Exercise 6
Economics of the Business – How Do You Make Money in the White Space?
Your mining of the value chain (Exercise 5) should present a view of the “white space” for your
business. In this section, we ask you to begin to quantify the space and to estimate the time and
resources it will take to fill that space. These preliminary assessments will provide the
foundation for the development of your financial statements, including income statement,
balance sheet, cash flow, and break-even point. Please provide:
 A realistic estimate of approximate sales and market share for your product or service in
the market area which your venture can attain in each of your first five years:
Product/Service Sales and Market Share
1
Total Market:
Units
Dollars
Est Sales:
Units
Dollars
Est. Market Share (percent):
Est. Market Growth:
Units
Dollars
Source of Data:
Researcher:
Confidence in Data:
2
Year
3
4
5
Checkpoint
Consider whether you suffer from mousetrap myopia or whether you lack enough experience to tackle the venture
at this stage. It is possible that if your venture does not stand up to this evaluation you may simply not be as far
along as you had thought. Remember, the single largest factor contributing to stillborn ventures and to those who
will ripen as lemons is lack of opportunity focus. If you were unable to fill in the chart on Product/Service Sales and
Market Share on the previous page, or do not have much idea of how to answer them, it is possible that you need to
do more work before proceeding with this venture.

An assessment of the costs and profitability of your product or service:
_______________________Product/Service Costs and Profitability_____________________
Product/Service:
Sales Price:
Sales Level:
Dollars/Unit
Production Costs (i.e., labor and
material costs) or Purchase Costs
Gross Margin
Fixed Costs
Profit Before Taxes
Profit After Taxes
Percent of Sales
Price/Unit

An assessment of the minimum resources required to “get the doors open and revenue
coming in,” the costs, dates required, alternative means of gaining control of (but not
necessarily owning) these, and what this information tells you:
________________________________Resource Needs________________________________
Minimum
Needed
Plant, Equipment, and Facilities
(remember, you only have to control the
asset, not own it)
Product/Service Development
(include raw materials and inventory)
Market Research
Setup of Sales and Distribution
(e.g., brochures, demos, and mailers
One time Expenditures (e.g., legal costs)
Lease Deposits and Other Prepayments
(e.g, utilities)
Overhead (e.g., salaries, rent, and
insurance
Cost($)
Date
Required
Probable
Source
Sales Costs (e.g., trips to trade shows
Other Startup Costs
Total
COMMENTS

A rough estimate of requirements for manufacturing and/or staff, operations, facilities,
including:
- An assessment of the major difficulties for such items as equipment, labor skills and
training, and quality standards in the manufacture of your product(s) or the delivery of
your service(s):
-
An estimate of the number of people who will be required to launch the business and the
key tasks they will perform:
-
An assessment of how you will deal with these difficulties and your estimate of the time
and money needed to resolve them and begin scalable production:

An identification of the cash flow and cash conversion cycle for your business over the
first 15 months (including a consideration of leads/lags in getting sales, producing your
product or service, delivering your product or service, and billing and collecting cash).
Show as a bar chart the timing and duration of each activity below:
______Cash Flow, Conversion Cycle, and Timing of Key Operational Activities_______
Developments of
Forecasts
Manufacturing
Sales Orders
Billing:
Invoice
Collect
Selling Season
_____________________________________________________________
1
2
3
4
5
6
7
8
9
Months
10
11
12
13
14
15

A preliminary, estimated cash flow statement for the first year, including considerations
of resources needed for startup and your cash conversion cycle:

An estimation of (1) the total amount of asset and working capital needed in peak months
and (2) the amount of money needed to reach positive cash flow, the amount of money
needed to reach breakeven, and an indication of the months when each will occur:

Create a breakeven chart similar to the following:
Retrieved February 11, 2010 from http://www.bizbound.com/breakeven.htm
To calculate the number of units required to breakeven:
$ Selling Price – Variable Costs = $ Contribution Margin/Unit Fix Costs/ $ Contribution Margin = Units to Breakeven

An estimate of the capital required for asset additions and operating needs (and the
months in which these will occur) to attain the sales level projected in five years: