Venture Creation Week 4 - Business Idea Viability PDF

THE VIABILITY OF A BUSINESS IDEA August 2024 Learning Outcomes 1) Understand what a viable business idea entails. 2) Determine whether a need exists for a product or a service. 3) Compile customer profiles. 4) Define the mission and objectives for a business. 5) Unde...

THE VIABILITY OF A BUSINESS IDEA August 2024 Learning Outcomes 1) Understand what a viable business idea entails. 2) Determine whether a need exists for a product or a service. 3) Compile customer profiles. 4) Define the mission and objectives for a business. 5) Understand the term ‘expected market share’. 6) Distinguish between different market segmentations. 7) Determine the break-even point for the business. 8) Determine whether a sustainable profit can be made. Characteristics of a viable business idea/business opportunity … …. ….. ✓ The idea should result ✓ The product should be ✓ The window of in a product or service well timed, and the opportunity should be that creates value for target market should open and should the customer. be big. remain open for some time to allow the ✓ The product or service ✓ The idea should be business to establish should be attractive in able to create a itself. such a way that the competitive advantage. customer would like to ✓ Potential profit growth. buy it.  ✓ Direct needs ✓ Latent needs Customer Needs ✓ Constant needs ✓ Variable needs ✓ General needs ✓ Niche needs Customer Profiling -This is a collection of information about a customer. This information includes demographic data, attitudes, preferences and other behavioral characteristics.  Market Share It is the size or portion that a particular firm possesses within a larger market. ✓ Market share and profitability are closely related. ✓ Businesses with larger market share have a higher return on investment (ROI). ✓ Market share of a particular business can change as they respond to the external factors.  Market Segmentation The market is broken down into groups, displaying common characteristics, behaviors and attitudes. ✓ Segments could be in terms of demographics, geographic, income and behavioral segments. ✓ Market segmentation aims to understand the need and forecast reaction and demand. Objectives of Firms ✓ Profit maximization ✓ Sales maximization ✓ Revenue maximization ✓ Growth ✓ Survival ✓ Market penetration  ✓ The objective is to make and increase profit. ✓ Profit = total revenue - cost of the resources used in the business. ✓ Total revenue is the price of goods and services multiplied by the quantity sold Profit Maximization (PQ). (Profit = PQ – Cost of labor, land etc.) Sell more by ✓ lowering prices and having special promotions. ✓ increasing and reducing sale price ✓ offering new products or services Sales Maximization  ✓ This is a theoretical objective of a firm which attempts to sell at a price which achieves the greatest sales revenue. ✓ This would occur at a point where there is extra revenue from selling the last Revenue marginal unit (i.e., the marginal revenue equals zero). Maximization ✓ If marginal revenue is positive, an extra unit sold must add to total revenue and revenue maximization will not have been reached. ✓ Only when marginal revenue is zero, will total revenue have been maximized.  Growth drives business performance and profit by acquiring assets, attracting new talent and funding investment to make it easier for the long-term survival of the business. SIGNIFICANCE OF GROWTH ✓ Positions the business to take advantage of new opportunities. ✓ Expands business products and services. ✓ Attracts new and more customers. Growth ✓ Increases sales. ✓ Employs more staff. Survival To remain sustainable in a business environment. Market Penetration To ensure a low-risk and cost-effective way to grow sales and profits. Cost Accounting Understanding how much it costs or amounts to produce a single unit. ✓ Cost accounting helps determine the selling price. Manufacturing Costs These are expenses incurred to transform raw material into finished goods. Types of Manufacturing Costs: ✓ Direct materials: Cost of all raw materials that are used to produce a particular product. ✓ Direct labor: The amount paid to employees who directly produce a particular product. ✓ Overhead cost: Manufacturing expenses which cannot be traced to a single unit.  ✓ Direct Types of Venture ✓ Indirect ✓ Variable Costs ✓ Fixed ✓ Stepped ✓ Semi-variable  Direct Costs Includes both material used to produce a product and labor needed. ✓ This costs also include costs such as distribution of the products (these are costs that can be identified specifically with a particular sponsored project or venture activity). Examples ✓ Salaries, wages, and fringe benefits of employees ✓ Engineers, and other scientific professionals. ✓ Materials and supplies such as chemicals, glassware, compressed gases and liquids, and research supplies ✓ Other direct costs such as travel, consulting services, equipment, toll charges, express mail, subject costs, animal care, and subcontracts Indirect Costs Costs that are incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular sponsored project or venture activity. Examples ✓ Services of the accounting staff ✓ Salaries of personnel engaged in a broad range of departmental support activities ✓ Cost of utilities for a building housing multiple research projects and other functions ✓ Office supplies, postage, local telephone and, communications infrastructure ✓ Depreciation on building and improvement and equipment ✓ Cost of Interest ✓ Cost of Library Fixed Costs Cost that remains constant as activity level changes. ✓ For example: rent of a factory, factory lighting electricity. Variable Costs Costs that increases and/or decrease directly in line with any change in activity level. ✓ This costs also include costs such as distribution of the products (these are costs that can be identified specifically with a particular sponsored project or venture activity).  Variable Costs Fixed Costs Stepped Costs The cost is fixed over a relatively short of activity and then increases overtime or in steps. (These are costs which have a fixed and variable element). ✓ Example 1: 1 Supervisor is required for 20 employees, then 3 supervisors are required for 60 employees. ✓ Example 2: Telephone and Water bills Calculation formula: Total Cost = Fixed Cost + (Variable Cost x Units) Break-Even Point ✓ The point where the business is neither making profit nor a loss. (Total Cost = Total Revenue) ✓ Break-even analysis allows the entrepreneur to compare alternative cost and revenue estimates to determine the acceptability of each price. Formula BE = TFC / SP – VC / units ✓ BE: Breakeven ✓ TFC: Total Fixed Costs ✓ SP: Selling/Sales Price per Unit ✓ VC: Variable Costs Exercise ✓ It costs Gabriel P12000 to produce 500 cellphones. His variable cost per unit is P3. Calculate his breakeven point, Breakeven Analysis (Graphical)  Cash Budget A forecast of expenses, payments, revenue etc. It is a financial tool that helps businesses be proactive. ✓ It is prepared on a shorter term as compared to other financial statements. ✓ It helps business identify loopholes in their debt collection system. ✓ It can be used as a preventive measure of a financial crisis. Cash Budget