2. Self Employment
1h50 min task
Source: National Collaborative on Workforce and Disability for Youth (2011, 2012)
Entrepreneurship - Developing a business idea
To create one’s own job it is necessary to develop skills such as creativity, teamwork, autonomy, sense of responsibility and organization, valuing learning.
When we have an idea, a business idea, and want to open a business activity we may have the need to present it to:
- investors (people and/ or entities that can put money into your project to develop it);
- partners (people and entities that can help you to develop your business);
- customers (to convince them to buy your product or service);
- suppliers (to show them what you want to do and where you need them);
- someone you want to hire (to convince him/ her to come work with you).
For this reason, it is essential to structure the business idea taking into consideration some key issues, for example:
| 1. What’s the problem you identified? | This should be the outcome of an analysis you made of identifying needs and business opportunities. |
| 2. What’s your solution proposal? | Your business idea, what you would like to implement. |
| 3. Who will buy? | Your market. |
| 4. How are you going to get to know each other and sell? | The distribution and promotion. |
| 5. What resources do you need? | How you organized your business. |
| 6. What results do you expect? | Your result. |
1. ENTREPRENEURIAL CONCEPTS
Mini-glossary of Entrepreneurship – 50 entrepreneurial terms:
Active
Any item with value possessed: cash on hand or at the Bank, receivables, Real estate, equipment, property rights, products in stock, etc.
Balance sheet
Document that lists by items all assets and liabilities at a given time.
Goods
Physical products that meet people’s needs.
Brainstorming
Creative activity developed in group that seeks to respond to problems or challenges.
Capital
Production Factor: Money and physical items such as tools, buildings and vehicles that are used in the production process.
Client
Entity acquiring or using goods or services.
Competition
A situation where different producers/ sellers of a given good and/ or service compete independently against buyers/ consumers to sell more – using different tools such as prices, product quality, after-sales services, advertising, etc.
Consumer
End user of a product or service.
Costs
Costs are expenses that the entity carries out with the objective of getting its product ready for sale, manufacturing it or just reselling it, or fulfilling its contracted service.
Production Costs
Sum of payments made for resources used in the production of a good or service.
Design
Idealization, creation, development, configuration, design of objects to be produced or built.
Differentiation
Ability to make different and be perceived by customers as different from competitors.
Distribution
Placement of products and/ or services so that customers can acquire.
Entrepreneur
One who, by identifying an opportunity and taking risks, creates, launches and generates new business with the aim of making a profit.
Entrepreneurship
The activity of setting up a business or businesses, taking on financial risks in the hope of profit.
Insolvency
When the debtor has obligations to fulfill that are higher than the income he has and must receive.
Production Factors
Resources used to produce goods and services.
Taxes
Imposition of a financial or other charge on the taxpayer. It is intended to meet the general costs of the State, like education, health, justice, defense and social security.
Industry
Economic activity aimed at processing raw materials into marketable products.
Innovation
The action or process of innovating.
Invention
Something new, process or machine that did not exist before and that differs from developments or improvements made in previous inventions.
Investment
Placing money in a business or project to make more money.
Production Process
Set of activities performed to produce goods or products.
Profit
Financial gain from revenue after all costs have been subtracted.
Profit = Revenues – Costs.
Brand
Name or symbol representing a product or company.
Marketing
The sum of all activities that influence sales, from producer to consumer.
Market
Any place, physical or virtual, where buyers and sellers do business exchanging goods, services, resources and money.
Target market
Group specific to those most likely to be potential customers of the product or service produced or marketed and therefore the seller intends to attract.
Business Model
Description of why a business exists and how it is intended to work.
Taxes
Change from a previous state, model or situation to a future state, model or situation for unexpected and uncontrollable reasons, or for planned and premeditated reasons.
Need
Goods or services that an entity (person or company) seeks and needs to have.
Business
A commercial activity.
Networking
Network of contacts and relationships that are created in various fields and that contribute to the development of the business.
Offer
Products or services that are intended to be sold at a certain price in a specific time.
Opportunity
A time or set of circumstances that makes it possible to do something.
Budget
Estimate of expenses to be incurred and revenues to be received in a given period of time.
Organigram
Diagram of the organization structure of a given business, defining the different areas of responsibility.
Outsourcing
Hiring external suppliers of business operations.
Liabilities
Sum of outstanding amounts.
Business Plan
Document that presents information about the framework (past and present) and future of an existing business or a new project.
Price
Value of products or services defined in cash.
Damage
Opposite of Profit. Damage happens when costs exceed revenues.
Search
Desired quantity of products and/or services at a given price at a given time.
Productivity
Relationship between production and inputs used. The greater the quantity produced by factors used the greater the productivity. Productivity is one of the best measures to measure business performance.
A company with increased results in its productivity is an entity with better use of its resources and which achieves better results.
Business Project
A business project is defined as an undertaking, often involving research, that is carefully planned to achieve a goal.
Advertising
Promotion tool that aims to communicate information about products and services to a determined audience, using the most diverse resources.
Recipe
Sum of the amounts received for the company’s activities. Usually it is the amounts received for sales but can also be sponsorships and subsidies.
Human Resources
They are the workers of a company, fundamental to the production of the goods or services that will be offered by it.
Salary
Amount paid to the worker in return for his/ her work. The sum of the wages is part of the personnel costs.
Services
Activities that serve to satisfy the needs of people or companies.
Challenge
There are 4 key concepts in blank, do you know what these concepts mean? If you need help use the dictionary and internet search.
ENTREPRENEURSHIP:
INNOVATION:
BUSINESS:
OPPORTUNITY:
2. IDEA
The basis of entrepreneurship is the transformation of ideas into business. So the entrepreneur must have a good business idea! This alone does not guarantee success, but it is a very important principle.
HAVE A BUSINESS IDEA:
If you want to be an ENTREPRENEURIAL you have to have a good Business Idea, which responds to an OPPORTUNITY that you have identified and that you know how to take advantage of in an INNOVATIVE way.
But how can we have a Business Idea after all?
Ideas come from many sources! They are born from a mixture of observation of reality, vision, experience, need, tastes and hobbies, dreams, conversations, learning…
Let’s look at some Sources of Ideas:
1) Observe the environment
Business ideas should respond to needs.
In many cases the needs can be detected in a cheap and effective way: by watching, asking and listening.
In this observation we should be able to ask questions like:
– Could this be done in a better way? (This can be a product or a service)
– Could this be done with less cost?
– What other function could this have?
– What limitation does this present?
– What’s needed here? (Here can be our locality, region, country, …)
– What needs can’t be met here?
– What resources are there and can they be used or better used?
Observing reality in a creative way and thinking about problem solving is really one of the best ways to have Business Ideas.
2) Import business ideas that have been successful elsewhere
Ideas developed in other countries and regions that do not yet exist in our region can be a source of inspiration when creating a business. But be careful, not all of them work. We have to be concerned to see if this idea adapts to our market and to our clients, in other words, to the reality where the business will be developed.
3) The Change as Source of Ideas
Another great source of Business Ideas is Change. There are movements and transformations that change the world we live in, and these changes end up being a source of new business.
Look at some examples:
3.1 _ Social Changes
_ Changes that occur in the society we live in and the way we live in society.
3.2 – Demographic Change
Changes in the demography.
3.3 – Business Changes
Changes that happen and transform the business world.
3.4 – Legislative Changes
Changes in the Law that bring change and business opportunities.
3.5 _ Technological changes _ Changes in technology that change the way we do business.
Challenge
Define your business idea, identifying the problem/opportunity identified, and the innovation/ differentiation factors the idea presents.
WHAT NEED/ PROBLEM/ OPPORTUNITY DID YOU IDENTIFY?
WHAT’S YOUR BUSINESS IDEA?
WHAT PRODUCT AND/ OR SERVICES WILL YOU SELL?
WHO WILL YOU SELL IT TO?
WHAT DIFFERENTIATION/ INNOVATION FACTORS DOES YOUR IDEA PRESENT?
3. MARKET
To have a successful business you need customers. The customers are all the people who can buy the products or services you offer.
Take into account that you are not alone in the market. There are other companies and other businesses that seek the attention of your potential customers. Those other companies are your competitors.
Thus, one of the most important steps in developing your business idea is to know the characteristics of your customers and your competitors.
What is the market?
The market is the place where purchases and sales of a product or service are made under a certain price and conditions. This transaction can take place in both physical and virtual space.
There are 3 themes on which knowledge of the market is very important:
– Knowing your customers
– Knowing your competitors
– Knowing the size of your market
MEET YOUR CUSTOMERS
Customers are the most important people in a business. Much of the business development effort must be geared towards meeting the needs, interests and desires of customers. So you have to offer them the best quality of the product or service they want, know the prices they are willing to pay and treat them with the utmost attention. This is the only way to make sure you have satisfied customers who will buy from you again. Having satisfied customers is the best way to ensure you have more sales.
RECALL:
No customers, no sales. Without sales your business will fail!
Customers purchase products and/ or services to satisfy different needs and wishes. For example:
- Bicycles, because they need transportation or for fun/
- Clothes, because they want to be properly dressed in the face of time and the society in which they live.
- Smartphones, because they want to be able to communicate and enjoy information and entertainment.
- Haircuts, because they want to look attractive.
CHALLENGE
Identify customers
WHAT NEED WILL CUSTOMERS HAVE FOR YOUR BUSINESS?
RECALL:
If you are offering products/ services that meet the needs, interests and desires of your customers, then you are on the way to success.
How to meet your customers?
To know who your clients are and what they are looking for, you need to ask several questions.
- What are the different types of customers in your business? Usually men, women, children, young, old, companies, …?
- When do you buy?
- How long and in what quantity do you make your purchases? Once a year, monthly, every day, etc?
To find the answers you can do a market study, making a survey, talking to potential customers.
CHALLENGE
Characterize the Customers
DEFINE A MATRIX OF MARKET INFORMATION REGISTRATION THAT HELPS TO SUMMARIZE THE PROFILE OF POTENTIAL CLIENTS
| FEATURES | PROFILE |
| TYPE OF CLIENT | END CUSTOMERS ( ) STORES ( ) DISTRIBUTOR ( ) |
| WHO WILL BE THE CUSTOMERS? | PRIVATE INDIVIDUALS ( ) FAMILIES ( ) COMPANIES ( ) |
| AGE | ADULTS ( ) SENIORS ( ) TEENAGERS ( ) CHILDREN ( ) |
| GENDER | FEMALE ( ) MALE ( ) NOT APPLICABLE ( ) |
| WHERE THEY ARE LOCATED | |
| LEVEL OF INCOME | HIGH ( ) MEDIUM ( ) LOW ( ) |
| WHEN YOU BUY THIS PRODUCT OR SERVICE | DAILY ( ) WEEKLY ( ) MONTHLY ( ) BIANNUALLY ( ) ANNUALLY ( ) |
| HOW TO BUY | LARGE QUANTITIES ( ) SMALL AMOUNTS ( ) ONE UNIT ( ) |
| EXPECTED FUTURE SIZE OF THE MARKET | WILL INCREASE CUSTOMERS ( ) WILL DECREASE CUSTOMERS ( ) WILL REMAIN THE SAME NUMBER OF CUSTOMERS ( ) |
| IDENTIFIED TASTES AND PREFERENCES (NOTES DETAILS SUCH AS: LEVEL OF CUSTOMIZATION, COLOR, SIZE, ETC.) |
5. KNOW THE SIZE OF YOUR MARKET
Since you have already defined the products/ services you will sell and the quality and prices your customers and your competitors need, you should now think about the geographical area you will cover and the size of your market.
Once you have decided what geographical area your business will cover you will be able to find out how many potential customers there are in that geographical area. A potential customer is someone who has the money and the interest to buy your products or services.
For example:
- If your business is dedicated to selling simple products to students then all students in your geographic area are potential customers.
- If you are going to produce and sell luxury products, then only a small number of people will be able to pay for your products and only that small number will be your potential customers.
To know the size of the market it is necessary to investigate how many potential customers there are in the geographical area you have defined. With this information you can then estimate the market volume for your products or services.
In order to obtain this type of information you can use entities that provide you with important statistical data. In Portugal, two important sources of information are the National Statistics Institute (www.ine.pt) and the Francisco Manuel dos Santos Foundation (www.pordata.pt). Visit their websites and see the information you can access.
Other sources of information that you can turn to are City Councils, entities representing sectors of activity, associations, etc.
But don’t forget that there is competition in the market, so your business will only get a portion of the market.
Once you have decided what geographical area your business will cover you will be able to find out how many potential customers there are in that geographical area. A potential customer is someone who has the money and the interest to buy your products or services.
For example
In a neighborhood school there is 1 Bar but the service takes a long time and many people complain that the supply of products is limited. A group of entrepreneurs verifying this need decided to open a new Bar and want to know the size of its market and estimate how many customers it can reach.
The School has 2,000 students, 60 teachers and 40 employees. Persons other than students, teachers or staff are not allowed to enter the School Bar.
Area Geographic | Neighbourhood School | ||
| Universe of Customers | All Students in the School + teachers and staff of the Ribatejo School | 2.000 + 60 +40 | 2100 |
Potentials Clients | Those who take money to school to shop at the Bar | 70% of the customer universe takes money to the school to shop at the bar | =70% x 2100 1.680 |
| Customers who will buy at the new Bar | Those who prefer the new products and the new Bar’s service | 40% of students who take money will prefer the new Bar | =40% x 70% x 2100 672 |
Challenge.
ESTIMATE THE SIZE OF THE MARKET: YOU CAN USE THIS EXAMPLE AND APPLY IT TO YOUR BUSINESS IDEA TO KNOW THE SIZE OF YOUR MARKET AND ESTIMATE YOUR NUMBER OF CUSTOMERS.
For that:
1- Define your geographic area.
2- Check the number of customers that exist in this geographical area. For this you may have to resort to entities with statistical information, Municipal Councils, sector-wide entities, associations, etc.
3- Identify your potential customers.
4- Estimate what portion of the market you can get.
GEOGRAPHIC AREA | |||
| CUSTOMER WORLD | |||
POTENTIAL CLIENTS | |||
ESTIMATED NUMBER OF CUSTOMERS THAT WILL BUY FROM YOUR COMPANY |
RECALL:
If in your investigation you conclude that you won’t have enough clients then you’ll have to rethink your business idea.
6. DISTRIBUTION AND COMMUNICATION
Where and how will you sell
You must define how you will sell (what distribution channels you will use) and how you will communicate and promote your business.
- What method of distribution are you going to choose to get your products to the final consumers? What distribution channels will you use? How will you get to your “main customers”?
- Will you have a shop and sell directly to customers?
- Will you use sales representatives, distributors or agents?
- Will you sell to retailers (Stores) who in turn sell to end customers?
The distribution channels vary depending on the type of product or service you offer and the strategy you have defined:
- Direct distribution channels: They sell directly to customers.
Product àFinal Clients
- Indirect distribution channels: They sell through intermediaries.
Intermediate àProduct àFinal Clients
CHALLENGE
Define which channel or channels best fit your business idea.
DEFINE THE DISTRIBUTION CHANNELS THAT YOU WILL USE AND WHERE YOU WILL LOCATE THEM.
Where will you locate your company?
Why did you choose this location?
What form of distribution did you choose?
(points out the ones that made sense to your business idea)
( ) Sell directly in my store
( ) Sell to retailers (others’ stores)
( ) Home delivery
( ) Sell to distributors
( ) Sell by catalogue and/ or internet
( ) Other:
HOW YOU WILL COMMUNICATE
Communication is an issue that should never be forgotten, especially when starting a new business.
RECALL:
Nobody buys what they don’t know!
Promoting means informing to attract customers who buy your products or services.
There are several ways to promote and communicate your business and your products and services.
We can easily remember ways to advertise like this:
_ Brochures, Internet, etc.
Advertising in Shop Windows and Company Vehicles.
Sales promotion: offers, demonstrations, gifts, time reduction of prices, sample offers, etc.
Selling means you have convinced customers to buy your product or service. But for this to happen you have to demonstrate and convince that what we sell is good.
And to do that, we have to communicate.
Besides advertising we can also:
_ Make sale by phone or catalogue;
_ Visit customers directly;
_ Participate in local, national or international fairs.
Promoting a product or service has a cost and not all types of promotion and communication have the same effect. For this reason we must define which strategies to use taking into account our type of business, our target market and the budget we have.
We also need to find out what kind of promotion the competition is doing to understand what they are doing well and how we can do it even better.
Challenge
We also need to find out what kind of promotion the competition is doing to understand what they are doing well and how we can do it even better.
NOW DEFINES WHICH FORMS OF PROMOTION AND COMMUNICATION YOU WILL USE IN YOUR BUSINESS DEVELOPING THE FOLLOWING ACTIVITIES:
- Analyze your competitors and see what kind of promotion they use;
- Find out the costs of the different types of advertising;
- Fill out the table below listing the forms of promotion that seem most appropriate for your business;
| Type of Advertising | Describe how you will do | Cost |
7. RUNNING THE BUSINESS
For your business to work efficiently, a fundamental condition for success, it must be well organized. This means having well defined processes and having the appropriate staff to do the work.
In order to organize and operationalize your business you must estimate:
- The people the business will need.
- The space you’ll need and your competitors.
- The machines and equipment you will need.
The People Your Business Needs
The people who make up the companies vary depending on the functions that have to be performed in them. In order to know which and how many people you will need in your team you must first define the functions that will be performed in the company and the size of the company.
Thus, a first challenge is to define the organizational structure of your company and the functions that are performed in it.
Some examples of departments and functions are the following:
ADMINISTRATIVE SECTION
| CHARGES | MAIN DUTIES |
| Administrator | – Carry out the company’s Development Plan – Define the organisational structure – Perform the general control of the company – Seek the resources necessary for the functioning of the company |
| Human Resources Manager | – Select and hire the employees – Ensure the implementation of the Training Plan – Evaluate the staff |
| Responsible for the financial area | Keeping up to date with tax responsibilities – Handling the accounting records – Dealing with payments and receipts |
PRODUCTION DEPARTMENT
| CHARGES | MAIN DUTIES |
| Manufacturing Manager | – Controlling the various production operations |
| Logistics Manager | – Dealing with shipments of products and reception of raw materials |
| Quality Manager | – Controlling the quality of products or services produced or rendered |
| Workers | – Carrying out the various production operations |
SALES DEPARTMENT
| CHARGES | MAIN DUTIES |
| Marketing Manager | – Implementing the marketing strategy – Searching for new markets |
| Sellers | – Making the Sales – Conquering and maintaining customers |
The structure to implement depends on the objectives you propose to achieve.
When you plan your structure, it must be in accordance with reality and the size of your business.
In a small business, in which the owner acts as manager and has few employees, the organization can be very simple in which all employees depend and respond directly to the entrepreneur:
Example:
Business owner/ manager
Worker 1 Worker 2 Worker3
But there are bigger and more complex businesses that are organized by departments according to their area of expertise and the functions they perform in the company.
Example:
Administration
Administrative Department Production Department Marketing and Sales Department
Accounting and Financial Area Manufacturing Marketing
Logistics
Human Resources Quality Control Sales
CHALLENGE
How many people will the business need and in what roles?
Taking into account your business idea you can now define the structure of your company, which functions you will have to fill and how many human resources you will need for the development of your project.
- Define the different Areas that your business will have (e.g. administrative, production, sales, etc.).
- Make sure you don’t forget any functions.
- Draw an organigram showing the structure of your business.
With the organizational structure defined you can identify which functions you will have to fill and how many human resources you will need for the development of your project.
- Describe the training and experience you will need for each function.
- Define the number of employees you will need for each function.
- Add any other type of function that you think is needed and is not identified.
| FUNCTION OR POSITION | CAUSES LOSS TO MY PROJECT | EXPERIENCE AND TRAINING REQUIRED | NO. OF EMPLOYEES |
| GENERAL MANAGER | YES ( ) NO ( ) | ||
| ADMINISTRATIVE SECTION | YES ( ) NO ( ) | ||
| SALES DEPARTMENT | YES ( ) NO ( ) | ||
| PRODUCTION | YES ( ) NO ( ) | ||
| MARKETING | YES ( ) NO ( ) | ||
| QUALITY MONITORING | YES ( ) NO ( ) | ||
| INFORMATICS | YES ( ) NO ( ) | ||
| MAINTENANCE | YES ( ) NO ( ) | ||
| YES ( ) NO ( ) | |||
| YES ( ) NO ( ) |
NECESSARY MACHINERY AND EQUIPMENT
To implement the business you have to analyze and define which technology is appropriate and which machines and equipment you will need.
Even if your business idea is in the area of trade or services, you will also have to determine what equipment and tools you need in order to conduct your business.
This information is very important not only to know what human resources you need and what expertise you have (because not everyone knows how to drive or operate a machine) but also because it will help you to know what investment you will have to make, i.e. how much money you need to buy all the necessary equipment and thus be able to set up the company.
CHALLENGE
What equipment will be needed?
COMPLETE THE LIST OF EQUIPMENT AND MACHINERY YOU NEED FOR YOUR BUSINESS:
- Define the essential equipment to start your business;
- Gather and list the necessary equipment by department;
- Consider whether there are any specifications you should take into account;
- Search the cost values of these equipment.
EQUIPMENT |
SPECIFICATION |
PRICE (EUR) |
THE SPACE NEEDED FOR MY BUSINESS
The space you will need will be defined by the type and size of business you intend to develop. Everything is related to the functions you have defined for your company and the requirements for the development of these activities/ functions.
The size is conditioned by the volume and type of production, the logistics and the technology.
Depending on what you have set, you will have to look for a suitable space that you can then buy or rent. If you don’t find the right space then you’ll have to consider finding a plot of land and building.
For example:
For a trade business, the necessary space should be included:
_ The exhibition space.
The customer service space.
_ The warehouse area.
_ The office area.
A distribution business requires less exhibition space, but much more storage space. In a service business the space depends on the type of service to offer. For example, a car repair shop requires ample space for repairs and a small office space. In a production business (a factory), the size of the space depends on the type of items to be manufactured and the technology (machines used).
The space is conditioned by the volume of production and the technology.
DEFINITION OF THE DESIGN AND DISTRIBUTION OF THE FACILITIES
The distribution of the installations concerns the adaptation and functionalities that each space must have in order to accommodate the production processes. This design should be established to allow the most efficient work possible.
A good design of the facilities helps you minimize work and transport costs, for example. It also helps to create a more pleasant and productive working environment.
For the design and distribution of the facilities in space you must take into account the departments, equipment, workers and materials that will exist in each of them.
RECALL:
A well-conditioned environment allows the work to develop
in an orderly manner and if resources are optimized.
Challenge:
What space will be needed?
DEFINE THE LAYOUT OF YOUR FACTORY, SHOP OR OFFICE:
- Does it define where each activity will take place?
- Do you consider where you will locate the machines and other equipment?
8. THE SWOT ANALYSIS
The SWOT analysis is intended to make the strengths and weaknesses of your business project and identify opportunities and threats it faces.
SWOT analysis is a very widespread technique to perform the strategic diagnosis of the company. This analysis aims to define the relationship between the company’s strengths and weaknesses and the most important trends in the company’s global environment, whether at the level of the global market, the specific market, the economic climate, legal constraints, etc.).
SWOT is the combination of the initials (in English) of the four key elements of this strategic analysis. Namely:
- Strengths: internal advantages of the company over competing companies. g.: Location
- Weaknesses: internal disadvantages of the company in relation to competing companies. g: Little experience in the activity
- Opportunities: positive aspects of the environment with the potential to grow the competitive advantage of the company. g.: Low interest rates
- Threats: negative aspects of the environment with the potential to compromise the company’s competitive advantage. g.: Economic recession
The idea is to evaluate, through an in-depth reflection in which all the company’s top managers should participate, what these elements are. Previously, it will be necessary to gather a lot of information:
- Internal, for strengths and weaknesses
- External, for the opportunities and threats (here vision and good sense are needed).
CHALLENGE:
Do the internal analysis of your business
Identify your strong points:
Identify your Weaknesses:
Do an external analysis
Identifying Opportunities:
Identifying the Threats:
8. THE SWOT ANALYSIS
The SWOT analysis is intended to make the strengths and weaknesses of your business project and identify opportunities and threats it faces.
SWOT analysis is a very widespread technique to perform the strategic diagnosis of the company. This analysis aims to define the relationship between the company’s strengths and weaknesses and the most important trends in the company’s global environment, whether at the level of the global market, the specific market, the economic climate, legal constraints, etc.).
SWOT is the combination of the initials (in English) of the four key elements of this strategic analysis. Namely:
- Strengths: internal advantages of the company over competing companies. g.: Location
- Weaknesses: internal disadvantages of the company in relation to competing companies. g: Little experience in the activity
- Opportunities: positive aspects of the environment with the potential to grow the competitive advantage of the company. g.: Low interest rates
- Threats: negative aspects of the environment with the potential to compromise the company’s competitive advantage. g.: Economic recession
The idea is to evaluate, through an in-depth reflection in which all the company’s top managers should participate, what these elements are. Previously, it will be necessary to gather a lot of information:
- Internal, for strengths and weaknesses
- External, for the opportunities and threats (here vision and good sense are needed).
CHALLENGE:
Do the internal analysis of your business
Identify your strong points:
Identify your Weaknesses:
Do an external analysis
Identifying Opportunities:
Identifying the Threats:
9. THE BUDGET
The goal of any business project is to make a profit, that is, to achieve revenues that exceed all the costs that the business faces. For any company to know what it can count on and to set goals it is recommended that it prepare a financial plan.
To make the budget you need to:
_ Estimate what your sales will be during the first year of your business;
_ Determine what your costs will be during the first year.
For this you need to determine:
For Sales: selling price and quantity sold;
_ Costs of materials used in production;
_ Costs of supplies and services you use externally;
_ Remuneration of hired personnel.
BUDGETING STEPS | ||
Stage 1 |
Knowing the costs of production |
Know the costs of materials sold or used in production. |
Stage 2 |
Knowing the value of deliveries and services of others |
Know the costs of the services and supplies you will need to contract externally. |
Stage 3 |
Knowing personnel costs |
Define the value of the wages for each function. |
Stage 4 |
Estimate sales |
Define the sales price and estimate the quantity sold. |
Stage 5 |
Calculate the result |
The result will be the balance obtained when you subtract the costs from revenue. |
Stage 6 |
Analyse the result |
Make sure we’re getting a positive result. |
STEP 1 | KNOW THE PRODUCTION COSTS
In this step you must calculate and know all the costs of the raw materials that will be used to produce the good that you will sell. If you only do the resale you have to consider as cost the price you paid for the product you are going to sell.
In the case of production you must consider all the raw materials used and the materials consumed.
Example:
Business of selling custom t-shirts with image or text of customers. They sell the customer a final product which is the printed and packed t-shirt.
Their production costs are:
The T-shirt – that you buy from a distributor
The transfer – which they use to print and cut on the Plotter
The bag – which they use to pack the T-shirt
In addition, to print the transfer the Plotter spends ink. This paint is also a production cost.
| COST OF RAW MATERIALS AND CONSUMED | |
| T-shirt | 2,00€ |
| Transfer | 1,50€ |
| Packaging bag | 0,35€ |
| Ink to print Transfer | 0,30€ |
| Total | 4,15€ |
CHALLENGE
Analyzes production costs
| COSTS OF RAW MATERIALS AND CONSUMED | |
| Total | |
STEP 2 | KNOW THE VALUE OF EXTERNAL SUPPLIES AND SERVICES
All businesses need to use some services or supplies provided by people or companies outside the company.
In this category are considered all costs that do not include personnel, materials or capital costs. Among these costs are for example costs for energy consumption, water, telephone, office supplies, insurance, rent, etc.
For example:
Accountant | To deal with their accounting and tax compliance. They pay 120,00 euros / month.
Electricity Company | To have energy in the company. They pay 150,00 euros / month.
Cleaning Company | To help them clean the space once a week. They pay 100 euros / month.
Insurance company | To ensure the insurance of the car, the machines and accidents at work. They pay 60 euros / month.
Space Owner | To whom they pay the rent to have the company based there. They pay 400 euros/ month.
Communications Company | To have telephone and internet. They pay 70 euros / month.
Advertising Agency, Google Ads and Typography | Who they order the advertising media they use.
The annual investment is 3,000.00 euros.
You too will need to turn to a number of external entities with whom you will contract to provide services and supplies that are fundamental to your business.
Identify the services you will need and research to find out what your monthly cost will be.
CHALLENGE
ANALYSES THE EXTERNAL SUPPLIES AND SERVICES YOU WILL NEED
| Description | Monthly Value | Annual Value |
| Accountant | ||
| Electricity | ||
| Fuels | ||
| Water | ||
| Tools | ||
| Office supplies | ||
| Income | ||
| Telephone and Internet | ||
| Insurance | ||
| Cleaning | ||
| Advertising | ||
| Other | ||
| TOTAL |
STEP 3 | KNOW THE PERSONNEL COSTS
By now you know your costs of materials sold and consumed and your costs of external supplies and services. Personnel costs are related to the human resource structure of the person, so it is necessary to define what salary each employee will receive
CHALLENGE
DEFINES THE BASE SALARY OF THE STAFF WHO WILL WORK IN YOUR BUSINESS:
- Use the information you put on the staff you’ll need;
- Adds the base salary amount of each function in the respective column.
| FUNCTION OR POSITION | CAUSES LOSS TO MY PROJECT | EXPERIENCE AND TRAINING REQUIRED | NUMBER OF EMPLOYEES |
| GENERAL MANAGER | YES ( ) NO ( ) | ||
| ADMINISTRATIVE SECTION | YES ( ) NO ( ) | ||
| SALES DEPARTMENT | YES ( ) NO ( ) | ||
| PRODUCTION | YES ( ) NO ( ) | ||
| MARKETING | YES ( ) NO ( ) | ||
| QUALITY MONITORING | YES ( ) NO ( ) | ||
| INFORMATICS | YES ( ) NO ( ) | ||
| MAINTENANCE | YES ( ) NO ( ) | ||
| YES ( ) NO ( ) | |||
| YES ( ) NO ( ) |
In addition to the basic salary, the company also assumes other personnel costs, such as the cost of social security discounts and meal allowance. It also sometimes has to assume travel costs.
Social security deductions are what allow the State to pay sickness benefits (when workers go on sick leave), unemployment benefits (when workers go unemployed) and pensions (when workers reach retirement age).
STEP 4 | ESTIMATE SALES
To estimate sales we need to know what sales price we are going to sell and how much we are thinking of selling.
After defining the product or service you are going to sell and its characteristics and differentiation, knowing the production costs and also analyzing the competition, you can define the average price at which you plan to sell your product or service.
Challenge
SET YOUR SELLING PRICE
What IS your production cost?
What price does the competition practice?
According to what you have defined for your product/ service, how will you position your price relative to the competition?
( ) Above
( ) At the same level
( ) Below
At what price will you sell?
Once you have set the sales price, you can then estimate the quantity you will sell based on your estimate of potential customers
Challenge
ESTIMATE THE AMOUNT OF SALES YOU WILL MAKE
| SALES ESTIMATE | |
| Estimate the number of customers (market) you will buy from your company | |
| Average number of times each customer buys per year | |
| Estimated sales quantity for 1 year | |
Once you have defined the sales price and estimated the quantity of sales it is possible to estimate the value of your sales, i.e. the value of your revenues.
Challenge
INDICATE THE VALUE OF YOUR SALES BY FILLING IN THE FOLLOWING TABLE
| SALES VALUE | |
| Sale Price | |
| X | |
| Estimated sales quantity for 1 year | |
| = | |
| Sales Value | |
STEP 5 | CALCULATE THE RESULT
With all the information obtained in the previous steps it is possible to calculate the result you hope to achieve with your activity.
Challenge
CALCULATE YOUR PREDICTIVE RESULT:
- Use the information you got in the various steps above;
- In the end, it subtracts the cost values from the revenue value;
INCOME STATEMENT | ||
REVENUE |
SALES VALUE | |
| + | ||
PRODUCTION COSTS |
COST OF MATERIALS SOLD AND CONSUMED | |
| – | ||
SUPPLY COSTS AND OUTSIDE SERVICES |
SERVICE COSTS AND SUPPLIES YOU WILL NEED OUTSOURCING | |
| – | ||
PERSONNEL EXPENSES |
PERSONNEL EXPENSES | |
| – | ||
| Result | ||
STEP 6 | ANALYZE THE RESULT
The objective of a financial plan is to internalize that a business aims to obtain profit and that, in order to do so, profits must exceed costs. That implies:
- ANALYZE THE REQUIRED INVESTMENT VALUE AND HOW TO FINANCE IT
- ESTIMATE THE FORECAST RESULT
- SET THE SALES PRICE
- ESTIMATE THE QUANTITY SOLD
- CALCULATE REVENUE
- ANALYZE PRODUCTION COSTS
- ANALYSE THE NEEDS OF EXTERNAL SUPPLIES AND SERVICES AND THEIR COSTS
This plan should reflect whether your activity will achieve the necessary revenues and whether these are high enough to make the business interesting.
Naturally, the revenue must be sufficient to cover the costs and thus achieve a positive result.
If your budget presents a negative result or dangerously close to zero you will have to think and analyze the problem. The sales and cost plan should again be studied carefully, trying to increase revenues and decrease costs but always knowing that the plan should be adequate and realistic.
Source: NERSANT – Associação Empresarial da Região do Ribatejo, Project Vive o Empreendedorismo, 2017.
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