2024 LECTURER MRS. C. BEZUIDENHOUT DEPARTMENT BUILDING &...

COPYRIGHT PERMISSION FORM – CP241CB4 LEGAL SERVICES: COPYRIGHT 2024 LECTURER MRS. C. BEZUIDENHOUT DEPARTMENT BUILDING & HSD COURSE KCN 400 NUMBER OF 100 ELECTRONIC COPIES TITLES Entrepreneurship and How PERMISSION PASA Permission to Establish your own RECEIVED Business, 7th Ed (JUTA) & Business Management for Entrepreneurs 5th Ed (JUTA) Permission is restricted to the unadjusted power points included by the Publisher in this prescribed book © Some rights reserved. This time-limited emergency licence (Covid-19) permits non- commercial use, distribution, and reproduction in any medium, provided the original author and source are credited in the customary fashion and provided re- used snippets link back to the original available from the publisher. The moral rights of the author have been asserted.  INSPIRING POSSIBILITI ES TOGETHER © Juta and Company Limited, Entrepreneurship and how to establish your own 2023 business 7e Lecturer Support Material ISBN 978 1 485132585 Chapter 4: The viability of a business idea Setting up a business Cultivating an entrepreneur’s creative attitude Generating business ideas Developing and evaluating business ideas Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER  Learning outcomes After you have studied this chapter, you should be able to: – Explain the term ‘viability study’ – Explain the term ‘market research’ – Explain the needs analysis and characteristics of customers – Explain the structure of the business Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Learning outcomes (cont.) – Explain the mission statement and objectives of the business – Calculate the expected market share of a business – Calculate the income of a business – Calculate the expected net profit of a business – Calculate the break-even point of a business – Explain cash planning in a business Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Introduction This chapter is concerned with the planning stage of the business idea Two phases are linked to business planning: – To establish the viability of the business idea – to draw up a business plan Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Viability study Entails estimating the interest in the business and its product or service, the expected sales in units and at a certain price, the expected costs associated cost with generating the sale, the strengths and weaknesses of the business Before a viability study can commence, market research must be done Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Viability study (cont.) Once market research has been done, assumptions, on the following, can be made: - The estimated number of units to be sold - The acceptable price the market is prepared to pay - Cash flow requirements for a business Essential that an entrepreneur does a proper needs analysis of the market and identifies the characteristics of the customers Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Market research Entails gathering, analysing and interpreting information on a certain market, on a product or service to be offered for sale in that market, and on the past, present and potential customers for the product or service Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Market research Is there a need for my product or service? (Needs (cont.) analysis) What type of person (customer) will buy my product or service? (Customer profile/characteristics) What can realistically be expected to be sold of this product or service based on the estimated market size? (Market share) How much are customers willing to pay for the product or service? (Price analysis) Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Needs analysis and the characteristics of customers Firstly: Find out who your potential customers are and what their needs are and how they make buying decisions Key to success is making sure your product is exactly what the customer wants There is a distinction between the physical products the customers buy and the image the customers have of the products Focus must be on customer profiles which is a description of the potential customers Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Needs analysis and the characteristics of Four questions(cont.) customers to establish if there is a need for your product: - List the features of the product or service-: helps to focus on each aspect of the product or service - Determine who the major competitors and industry leaders are as well as suppliers and other major role players in this market-: This section forces you to examine the industry as a whole in order to determine its place in the market - Identify the possible customers and segment of the market-: each market must be examined carefully in terms of overall size/ demand and potential profitability - Draw up a final list: includes all of the above Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER The business structure Types of business structures: - Sole trader/ sole proprietor - Partnership - Close corporation - Company Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER The business structure (cont.) Legal considerations - New Companies Act - Companies - Funding statement - Transparency - Consumer Protection Act Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER The business structure (cont.) A practical check list when starting a business: – Decided on the type of business you wish to form: Public/private company – Choose the name and consider alternatives – Draw up a business plan – Await your enterprise registration number from the CIPC – Apply for your VAT/income tax/PAYE/SDL and UIF number – Register your logo as a trademark with CIPC – Ensure all enterprise’s intellectual property is copyrighted – If you have an unique product, register a patent with CIPC Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER The mission statement and objectives of the business Once you have decided on the type of business, you must define your business, using the following questions: - Who are the customers of the business? - Which customer needs will the business satisfy? - How will the business satisfy these needs? Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER The mission statement and objectives of the business (cont.) Mission statement: - Defines the fundamental and unique process of a business and identifies its products/ services, as well as its customers. The mission of a business is defined by customers satisfaction by its products and services - Certain questions need to be answered when developing a mission statement Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER The mission statement and objectives of the business (cont.) After setting the mission statement, you can formulate objectives for your business Objective is something the business wants to achieve over a set period of time Objectives are necessary so that you have something against which to measure progress Objectives are usually adjusted over time based on changes that take place in the industry Defining your mission statement and objectives clarifies what your business is all about Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER The mission statement and objectives of the business (cont.) SMART Framework: – Specific: Provide a clear description of what needs to be achieved – Measurable: Include a metric with a target that indicates success – Attainable: Realistic, yet it should still provide a challenge – Relevant: Should relate to the business’s mission and strategic goals Business Management for – Time bound: Should have a specific entrepreneurs 5E time limit ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Market analysis Calculating the total market potential: Used as a basis to estimate the potential income of your business Must not be over estimated To calculate the expected market share, you need to: - Estimate the total potential market for your product or service - Estimate what portion of the market is occupied by your competitors - Estimate what portion you can expect to sell Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Market analysis (cont.) Calculating the total market potential (cont.): – When calculating the potential market you should begin by dividing it into various market segments – Establishing your target market consists of three steps: - Market segmentation - Evaluation and the target-market decisions - Market positioning Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Market analysis (cont.) Calculating the total market potential (cont.): Market segmentation: - A market can be divided into the following segments: 1. Demographic 2. Geographical 3. Psychographic 4. Behaviouristic Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Market analysis (cont.) Calculating the total market potential (cont.): – Evaluation and the target market decision: - One segment must be selected, to focus on - Choice of the segment should be governed by things such as accessibility and size - Market positioning: - If you choose more than one segment as your target market, you must design a different marketing campaign for each segment Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Market analysis (cont.) Calculating the size of the market: – Traditional method for estimating the market size of your target market: Number of customer units (a) Average annual gross income per unit (b) Total income for area a × b = (c) Percentage ( %) of income spent on item (d) Potential rand value for item c × d = (e) Realistic percentage ( %) of entrepreneur’s market share (f) Rand value of entrepreneur’s market share e × f = (g) Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Market analysis (cont.) Determine the target market: – A target market - specific group of consumers at which a business aims its products and services – A SWOT analysis - study undertaken by a business to identify its internal strengths and weaknesses, as well as its external opportunities and threats Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Market analysis (cont.) Calculating the expected market share: – It is important to determine what your expected market share would be under varying circumstances – The expected market share is that part of a target market that a business will be able to serve on the basis of its production capacity and the state of the economy Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Market analysis (cont.) Calculating the expected market share: – To calculate the expected market share, estimate: the total potential market for your product or service what portion of the market is held by your competitors the market portion Business you canfor Management expect to sell to entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Market analysis (cont.) Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Calculating income Work out the selling price of your product or service It is important to calculate the selling price of your product or service, by identifying the costs to manufacture and sell the products Once all the costs have been established, you must add a percentage (mark-up) to the costs Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Calculating income Calculating the cost price of the product (cont.) – Variable and fixed costs Variable costs are fixed per unit but vary in total Fixed costs are fixed in total but vary per unit – Direct and indirect costs Direct costs are those costs that can be allocated directly to the manufacture of the product Indirect costs are costs that cannot be allocated directly to a product – Calculating the total costs per unit of the product Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Calculating income Calculating the selling price: (cont.) – The price you charge for your product or service is directly influenced by the price your competitors charge for their products or services – Your product or service can only be more expensive than your competitors if you offer more benefits than your competitors – To determine what you can charge for your product, make a list. Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Calculating the expected net profit A Statement of Comprehensive Income - a summary of the income and expenditure of a business over a specific period of time A Pro Forma Statement of ‘Financial Performance’ with ‘Comprehensive Income’ is one that is drawn up using estimated figures Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Calculating the expected net profit Once you have calculated the costs and the mark (cont.) up of your product, you must test the viability of your business Viability = Profitable Profitability = [(expected sales x expected selling price)- expected costs] Income > expenses= profit Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Calculating the break even point Break even is the volume where all fixed expenses are covered Firstly, determine all fixed expenses that occur on a monthly/quarterly/ yearly basis It is important to look at your profit and loss statement on half yearly basis, and recalculate your break-even number Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Calculating the break even point (cont.) Ways to lower the break-even volume: – There are 3 ways to lower the break-even volume; only two of them involve cost controls: - Lower direct costs, which will raise the gross margin - Exercise costs controls on your fixed expenses - Raise prices Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Calculating the break even point (cont.) The aim is profit – You are in business to make profit not break even – Break-even point allows for better management of the business: - Allocate the sales and marketing effort to the point you need to be - You can control costs in a slow month - You can maximise profits by understanding the elements of your break-even figure Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Cash planning: The cash budget (cash forecast) Cash budget - a formal plan for forecasting future receipts and payments of cash over a specific period of time, such as a month, quarter or year. Do not attempt any business venture if you cannot sustain profits over time Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Cash planning: The cash budget (cash forecast) (cont.) Profits over time are not enough, you need cash to manage the business on a daily basis If you don’t have enough money to meet expenses as they occur you are technically bankrupt It is important to pay close attention to the planning of actual money flowing in and out of your business Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Cash planning: The cash budget (cash The purpose forecast) (cont.)of cash budgeting - Helps establish the in and out flows of cash - The budget can: 1. Be used to plan your short term credit needs 2. Be presented to your bank to show proper financial planning 3. Help predicted months when there might be a cash shortfall Business 4. Highlight Management problem areas infor your payment schedule entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Cash planning: The cash budget (cash forecast) (cont.) Consistent budgets: – Cash budgeting is a continuous process that can be checked for consistency and accuracy by comparing budgeted amounts with amounts expected from using ratios or financial statements Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Summary First phase of the planning stage of the business, which is to establish the viability of the business idea Performing a viability study is an integral part of the planning process for any business Business Management for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER Summary (cont.) The viability study’s market potential determinants involve: – doing market research to establish exactly who your customers will be; – whether your product or service will satisfy their needs; – who your competitors will be; how to set up a mission and objectives for your business; – how to doBusiness a marketManagement analysis for entrepreneurs 5E ISBN: 978 1485 132523 INSPIRING POSSIBILITIES TOGETHER