King Saud University -- Kent State University
Partners in Entrepreneurship
Survey of Entrepreneurship
Workshop
Trends in Entrepreneurship:
Social Entrepreneurship
1
Slide 1
The Entrepreneurial Revolution
Beyond Commercial
Entrepreneurism
Key Points:
1. Social Entrepreneurship can be considered as an alternative to “traditional” profitfocused, profit-generating entrepreneurships. In days gone by, entrepreneurs have
been known to or reputed to be concerned, even consumed, by their desire to make
money; to be independent and their own boss; and so forth.
2. The trend today in the entrepreneurial revolution is that there is a much broader scope
to being an entrepreneur. That scope includes factors beyond money, profits, financial
gain, etc. This class will focus on what many in the business and study of
entrepreneurship call “social entrepreneurship”. Some call it “green entrepreneurship”;
“venture philanthropy”; “sustainopreneurship”; or some other catchy name. The point
is that the trend in entrepreneurship includes more than money and self interest. It
includes societal and environmental considerations as well.
Slide 2
New Paradigms in
Business Management
• flat, fast, flexible, innovation driven
• principle- and value-based management
• opportunity- and customer-focused
• manage more with less resources
• managing change and chaos
• people and team-centered management
Key points:
In today’s business environment, new business thinking is rapidly spreading throughout small,
medium, and large business organizations. The items listed on this chart reflect contemporary
trends in managing the business, relative to trends or directions that businesses are taking
regarding how they approach the marketplace.
Slide 3
New Paradigms in
Business Education
• Beyond business school
• Not-for-profit
• Trends in entrepreneurism
-From making $$$ to making a difference
-Community-based initiatives
-Social Change
Key Points:
In the educational approaches to entrepreneurism, the new thinking and trends are shown on
this chart. In the past, the business school paradigm of getting an MBA was the ticket to
business success. Today, it has gone beyond just the business school: witness----the growth of
entrepreneurship centers in colleges and universities, which often are not part of the business
college, but part of the engineering college or some joint venture between technical and
business colleges within a university setting.
New paradigms also exist relative to the not-for-profit sector, where, for example, growth in
community-based correctional facilities is fast becoming a preferred approach to reintegrating
anti-social elements back into the social and community mainstream, as opposed to jails and
prisons.
Trends in entrepreneurism are broadly focused around the 3 elements shown at the bottom of
the chart. The first bullet of going from making money to making a difference is one in
particular that encompasses many dimensions: from energy efficiency to saving the whales and
the environment. Ultimately, social change is the macro-objective of many social
entrepreneurs resulting in the betterment for humankind.
Slide 4
The Evolution of Entrepreneurship
• Traditional model of entrepreneurship–
“commercial” enterprise
– labor mental and physical effort
– physical capital -plant and equipment
– human capital –knowledge and expertise
– Managerial Skill
• Risk willingness
Key Point:
This chart identifies how “conventional wisdom” has viewed entrepreneurship. This is in
contrast to the previous chart of contemporary trends in entrepreneurship.
Slide 5
General Entrepreneurship model
• is “process” focused
• Opportunity recognition – idea into opportunity
• Concept development – translation of
opportunity into concept
• Resource development and acquisition
• Launch and venture growth
• Harvest/grow the venture
Key Point:
Recall the working definition of entrepreneurship that was presented in the first class:
•
There is no commonly accepted definition of the term entrepreneurship. The key
words in the working definition are “exploiting” and “value-creating opportunity”.
Entrepreneurs are people of vision and action: They recognize an opportunity, and
they take decisive action to take advantage of the opportunity, which will result in
some tangible benefit, such as profits or benefits to society.
•
The term “messy” is intended to reinforce the fact that there is not commonly
accepted definition of entrepreneurship. The word messy is difficult to define, and
each person has his own perception of what messy is. And one person’s definition
based on his perception is no more valid than any other person’s.
•
The important idea is that an entrepreneur recognizes the opportunity in the market
place when most other people only see problems. This is vision. But what
differentiates him from the others is that he takes action to do something about the
opportunity.
• Broadly speaking, an entrepreneur is an individual who, rather than working as an
employee, runs a small business and assumes all the risk and reward of a given
business venture, idea, or good or service offered for sale. The entrepreneur is
commonly seen as a business leader and innovator of new ideas and business
processes.
• Entrepreneurship is process focused.
•The 5 process steps are shown on this chart.
Slide 6
What is Social Entrepreneurship?
• Entrepreneurial activity whose goal is to find
innovative solutions to social needs, problems,
and opportunities
• Entrepreneurial activity with an embedded social
purpose
• Social Entrepreneur: one who develops
innovative solutions to society’s most pressing
needs, problems, and opportunities; a pioneer of
innovations that benefit humanity
Key Notes:
Social entrepreneurship is the work of a social entrepreneur. A social entrepreneur is
someone who recognizes a social problem and uses entrepreneurial principles to organize, create,
and manage a venture to make social change. Whereas a business entrepreneur typically
measures performance in profit and return, a social entrepreneur assesses success in terms of the
impact s/he has on society. While social entrepreneurs often work through nonprofits and citizen
groups, many work in the private and governmental sectors.
The main aim of a social entrepreneurship as well as social enterprise is to further social and
environmental goals. Although social entrepreneurs are often non-profits, this need not be
incompatible with making a profit. Social enterprises are for ‘more-than-profit,’ using blended
value business models that combine a revenue-generating business with a social-valuegenerating structure or component.
An individual who generates business activity. A businessman or businesswoman. Often
associated with one who takes business risks. One that creates, founds, or originates: architect,
author, creator, father, founder2, inventor, maker, originator, parent, patriarch.
An organizer, singly or in partnership, who takes risks in creating, investing in, and developing a
firm from its inception through to hoped-for profitability as goods and services are marketed.
The enterprise of the entrepreneur can be seen as a fourth factor of production
Investopedia Says:
Entrepreneurs play a key role in any economy. These are the people who have the skills and
initiative necessary to take good new ideas to market and make the right decisions to make the
idea profitable. The reward for the risks taken is the potential economic profits the entrepreneur
could earn.
http://www.answers.com/main/ntquery?afid=5052&s=social+entrepreneurship
Slide7
Behavior Characteristics Exhibited
By Entrepreneurs

Creative

Risk tolerant

Innovative

Courageous

Fortitude

Take direction action

Alert to opportunity
Entrepreneurs exhibit multiple characteristics, but others also exhibit similar behaviors: for
example, gamblers and entrepreneurs have a high tolerance to risk. They can be separated in the
following way:
R
I
S
K
|
|
High
Low
Innovativeness
Low
High
Gamblers
Entrepreneurs
Hired Help Intrapreneurs
Artists, inventors, corporate executives also show behavior characteristics similar to
entrepreneurs. Perhaps a single defining characteristic is, “the entrepreneur always searches for
change, responds to it and exploits it an opportunity.” Peter F. Drucker, Innovation &
Entrepreneurship (NY: Harper Business 1995):28.
Slide 8
Business Entrepreneur Drivers

Psychic reward

Value proposition


Targets those who can afford the
service or product
Profit potential
Entrepreneurs seek rewards of varying types. One is psychic reward. These are rewards of
various types that benefits the ego of the entrepreneur. These could be anything and everything,
tangible and intangible, that supports an improved sense of self for the individual.
Value Proposition is another way of viewing why entrepreneurs engage is the business actions
that they do. In many cases, they look to the marketplace and target their customers based on the
customer ability to afford the service or product, or targets under served, neglected, or
disadvantaged population. For example, the entrepreneur sets out to solve problems involving:
water/sanitation
urbanization
ecosystems, biological diversity, and land use
utilizations of sea resources
Profit potential for each of the foregoing obviously drives the entrepreneur’s focus.
Social Entrepreneurs take the position that they can do better than companies using TBL (Triple
Bottom Line) accounting by directly targeting the population they wish to serve. This is in
contrast to other organizations such as Volunteer and NGOs (Non-Government Offices) who
have tended to believe that doing “good” for a population would be somehow tainted if business
principles became too involved in the service delivery process.
The Social Service Provision considers the situation where an individual identifies a social
wrong and does something about it. It will help the targeted people, for as long as the individual
remains committee and able to gather resources.
Social Activism identifies attempts to cause change by influencing others, consumers,
workers, government, NGOs, consumers, workers, etc., to take action. For example, Martin
Luther King and Mahatma Gandhi were Social Activists not social entrepreneurs. An example
of a social entrepreneur is Muhammad Yunus, who took direct action by lending small amounts
of money at low rates to underprivileged women in Bangladesh. The loans were paid back at
higher rates than normal banking. The resulting social change has been huge and spawned
competitors in the microloan business. While academics make these distinctions, in the real
world there are probably more hybrids using social activism and social entrepreneurship at the
same time.
Social enterprises are not very profitable because at least 50% of profits must be re-invested in
the core areas the business supports. (citation from Social Enterprise Council) In 2006 in the
U.K. there were 55,000 Social Entrepreneurs (2006 U.K. Survey of Small Businesses). There is
talk in England of creating a social stock exchange where entrepreneurs can raise money.
What drives an entrepreneur: more than anything, it is using all their behaviors in bringing
something new to the world. This is the psychic reward component. To take a step back,
entrepreneurs have an ability to look at the world and recognize that things can be done better.
They have the ability to:
1. Recognize subpar (outmoded, inefficient, etc.) methods of accomplishing some task.
2. Desire to change the status quo.
3. Creative thinking: develop a new solution.
For example: Steve Jobs and Steve Wozniak developed the personal computer, in contrast to the
existing mainframe computer set-up.
4. Direct action to implement the new idea.
For example: Jobs and Wozniak didn't campaign against the mainframe computer environment,
they simply ignored it in favor of their solution – the personal computer.
5. The Courage to continue the process of innovation often requires taking risks and doing
things others think unwise. For example: when developing Fed Ex, Fred Smith had to convince
his investors that acquiring jets and building an airport was a wise decision, when other
companies only had fleets of trucks.
6. Fortitude to drive the creative ideas to market.
Slide 9
Social Entrepreneurship (SE) mission
• to create and sustain “social” value –
– freed from profit as the reward ,the SE can
generate opportunities from failure
– unmet social need may be in the form of unfilled
demand or ‘latent’ demand
Key point:
Charts 9 thru 13 are optional charts for use in this lecture. These charts add more detail to
what social entrepreneurship is; the process; characteristics thereof; and leader dimensions.
Social entrepreneurship has been described to focus principally around “profits, people, and
planet”. This notion is further described in chart 18.
Slide 10
Social Entrepreneurship (SE) mission
• opportunity can lead to development of an enterprise
concept
• denominated in its value in three ways:
– 1. identifiable,
– 2. defensible,
– 3. measurable.
• Failure to identify and denominate social returns and
set clear, specific goals at this stage is a key reason for
many social enterprise failures.
Slide 11
Social Entrepreneurship (SE) uses the
“enterprise” process
• seeks different ends/rewards
• Pursues/Addresses social problems or needs unmet
by private markets or governments
• Social entrepreneurship is motivated primarily by
social benefit
• Social entrepreneurship generally works “with” – not
“against” market forces -a balancing act between
“moral imperatives” and “profit motives”
Slide 12
Social Entrepreneurship (SE) uses the
“enterprise” process (continued)
• Social entrepreneurs combine innovation,
entrepreneurship, and social purpose and seek to
be financially sustainable by generating revenue
from trading
• The primary difference between Commercial
Entrepreneurship and Social Entrepreneurship is
not the entrepreneurial process, but the
denomination of the rewards (from the created
value) sought
• Exhibit heightened sense of accountability to
those served for outcomes and their impact
Slide 13
Social Entrepreneurship and Leader
characteristics
• Social Entrepreneur recognizes a social problem
and all its complexity and binds the problem with
a vision that has the potential to reshape the
situation directly and change public attitudes that
perpetuated the original problem
• SE holds significant personal credibility (referent
power) which allows them to tap critical
resources and actually build the necessary
network of participating persons and
organizations
Slide 14
Social Entrepreneurship and Leader
characteristics
• SE generates followers’ commitment to a
project by framing the project in terms of
important social values, rather than purely
economic terms.
• This results in a sense of collective purpose
between and among the social entrepreneur
and those who join the effort.
SE’s have an obligation to shareholders:
Shareholders are investors in the business who own shares (also known as stock
certificates) in the business, which issues such shares. This arises from the
traditional input-output models of a corporation:
firms convert the inputs of investors (ie, capital resources) into salable outputs
which customers buy, thereby returning capital benefit to
the firm.
The shareholder view is the only view recognized in the business law of most
countries.
In the U.S. it is the fiduciary responsibility of the company to put the needs of
the shareholders first, to increase value for them.
“Fiduciary” in this context means the highest standard of care. A fiduciary
(the entrepreneur) is expected to be extremely loyal to the people (stockholders) to
whom he owes the duty (the principal); (s)he must not put his personal interests
before the duty and must not profit from his position as a fiduciary, unless the
principle consents. A fiduciary cannot have a conflict of interest.
One can measure obligations to shareholders as outputs on two levels:
Microscale – Financial accounting, profit and loss statement ask questions, such
as:
investors – did you maximize wealth? did you do all you could to
generate a profit?
Macroscale – entrepreneurs don't exist in a vacuum. On a larger scale, the
activities of an entrepreneur contribute to the Gross National Product (GNP),
which is a measure of the
economic performance of a country. GNP is
defined as the market value of all goods and services produced within a
nation's borders in a given year.
Entrepreneurs also have responsibilities to their stakeholders.
Stakeholders – for example: employees, suppliers, customers, governmental
bodies, political groups, trade associations, communities, public at large: any
person or organization that can positively or negatively impact the actions of a
company.
In the business context, a stakeholder is a person or organization that has a
legitimate interest in a project or entity. The theory that a company owes duties to
stakeholders is controversial, but grounded in reality – for example a responsibility
of paying taxes.
You can often find entrepreneurs on a voluntary basis involved in: Local
communities, Political activities, Arts, and Family issues
This makes sense, as communities would be much different without their activism
– sick communities are not good places to do business.
Example: There is a lawyer, an entrepreneur, who is the president of city council
and a member of the local business organization. He coached a local kids soccer
team for a while. He is visible, actively helping his community, and generating
possible business at the same time.
Slide 15
Common ‘Myths’ about Social and
Commercial Entrepreneurship
• SEs are anti-business – SEs seek collaboration
for alignment and mutual benefit
• Difference between SE and Commercial
Entrepreneurship (CE) is ‘GREED’ – many SEs
are also CEs.
• SEs run only non-profits – social
entrepreneurship process can occur in any
sector and with any legal status
Key points:
Some of the most common myths regarding entrepreneurship and entrepreneurs are identified
in the following sequence of 3 charts.
Slide 16
Common ‘Myths’ about Social and
Commercial Entrepreneurship
• SEs are born, not made – people can grow and
learn to be comfortable with risk and
ambiguity, as well as have their level of
community awareness elevated.
• SEs are misfits – they value different goals
• SEs usually fail – while <50% of CEs fail, an
even smaller percentage of SEs actually fail
(<30%)[Cordes, 2001].
Slide 17
Common ‘Myths’ about Social and
Commercial Entrepreneurship
• SEs love risk – there is little empirical
evidence for this claim, rather all
successful entrepreneurs utilize well
thought out risk taking. SEs take
calculated risks.
Slide 18
The Triple Bottom Line
- Profits
Commercial entrepreneurs (Xtracycle: bicycle
accessory products; health care centers …..)
- People
non-profits (NGOs, World Food Program, relief
organizations, public radio and television,
community centers ……)
for profit (community-based correctional houses,
half-way houses, wellness and fitness
centers…..)
- Planet (Environmentalism)
Is this the future of entrepreneurism?
Today, trends in the field of entrepreneurism are moving in the directions of Profits (ie,
traditional commercial entrepreneurism); People (not-for-profit companies that seek to help
people); and Planet (ie, companies that seek to make a profit by environmentally-friendly
products, technologies, and services. This is becoming known as the Triple Bottom Line.
Social Entrepreneurs thus have a paradigm of Corporate Social Responsibility (CSR). (An
example in KSA is the Dr. CAFE kiosk areas. The tabletops in the student break area show the
company’s social mission.) Many companies/corporations have adopted this Triple Bottom Line
philosophy.
Drivers for Corporate Social Responsibility (CSR) include:
Ethical Consumerism
Globalization and market forces
Social awareness and education
Ethics in corporate behavior
Laws and regulation
Potential business benefits of CSR exist in such area as:
Human Resources – by understanding what causes are important to employees you get increased
retention, improved recruitment, higher productivity, etc.
License to Operate – businesses do not want interference by governments or others and by doing
things better, they minimize the risk of interference
There are strong arguments both in TBL's (triple bottom lines) favor and against it. Some
companies have voluntarily adopted TBL in their articles of incorporation and some states are
currently considering legislation to allow corporations to formally adopt TBL accounting.
Measuring the Triple Bottom Line
The Triple Bottom Line captures an expanded spectrum of values and criteria for measuring
organizational (and societal) success. It is now the dominant approach when the government
sector uses full cost accounting (which incorporates financial, social and environmental
concerns), although the current measuring tools are not as good as those for purely financial
accounting.
At a Microscale level:
Working life:
Profits: This includes the economic benefit enjoyed by the society.
People: Beyond their employees, a company will not exploit people; for example, it would
not use child labor. The company will shift some profits back to the original producers, like
Green Mountain Coffee which only buys from fair trade coffee growers. Also, a company may
give back to the community (similar to Sadaqa -“leave something behind”- for individuals) or a
mandatory giving by companies (ie, Zakat).
Planet: Doing things to reduce the ecological footprint and taking credit for it, i.e., “Going
Green.” There are new businesses and industries starting up seemingly every day based on
opportunities being identified in the ecological-friendly, environmentally-friendly arenas.
Note: The company SAP is now producing software to help companies measure the Triple
Bottom Line
Note: the TBL considers what a company does. Often people are only indirectly affected
(reducing pollution) vs. having a direct effect (paying someone higher wages).
Retirement life:
Philanthropy: Often, successful entrepreneurs will set up a foundation to do charitable works,
or they will donate money to charities or NGOs (Non-Governmental Organizations) in a
voluntary effort to give back to the community.
For example: Andrew Carnegie left a major legacy by building libraries in the early 1900s in
communities without the ability to do so for themselves. Bill Gates is currently using his
foundation for the purpose of improving medical health in developing countries.
Macroscale: Example, Bhutan measures Gross National Happiness.
Slide 19
Planet (Environmentalism)
• Conservation
• Environment (The Green Revolution)
• Energy
Sustainable
Recycle
Renewable
Efficient
• Pollution
• Air
• Water
• Noise
• Reuse and Recycling
Key Point:
Eco-related entrepreneurial ventures are rapidly growing in societies today. The primary
arenas are shown on this chart. Ventures not only save the planet, but they can also be quite
profitable for the entrepreneur.
Slide20
Activities
1. Present and discuss an overview of the
Business Plan format
Key Point
At this point in the workshop, we’ve talked all about starting ventures and businesses in
becoming an entrepreneur. The tool for starting the venture or business by detailing the
rationale, supporting market data/information, business justification, and financial
requirements and potential is called the business plan. There is the Business Plan Template
and the Operational Summary Plan Template. Both are from the Small Business Development
Center, Kent State University Tuscarawas Campus.
There is another tool called Business Plan Pro (BPP). This software is a widely used business
planning software that many text books use. This tool is also available to the Preparatory Year
course students in the Survey of Entrepreneurship course.
BUSINESS
PLAN
WORKSHEET
The Small Business Development Center Program of Ohio is a funded program of the Ohio Department of Development and the U.S.
Small Business Administration in cooperation with Kent State University Tuscarawas. The support given through such funding does not
constitute an express or implied endorsement of any of the co-sponsor(s) or participant(s) opinions, products or services. Special
arrangements for the disabled will be made if requested in advance. This program is provided on a non-discriminatory basis.
SUGGESTED LOAN PROPOSAL FORMAT
(This can also be used as your Executive Summary)
I.
Introduction
II.
Loan Proposal
A.
Describe purpose of loan
B.
Dollar amount required
1.
III.
IV.
V.
Breakdown of how loan dollars are to be used
C.
Primary and secondary sources of repayment
D.
Expected term of the loan
Description of Business
A.
History and nature
B.
Overview (present and future position of company within the industry)
C.
Products
D.
Market area
E.
Principal customers
F.
Principal suppliers
G.
Competitors
H.
Description
Management
A.
Ownership structure
B.
Resumes of key personnel and discussion of back-up managers
C.
List of professional advisors, i.e. accountant, attorney, consultant, etc.
Non-Management
A.
Number and types
B.
VI.
Union affiliations
Financial Plan
A.
Historical company financial statements (up to five)
B.
Pro forma balance sheets, income statements and cash flow projections
C.
Description of collateral
1.
Appraisals of real estate and equipment, if available
(not insurance of replacement estates)
D.
VII.
Personal financial statements
Miscellaneous
A.
Accounts receivable and payable agings
B.
Exhibits
C.
Acquisition related
1.
Buyout agreement
2.
Loan arrangements, if any, with former owner(s)
BUSINESS PLAN QUESTIONNAIRE (Your Business Plan Will Actually be a Word Document
which answers all these questions. DO NOT use the questions in the final draft)
(Please use complete sentences and detailed answers)
ENTREPRENEUR (TEAM):
BUSINESS NAME:
1. DESCRIBE THE SPECIFIC BUSINESS YOU WANT TO ENTER (fill this in after Class 8. You will present after
class 10 NOTE: In your Business Plan, you will NOT be limited to a few lines, like those below. Use as many as
necessary).
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2. WHY DO YOU WANT TO BE IN THIS BUSINESS?
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3. WHAT PRODUCTS OR SERVICES DO YOU WISH TO SELL
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4. WHO WILL BE A PART OF THE MANAGEMENT TEAM FOR THIS BUSINESS? (After Class 23)
(Be sure to include your CPA, Insurance agent, Banker, Business Advisor(s), and Attorney(if one is necessary)
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5. WHAT TECHNICAL SKILLS AND EXPERIENCE DO YOU AND THE MANAGEMENT TEAM HAVE THAT ARE
NECESSARY TO CARRY ON THIS BUSINESS? (After class 23)
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MARKET RESEARCH
*For specific numbers, visit www.census.gov for USA information
6. WHERE DO YOU PLAN TO LOCATE YOUR BUSINESS AT FIRST? DO YOU PLAN TO RELOCATE? WHAT
IS THE SPECIFIC ADDRESS? WHY ARE YOU LOCATING THERE? (After Market Research)
_____________________________________________________________________________________________
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7. WHAT KIND OF LOCATION DO YOU NEED FOR THIS BUSINESS IN TERMS OF TYPE OF
NEIGHBORHOOD, TRAFFIC AND SUPPLIERS? (After Market Research class)
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CUSTOMERS:
8. DESCRIBE WHO WILL USE YOUR PRODUCTS OR SERVICES
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9. DEFINE THE GEOGRAPHICAL AREAS FROM WHICH YOU CAN REALISTICALLY EXPECT TO DRAW
CUSTOMERS
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10. WHAT IS THE POPULATION OF THESE AREAS? *
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11. ARE THERE POPULATION GROWTHS IN THESE AREAS?
*
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12. WHAT AGES WILL YOU BE CATERING TO?
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13. HOW MANY OF THIS AGE GROUP IS IN YOUR MARKET AREA? *
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14. WHAT INCOME BRACKET WILL YOU BE CATERING TO?
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15. HOW MANY OF THIS BRACKET ARE IN YOUR MARKET AREA? *
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16. IS THERE A REAL DEMAND FOR YOUR PRODUCT OR SERVICE IN YOUR MARKET AREA? HOW DO YOU
KNOW THIS?
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17. BASED ON THE ABOVE INFORMATION, DO YOU BELIEVE YOUR BUSINESS WILL APPEAL TO A LARGE
ENOUGH MARKET TO BE PROFITABLE? EXPLAIN.
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18. ARE THERE OTHER CHARACTERISTICS OF YOUR POTENTIAL CUSTOMERS THAT AFFECT THEIR
BUYING HABITS?
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COMPETITION:
19. WHO ARE YOUR MAJOR COMPETITORS?
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20. HAVE ANY FIRMS OF YOUR TYPE GONE OUT OF BUSINESS RECENTLY? IF SO, WHY?
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21. WHAT ARE YOUR STRENGTHS AND WEAKNESSES?
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22. WHAT ARE STRENGTHS AND WEAKNESSES OF YOUR COMPETITION?
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23. WHAT OPPORTUNITIES DO YOU SEE IN THESE STRENGTHS AND WEAKNESSES?
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24. WHAT THREATS?
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25. CONSIDERING THE STRENGTH AND WEAKNESSES OF YOUR COMPETITION, WILL YOU BE ABLE TO
COMPETE SUCCESSFULLY, HOW? WHAT WILL SET YOU APART?
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SUPPLIERS:
26. DO YOU KNOW ANY POTENTIAL SUPPLIERS FOR THE INVENTORY NEEDS OF YOUR BUSINESS? WHO
ARE THEY AND WHAT COULD THEY SUPPLY FOR YOUR BUSINESS?
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27. DO ANY OF THEM HAVE ANY SPECIAL WEAKNESSES OR STRENGTHS? IF SO, WHAT?
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MARKETING PLAN
28. DESCRIBE THE DAILY OPERATIONS OF YOUR BUSINESS, STEP BY STEP
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29. HOW WILL YOU ADVERTISE OR PROMOTE YOUR PRODUCTS OR SERVICES
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30. WHY WILL YOUR CUSTOMERS BUY FROM YOU? (What is Unique about your idea?)
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31. WHAT ARE THE MARKET TRENDS REGARDING YOUR PRODUCTS OR SERVICES?
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32. DO YOU PLAN TO EMPHASIZE PRICE, QUALITY OR BOTH? HOW?
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33. WHAT IMAGE DO YOU WANT YOUR CUSTOMERS TO HAVE OF YOUR BUSINESS?
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34. DO YOU PLAN ANY SPECIAL SERVICES IN YOUR BUSINESS SUCH AS FREE DELIVERY, “800”
TELEPHONE NUMBER, SPECIAL DISCOUNTS, ETC.?
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FINANCIAL PLAN AND PROPOSED FINANCING
35. HOW MUCH MONEY WILL IT TAKE TO GET YOUR BUSINESS STARTED?
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36. HOW MUCH OF YOUR OWN MONEY DO YOU PLAN TO INVEST INTO THIS BUSINESS?
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37. HOW DO YOU PROPOSE TO FINANCE THE BALANCE? HOW MUCH WILL BE NEEDED FROM A LENDER?
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38. DO YOU HAVE A CASH FLOW PROJECTION ATTACHED TO THIS QUESTIONNAIRE?
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39. DO YOU HAVE AN INCOME PROJECTION ATTACHED TO THIS QUESTIONNAIRE?
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40. WHAT OTHER FINANCIAL INFORMATION DO YOU HAVE ATTACHED TO THIS QUESTIONNAIRE?
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41. DOES THE ABOVE INFORMATION CLEARLY SHOW HOW MUCH MONEY IT IS GOING TO TAKE TO
OPERATE YOUR BUSINESS AND TO MAKE AN ACCEPTABLE PROFIT FOR YOU?
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42. HOW WILL YOU DETERMINE YOUR PRICES?
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43. HOW DO YOU PLAN TO FIND OUT ABOUT TAX LIABILITIES NEEDS (Zakat)?
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44. WHO WILL HANDLE YOUR BOOKKEEPING/RECORDKEEPING NEEDS?
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ORGANIZATIONAL PLAN
45. WILL YOU HAVE EMPLOYEES? HOW MANY?
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46. WHO WILL BE RESPONSIBLE FOR:
SELLING: _____________________________________________________________________
BUYING: ______________________________________________________________________
RECORDKEEPING: _____________________________________________________________
PRODUCTION/OPERATIONS: _____________________________________________________
ADVERTISING/PROMOTIONS: ____________________________________________________
PRICING: _____________________________________________________________________
CLERICAL WORK: ______________________________________________________________
LEGAL ORGANIZATION
47. DO YOU PLAN TO OPEN AS A SOLE PROPRIETORSHIP, A PARTNERSHIP, AN L.L.C. OR A
CORPORATION? (see next page for definitions, if needed)
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48. WILL YOU NEED ANY SPECIAL LICENSES OR PERMITS ? IF SO, WHICH?
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Proprietorship
Partnership
Unlimited liabilities
Best Suited for:
Main Disadvantage:
Single owner business
where taxes or product
No tax benefits
liability are not a
concern
Business with partners
where taxes or product
liability are not a
concern
Business dissolves upon
death of owner
Inseparable for owner
Types of Entity:
Owner is responsible
Taxes:
Inseparable from
owner but can have
debt or property in its
name
Inexpensive to set-up
inexpensive to set-up
Main Advantage:
File schedule C with
Form 1040
Few administrative
duties
Few administrative
duties
Unlimited liability also
liable for partner’s acts
Corporation (S or C)
LLC
More administrative
duties
More administrative
duties
No tax benefits
Legally dissolves upon
change or death of
partner
Single or multiple
business where
owner(s) need(s)
company funded
fringe benefits and
liability protection.
S Corp limited 35
shareholders
Single or multiple
owner business where
owner(s) need(s)
limited liability but
want to be taxed as
partnership
C Corp pats its own
Separate legal entity
Partners are
responsible
Separate legal entity
S Corp passes through
to owners
Usually form 1065
Files form 1020
S Corp files form 1020S
File form 1055
Limited liability
Limited liability
Company paid fringe
benefits (C Corp)
Pass-through entity
Tax Savings through
Income splitting (C
Corp)
Capital is easy to raise
through sale of stock
Usually taxed as a
partnership, but can
be taxed as a corp. in
some states
Unlimited number of
owners
Capital is easy to raise
through sale of interest
Can be costly to form
Can be costly to form
RISKS AND POTENTIAL PROBLEMS
49. WHAT ARE THE MAJOR RISKS IN YOUR TYPE OF
BUSINESS FOR CUSTOMERS, EMPLOYEES AND
YOU AS THE OWNER?
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50. ARE THESE RISKS BEYOND YOUR CONTROL OR
WHAT PROCEDURES WILL YOU TAKE TO PREVENT
THEM?
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Before going into the detail of building the Financial Plan, it
is important to realize that some basic knowledge of
accounting is essential to the productive management of
your business. If you are like most home business owners,
you probably have a deep interest in the product or services
that you sell or intend to sell. You like to do what you do and
it is even more fulfilling that you are making money doing it.
There is nothing wrong with that. Your conviction that what
you are doing or making is worthwhile is vitally important to
success. Nonetheless, the income of a coach who takes the
greatest pride in producing a winning team will largely
depend on someone keeping score of the wins and losses.
OPERATIONAL PLANS SUMMARY
The purpose of this section is to summarize from
previous sections the various operations of your
business and link them to the finance section of your
business plan. In addition you will want to summarize
the advantages and disadvantages of your business
operation. Write you summary here:
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THE FINANCIAL PLAN
Clearly the most critical section of your Business Plan
Document is the Financial Plan. In putting together this part
of the planning document you will establish vital schedules
that will guide the financial health of your business through
the troubled waters of the first year and beyond.
The business owner is no different. Your product or
service may improve, but, unless you have access to
an unlimited bankroll, you will fail if you don’t make a
profit. If you don’t know what’s going on in your
business, you are not in a very good position to assure
its profitability.
Most startup businesses will use a method of
accounting with a system of record keeping that may be
little more than a checkbook in which is recorded all
receipts and all expenditures, backed up by a few forms
or original entry (invoices, receipts, cash tickets, etc.)
For a Sole Proprietorship, the business form assumed
by this management aid, the very minimum of recorded
information is that required to accurately complete the
tax forms needed for the USA. Other business types
(partnerships, joint ventures, corporations) have similar
requirements but use different tax forms.
If your business is, or will be, larger than just a small
supplement to family income, you will need something
more sophisticated. Stationary stores can provide you
with several packaged small business accounting
systems complete with simple journals and ledgers and
detailed instructions in understandable language. Many
programs are available to be run by your computer.
Should you feel that your accounting knowledge is so
basic that you will need professional assistance to
establish your accounting systems ?; the classified
section of your telephone directory can lead you to a
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number of small business services that offer a complete
range of accounting services. You can buy as much as
you need from a simple “peg-board” system all the way
to computerized accounting, tax return service, and
monthly profitability consultation. Rates are reasonable
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for the services rendered and an investigative
consultation will usually be free. Look under the
heading, “Business Consultants”, and make some calls.
Be sure to let them know the size of your business so
you get to the ones who specialize in start up
operations. Many of them are home-based
entrepreneurs themselves and know what you will be
going through.
Let’s start by looking at the makeup of the Financial
Plan for the business.
staged purchasing, high volume months and
slow periods.
Creating the Profit and Loss Projection
Refer to Exhibit A & A-1. Create a wide sheet of
analysis paper or an Excel spread sheet with three-inch
wide columns across the page. Write at the top of the
first page the planned name of your business. On the
second line of the heading write “Profit and Loss
Projections”. On the third line write “First year”
The Financial Plan includes the following:
1. Financial Planning Assumptions – these are
short statements of the conditions under which
you plan to operate.
 Market health: _____________________
 Date of start up: ____________________
 Sales buildup ($): ___________________
 Gross profit margin: _________________
 Equipment, furniture and fixtures required
_________________________________
 Payroll and other key expenses that will
impact the financial plan: _____________
_________________________________
2. Operational Plan – Profit and Loss
Projection – this is prepared for the first year
broken into twelve individual months. It should
become your first year’s Budget. See Exhibit A
& A-1
3. Sources of Funds Schedule – this shows the
source(s) of our funds to capitalize the
business and how they will be distributed
among your fixed assets and working capital.
4. Pro Forma Balance Sheet – Exhibits B & B1.
“Pro forma” refers to the fact that the balance
sheet is before the fact, not actual. This form
displays Assets, Liabilities and Equity of the
business. This will indicate how much
investment will be required by the business and
how much of it will be used as Working Capital
in its operation.
5. Cash Flow Projection – Exhibit C. this will
forecast the flow of cash into and out of your
business through the year. It helps you plan for
Then note the headings on Exhibit A and copy them
onto your 13-column sheet. If startup is indefinite, just
write “Month #1”, “Month #2”, etc. Although the
example shows only 3 months, you need to continue
this out for all 12 months.Column 13 should be headed
“Total Year”.
In the wide, unnumbered column on the left of your 13column sheet, copy the headings from the similar area
on Exhibit A. Then follow the example set by Exhibit A
and list all of the other pieces of your income, cost and
expense structure. You may add or delete specific lines
of expense to suit your business plan. Guard against
consolidating too many types of expense under one
account or you may lose control of the parts. At the
same time, don’t try to break down expenses so fine
that accounting becomes a nuisance instead of a
management tool. Once again, Exhibit A provides
sufficient details for most home based businesses.
You will want to note which of the items you are to
estimate on a monthly (M) or yearly (Y) basis. Items
such as Sales, Cost of Sales and Variable Expenses
will be estimated monthly based on planned volume
and seasonal or other estimated fluctuations. Fixed
Expenses can usually be estimated on a yearly basis
and divided by twelve to arrive at even monthly values.
The “M” and “Y” designations will be used later to
distinguish between variable and fixed expense.
Depreciation allowances for Fixed Assets such as
production equipment, office furniture and machines,
vehicles, etc. will be calculated from the Source of
Funds Schedule.
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Sources of Funds Schedule
Exhibit A-1 describes line by line how the values on the
Profit & Loss Projection are developed. Use this as
your guide.
To create this schedule, you will need to create a list of
all of the Assets that you intend to use in your business,
how much investment each will require and the source
of funds to capitalize them. A sample of such as list is
show below:
ASSET
COST
SOURCE OF FUNDS
Cash
Accounts Receivable
Inventory
Pickup Truck
Packaging machine
Office desk & chair
Calculator
Computers
$2,500
$3,000
$2,000
$5,000
$10,000
$300
$75
$1,500
Personal Savings
From Profits
Vendor Credit
Currently owned
Installment purchase
Currently owned
Personal cash
Personal savings
Before you leave your Source of Funds
Schedule, Indicate the number of months (year
x 12) of useful like for depreciable fixed assets.
(In the example, the pickup truck, the
packaging machine and the furniture and office
equipment would be depreciable.) Generally,
any individual item of equipment, furniture,
fixtures, vehicles, etc. costing over $100 should
be depreciated. For more information on
allowances for depreciation, you can get free
publications and assistance from your local
Internal Revenue Service office. Divide the cost
of each fixed asset item by the number of
months over which it will be depreciated. You
will need this data to enter as monthly
depreciation on your Profit & Loss Projection.
All of the data on the Source of Funds
Schedule will be needed to create the Balance
Sheet.
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Creating the Pro Forma Balance Sheet
Refer to Exhibit B. This is a Balance Sheet form. There
are a number of variations of this form and you may
find it prudent to ask your banker for the form that the
bank uses for small business. It will make it easier for
them to evaluate the health of your business. Use
Exhibit B to get started and transfer the data to your
preferred form later. Accompanying Exhibit B is Exhibit
B-1, which describes line by line how to develop the
Balance Sheet.
Even though you may plan to stage the purchase of
some assets through the year for the purpose of this
pro forma Balance Sheet, assume that all assets will be
provided at the startup.
Cash Flow Projections
An important subsidiary schedule to your financial plan
is a monthly Cash Flow Projection. Prudent business
management practice is to keep no more cash in the
business than is needed to operate it and to protect it
from catastrophe. In most small businesses, the
problem is rarely one of having too much cash. A Cash
Flow Projection is made to advise management of the
amount of cash that is made to advise management of
the amount of cash that is going to be absorbed by the
operation of the business and compares it against the
amount that will be available.
SBA has created an excellent form for this purpose and
it is shown as Exhibit C. Your projection should be
prepared on a 13-column analysis paper to allow for a
twelve month projection. Exhibit C-1 represents a line
by line description and explanation of the components
of the Cash Flow Projection which provides a step-bystep method of preparation.
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OUTSIDE SOURCES OF ASSISTANCE
The U.S. Small Business Administration’s Office of
Business Development programs are extensive and
diversified. They include free individual counseling,
courses, conferences, workshops, problem clinics, and
a wide range of publications. Counseling is provided
through community based organizations such as:
SCORE and ACE, which help small business owners,
solve their operating problems through a one-on-one
relationship. Counseling is not limited to small
businesses that have a problem. It is available as well
to managers of successful firms who wish to review
their objectives and long-range plans for expansion and
diversification.
SMALL BUSINESS INSTITUTES (SBIs), which have
been, organized through SBA on over 500 university
and college campuses as another way to help small
business. At each SBI, senior and graduate students at
schools of business administration, and their faculty
advisors, provide on-site management counseling.
Students are guided by the faculty advisors and SBA
management assistance experts and receive academic
credit for their work.
prospective business owners. Clinics that focus on
particular problems of small firms in specific industrial
categories are held on an as-needed basis.
A FINAL WORD
In completing this Management Aid, you have put in a
great deal of time and effort. You should now have all
of the elements needed to present as simple or
sophisticated a prospectus for your enterprise as you
desire. More important, you have created the
management tools to guide you in your venture. Once
the business opens its doors, you will be inundated by
the details, problems, and challenges of all the joys of
going it alone. It should be a living document, referred
to regularly, massaged constantly, and revised to
reflect your experiences one that spans three or five
years out. Update it at regular intervals. Set your goals
and live by them. Your success is in your hands.
SMALL BUSINESS DEVELOPMENT CENTERS
(SBDCs) which draw from resources of local, state and
federal government programs, the private sector, and
university facilities to provide managerial and technical
help, research studies, and other types of specialized
assistance of value to small business. These universitybased centers provide individual counseling and
practical training for small business owners.
BUSINESS MANAGEMENT TRAINING programs are
co-sponsored by SBA in cooperation with educational
institutions, Chambers of Commerce, and trade
associations. Courses generally take plan in the
evening and last from six to eight weeks. In addition,
conferences covering such subjects as working capital,
business forecasting, and marketing are held for
established businesses on a regular basis. SBA
conducts, Pre-Business workshops, dealing with
finance, marketing assistance, types of business
organizations, and business site selection, for
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EXHIBIT A1
PROFIT AND LOSS PROJECTION
The Profit and Loss statement (P&L) is valuable as a planning tool and as a key management tool to help control operations
to reach business goals. It enables the owner/manager to develop a “preview” of the amount of profit, or loss, generated each
month, and for the business year - based on reasonable predictions of monthly levels of sales, costs and expenses. The
owner/manager can compare the year’s expected profits or losses against the profit goals and needs established for the
business. A completed P & L statement allows the owner/manager to compare actual figures with the monthly projections, and
to take steps to correct any problems.
REVENUE (SALES)



List the departments within the business, e.g., assume your business is appliance sales and service: New appliances,
used ones, parts, in-shop service, on-site service.
In the “Estimate” columns, enter a reasonable projection of monthly sales for each department of the business. Include
cash and on-account sales. In the “Actual” columns, enter the actual sales for the month as they become available.
Exclude from the Revenue section any revenue that is not strictly related to the business.
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COST OF SALES


Cite costs by department of the business, as above.
In the “Estimate” columns, enter the cost of sales estimated for each month for each department. For
product inventory, calculate the cost of the goods sold for each department (beginning inventory plus
purchases and transportation costs during the month, minus the inventory). Enter “Actual” cost when
known each month.
Gross Profits - subtract the total cost of sales from the total revenue.
EXPENSES


Salary Expenses: Based pay plus overtime
Payroll Expenses: Include paid vacations, sick leave, health insurance, unemployment insurance, social
security taxes.
 Outside Services: Include costs of subcontracts, overflow work farmed out, special or one-time
services.
 Supplies: Services and items purchased for use in the business, not for resale.
 Repairs and Maintenance: Regular maintenance and repair, including periodic large expenditures such
as painting or decorating.
 Advertising: Include desired sales volume, and yellow pages expenses, etc.
 Car, Delivery and Travel: Include charges if personal car used in business, including parking, tolls,
buying trips, etc.
 Accounting and Legal: Outside professional services.
 Rent: List only real estate used in the business.
 Telephone: Self-explanatory
 Utilities: Water, heat, light, etc.
 Insurance: Fire or liability on property or products, workmen’s compensation.
 Taxes (real estate, etc): Inventory, sales, excise tax, others.
 Interest: Self-explanatory.
 Depreciation: Amortization of capital assets.
 Other Expenses (specify each): e.g., tools, leased equipment.
 Miscellaneous (unspecified): Small expenditures without separate accounts.
Net Profit - subtract total expenses from gross profit.
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EXHIBIT B1
SAMPLE BLANK BALANCE SHEET
The following text covers the essentials elements of a Balance Sheet. Figures used to compile the Balance Sheet are
taken from the previous and current Balance Sheet as well as the current Income Statement (or Profit & Loss
Statement). The report is usually attached to the Balance Sheet.
1. Heading - The legal name of the business, the type of statement and the day, month and year. Must be
shown at the top of the report.
2. Assets - Anything of value that is owned or legally due the business. Total assets include all net realizable
and net book (also net carrying) values. Net realizable and net book values are amounts derived by
subtracting any estimated allowances for doubtful accounts, depreciation, and reductions of future service such as amortization of a premium during the term of an insurance policy - from the acquisition price of
assets.
3. Current Assets - Cash and resources that can be converted into cash within 12 months of the date of the
Balance Sheets (or during one established cycle of operations). Besides cash (money on hand and demand
deposits in the bank, e.g., checking accounts and regular savings accounts), resources include:
Account Receivable - The amounts due from customers in payment for merchandise or services.
Inventory - Includes raw materials on hand, work in process, and all finished goods either
manufactured or purchased for resale.
Temporary Investments - Interest - or dividend yielding holding expected to be converted into
cash within a year. Also called marketable securities or short-term investments, they include stocks
and bonds, certificates of deposit, and time deposit savings accounts. List on the Balance Sheet at
either their cost or market value, whichever is less.
Prepaid Expenses - Goods, benefits, or services a business buys or rents in advance of use.
Examples are office supplies, insurance protection, and floor space.
4. Long-term Investments - Also called long-term assets. They are holding the business intends to keep for
at least a year and that typically yield interest or dividends. Included are stocks, bonds, and saving accounts
earmarked for special purposes.
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5. Fixed Assets - Fixed assets, frequently called plant and equipment, are the resources a business owns or
acquires for use in operations and does not intend for resale. Land is listed at its original purchase price,
with no allowance for appreciation or depreciation. Other fixed assets are listed at cost, less depreciation.
Fixed assets may be leased. Depending on the leasing arrangement, both the value and the liability of the
leased property may need to be listed on the Balance Sheet.
6. Other Assets - Resources not listed with any of the above assets. Examples include tangibles such as
outdated equipment salable to the scrap yard, and intangibles such as trademarks.
7. Liabilities - All monetary obligations of a business and all claims creditors have on its assets.
8. Current Liabilities - All debts and obligations payable within 12 months or within one cycle of operations.
Typically they are:
Accounts Payable - Amounts owed to suppliers for goods and services purchased in connection
with business operations.
Short-Term Notes - The balance of principal due to pay off short-term debt for borrowed funds.
Current Portion of Long Term Notes - Current amount due to total balance on notes whose
terms exceed 12 months.
Interest Payable - Any accrued fees due for use of both short- and long-term borrowed capital and
credit extended to the business.
Taxes Payable - Amounts estimated by an accountant to have been incurred during the
accounting period.
Accrued Payroll - Salaries and wages currently owned.
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9. Long Term Liabilities - Notes, contract payments or mortgage payments due over a period exceeding 12
months or one cycle of operations. They are listed by outstanding balance, less the current portion due.
10. Equity - Also, called Net Worth. Equity is the claim of the owner(s) on the assets of the business. In a
proprietorship or partnership, equity is each owner’s original investment plus any earnings after withdrawals.
In a corporation, the owners are the shareholders. The corporation’s equity is the sum of contributions plus
earnings retained after paying dividends.
11. Total Liabilities and Equity - The sum of these two amounts must always match that for Total Assets.
12. Reconcilement of Equity - Used for proprietorships and partnerships, this report reconciles the equity
shown on the current Balance Sheet. It records equity at the beginning of the accounting period and details
additions to or subtractions from this amount made during the period. Typically, additions and subtractions
are net income or loss and owner contributions and/or deductions.
For corporations, the same type of report is called the Statement of Retained Earnings. It lists increases
or decreases in this accumulated net income since the beginning of the current period.
Source: Extracted from “Understanding Financial Statements,” Small Business Reporter, Copyright ©
Bank of America NT & SA 1980.
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330 University Drive NE ● New Philadelphia, Ohio 44663 ● 330.308.7479
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330 University Drive NE ● New Philadelphia, Ohio 44663 ● 330.308.7479
sbdc@tusc.kent.edu
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Ohio Small Business Development Center @ Kent State University Tuscarawas
330 University Drive NE ● New Philadelphia, Ohio 44663 ● 330.308.7479
sbdc@tusc.kent.edu
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Ohio Small Business Development Center @ Kent State University Tuscarawas
330 University Drive NE ● New Philadelphia, Ohio 44663 ● 330.308.7479
sbdc@tusc.kent.edu