Software of the Month Club 1997 February

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EntreQuik The Essential Tool for Entrepreneurs by Banyan Business Software Inc. Version 3.0 Copyright 1996 All rights reserved Banyan Business Software Inc. Suite 251 - 9632 Cameron Street Burnaby, British Columbia Canada V3J 7N3 EntreQuik Version 3.0 Copyright (c) 1996, Banyan Business Software Inc. All rights reserved. THE ENTREQUIK SOFTWARE PROGRAM IS COPYRIGHTED. BANYAN BUSINESS SOFTWARE INC. DISCLAIMS ALL WARRANTIES RELATING TO THIS SOFTWARE, WHETHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, AND ALL SUCH WARRANTIES ARE EXPRESSLY AND SPECIFICALLY DISCLAIMED. NEITHER BANYAN BUSINESS SOFTWARE INC. NOR ANYONE ELSE WHO HAS BEEN INVOLVED IN THE CREATION, PRODUCTION, OR DELIVERY OF THIS SOFTWARE SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL, CONSEQUENTIAL, OR INCIDENTAL DAMAGES ARISING OUT OF THE USE OR INABILITY TO USE SUCH SOFTWARE EVEN IF BANYAN BUSINESS SOFTWARE INC. HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR CLAIMS. IN NO EVENT SHALL BANYAN BUSINESS SOFTWARE INC.'S LIABILITY FOR ANY DAMAGES EVER EXCEED THE PRICE PAID FOR THE LICENSE TO USE THE SOFTWARE, REGARDLESS OF THE FORM OF CLAIM. THE PERSON USING THE SOFTWARE BEARS ALL RISK AS TO THE QUALITY AND PERFORMANCE OF THE SOFTWARE. FURTHER, BANYAN BUSINESS SOFTWARE INC. RESERVES THE RIGHT TO REVISE THIS SOFTWARE, AND TO MAKE CHANGES FROM TIME TO TIME WITHOUT OBLIGATION OF BANYAN BUSINESS SOFTWARE INC. TO NOTIFY ANY PERSON OR ORGANIZATION OF SUCH REVISION OR CHANGES. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE PROVINCE OF BRITISH COLUMBIA, CANADA AND SHALL INURE TO THE BENEFIT OF BANYAN BUSINESS SOFTWARE INC. AND ANY SUCCESSORS, ADMINISTRATORS, HEIRS, AND ASSIGNS. ANY ACTION OR PROCEEDING BROUGHT BY EITHER PARTY AGAINST THE OTHER ARISING OUT OF OR RELATED TO THIS AGREEMENT SHALL BE BROUGHT ONLY IN A COURT OF COMPETENT JURISDICTION LOCATED IN BURNABY, BRITISH COLUMBIA, CANADA. THE PARTIES HEREBY CONSENT TO IN PERSONAM JURISDICTION OF SAID COURTS. EntreQuik is a trademark of Banyan Business Software Inc. Lotus and Lotus 1-2-3 are trademarks of the Lotus Development Corporation. IBM is a trademark of International Business Machines Corporation. Table of Contents CHAPTER 1 INTRODUCTION WHAT IS ENTREQUIK? ENTREQUIK'S SPECIAL FEATURES WHAT YOU NEED TO RUN ENTREQUIK CHAPTER 2 FIVE EASY STEPS TO EVALUATING YOUR IDEA STEP 1. THINK OF A GREAT IDEA FOR A NEW BUSINESS STEP 2. RESEARCH YOUR NEW BUSINESS IDEA STEP 3. USE ENTREQUIK TO ANALYZE YOUR NEW BUSINESS IDEA STEP 4. REVIEW YOUR FINANCIAL STATEMENTS STEP 5. CREATE MULTIPLE SCENARIOS CHAPTER 3 ENTREQUIK'S DATA INPUT REQUIREMENTS 1. PRODUCT PRICE AND COST INFORMATION WHAT PRODUCT OR SERVICE DO I PLAN TO SELL? AT WHAT PRICE DO I WANT TO SELL MY PRODUCT OR SERVICE? HOW MUCH WILL MY PRODUCT COST ME TO EITHER PRODUCE MYSELF OR PURCHASE FROM A WHOLESALER/MANUFACTURER? 2. FORECASTING PRODUCT SALES 3. SALES EXPENSES 4. GENERAL AND ADMINISTRATIVE EXPENSES 5. FIXED ASSETS IMPACT ON INCOME STATEMENT IMPACT ON BALANCE SHEET IMPACT ON CASH FLOW STATEMENT 6. FINANCING YOUR NEW BUSINESS DEBT FINANCING A) TERM LOAN FINANCING B) DEMAND LOAN FINANCING EQUITY INVESTMENT OPTIMAL MIX OF DEBT AND EQUITY 7. GENERAL ASSUMPTIONS CASH SALES/ACCOUNTS RECEIVABLE ACCOUNTS PAYABLE TERMS INVENTORY POLICY STARTING INVENTORY 8. TAXES AND DIVIDENDS TAXES DIVIDENDS CHAPTER 4 RUNNING ENTREQUIK INSTALLING ENTREQUIK STARTING ENTREQUIK CHAPTER 5 ENTERING DATA MENUS, KEYS, AND SCREENS MAKING MENU SELECTIONS ENTERING DATA USING A MOUSE WITH ENTREQUIK ON-LINE HELP ENTREQUIK'S MAIN MENU MAIN MENU OPTION: A.FILE A.RETRIEVE SESSION B.SAVE SESSION MAIN MENU OPTION: B.DATA INPUT A.QUIK INPUT B.PRODUCT PRICE/COST C.SALES FORECAST D.SALES EXPENSES E.GENERAL & ADMINISTRATIVE EXPENSES F.FIXED ASSET EXPENDITURES G.DEBT FINANCING H.OWNER'S INVESTMENT I.GENERAL ASSUMPTIONS J.TAXES & DIVIDENDS MAIN MENU OPTION: C.VIEW MAIN MENU OPTION: D.PRINT CHANGING THE PRINT SETTINGS CHAPTER 6 ENTREQUIK OUTPUTS: PROJECTED FINANCIAL STATEMENTS INCOME STATEMENT BALANCE SHEET CASH FLOW STATEMENT KEY FINANCIAL INDICATORS CHAPTER 7 EVALUATING YOUR NEW BUSINESS HOW MUCH FUNDING DO I NEED? HOW MUCH PROFIT CAN I REALISTICALLY EXPECT TO MAKE FROM MY NEW VENTURE? USING YOUR ENTREQUIK PROJECTIONS AS A CONTROL TOOL CHAPTER 8 SETTING UP ENTREQUIK CHANGING DEFAULT GLOBAL SETTINGS (/W) CHANGING PRINT SETTINGS (/P) CHANGING DEFAULT VIDEO SETTINGS (/V) CHAPTER 9 A LAST WORD APPENDIX 1 ENTREQUIK'S MEMORY REQUIREMENTS APPENDIX 2 ESTIMATING THE COST OF GOODS SOLD FOR A MANUFACTURING VENTURE APPENDIX 3 PROFIT VERSUS CASH APPENDIX 4 TROUBLE-SHOOTING APPENDIX 5 PRINT SETTINGS ENTREQUIK'S DEFAULT PRINT SETTINGS PRINTER SETTINGS 1) NARROW CARRIAGE PRINTER 2) WIDE CARRIAGE PRINTER 3) HP LASER PRINTER PRINTER SET-UP STRINGS CHANGING THE PAGE LENGTH TYPICAL PAGE LENGTHS SAVING YOUR PRINT CHANGES CHAPTER 1 INTRODUCTION Not a day goes by that you don't come up with at least one brilliant business idea. Mail-order cakes, one-hour photo labs, brew your own beer, and in-home lingerie sales are some of the ideas that have made it big. What can help turn your great business idea into a success story?--financial know-how. Without a sound financial analysis, you will have difficulty getting your idea off the ground, no matter how promising it is. Starting a new business is risky. There's no getting around the fact that eighty percent of new businesses flop in their first five years. Before diving into your new business, you need to test the waters. Ask yourself the following questions: * What is the profit potential of my idea? * How much cash do I need to get my business off the ground? * How much of my own money should I invest, and how much should I borrow? * What return rate can I expect from my investment, and is this return worth the risk I am taking? * What if my sales are 50% less than I expected? How will this affect my cash flow and rate of return? Why leave these answers to guesswork? EntreQuik has the modeling and simulation capabilities to help you arrive at intelligent answers, and to develop valuable insights into your new business idea, before you invest your own money. *** The best route to the top is to own the company. Lewis Bookwalter Ward, Harvard Business School. *** What is EntreQuik? ------------------ EntreQuik is an easy-to-use software program that runs on IBM compatible/MS-DOS based personal computers. EntreQuik is shareware. Persons having a range of business experience and needs, all the way from the budding green-horn to the seasoned entrepreneur, will find EntreQuik useful. If you have never developed a financial business plan, you'll like EntreQuik's user-friendly menus and easy-to- read manual. On the other hand, if you're an experienced entrepreneur, you'll enjoy sitting back and letting EntreQuik take care of the tedious number-crunching, as well as generating professional looking financial statements. EntreQuik financially simulates your new business idea by projecting key financial statements over a three year planning horizon. EntreQuik's easy-to-follow format lets you enter assumptions about your new business, and then produces four key financial summaries: * an Income statement that lets you know, month-by-month for the entire three year period, whether you'll make enough profit to keep your business running, and whether your revenue and expense estimates are realistic. * a Balance sheet showing your new business' monthly forecasted growth in assets, liabilities, and net worth. * a Cash flow statement detailing your sources and uses of cash over the 36 month period, as well as showing you whether you have enough financing to keep your business afloat. You will see why healthy profits don't always equal a healthy cash flow. * a Key financial indicators report which shows you at a glance, important indicators like your new business' rate of return, debt to equity ratio, and gross profit margin. These proforma financial statements are essential for a new business. You need to understand the long-term financial aspects of your business, not just how much money you'll make in the first month. Research has shown that many start-up failures could have been prevented had the owners made proper financial projections of their new business ideas. *** Success is that old ABC--ability, breaks, and courage. Charles Luckman, American architect. *** EntreQuik's Special Features ---------------------------- * dynamic financial statements--EntreQuik's projected income statement, balance sheet, cash flow statement, and key financial indicators are fully linked and integrated. A change in your data or assumptions in, say, your income statement will automatically be reflected in your other three statements. * straightforward presentation of financial statements--EntreQuik presents your financial statements in summary form, plus it enables you to print detailed schedules supporting these statements. * specify up to 10 products or product groups in your business simulation. You also have the flexibility of varying your product price or cost over your three year planning horizon. * incorporate up to five fixed asset purchases into your analysis. As well, you have a choice of four depreciation methods: fixed rate percentage, double-declining balance, sum-of-the-years' digits, and straight-line depreciation. * includes both term financing (up to a 25 year amortization term) and demand financing (line of credit). * flexible owner equity investment...any month, quarter, or year. * produces professional looking financial statements to enhance your fund raising efforts. * easy-to-use data input format, enabling you to forecast as often as you like. EntreQuik develops different scenarios based on changes you make in things like your fixed asset purchases, expenses, and equity investment. These what-if analyses of your business ideas let you quickly determine your downside risks, and see whether your proposed changes make business sense. * fully menu driven and user friendly. *** I don't meet competition, I crush it. Charles Revson, American businessman. *** What You Need to Run EntreQuik ------------------------------ 1. An IBM PC, XT, AT, PS/2, or IBM compatible with at least 640K of RAM. For further information on EntreQuik's memory requirements, see Appendix 1. 2. Operating system: MS-DOS version 3.3 or higher. 3. EntreQuik supports the VGA, EGA, CGA, monochrome, and Hercules display adapters. 4. A hard disk drive with at least 2 megabytes of free disk space. 5. A printer. While a narrow carriage printer will suffice (monthly schedules may require cut and pasting), a wide carriage printer or a HP LaserJet printer with compressed print and landscape printing capabilities are preferred. *** I would rather be first in a small village in Gaul than second in command in Rome. Julius Caesar. *** CHAPTER 2 FIVE EASY STEPS TO EVALUATING YOUR NEW BUSINESS IDEA EntreQuik, when used correctly, can provide you with valuable insights into which of your ideas belong in the fore-front of your mind, which you should keep in the back of your mind, and which you are better off erasing completely from your mind. It does this by analyzing your business opportunities specifically from a financial standpoint. These are the five easy steps to determining which of your business ideas are worth pursuing: STEP 1. Think of a Great Idea for a New Business Chances are you already have one, if not several, business ideas you'd like to try out. If you're still waiting for the light-bulb to go off in your head, or your idea didn't pan out the way you thought it would, we can only recommend you keep trying. Remember to keep your eyes open, your ears to the ground, and the left and right sides of your brain fully operational. STEP 2. Research Your New Business Idea If you think your idea is a winner, then do some preliminary research to back up your gut feelings. For example, before opening an ice-cream shop you'd want to know how much it would cost to rent the shop, how many people walk by, and how many other ice-cream shops are already located on the street. STEP 3. Use EntreQuik to Financially Analyze Your New Business Idea Start EntreQuik, and enter your data. STEP 4. Review Your Financial Statements View and evaluate your projected financial statements. If necessary, make revisions to your data. STEP 5. Create Multiple Scenarios It's almost impossible for you to predict 100% how well your new business idea will do. All businesses, some more than others, are vulnerable to outside factors completely beyond their control. A good example is the vulnerability fruit-growers have to weather conditions, transportation links, and market demand. An unusually cold winter could ruin a farmer's peach crop, while a problem like pesticide in imported peaches could mean bigger-than-usual sales for local crops. To get a complete picture of all your business prospects we suggest you make multiple scenarios--pessimistic, most likely, and optimistic- -so you can be prepared for anything. ***People can be divided into three groups: those who make things happen, those who watch things happen, those who wonder what happened. John W. Newbern. *** CHAPTER 3 ENTREQUIK'S DATA INPUT REQUIREMENTS This chapter gives you some background on the data EntreQuik needs to accurately analyze your new business opportunity. The following is a list of what you need to know: 1. product price and cost information 2. forecast of how many products you expect to sell 3. forecast of sales expenses 4. forecast of general and administrative expenses 5. fixed asset expenditures and asset life expectancy 6. debt financing--term and demand loan 7. equity financing 8. general assumptions: cash sales, account receivable, accounts payable, inventory policy, and starting inventory 9. expected taxes and dividend pay out Before going on to discuss EntreQuik's data input requirements in more depth, we advise you to use only reliable data--based on the way things are, not on how you'd like them to be. The quality of your research is directly reflected in the accuracy of your projected financial statements. If your data differs from the normal industry guidelines or averages, it may raise the eyebrows of bankers or venture capitalists, who will likely ask you for reasonable explanations, or send you back to take a second look at your numbers. *** It takes 99 "no" answers to get to a "yes." Old sales adage. *** 1. Product Price and Cost Information ------------------------------------- The data you provide in this step has a crucial impact on your new business' revenue forecast, cost of goods sold, and gross profit margin. In order to complete this step you must be able to answer these questions: * What product or service do I plan to sell? * At what price do I want to sell my product or service? * How much will my product cost me to either produce myself or purchase from a wholesaler/manufacturer? What product or service do I plan to sell? We assume at this point you have already done your preliminary product research and know what product you want to sell. If you are selling an established product in the marketplace, you may already have some idea of its demand. However, if you are introducing a new product you may need to do some market research. This type of research usually involves a user needs study to determine whether there is a need for the product, and a competitive analysis study to find out what similar products are already available on the market. *** Let a man start out in life to build something better and sell it cheaper than it has been built or sold before, let him have that determination and the money will roll in. Henry Ford I. *** At what price do I want to sell my product or service? Pricing your product correctly is important to your business' success. Your pricing strategies are set mostly by the type of product you are selling and the type of market you are selling to. If you are selling a low price, low profit margin product, you will likely emphasize high volume sales and a low overhead operation with less customer service. On the other hand, if you have a high priced, high profit margined product, your operation will probably be geared to lower volume sales, and a more select market emphasizing personal service and support. There are many ways of pricing your product. Below are three points to keep in mind: 1. A product's price goes through several stages before it reaches the customer--for example, the pricing for a box of floppy disks might look like this: Manufacturer -->Wholesaler -->Retailer -->Customer $3 $6 $7 $10 A manufacturer produces the disks for $3 a box, and sells them to a wholesaler for $6 a box. The wholesaler distributes the disks to retailers for $7 a box, and the retailers sell them to customers for $10 a box. Before you can price your product properly, you must know where your new business start-up fits in. Are you a manufacturer, wholesaler, or retailer? 2. Your product's price may vary over its life. Electronic items are a good example: the typical pricing strategy is to start out high, when the product is first introduced and the competition is low, and then reduce the price in subsequent years as the competition heats up. I may, for instance, sell an all new super- duper microcomputer that no other competitor has developed for $4,500 in the first year. However, if I want to stay competitive in years two and three I may have to reduce my price to $3,500 and $3,000 respectively, as similar products enter the market. 3. Consider how your competitors price their products--if they are marking-up their product at cost plus 100%, it doesn't make sense for you to sell your product at cost plus 15%--unless you don't mind leaving "money on the table," or you're confident in weathering a price war should your established competitors choose to meet and beat your price. EntreQuik allows you to specify a different price for up to 10 products within each year of your three year forecast horizon. This lets you take into account any expected price increases or decreases in years two and three. *** When you are skinning your customers, you should leave some skin on to grow so that you can skin them again. Nikita Khrushchev. *** How much will my product cost me to either produce myself or purchase from a wholesaler/manufacturer? Equally as important as pricing your product is costing your product accurately. The cost you forecast for your product directly affects your cost of goods sold on your income statement. As with pricing your product, EntreQuik gives you the flexibility to specify a different cost for up to 10 products within each year of your three year forecast horizon. So remember to include any expected product cost increases or decreases in years two and three. Your product's cost depends on the type of business you are planning to start: a retail/wholesale, manufacturing, or service oriented business. Each of these has special considerations: Retail/wholesale--typically these businesses are not involved in making a product, but rather in re-distributing products to either consumers or other retailers. Consequently, your product cost is fairly easy to forecast: whatever you pay the manufacturer or wholesaler to buy the product. Manufacturing--calculating product costs for this type of business is more complicated. It typically involves estimating costs such as direct labor usage, materials, and allocations for factory overhead (see Appendix 2 for an example). Unfortunately, this costing method is quite laborious. Many entrepreneurs instead use the simpler method of taking a percentage of their product's selling price as an estimate of their product's cost. For example, if you know from experience that the average product cost in your line of business is 50%, and your selling price is $100, then you can estimate your product cost at $50. However, caution should be taken in using this "quick and dirty" method, as most cost percentages are averages that pertain to established manufacturers. You may risk serious error in applying it to a new manufacturing business. Service--estimating a product cost for a service oriented business is usually the simplest of all. Costs normally equal whatever you plan on paying your employees. For example, the biggest cost in running an escort service would be what the escorts are paid. Service oriented businesses typically do not sell inventories, and therefore do not have a cost of goods sold. EntreQuik allows you to incorporate up to 10 products into your analysis. Chances are you'll begin by handling a smaller number, maybe three to five products. There are two ways you can enter product price and cost. The first is in absolute dollar amounts, for example, product one's price is $10 per unit, and its cost is $5 per unit. Your second option is to use EntreQuik's Quik input option by specifying cost as a percentage of price, for instance, product one's price is $10 per unit, and its cost is 50% of the price ($5). ************************************************************************ *If you're evaluating a new manufacturing business, you can look up the* *income ratios for similar businesses in Dun and Bradstreet or Robert * *Morris and Associates publications, both found at your local library. * ************************************************************************ *** I've always felt that if you could develop an answer to a need, this was the way to make money. Most people are more anxious to make money than they are to find a need. And without the need, you're working uphill. Bill Lear. *** 2. Forecasting Product Sales ---------------------------- Your product sales forecast is the main driver in projecting all three of your financial statements (income statement, balance sheet, and cash flow statement). Therefore it's worth your while to spend some time developing a realistic forecast. Try to keep the following guidelines in mind: * Sales volumes are critical to all businesses. In general, most businesses have a basic level of costs (inventory, administrative expenses, finance charges, etc.), which form the minimum level of sales required to sustain operations. If this volume is not met, the business can quickly get into financial trouble. * Be realistic in your sales forecast. Some entrepreneurs prepare grandiose forecasts with amazing sales growth potential, mostly to impress bankers and investors. Unfortunately, building a business on exaggerated expectations paves the way to business failure. In addition, bankers and investors know what a reasonable forecast looks like, and a rose-tinted one will do little to boost your credibility. * Allow sufficient time in your forecast for product development and marketing activities to start rolling. Your sales should show a gradual increase; sky-rocketing does not happen often. * If it applies, incorporate a seasonal factor into your sales forecast. For example, you can expect to sell more Christmas cards in December than in June. * Prepare more than one sales forecast. We recommend doing a pessimistic, a most likely, and an optimistic forecast. This enables you to plan for risk and cash flow contingencies, in case your sales are less than or more than you expected. We will talk more about multiple sales forecasts in Chapter 7: Evaluating Your New Business. * As a final step, to ensure your projections are reasonable, you should verify the projected sales volume of your business with someone knowledgeable in the industry. EntreQuik allows you to forecast product sales on a month-by- month basis for up to 36 months. This sales forecast is expressed in the number of products sold per month. *** With over 50 foreign cars already on sale here, the Japanese auto industry isn't likely to carve out a big slice of the U.S. market for itself. Business Week magazine, August 2, 1968. *** 3. Sales Expenses ----------------- In this step you enter all the costs associated with selling and marketing your product. These costs usually include salespersons' salaries, commissions, advertising, promotional supplies, and so on. In general, sales expenses are not fixed, but tend to vary directly with sales revenue. EntreQuik accommodates up to 10 categories of sales expenses. Four of these sales expenses are open categories, allowing you to tailor EntreQuik to suit your business' needs. You can also change the other specified categories if required. These are the 10 general sales expense categories used in EntreQuik: Salaries Commissions Travel Advertising Promotional supplies Automobiles Other Other Other Other ************************************************************************ *If you are running a quick analysis and do not require a detailed * *break-down of sales expenses, you may want to designate one category * *as Total Sales Expenses, and leave the other nine sales expense * *categories blank. Bear in mind though, any expense item you leave out* *creates an additional drain on your firm's finances when it inevitably* *crops up later on. If too many items are left unaccounted for, it * *could lead your business into financial hot-water. * ************************************************************************ *** If you pay peanuts, you get monkeys. Sir James Goldsmith, British businessman. *** 4. General and Administrative Expenses -------------------------------------- General and administrative expenses (G&A) are overhead costs, relatively fixed to sales revenue (remain constant regardless of how many sales you make), and they are generally unrelated to any specific activity like sales or manufacturing. Examples of G&A expenses are office and executive salaries, telecommunication expenses, accounting, and legal costs. EntreQuik provides 10 standard G&A expense categories: Salaries Occupancy expenses - rent Office equipment - rent Office supplies Telephone and postage Utilities Legal and accounting Consultants Insurance Other Again, these categories can be changed to reflect the particular G&A expenses of your proposed business. ************************************************************************ *If you are running a quick analysis and do not need a detailed * *breakdown of general and administrative expenses, you may want to * *designate one category as Total G&A expenses, and leave the other nine* *G&A expense categories blank. * ************************************************************************ *** If you don't drive your business you will be driven out of business. B. C. Forbes, American publisher. *** 5. Fixed Assets --------------- In this step you enter information about the fixed assets you need to get your business started. Fixed assets (also referred to as capital assets) are operating assets having a useful life of more than one year, which are needed to support and run a business. Examples of fixed assets are machinery, trucks, buildings, and computers. Although every business has to buy some fixed assets to support their operations, some businesses are more capital intensive than others. Service businesses are often the least capital intensive, because they only involve purchasing equipment such as a photocopier, fax machine, and furniture. Retail operations, on the other hand, are more capital intensive; since they entail fixed assets such as store- fronts, display units, and fixtures. Finally, manufacturing start-ups are the most capital intensive, because they require large purchases such as trucks, lathes, conveyors, and drills. *********************************************************************** *While you shop for fixed assets, compare the costs of both new and * *used equipment. A new machine will yield you higher production runs,* *but also cost you substantially more money than a slower, used * *machine. What you buy will depend on your estimated sales volume and* *how much money you have to spend. * *********************************************************************** As fixed assets have a useful life of more than one year, their purchase costs are not expensed entirely in one year, but rather over the time they remain useful. This expensing of a fixed asset over a number of years is known as taking depreciation. Depreciation is an important consideration in your business, because it affects all three financial statements and their subsequent interpretations. For example: you have a brainstorm idea to set up a gourmet hot dog stand at a strategic downtown sidewalk location. Your only major fixed asset purchase is the hot dog stand itself. How much will it cost? You do some comparative shopping around town and find a Deluxo hot dog stand, fully equipped with gas stove, mag wheels, and a polished mahogany finish, for the rock-bottom price of $15,000. The dealer gives you his personal guarantee--the stand will last at least three years before it needs replacing. There are many methods you can use to depreciate the Deluxo hot dog stand. We'll use the simplest, the straight-line method. The straight-line method calculates yearly depreciation expenses by dividing the purchase cost of the fixed asset by its useful life expectancy. For example, the depreciation on your Deluxo hot dog stand would look like this: Purchase cost of asset = $ 15,000 Useful life expectancy = 3 yrs Depreciation method = straight-line Depreciation expense per year = $ 5,000 Your next concern is how the purchase cost and subsequent depreciation expense of the hot dog stand affects your projected income statement, balance sheet, and cash flow statement. Impact on income statement -------------------------- Depreciation expense is a legitimate deduction from revenue like other expenses, but it is a non-cash expense (i.e. no cheque is written for this expense). The purchase cost of the new fixed asset ($15,000) is made in year one, but this cost only shows up on the income statement as a $5,000 per year depreciation expense. This reflects a gradual charge-off of the fixed asset's cost over its three year life expectancy. Year 1 Year 2 Year 3 Revenue $$$$$ $$$$$ $$$$$ -Cost of goods sold $$$ $$$ $$$ ------ ------ ------ Gross profit margin $$$$$ $$$$$ $$$$$ | | | | | | -Depreciation expense 5,000 5,000 5,000 ------ ------ ------ Profit before tax $$$ $$$ $$$ Impact on balance sheet ----------------------- The total purchase cost of the Deluxo hot dog stand appears on your balance sheet as a fixed asset under Equipment. An account called Accumulated Depreciation also appears below Equipment. This reflects the cumulative amount of the fixed asset's cost which has been charged-off or depreciated between the time you bought the item and the date shown on the balance sheet. Looking at the example below you can easily figure out the undepreciated portion of the original fixed asset's cost by subtracting the accumulated depreciation amount from the fixed asset's original cost. The undepreciated portion is $10,000 at the end of year one, $5,000 at the end of year two, and by the end of the third year the fixed asset is fully depreciated. Year 1 Year 2 Year 3 Assets Current assets: Cash $$$ $$$ $$$ | | | | | | Fixed assets | | | Equipment 15,000 15,000 15,000 Accum. depreciation 5,000 10,000 15,000 Impact on cash flow statement ----------------------------- This statement is concerned only with the changes in your business' cash balance. Depreciation, being a non-cash expense, must be added back to your net income. Also note, the Deluxo hot dog stand's full purchase cost is shown as a use of cash in year one. Year 1 Year 2 Year 3 Net income $$$$$ $$$$$ $$$$$ Add: depreciation 5,000 5,000 5,000 | | | | | | Uses of cash | | | Fixed equipment 15,000 0 0 EntreQuik allows you to incorporate up to five fixed assets into your new business analysis. It also lets you choose from four methods in depreciating your fixed assets: * yearly percentage rate * straight-line * double-declining balance * sum-of-years' digits ******************************************************************** *Due to the complexity of tax and fixed asset management issues, we* *recommend you obtain a qualified accountant's opinion on the best * *depreciation method for your business. * ******************************************************************** EntreQuik calculates depreciation expenses on a yearly basis. It assumes all fixed asset expenditures are made at the beginning (first month) of the year. Monthly depreciation expenses are derived by dividing the yearly depreciation expense by 12. ************************************************************************ *If you are purchasing fixed assets that typically do not depreciate, * *land for instance, enter 0 as your yearly percentage rate if you plan * *on using the yearly percentage rate method, or enter a very large life* *expectancy (100,000 years) for the straight-line method. * ************************************************************************ *** Everything comes to him who hustles while he waits. Thomas Alva Edison. *** 6. Financing Your New Business ------------------------------ You need money to get your business up and running, plain and simple. It takes money to do things like buy or lease a site, hire people, carry accounts receivable, and purchase inventory. A new business typically has three sources of financing to draw from: * Debt financing--loans from friends, family, banks. * Equity investment--investing your own money or money from others. Investors gain ownership rights in your business. * Cash receipts from operations--cash generated through your business' sales activity. For a new business, cash receipts from operations are usually negative for at least the first year. This leaves debt financing and equity investment as the only two sources of money open to entrepreneurs for covering losses until their cash receipts from operations reach a self-financing level. *** People who work sitting down get paid more than people who work standing up. Ogden Nash. *** ************************************************************************ *Many entrepreneurs like to over capitalize--that is, ask for more * *money than their projections suggest they need. A good rule of thumb * *for determining your capitalization requirements is to take your best * *revenue projection and divide by two; and your best expense projection* *and multiply by two. Overcapitalization enables you to prepare ahead * *of time for a worst-case revenue performance. This is better than * *being caught off-guard with an unexpected downturn in your business, * *and then having to scramble around for more money. Investors aren't * *eager to throw more money at what appears to be a sinking ship. * ************************************************************************ Debt Financing -------------- Debt financing refers to raising new venture cash from debt resources such as loans, mortgages, bonds, a line of credit, or any other means whereby the borrower is obligated to repay funds at a later date. You can think of it as renting cash for a specified period: you don't own the money, and you must pay for the right to use it. Your interest payments are like monthly rental payments, and eventually you must return the entire principal amount to the lender. Debt financing has a direct effect on your income statement, balance sheet, and cash flow statement. On your income statement, interest payments are regarded as a legitimate expense deduction from your revenue. Repayments of loan principal, however, are not an operating expense and therefore do not appear on your income statement. Because debt eventually has to be repaid to the creditor, the outstanding principal is shown on your balance sheet as a liability. Since interest payments and repayments of loan principal affect cash, both these items appear on your cash flow statement. *** There are one hundred men seeking security to one able man who is willing to risk his fortune. J. Paul Getty. *** EntreQuik has two types of debt financing: a) Term loan financing ---------------------- Term loan financing is usually an intermediate (1-4 years) to long- term (over 5 years) debt financing instrument. Borrowers acquire a fixed sum of money, and pay back the principal plus interest in blended monthly payments over a defined period of time (called the loan term). The loan amount is often secured by the borrower's collateral (e.g. a personal asset such as a house or an automobile). EntreQuik provides you with a maximum of two term loans. Each one requires the following information: * the loan start date (any month of your 36 month forecast horizon) * the loan amount * the annual interest rate * the loan term (in months, up to a 300 month term) Determining how much money you need to borrow is usually a step- by-step process, dependent on how much you think it will cost you to buy equipment, inventory, etc. As EntreQuik allows you to revise your loan financing assumptions easily at any time, you may want to enter your loan amount as the amount you anticipate being able to borrow. If necessary, you can revise this amount later, after you have reviewed your cash flow statement. ************************************************************************ *Some entrepreneurs aim for the longest loan term available, so their * *monthly loan payments will be low. Don't forget, however, in the long* *run longer loan terms also mean more monthly payments, more interest * *accruing, and above all, more money out of your own pocket. * ************************************************************************ *** Having lost sight of our objectives, we redoubled our efforts. Old adage. *** b) Demand loan financing ------------------------ Demand loan financing is sometimes referred to as a line of credit from a bank. It is normally left as a last resort month-to- month financing plan, used on a short-term basis to get over monthly cash flow dips. For example, a rainwear business may have an unexpected slump, because of continuing dry weather in September, October, and November. The owners might arrange for a line of credit from their bank (secured by their inventory or accounts receivable). They could then draw from this loan as they needed to, and repay it as soon as their sales picked up. EntreQuik allows you to borrow or repay a demand loan amount in any or all 36 months of your forecast horizon. It assumes the interest on your demand loan is payable on a monthly basis, and is a function of your previous month's outstanding balance. As demand loan financing is typically used to cover only short-term cash flow fluctuations, it may be wiser for you to figure out your term loan and equity investment requirements first. You may be in a better position to decide on your demand loan financing needs after reviewing your cash flow statement. *** Man was born to be rich or inevitably to grow rich through the use of his faculties. Ralph Waldo Emerson. *** Equity Investment ----------------- Equity investment is any investment that you, your friends, or venture capitalists make, which represents ownership rights in your business. If your business is incorporated, ownership rights will likely take the form of common shares. Investors normally don't invest their money without some benefit or return, such as a share in your business' decision-making and profits (e.g. dividends). How does equity investment fit into your projection? Income statement--as equity investment is not a revenue or expense activity, it does not appear on this statement. Balance sheet--the amount of equity investment appears on your balance sheet under Paid-in Capital. Cash flow statement--as equity investment affects your cash balance, it appears on this statement as a Source of Cash. EntreQuik lets you inject equity investment into your new business model in any or all of your 36 month forecast horizon. Optimal mix of debt and equity Keep these two points in mind when you're figuring out the optimal mix of debt and equity financing for your forecast: 1. Most lenders require a significant contribution of an entrepreneur's money. Don't make the mistake of thinking you can fund your business entirely through debt. This is like attempting to buy a house with "no money down"...any lender agreeing to this type of arrangement would not stay in business long. By investing some of your own money, you are telling lenders that you think your idea is a good one, and you are committed to its success. At the same time you are also reducing their risk in your business. 2. Different industries have different acceptable levels of debt and equity. An industry which is highly leveraged usually has $3 to $4 of debt for every $1 of equity. Highly leveraged businesses normally have high success rates and good collateral behind their debt; therefore the risk of loss to the lender is lessened. On the other hand, industries with lower levels of leveraging typically have higher failure rates and less dependable collateral. You can get an idea of the common debt to equity ratios in your industry from Dun and Bradstreet or Robert Morris and Associates. *** He that is without money might as well be buried in rice with his mouth sewed up. Chinese Proverb. *** 7. General Assumptions ---------------------- To complete this step, you need to answer these five questions: Cash sales - what percentage of your total sales are made on a cash basis? Accounts receivable - what percentage of your total sales are made on credit, collectible 30 days from the date of sale? 60 days from the date of sale? 90 days from the date of sale? Accounts payable - what payment terms will your suppliers extend to you--0 days (cash only basis) or 30 days to pay for your purchases? Inventory policy - how many days in advance of expected sales--0, 30, 60, or 90 days--will you purchase or produce your inventory? Starting Inventory - Do you have a starting inventory different from what EntreQuik calculates? Use your own starting inventory if, for example, you are purchasing an existing business that already has inventory on hand. Cash sales/Accounts receivable ------------------------------ When you sell a product, it will be either on a cash or a credit basis. Some customers prefer to pay cash up front, while others want to pay on credit. For example, if your business sells to large corporate customers, you'll likely have to extend them credit terms, such as giving them 30 days to pay. Large corporate customers rarely pay cash right up front. However, if you are selling low priced items such as candy bars to the general public, you'll want cash only. EntreQuik allows you to build a customized collection pattern, based on your expected cash sales and accounts receivable policy. For example, EntreQuik gives you the flexibility to assume 50% of your total sales are for cash, 35% of your total sales are collectible in 30 days, 10% are collectible in 60 days, and the remaining 5% are collectible in 90 days. Accounts payable terms ---------------------- You must also consider the payment terms suppliers extend you in buying their goods. If they demand cash at the time of your purchase, enter 0 days in your forecast; or if they give you 30 days to pay your invoice, enter 30 days. Inventory policy ---------------- If you are a retailer, the number of days between the time you buy your product from a wholesaler and expect to sell it depends, to a large extent, on your wholesaler's stocking levels and delivery times. It could be 0, 30, 60, or 90 days in advance of your expected sales. The ideal situation for you is to buy the product only when you have a sale (and therefore you only need to carry minimal inventory). However, you must also keep in mind that wholesalers may need a set time to deliver their product, or order it, if they don't have it in stock. In the case of service start-ups, you are typically not selling a product; you are selling labor, so you don't have to worry about inventory purchases (enter 0 in your forecast). For a manufacturing business, your inventory depends on how much you produce, and how much you produce depends on how much you expect to sell. The decision you have to make is whether to produce your product 0, 30, 60, or 90 days in advance of your forecasted sales. Starting inventory ------------------ Leave starting inventory at zero if you want EntreQuik to calculate your starting inventory for you. For example, if your policy is to purchase goods for sale 30 days in advance of forecasted sales, then your opening inventory will be the dollar amount of goods required to satisfy projected sales 30 days from day one. If, for example, you are buying an existing company that comes with $20,000 inventory as part of the purchase price, then enter $20,000. Caution: The starting inventory, $20,000 in our example, is a simplistic starting inventory, and does not assume any product mix component. *** He is free who knows how to keep in his own hands the power to decide. Salvador de Madariaga. *** 8. Taxes and Dividends ---------------------- Taxes and dividends are both complex matters, which go beyond the scope of EntreQuik's financial projection model. For instance, it takes literally hundreds of pages in government tax rules to define taxable income and taxes payable. Unless you have special knowledge in these areas, we recommend you consult a qualified accountant before entering this data into your forecast. Taxes Although EntreQuik does not provide an automatic tax calculation, it does enable you to directly enter manually calculated taxes directly into your income statement. Dividends Dividends (also called owner's withdrawals) are slices of your business' profits shared amongst its owners. In a new business you may want to plow back (re-invest) all your profits into your business; however, you also have the option of taking some or even all your profits out of your business. As with taxes, EntreQuik allows you to insert manually calculated dividend pay outs directly into your income statement. *** Greater even than the pious man is he who eats that which is the fruit of his own toil; for scripture declares him twice-blessed. The Talmud. *** CHAPTER 4 RUNNING ENTREQUIK Now that you have an idea of what goes into a financial analysis and you have completed the worksheets, you are ready to run EntreQuik. This chapter tells you how to install and load EntreQuik into your computer. Installing EntreQuik -------------------- 1. Make a subdirectory on your hard drive. This subdirectory can be named anything you want, but may we recommend a subdirectory called EQV3. 2. Copy the self-extracting file EQV3.EXE to this sub-directory. 3. To extract the contents of EQV3.EXE, type EQV3 <enter>. The following EntreQuik program files will be extracted to the specified directory on your hard drive: File Description EQ.EXE The EntreQuik program. EQ.WKB The default EntreQuik data file. Files with the WKB extension are files that contain your input data. EQ.CNF EntreQuik's configuration file. EQ.HLP EntreQuik's help file. README.DOC Contains the latest information which corrects or adds to the information in this user's manual. Use a DOS command such as TYPE or EDIT, or use your word processor to read this file. To print this file, enter TYPE README.DOC > LPT1: <Enter> at the DOS prompt. *** Thinking is the hardest work there is, which is probably the reason why so few engage in it. Henry Ford. *** Starting EntreQuik ------------------ You can start EntreQuik by following these steps (assuming you installed EntreQuik on a subdirectory of your hard drive called C:\EQV3): Keystroke Description cd c:\EQV3 <Enter> changes directory to C:\EQV3 EQ <Enter> start EntreQuik by executing the file EQ.EXE The EntreQuik title screen will appear until EntreQuik has completely loaded into your computer's memory. When EntreQuik has loaded completely into your computer's memory, the EntreQuik Main Menu will appear. You can now start using EntreQuik. *** The only way to enjoy anything in this life is to earn it first. Ginger Rogers, film star. *** CHAPTER 5 ENTERING DATA EntreQuik utilizes a menu-driven operating format. It is therefore important to spend a few minutes learning how to move both between and within the various menus. Menus, Keys, and Screens ------------------------ Making menu selections ---------------------- You select your desired option by pressing the first letter of the option you want, or you can use the directional keys (e.g. <Up Arrow>, <Down Arrow>) to highlight the option and press <Enter>. Pressing <Esc> allows you to exit from the menu. Entering data ------------- EntreQuik puts itself into data input mode when you have to enter data. Direct your cursor to the field you want to input data by using the directional keys (<Left Arrow>, <Right Arrow>, <Down Arrow>, <Up Arrow>). The <Home> and <End> keys move your cursor to the first and last data input fields respectively. To enter numbers or text into a data input field, place your cursor on the field, type the number or text, and by using a directional key, move your cursor to the next data input field you want. Your data is automatically entered when you move your cursor. You can also enter data by typing the number or text, pressing <Enter>, and moving your cursor to the next desired data input field. After you've finished entering your data, or at anytime, you can exit from the data input mode by pressing <Esc> or by pressing <Enter> twice. *** It takes twenty years to make an overnight success. Eddie Cantor. *** Using a Mouse with EntreQuik ---------------------------- Selecting a menu item: place the mouse cursor on a menu item and press the left mouse button to select that item. You can use the right mouse button as a replacement for the <Esc> key to back out of menu selections. On-line Help ------------ As a supplement to this user's manual, pressing the <F1> key when using EntreQuik will provide context sensitive on-line help. EntreQuik's Main Menu --------------------- Description of the main menu options Menu option Description A.File Allows you retrieve a saved session or save the current session to a disk. B.Data Input Enters the necessary data for producing proforma financial statements. Brings up the data input menu consisting of ten data input options. C.View Enables you to view your proforma income statement, balance sheet, cash flow statement, and key financial indicators. D.Print To print supporting data schedules and financial statements. E.Quit Exits from EntreQuik. *** The purpose of life is not to be happy--but to matter, to be productive, to be useful, to have it make some difference that you have lived at all. Leo Rosten. *** Main Menu option: A.File ------------------------- Select A.File to bring up the file menu. Description of the File menu Menu option Description A.Retrieve Session To retrieve data saved in a previous session. B.Save Session To save the current EntreQuik session data to a file. <Esc> Exit this menu. A.Retrieve Session To retrieve data from a previously saved session, select the A. Retrieve Session option of the file menu. When EntreQuik retrieves a file, it copies the file from disk into memory. EntreQuik by default will display all EntreQuik data files with a .WKB extension in the current drive/directory. If the file you want is in another drive or directory, then type in the desired drive and directory. You can press the <F3> key to see a full screen of available files. *********************************************************************** *Note: to abort an unwanted EntreQuik session, and to reset EntreQuik* *values back to the defaults, retrieve the EntreQuik default data file* *EQ.WKB. * *********************************************************************** B.Save Session To save your work, select the B.Save Session option of the file menu. When EntreQuik saves a file, it copies the file from memory to disk, making a permanent copy of the file. EntreQuik will display the filename of your current session. If you want to save your work session under this name then press <Enter>. EntreQuik will display a Cancel, Replace, or Backup prompt. Cancel aborts the file save, Replace writes over the existing file with the active file, and Backup renames the file on your disk with the extension .BAK, and saves the active session with the existing file name. *********************************************************************** *Note: If you are saving a new session, the displayed file name will * *be EntreQuik's default data file EQ.WKB. Do not save over this file * *as EntreQuik's default values will then be overwritten. If by chance* *you overwrite the EQ.WKB file, then restore this file by copying the * *original EQ.WKB file from your program disk or backup disk. * *********************************************************************** If you want to save the session under a new file name, then enter the new name and press <Enter>. Please adhere to the following guidelines regarding file names: Characters allowed: Your file name can include the letters from A through Z, and numerals from 0 through 9, but it cannot include spaces or any other characters. File name length: Your file name must be eight characters or less in length. If you specify a file name with, for example, 11 characters, e.g. Evaluation1, EntreQuik will save only the first eight characters, Evaluati. File suffix: When you save a file, EntreQuik automatically adds a three character file extension (.WKB) to your file name. Deleting unwanted files ----------------------- EntreQuik does not have a built-in menu option for deleting previously saved EntreQuik sessions. You can erase an EntreQuik data file (.WKB file extension) at the DOS level by using the DELETE or ERASE command. *** There is plenty of room at the top, but not enough to sit down. Fred Shero, American pro ice hockey coach. *** Main Menu option: B.Data Input ------------------------------- Select B.Data Input to bring up the data input menu. Description of the data input menu Menu option Description A.Quik Input Quik Input option. B.Product Price/Cost Enter product name, product price, and product cost. C.Sales Forecast Enter a forecast of product sales. D.Sales Expenses Enter a forecast of sales expenses. E.General & Admin. Expenses Enter a forecast of general and administrative expenses. F.Fixed Asset Expenditures Enter fixed asset purchases. G.Debt Financing Enter debt financing requirements. H.Owner's Investment Enter owner's equity investment. I.General Assumptions Enter general financial assumptions. J.Taxes & Dividends Enter manual tax and dividend calculations. <Esc> Exit this menu. A.Quik Input ------------ Select option A of the data input menu to enter "broad brush" data for your sales forecast, cost of goods sold, sales expenses, and general and administrative expenses. The Quik Input option puts initial data for your sales forecast, cost of goods sold, sales expense, and administrative expenses into the respective data fields. You can then go to the respective data input menu option and "fine tune" your data. The Quik Input option lets you do these four procedures: Enter your sales forecast by year, rather than by month. For example, you may specify sales for product 1 as 1200 units in year 1. Quik Input will then divide the yearly amount of 1200, and enter monthly amounts of 100 units (1200 divided by 12 months) into the monthly sales forecast for year 1. You then go to the data input menu option for sales forecast Year 1, and fine tune by month if necessary. Enter your product's cost of goods sold as a percentage of selling price. Caution: the Quik Input option calculates your cost of goods sold as a percentage of selling price only once. For example, if product one's price is $100, and you specify the cost of goods sold as 50%, then EntreQuik will calculate the cost of goods sold for product one as $50, and place this amount into the cost of goods sold field of data input option B.Product Price/Cost. If you subsequently go to data input option B.Product Price/Cost and adjust product one's price from $100 to $120, the cost of goods sold will not be updated. You must either manually update the cost of goods sold for product one to $60 (50% of $120) or go back to the Quik Input option. Enter your estimate of sales expenses as a percentage of revenue. Caution: the Quik Input option calculates your sales expenses as a percentage of revenue only once. If you subsequently go to data input option B.Product Price/Cost and adjust a product price or go to data input option C.Sales Forecast and adjust unit sales, the sales expenses will not be updated. You must either manually update the sales expenses or go back to the Quik Input option. Enter your estimate of general and administrative expenses as a percentage of revenue. Caution: the Quik Input option calculates your general and administrative expenses as a percentage of revenue only once. If you subsequently go to data input option B.Product Price/Cost and adjust a product price or go to data input option C.Sales Forecast and adjust unit sales, the general and administrative expenses will not be updated. You must either manually update the general and administrative expenses or go back to the Quik Input option. The Quik Input option is entirely optional. The Quik Input option is meant to make your initial data entry a little quicker and less tedious. B.Product Price/Cost -------------------- Select option B of the data input menu to enter your product's name, price, and cost. * Enter your product's name. You can name up to 10 products. If you have, say, only one product, you can eliminate the other nine product name categories by entering an ' (apostrophe) in each name field. * Enter the price of each product by year. * Enter the cost of each product by year. * To exit press <Esc>. *** Video won't be able to hold onto any market it captures after the first six months. People will soon get tired of staring at a plywood box every night. Darryl F. Zanuck, 1946. *** C.Sales Forecast ---------------- Select option C of your data input menu to enter your forecast of how many units you expect to sell. Description of the sales forecast menu Menu option Description A.Sales Forecast Yr.1 Enter the monthly number of units for each product sold in year one. B.Sales Forecast Yr.2 Enter the monthly number of units for each product sold in year two. C.Sales Forecast Yr.3 Enter the monthly number of units for each product sold in year three. D.View Revenue Forecast View the resulting sales revenue. E.View COGS Forecast View the resulting cost of goods sold. <Esc> Exit this menu and return to the data input menu. You can enter unit sales for your product in any or all months of your three year forecast horizon. D.Sales Expenses ---------------- Select option D of the data input menu to enter your sales expenses. Description of the sales expense menu Menu option Description A.Sales Expenses Yr.1 Enter the monthly sales expenses for year one. B.Sales Expenses Yr.2 Enter the monthly sales expenses for year two. C.Sales Expenses Yr.3 Enter the monthly sales expenses for year three. D.Sales Expense Categories Change the default sales expense categories. You can specify up to 10 categories of sales expenses, and eliminate any unwanted categories by pressing the <Del> key in the respective fields. <Esc> Exit this menu and return to the data input menu. *** A good deal is one that is fair to all parties. You never want to give your opponent the feeling that the negotiations have been a complete loss. Let him win a point. Mortimer Zuckerman. *** E.General & Administrative Expenses ----------------------------------- Select option E of the data input menu to estimate your general and administrative expenses. Description of the general and administrative expense menu Menu option Description A.G&A Expenses Yr.1 Enter the monthly G&A expenses for year one. B.G&A Expenses Yr.2 Enter the monthly G&A expenses for year two. C.G&A Expenses Yr.3 Enter the monthly G&A expenses for year three. D.G&A Expense Categories Change the default G&A expense categories. You can specify up to 10 categories of G&A expenses. If you want to use less than 10, you can eliminate the remaining expense categories by pressing the <Del> key in the respective fields. <Esc> Exit this menu and return to the data input menu. *** I think if we want to understand the entrepreneur, we should look at the juvenile delinquent. Abraham Zalenick, Konosuke Matsushita Professor of Leadership, Harvard Business School. *** F.Fixed Asset Expenditures -------------------------- Select option F of the data input menu to detail the fixed assets you plan on purchasing. Description of the fixed asset menu Menu option Description A.Fixed Asset Expenditures Enter your fixed asset data and assumptions. B.View Depreciation Schedule View the depreciation schedule. <Esc> Exit this menu and return to the data input menu. You can specify up to five fixed asset purchases. EntreQuik offers four depreciation methods: Enter 1 for fixed percentage rate depreciation Enter 2 for straight-line depreciation Enter 3 for double-declining balance depreciation Enter 4 for sum-of-years' digits depreciation You can specify only one depreciation method for all five fixed assets. Date of purchase for each fixed asset: enter 1 for year one, 2 for year two, or 3 for year three. Enter the dollar amount of each fixed asset's cost. Depreciation life/rate: Enter a percentage rate (for instance, .25 for 25%) if you select the fixed percentage rate depreciation method. Enter the life expectancy (e.g. 4 for four years) if you select the straight-line, double-declining balance, or sum-of-years' digits depreciation methods. *********************************************************************** *Note: the life expectancy of your fixed assets must be more than two* *years if you are using the double-declining balance method, otherwise* *your depreciation schedule will result in ERR values. * *********************************************************************** Fixed assets which don't depreciate, land for example, are an exception. Enter 0 (zero) for the depreciation rate if you're using the fixed percentage rate depreciation method, or enter a very high life expectancy, e.g. 100,000 years, if you are using the straight- line, double-declining balance, or sum-of-years digits methods. *** Don't ever try to get one hundred percent of the facts, because by the time you get them, it will be too late to do anything. Get as much as you think you need, and then move on. Harold Geneen. *** G.Debt Financing ---------------- Select option G of the data input menu to enter your debt financing requirements. Description of the debt financing menu Menu option Description A.Term Loan Financing Enter your term loan financing requirements. B.Demand Loan Financing Enter your demand loan financing requirements. <Esc> Exit this menu and return to the data input menu. A.Term Loans ------------ Selecting Option A of the debt financing menu brings up the term loan financing menu. Description of the term loan financing menu Menu option Description A.Loan Assumptions Enter term loan assumptions. B.Amortization Schedules View term loan amortization schedules. <Esc> Exit this menu and return to the debt financing menu. EntreQuik allows for a maximum of two term loans. For each term loan you must enter: The loan starting date: a month from 1 to 36, or 0 if you do not want to use this term loan. The loan amount: the dollar amount, or 0 if you do not want to use this term loan. The loan term: a month from 1 to 300, or 0 if you do not want to use this term loan. The loan annual interest rate: a percentage rate such as .15 for 15%, or enter 0 if you do not want to use this term loan. B.Demand Loans -------------- Select Option B of the debt financing menu to enter your demand loan financing amounts. Your new business' projected ending cash flow for each of the 36 months in your forecast horizon will appear in a column on the left side of your screen. Use the <Down Arrow> to view all 36 months of your ending cash balances. Look on the right side of your demand loan screen, opposite month one's demand loan balance, and you will see the data input field for your demand loan's rate of interest. Use the <Right Arrow> to move toward this field, and enter your expected annual loan interest rate (e.g. .12 for 12%). Move your cursor back to the demand loan amounts column using the <Left Arrow>. Go through all 36 months of your forecast horizon and adjust any negative ending cash balances. For instance, if the balance in say, month 10 is $-10,000, then you may want to enter demand financing of $11,000 ($10,000 plus a $1,000 buffer). On the other hand, if your ending cash balance starts growing positively and gets big, you may want to start repaying demand loan amounts. For example, if your ending cash balance in month 18 is $55,000, then you may want to repay the $11,000 demand loan borrowed in month 10. To do this move the cursor to month 18 and enter $- 11,000. When you complete your demand loan financing requirements press <Esc> to end the data input mode. If your ending cash balances are only mildly negative for a few months, you may choose to cover these dips with short-term demand loan financing. However, if your ending cash balances are considerably negative, you may have to go back and re-evaluate your term loan financing or equity investment amounts. *********************************************************************** *Note: since demand loan financing is typically used to cover * *forecasted short-term negative cash flows, you may want to enter your* *demand loan amounts after you complete all your other data input * *options, and had a chance to review your cash flow statement. * *********************************************************************** *** The meek shall inherit the earth--but not its mineral rights. J. Paul Getty. *** H.Owner's Investment -------------------- Select option H of the data input menu to enter the amount of your own money you plan on investing. You can enter dollar amounts for the equity investment you expect to contribute in any of your 36 month forecast horizon. When you complete entering your equity investment amounts press <Esc> to exit the data input mode. I.General Assumptions --------------------- Select option I of the data input menu to enter your general assumptions. Enter data regarding the following five assumptions: 1. Cash sales - the percentage of your total sales conducted on a cash only basis. 2. Credit sales - the percentage of your total sales collectible within 30, 60, or 90 days from the date of sale. ************************************************************** *Note: The percentages you specify for cash and credit sales* *assumptions must add up to 100 percent. * ************************************************************** 3. Accounts payable - enter 0 or 30 to indicate the number of days you have to pay your suppliers' invoices. 4. Inventory policy - enter the number of days in advance of your expected sales--0, 30, 60, or 90 days--you will purchase or produce your inventory. 5. Starting Inventory - enter 0 if there is no starting inventory other than what EntreQuik calculates for you. If you are purchasing a business that comes with existing inventory, then enter the dollar amount here. *** Instead of sitting in your kitchen with your mousetrap, you should be waving it from your rooftop and shouting that it turns out dead mice better than anything in creation. The other trap makers out there are already doing so, and they'll just gobble you up like so much Vermont cheddar unless you find out some other ways to outshout them. John J. McDonald, CEO of Casio. *** J.Taxes & Dividends ------------------- Select Option J of the data input menu to bring up your tax and dividend menu. Description of the tax and dividend menu Menu option Description A.Taxes Enter manually calculated tax payments into any month of the income statement for years 1, 2, or 3. B.Dividends Enter manually calculated dividend pay-outs into any month of the income statement for years 1, 2, or 3. <Esc> Exit this menu and return to the data input menu. Main Menu Option: C.View ------------------------- Select option C.View from EntreQuik's main menu to bring up the view menu. Description of the view menu Menu option Description A.Income Statement View proforma income statements for years 1, 2, and 3. B.Balance Sheet View proforma balance sheets for years 1, 2, and 3. C.Cashflow Statement View proforma cash flow statements for years 1, 2, and 3. D.Key Financial Indicators View the summary of key financial indicators for years 1, 2, and 3. <Esc> Exit this menu and return to the main menu. While your reviewing your proforma statements and key indicators, ask yourself: Is your projected profit adequate? Is your return on equity healthy? What is your largest negative ending cash balance? *** Excellent, but the next one must be better. Sam Goldwyn. *** Main Menu Option: D.Print -------------------------- To print out copies of your supporting data schedules and financial statements, select D.Print option from the main menu to bring up the print menu. Description of the print menu Menu option Description A.Price/Cost/Assumptions Print all schedules pertaining to product price, cost, and general assumptions. B.Units, Revenue & COGS Print all units sold, revenue, and cost of goods sold schedules. C.Sales, and G&A Expenses Print all sales, and general and administrative expense schedules. D.Debt Financing Schedules Print all schedules pertaining to debt financing. E.Equity Financing Schedule Print the equity financing schedule. F.Fixed Assets Schedule Print the fixed assets schedule. G.All Data Schedules (A-F) Print all data schedules (menu options A-F). H.Income Statement Print income statements for years 1, 2, and 3. I.Balance Sheet Print balance sheets for years 1, 2, and 3. J.Cash Flow Statement Print cash flow statements for years 1, 2, and 3. K.Key Financial Indicators Print key financial indicators for years 1, 2, and 3. L.Print Everything (A-F & H-K) Print everything (menu options A-F and H-K). M.Label with Header and Date Label each schedule and statement with a heading and a date. N.Set-up Set-up EntreQuik's default global, printer, and video settings. <Esc> Exit this menu. Printing time will vary depending on the schedule/statement you are printing. The month-by-month data schedules take the longest time. EntreQuik's print menu option M. enables you to print a header on the top of each schedule and statement. The header comes in two parts. This lets you include two different types of information on your header, for instance a project name and a date. EntreQuik enables you to print yearly summaries, in addition to your monthly reports. You may find monthly reports unnecessary for your analysis, opting instead for a yearly summary. Yearly summaries are available on print menu option B (revenue and cost of goods sold), option C (sales, general, and administrative expenses, option H (income statements), option I (balance sheets), and option J (cash flow statements). When you select one of these print options you will be prompted to enter yearly or monthly reports. Note: print options G (all schedules) and L (print everything) automatically print yearly summary reports instead of month-by-month reports. If you are using a narrow carriage printer (80 column), you may have to cut and paste those schedules and statements printed on a monthly basis. Changing the print settings --------------------------- EntreQuik is configured to use these print settings: left margin=0, right margin=80, top=0, bottom=0, and page length=66 lines. In general, EntreQuik does not need any special printer configuration. EntreQuik will print standard quality output on almost any printer with no special set-up. If you wish to access special print modes, like compressed printing from your printer, use printer set-up strings. EntreQuik will send these set-up strings to your printer. See Appendix 5 for information on how to change your print settings and use printer set- up strings. ******************************************************************** *HP LaserJet Users: Typically the default page length for LaserJet* *printers is 60 lines. Since EntreQuik's page setting is set at 66* *lines, you should change your setting to 60 lines, otherwise your * *schedules/statements will not page break properly. Appendix 5 has* *directions for changing your page length. * ******************************************************************** *** Business is a game, the greatest in the world if you know how to play it. Thomas J. Watson, Sr. *** CHAPTER 6 ENTREQUIK OUTPUTS: PROJECTED FINANCIAL STATEMENTS Now that you've entered your data, EntreQuik can help you decide if your new business idea is a good one. EntreQuik provides you with four key financial statements covering a three year period: Income statement Balance sheet Cash flow statement Key financial indicators This chapter discusses each of these financial statements in detail. Income Statement ---------------- The proforma income statement (also known as the Profit and Loss, or just plain P&L statement) captures the profitability of your new business start-up over a specific period of time (EntreQuik uses monthly statements). The income statement is the most common, although not the most critical statement, for demonstrating a new business' financial performance. It predicts how much money you expect to earn (revenue), and how much you expect to spend (expenses) over a set period of time. EntreQuik uses the following format for the income statement: Sales revenue -cost of goods sold ------------------ Gross profit margin -sales expenses -general and administrative expenses ----------------------------------- Net operating profit -interest expense (demand loans) -interest expense (term loans) -depreciation expense -------------------- Profit before taxes -taxes ---------- Net income Sales revenue reflects your total sales revenue from all your products and/or services. Revenue is a function of how many products you sell, and at what price you sell them. Remember, this revenue is earned revenue only. It does not necessarily equal cash in your hands, as some of your sales may have been made on a credit basis. Cost of goods sold is the total cost of products sold in a month. It depends on how many products you sell and how much they cost. Gross profit margin is the difference between your sales revenue and your cost of goods sold. This margin, commonly expressed as a percentage of total sales revenue, is one of the most widely used indicators for presenting and comparing product profitability. Gross profit margin is what is left over to cover your indirect expenses and overhead costs. Sales expenses are what you spend to sell and market your product. General and administrative expenses are overhead costs independent of any specific business activity like sales or marketing (i.e. salaries, telecommunication expenses, and legal costs). Net operating profit is the amount of money remaining after sales expenses and G&A expenses have been subtracted from the gross profit margin. Interest expense (demand loans) is the cost of borrowing funds on a demand loan or line of credit basis. Interest expense (term loans) is the cost of borrowing funds on a term loan basis. Depreciation expense shows the gradual expensing of a fixed asset over its life expectancy. Depreciation is a non-cash expense that reflects a continuing accounting allocation for a fixed asset purchase that may have occurred years earlier. Profit before taxes is the amount remaining after interest expense and depreciation expense have been deducted from the net operating profit. Taxes are payments made on profits to local, state, and federal authorities. Net income is the net profit after taxes have been subtracted. The net income may be distributed to the business owners in the form of dividends, or it may be kept in the business by adding it to the Retained Earnings Account of the balance sheet. ************************************************************************ *Don't be fooled into misinterpreting the profit figures on your * *projected income statement as cash in the bank. A company can have a * *rosy income statement, but still not be able to pay its bills. * *Appendix 3 gives you a more detailed explanation on why profit may not* *necessarily equal cash. * ************************************************************************ *** Business without profit is not business any more than a pickle is a candy. Charles F. Abbott. *** Balance Sheet ------------- The balance sheet is a standardized financial statement that outlines the assets of your business (what your business owns in the way of inventory, cash, equipment), the liabilities of your business (what you owe to others--your accounts payable and loans), and your equity or net worth (what you own minus what you owe to others). While the income statement reflects your business' operating performance over a period of time (month or year), the balance sheet is a snapshot of your business' strengths, weaknesses, and subsequent wealth. As an analogy, your personal income tax return is similar to a business' income statement. Your tax return lists the income or revenue you made for the year. When you subtract your deductions and taxes you are left with your disposable income for the year. From your disposable income you subtract your living expenses, leaving you with your net savings for the year. These savings are then added to your net worth. You could also develop a balance sheet that shows your personal wealth or net worth by listing your assets (house, car, cash, stocks), liabilities (mortgage, loans, outstanding credit card balances), and your net worth (assets minus liabilities). EntreQuik uses the following format for its balance sheet: Assets Current assets Cash Accounts receivable Inventory Fixed assets Equipment Accumulated depreciation Liabilities Current liabilities Accounts payable Demand loans Non-current liabilities Term loans Equity Paid-in capital Retained earnings The golden rule of balance sheet accounting is that assets must always equal liabilities plus owner's equity--otherwise it won't be a balance sheet! ASSETS = LIABILITIES + OWNER'S EQUITY or, by re-arranging this equation we get, ASSETS - LIABILITIES = OWNER'S EQUITY In other words, what your business owns, less what it owes to creditors, equals its net worth or equity. If your liabilities exceed your assets, you're in the red. Profits you make in each period are added to this net worth as they are carried from your income statement to your retained earnings. Here is a closer look at the balance sheet: Current assets are generally assets that can be easily converted into cash--money held in banks, accounts receivable, and inventory are three examples. Cash refers to money or liquid securities held in banks, savings and loans, and other financial institutions. Accounts receivable are payments owing to your business from customers who purchased your product or service on credit. Inventory includes all products you presently have in stock. Fixed assets, also known as capital assets, are operating assets purchased by a business, which have a useful life of more than one year. Accumulated depreciation reflects the cumulative amount of your fixed asset cost that has been used up as depreciation expense since the date you bought your fixed asset. Current liabilities include all your business' liabilities that must be paid within the year. This category includes accounts payable and usually demand loans. Accounts payable are payments owed by your business to suppliers for merchandise, raw materials, or inventory you purchased on credit. Demand loans are short-term loans, such as a line of credit from a bank, used to cover temporary cash flow dips. Term loans are longer term (up to 25 years) loans. Paid-in capital reflects the amount of money you invested in your business. Retained earnings are the cumulative amounts of your business' net income that you chose to leave in your business. *** Money will come when you are doing the right thing. Michael Philips, American economist. *** Cash Flow Statement ------------------- Once you have perused your income statement and balance sheet, you can turn to your cash flow statement. By combining the information from your income statement and balance sheet, your cash flow statement details the changes in your business' cash balance. The cash flow statement for a new or growing business is probably your most critical forecasting tool. In your business' early years, cash position is more critical than profitability, because it mirrors your company's viability. You can't pay bills with profits, only with cash... and if you don't have enough cash to pay your bills, sooner or later you will go out of business. Your cash flow statement helps you identify in advance how large your negative cash flows will be, and how long they will last, so you can arrange for additional funding when necessary. EntreQuik uses the following format for the cash flow statement: Sources of cash From operations net income + depreciation expense -------------------- Net income and depreciation + change in accounts payable - change in accounts receivable - change in inventory ------------------- Net cash flow from operations Other sources of cash + investment by owners + loan proceeds (demand loans) + loan proceeds (term loans) Total sources Uses of cash + starting inventory + capital equipment purchases + dividends + demand loan repayment + term principal repayment Total uses Net increase/decrease in cash End-of-period cash balance As you can see, the cash flow statement separates your sources of cash into two main categories: Cash Flow from Operations, and Other Sources of Cash, which are basically financing activities. Separating your sources of cash this way enables you to zero in on cash flow provided by operations. In the long run, your cash flow from operations will be the lifeblood of your business. Without a positive cash flow from operations it will be difficult for you to stay in business. EntreQuik uses the following steps to derive cash flow: 1. Start with net income from your income statement. 2. Add depreciation expense back to net income, as depreciation expense is a non-cash expense on your income statement. At this point, we have what is sometimes referred to as cash flow from net income, which is simply the net income amount plus depreciation expense. However, this is not the same as cash flow from operations, as some entrepreneurs mistakenly interpret it to be. To derive your cash flow from operations, you must also look at the changes in operating assets and operating liabilities affecting your net income (steps 3, 4, and 5). 3. Add increases or subtract decreases in accounts payable since your last accounting period. An increase in accounts payable indicates that cash equalling the amount of the increase was not paid out to your suppliers. For example, your income statement may show $1,000 of expenses incurred during a one-month period. If, however, these expenses were made on credit, no cash would have been paid and your accounts payable would increase by $1,000. 4. Deduct increases or add decreases in accounts receivable since your last accounting period. An increase in your accounts receivable for the period indicates that cash equalling the amount of the increase was not received by you from customers buying your goods. For example, your income statement may show a sales revenue of $10,000 for the period. If, however, all $10,000 of your sales were made on credit by your customers, you will not have received any cash, increasing your accounts receivable by $10,000. 5. Deduct increases or add decreases in inventory since your last accounting period. An increase in your inventory for the period indicates that more cash was spent on inventory purchases than received for inventory sold. For example, your income statement may show $5,000 as the cost of goods sold during the period. However, if inventory purchases of $10,000 were also made, an additional demand on cash of $5,000 would be created, and your inventory would increase by $5,000. 6. The net figure is net cash flow from operations. 7. Add other sources of cash for the month: equity investment demand and term loan proceeds. 8. Total all sources of cash. 9. Total all uses of cash: fixed asset purchases during the month dividends paid out to owners demand or term loan principal repayments. 10. Total sources of cash minus total uses of cash gives you the net increase or decrease in cash for the month. 11. Add this net increase or decrease in cash for the month to your previous month's ending balance and you'll have your present month's cash ending balance. Your end-of-period cash balance is an important indicator. If you have not yet included funding (debt/equity investment) in your analysis, then your ending cash balance will likely go negative quickly. This cash balance should, however, increase as your revenues increase. Your largest negative ending cash balance over your three year forecast horizon is, in theory, the amount of funding you will need. *** Success is simply a matter of luck. Ask any failure. Earl Wilson. *** Key Financial Indicators ------------------------ EntreQuik's key financial indicators report shows, at a glance, important information you will need to evaluate your new business idea. Return on equity (pretax) = profit before taxes divided by average total owner equity. This is a profitability indicator that shows what your new business is capable of earning (profit before taxes) on your total owner equity investment (paid in capital plus retained earnings). You can compare this indicator to rates of return on similar risk investments to see if your return on equity is enough. Note: the owner equity figure appearing on your balance sheet in a yearly summary format is the owner equity figure at the end of the year. The end-of-year owner equity figure will differ from your average total owner equity figure. Return on total investment (pretax) = profit before taxes, plus interest expense, divided by average owner investment (paid in capital plus retained earnings) and investment by lenders (short- and long- term debt). This is a variation of the return on equity indicator. It shows the return on investment from capital invested by all sources, both owners and lenders. Note: the total investment figure appearing on your balance sheet in a yearly summary format is the total investment figure at the end of the year. The end-of-year total investment figure will differ from your average total investment figure. Return on assets (pretax) = profit before taxes divided by average total assets. The return on assets indicator measures how much profit you are generating with each dollar of your assets. Note: the total assets figure appearing on your balance sheet in a yearly summary format is the total assets figure at the end of the year. The end-of-year total assets figure will differ from your average total assets figure. Profit before taxes = the dollar amount of profit after all expenses except taxes have been deducted from sales. It is taken from the income statement. Net income added to retained earnings = the net profit, less any dividends added to the retained earnings account of the balance sheet. If there is a loss for the period, it is subtracted from the previous period's retained earnings account. Average owner equity = average owner equity (paid-in capital and retained earnings) during the year. Average debt and equity = average debt (demand and term loans) and equity (paid in capital and retained earnings) during the year. Average total assets = average total assets during the year. Lowest monthly cash flow = the lowest monthly cash flow for the year, as shown on the cash flow statement. Key financial indicators report:lowest ending cash balance;Lowest ending cash balance = the lowest ending cash balance for the year, as shown on the cash flow statement. Key financial indicators report:asset turnover ratio;Asset turnover ratio = total sales revenue divided by average total assets. This efficiency ratio measures how many sales you are generating with each dollar of your assets. Current ratio = year-end current assets divided by year-end current liabilities. This liquidity ratio measures how much of your current assets are available to cover each dollar of your current liabilities. Quick ratio = year-end cash and accounts receivable divided by year- end current liabilities. The quick ratio, also referred to as the acid test ratio, is a variation of the current ratio that provides a more stringent test of a business' liquidity. This ratio omits inventory and concentrates on your more liquid assets such as cash and accounts receivable. Gross profit to sales = gross profit divided by total sales revenue. This ratio is called gross profit, because no expenses other than the cost of goods sold have been deducted. This popular ratio is often used when comparing how products are priced. Net profit margin = net profit before taxes divided by total sales revenue. The net profit margin indicates the relative profitability of a business after taking into account its expenses. Debt to equity ratio = average total liabilities divided by average total owner equity. This ratio measures how much debt a business has relative to its equity or net worth. Most lenders and creditors use this ratio to gauge the risk factor of a business. The higher the ratio of debt to equity, the riskier the business. Times interest earned ratio = net operating profit before interest and taxes, divided by total interest expense. This traditional coverage indicator demonstrates a company's ability to service its interest payments. Operating expense to sales = selling expense plus G&A expenses, divided by total sales revenue. This ratio measures operating expenses as a percentage of sales. This ratio is often compared to industry averages as an indication of a business' operating efficiency. Sales revenue growth = the present period's sales revenue minus the previous period's sales revenue, divided by the previous period's sales revenue. *********************************************************************** *We have endeavored to include the most widely used definitions of the* *above indicators. In some cases there is variability as to how * *specific ratios are computed and how the values substituted in the * *formulas are determined. Our formulas are generic. Make sure, in * *other words, you're comparing "apples to apples" when you look at * *ratios from different sources. * *********************************************************************** *** A man's work is his dilemma: his job is his bondage, but it also gives him a fair share of his identity and keeps him from being a bystander in somebody else's world. Melvin Maddocks. *** CHAPTER 7 EVALUATING YOUR NEW BUSINESS This chapter looks at how you can effectively analyze and interpret your projected financial statements by answering these crucial questions: 1. How much funding do I need to get my business up and running to the point where I can finance it internally through operations? How will I raise these funds--through debt financing or equity investment? 2. How much profit can I realistically expect to make from my venture? How much rate of return can I expect from my investment? Is my expected rate of return worth the risk I am taking? How Much Funding Do I Need? --------------------------- Your business is not going to make it, unless you have enough cash to support your operations until your business reaches a self- financing level through sales activity. You can find out how much cash you will need by reviewing your projected cash flow statement. Take a look at your month-end cash balances over your three year forecast horizon and find the largest negative cash balance. This is the minimum amount you must have in your bank account. Preferably, to this amount you will add enough money to cover a contingency reserve factor. When will you need this cash funding? Your cash flow statement answers this question by showing you, month-by-month, how much cash is coming in and how much cash is going out of your business. This prepares you ahead of time for those months when more cash is going out than coming in. Many entrepreneurs are optimists--they have to be, otherwise they wouldn't be trying to start a new business. And they wouldn't be trying the venture they chose unless they were convinced it had promise. It's easy, however, to see more promise in your business idea than what is really there. For this reason you should keep a contingency reserve of cash on hand, in case your business does not go over the way you thought it would. You can get a good idea of your contingency requirements by projecting multiple scenarios--an optimistic scenario, a most likely scenario, and a pessimistic scenario. By forecasting three different outcomes of your new business, you will be prepared for a range of situations, each having its own maximum negative cash balance, cash contingency reserve, and profit outcome. For example, say you project your maximum negative cash balance under the following three scenarios: Maximum negative cash balance Optimistic forecast scenario $-70,000 Most likely forecast scenario $-55,000 Pessimistic forecast scenario $-48,000 Funding:contingency reserve factor;From this example, you can see that you'll need at least $55,000 in additional funding to finance the most likely scenario. But if, by chance, you meet your optimistic forecast you will need at least $70,000 in additional funding. You should therefore plan to obtain funding of at least $55,000, plus a contingency reserve of another $15,000 (total $70,000), just in case you meet your optimistic forecast. If you're wondering why the optimistic scenario requires the most cash--the answer is, it takes money to make money. More sales mean more working capital to carry additional accounts receivable and additional inventory. *** The fellow who never makes a mistake takes his orders from one who does. Herbert V. Prochnow. *** How Much Profit can I Realistically Expect to Make from My New Venture? ----------------------------------------------------------------------- You do not need to specify an upper limit on how much profit you'd like to make--we assume it's as much as possible. However, you should have an idea of how much profit, as a bare minimum, your business must have to survive. You can determine your minimum acceptable profit by looking at your key financial indicator, rate of return on equity (ROE), which shows you how much return you will earn on the amount of money you invest in your business. What is an acceptable return on your equity? Your rate of return should be commensurate with the risk you are taking. If you put your money into a bank account, for example, the risk to your money is minimal, therefore your return will not be huge--maybe 7% interest. Most new businesses require an ROE of at least 20%, to compensate for the risk involved. If your predicted ROE is not high enough, go back to your data input section and make adjustments to save money or increase your revenues. You may want to consider money-saving options like buying used fixed assets rather than new equipment, subcontracting production, renting smaller premises, or increasing collections on credit sales. ************************************************************************ *Starting a new business will take up almost all of your time. In the * *first years a small business owner may have to work 12-hour days, * *seven days a week! Therefore, even if the numbers look good, consider* *whether your new business idea is suited to your personality. Can you* *remain committed and enthusiastic over the long haul? * ************************************************************************ *** You see things and you say why, but I dream of things that never were and say why not. George Bernard Shaw. *** Using Your EntreQuik Projections as a Control Tool -------------------------------------------------- After you have spent your time using EntreQuik to build financial projections for your new business, don't file your projections in the bottom drawer of your desk and forget about them. Instead, use your projections as control tools, by comparing them to your actual operation results, to make sure all your underlying assumptions were accurate. If your actual sales expenses are double what you forecasted or your actual profit is higher than you expected, you should look for a reason so you can adjust your projections accordingly. *** When I was young I thought that money was the most important thing in life; now that I am old I know that it is. Oscar Wilde. *** CHAPTER 8 SETTING UP ENTREQUIK While most users will be able to use EntreQuik "right out of the box", EntreQuik also allows you to tailor many of its default settings to suit your own particular needs. For example, you may want to change EntreQuik's default colours, or to change printer settings. To do so, you must choose the N.Setup option from the Print menu. Follow these steps: 1. Go to EntreQuik's print menu. 2. Select option N.Setup. 3. To change default global settings, type /W. The /W settings change the default EntreQuik settings stored in the EntreQuik configuration file EQ.CNF. The settings in this file take effect automatically whenever you start EntreQuik. To change the current default print settings, type /P. To change default video/colour settings, type /V. Note: EntreQuik's /W, /P, and /V commands follow the same menu structure as Lotus 1-2-3 for DOS. If you are familiar with Lotus 1-2- 3 you will find EntreQuik's / commands easy to grasp. Changing Default Global Settings (/W) ------------------------------------- /Worksheet Global Default Printer Sets the assumptions EntreQuik makes about your printer at the start of each session. You can use /Printer commands to override these assumptions for individual print jobs. /Worksheet Global Default Printer Interface Identifies the printer port through which your printer and computer are connected. If you select a serial port you must also select a baud rate. These are the interfaces available: 1=Parallel 1 5=DOS device LPT1 2=Serial 1 6=DOS device LPT2 3=Parallel 2 7=DOS device LPT3 4=Serial 2 8=DOS device LPT4 /Worksheet Global Default Printer Interface Parity /Worksheet Global Default Printer Interface Data Bits /Worksheet Global Default Printer Interface Stop Bit /Worksheet Global Default Printer Auto-LF Identifies whether your printer automatically inserts line feeds. /Worksheet Global Default Printer Left Sets the left margin on the printed page at a specified number of standard characters from the left edge of the paper. The initial left margin setting is 0. /Worksheet Global Default Printer Right Sets the right margin on the printed page at a specified number of standard characters from the left edge of the paper. The initial right margin setting is 80. /Worksheet Global Default Printer Top Sets the top margin on the printed page at a specified number of standard lines. The initial setting is 0. /Worksheet Global Default Printer Bottom Sets the bottom margin on the printed page at a specified number of standard lines. The initial setting is 0. /Worksheet Global Default Printer Pg-length Sets the length of each page measured in standard lines. This setting determines where EntreQuik creates page breaks and the number of printed lines per page. The initial setting is 66 lines. /Worksheet Global Default Printer Wait Tells EntreQuik whether to pause after it prints each page. You may require this command when you are printing on a printer that requires you to feed single-sheet paper. /Worksheet Global Default Printer Setup Lets you enter a set-up string which is a series of characters that control printing. EntreQuik sends the set-up string to turn on specific printing modes in your printer before printing begins. (See appendix 5) /Worksheet Global Default Printer Quit /Worksheet Global Default Directory Sets the EntreQuik default directory, the directory that starts out as your current directory each time you use EntreQuik. The current directory is the directory EntreQuik automatically searches when you save, read, or list files. /Worksheet Global Default Update Updates the EntreQuik configuration file EQ.CNF with settings you establish in the other /Worksheet Global Default commands. The contents of EQ.CNF determines the EntreQuik configuration when you start EntreQuik. /Worksheet Global Default Quit Once you are satisfied with your selections, there are two ways to save them: execute a Save Session from the File menu, or perform a /Worksheet Global Default Update command from the set-up menu. Changing Print Settings (/P) ---------------------------- Use /P to change printer settings from the default printer settings for the current EntreQuik session. See appendix 5 for specific information on printer setting changes, and printer command codes (also called printer set-up strings). /Print Printer Line Produces a line feed (a blank line) on your printer. /Print Printer Page Advances the paper in your printer to the top of the next page. /Print Printer Options Margins Sets left, right, top, and bottom margins. Use this setting only if you want to set margins that are different from the default margins settings. /Print Printer Options Setup Lets you use printer command/set-up strings to specify printer attributes that are available on your printer. This command overrides the default set-up string you specify with /Worksheet Global Default Printer Setup. (see appendix 5 for specifics on set- up strings). /Print Printer Options Pg-length Sets the length of each page, measured in standard lines. /Print Printer Options Quit /Print Printer Clear All Clears the current print range; clears header; resets all formats and options to their default settings. /Print Printer Clear Format Resets margins, page length, set-up strings to their default settings. /Print Printer Quit Once you are satisfied with your printer selections, you can make them permanent by executing a Save Session from the File menu. Changing Default Video Settings (/V) ------------------------------------ The /Video commands lets you select foreground and background color combinations for EntreQuik's screen elements. /Video Color Window Sets color of EntreQuik main screens. /Video Color Window Normal Sets colors of EntreQuik's normal text. /Video Color Window Bright Sets colors of EntreQuik's bright text. /Video LCD/BW Window Sets foreground and background gray scales on black and white monitors hooked up to a CGA or VGA display adapter and the LCD displays used in laptop computers. /Video LCD/BW Window Normal Sets gray scales of EntreQuik's normal text. /Video LCD/BW Window Bright Sets gray scales of EntreQuik's bright text. /Video Mono/Herc Window Sets foreground and background gray scales on black and white monitors using Monochrome or Hercules display adapters. /Video Mono/Herc Window Normal Sets gray scales of EntreQuik's normal text. /Video Mono/Herc Window Bright Sets gray scales of EntreQuik's bright text. Once you are satisfied with your color selections, you can make them permanent by executing a Save Session from the File menu, or perform a /Worksheet Global Default Update command from the set-up menu. *** If you think you can or you can't, you're always right. Henry Ford I. *** CHAPTER 9 A LAST WORD We sincerely hope EntreQuik has helped you to evaluate your new business idea. The development of EntreQuik has involved considerable research and testing. We are constantly looking for ways to improve EntreQuik, and we would appreciate your comments or recommendations. Please send your feedback to: Banyan Business Software Inc. Suite 251 - 9632 Cameron Street Burnaby, British Columbia Canada, V3J 7N3 (604) 990-9612 Fax (604) 990-9613 Thank you for purchasing EntreQuik. APPENDIX 1 ENTREQUIK'S MEMORY REQUIREMENTS In order to run EntreQuik, your IBM PC or compatible must have as a minimum 640 Kilobytes of RAM memory (conventional memory). EntreQuik also supports the Expanded Memory Specification (EMS), LIM version 3.2 or later. In addition, EntreQuik supports Virtual Memory, meaning that EntreQuik has the ability to use space on your hard disk as though it were RAM to store data which doesn't fit into conventional RAM memory or Expanded Memory (EMS). Memory management is handled automatically with conventional memory being used first, then expanded memory, and finally virtual memory if required. If your system has 640 Kilobytes of RAM, it still may not load if there is not enough free conventional memory. Of the 640K of conventional memory, 442K must be free if there is expanded memory (EMS) available. If there is no expanded memory, then there must be at least 490K of conventional memory before EntreQuik will load. If you are not sure how much free conventional memory you have, type MEM <Enter> at the DOS prompt to display the amount of used and free memory on your computer (the MEM command is supported in MS-DOS versions 4, 5, and 6). If you don't have enough free conventional memory, you can make more available by unloading memory resident utilities or drivers such as network drivers. Please refer to your MS-DOS manual on how to make more conventional memory available. APPENDIX 2 ESTIMATING THE COST OF GOODS SOLD FOR A MANUFACTURING VENTURE Establishing a product's direct cost can be much more involved for a manufacturing venture, because you have to estimate both a material and a labor cost component. There are numerous ways of estimating the cost of goods sold. Each method depends on the item being manufactured. We present one of the easier methods: 1. Estimate the number of units you plan on producing in one year, for example 2,000 units. 2. Establish a Parts List or a Bill of Materials on a per unit basis. For example, here are some materials that could go into making a leather purse: Material Labor Hourly Labor Part Description Cost Assembly Rate Cost A Cloth $ 4 0.25 hr $5.00 $1.25 B Leather $10 1.00 $5.00 $5.00 C Buttons $ 2 0.75 $5.00 $3.75 D Miscellaneous $ 5 0.75 $5.00 $3.75 Totals $21 2.75 $13.75 3. Based on an assembly time estimate of 2.75 hours and a total number of units to be produced during the year estimate of 2,000, you can now calculate your labor requirements: Assuming a 40 hour week and 49 working weeks per year, we can calculate 1,960 hours per year per worker. However, you must not forget that each worker has a certain productivity loss per day. This includes coffee breaks, sickness, holidays, start-up and close-down habits, etc. Suppose this amounts to three-fourths of an hour per day. We now have a productivity loss of .75 hour x 5 days x 49 weeks = 183.75 hours. Subtract the productivity loss from the number of hours available: 1,960 - 183.75 = 1,776.25 productive hours. One worker can produce 1,776.75 / 2.75 = 646 units. In order to produce 2,000 units you will need approximately 4 workers (2,000/646). Manufacturing cost per unit (revised): 1. Material costs $21.00 2. Direct plant labor: 4 workers @ 1,960 hrs. @ $5/hr divided by 2,000 units $19.60 ------ Total direct product cost $40.60 Your direct cost per product is estimated at $40.60. This cost includes material costs per unit and labor costs (adjusted for productivity losses). ***************************************************************************** *Raw materials and component parts used in manufacturing can be significant * *cost factors. You should establish the locations and names of potential * *suppliers, and, of course, the delivered price of materials to your * *factory. Some raw materials and parts are difficult to obtain in small * *quantities and must be purchased by paying a premium price. This usually * *escalates your total cost of materials. Buying in volume might reduce your* *initial cost, but if your turnover of material is slow, the financial and * *storage costs could offset any initial cost savings. * ***************************************************************************** APPENDIX 3 PROFIT VERSUS CASH Many entrepreneurs are disappointed when they learn that even though their income statement is rosy, they are still consistently short of cash. Cash, not profit, is the life-blood of a business in its early stages, because if you can't pay your bills, you will eventually go out of business. If your income statement looks healthy, but your cash situation is dismal, consider these variables: Increases in inventory ---------------------- Increases in inventory do not immediately affect your income statement. You may make a large inventory purchase one month, and pay cash for it, but this inventory purchase will not impact your income statement until it is sold, and then it appears as a cost of goods sold expense. Customer purchases on credit ---------------------------- Every time a customer makes a purchase on credit an accounts receivable is created. This purchase is shown on the income statement as revenue, but no cash is received from the customer until a later period, maybe one to two months after the sale. You can see how a small business can quickly become strapped for cash if there is a long time between when their inventory is purchased and when they actually receive cash from their customers. Large loan payments ------------------- This is another situation where a cash outflow does not appear on the income statement. Loan payments usually consist of an interest component and a principal repayment component. For example, a monthly loan payment of $1,000 may consist of $100 interest and $900 principal repayment. Because the principal repayment portion is merely repaying money given to you earlier, it does not appear on the income statement as an expense. The interest portion, however, is a legitimate expense and does appear on the income statement. Thus, if you are making large principal repayments, it is possible for you to be short of cash, even though your income statement shows a profit. Unprofitable, but cash rich --------------------------- It is also possible for you to be cash rich even though your income statement looks dismal. This can arise when you have a large depreciation expense on your income statement. Since depreciation expense is a non-cash expense (no cheque is written for this expense), you may have cash to spend even though your large depreciation expense makes your business appear unprofitable. APPENDIX 4 TROUBLE-SHOOTING Problem: EntreQuik locks up under Windows 3.1. 1. Although EntreQuik will run under Windows 3.1 in a DOS session, EntreQuik is a DOS program and therefore runs the best in a strictly DOS environment. In general it is difficult to trouble-shoot Window 3.1 problems, since there are many probable causes such as low memory, strong interaction from concurrently loaded programs, and different hardware configurations. If you are having problems running EntreQuik in Windows, we highly recommend you run EntreQuik outside of Windows to prevent data loss. Problem: A menu screen or data input screen is frozen--pressing directional keys has no effect. 1. The screen may appear to be frozen, but EntreQuik may actually be in a recalculation mode. Do not touch the keyboard, and wait 15-30 seconds for recalculation to complete. 2. If control does not return, press <Esc> two or three times, and then press a directional key to test if the screen is still frozen and/or press <F10> to return to EntreQuik's main menu. Problem: Program will not load. An "out-of-memory" indicator or "not enough memory for virtual buffers" message appears. 1. You may not have enough memory to run EntreQuik. You need at least 640K of RAM. If you have 640K of RAM, but still cannot load EntreQuik, refer to Appendix 1. 2. If you have enough conventional RAM, but no EMS (Expanded memory), EntreQuik will use your hard drive for virtual memory. Your hard drive must have at least 500K free disk space. Problem: Using the Quik Data input option, monthly sales added together do not equal the yearly total. 1. If you do not enter a yearly sales unit forecast that is evenly divisible by 12 (to get a monthly quantity sold) EntreQuik rounds up or down the calculated monthly quantity. Therefore, a yearly total of 1,000 units sold divided by 12, gives you a monthly total of 83.33 units. Eighty-three units multiplied by 12 gives you 996 units, 4 short of your 1,000 actual sales. You can, however, adjust your forecast to equal 1,000 by selecting data input menu option 3 (product sales forecast), and adjusting up any month's forecast of sales. Problem: While printing on a Hewlett Packard LaserJet II printer, EntreQuik's financial statements or supporting data schedules sometimes page-break in the middle of a statement or schedule. 1. EntreQuik uses a default page length of 66 lines per page which is suitable for most printers. LaserJet printers, however, use a page length of 60 lines per page in portrait orientation, and 45 lines per page in landscape orientation. Please check your printer manual for your printer's page length specification. For instructions on changing EntreQuik's default page length refer to appendix 5. Problem: How do I delete unwanted EntreQuik data files (.WKB files)? 1. EntreQuik does not have a built-in menu option for deleting previously saved EntreQuik sessions. You can erase an EntreQuik data file (.WKB file extension) at the DOS level by using the DELETE or ERASE commands. APPENDIX 5 PRINT SETTINGS EntreQuik's Default Print Settings ---------------------------------- EntreQuik uses the print settings (left margin 0, right margin 80, top 0, bottom 0, and page length 66 lines). These settings are for a typical narrow carriage dot matrix type printer (for example, an Epson narrow carriage printer). You may need to change these print settings if you are printing on a wide carriage dot matrix printer, HP, or HP compatible Laserjet printer. Printer Settings 1) Narrow carriage printer -------------------------- Narrow carriage printers are usually dot matrix type printers that have the ability to print on paper up to 11 inches wide (actual paper width varies by printer manufacturer). Although a narrow carriage will print most of the data schedules and yearly summary financial statements properly, the yearly month by month reports will require some cut and pasting as the width of some data schedules are wider than most narrow carriage printers can handle. In general, EntreQuik's default print setting works fine on typical narrow carriage printers. 2) Wide carriage printer ------------------------ Wide carriage printers have the capability to print on paper up to 16 inches in width (actual paper width varies by printer manufacturer). You should have no problem printing all EntreQuik schedules and statements by using compressed printing and setting the right margin to 190. For example, if you want to print in a compressed mode on a wide carriage printer you would make the following print setting changes: 1. Go to EntreQuik's print menu. 2. Select option N.Setup. and type the following: Keystroke Description / brings up the EntreQuik command menu PP selects the Print and Printer command OM selects the Options and Margins command L0 sets the left margin to 0 <Enter> processes the command MR190 sets the right margin to the maximum possible width <Enter> processes the command S selects the Set-up command \015 sets the printer to compressed mode (see note below below) <Enter> processes the command QQ exits the print options and print command menus <F10> exit set-up and returns to the main menu Note: The set-up string (also called printer code) \015 sets the printer for compressed print on Epson as well as several other popular printers. Refer to your printer manual for the printer code of your particular printer model. Some printers do not need to be set up via printer codes, but can be set for compressed and other print features through the printer's control panel. 3) HP Laser printer ------------------- If you are using an HP Laserjet (or compatible) you should have no problem printing all EntreQuik schedules and statements as most laser printers will allow you to print in landscape (across the length of the page) as well as portrait (across the width of a page) orientation. The following settings should be used: 1. Portrait orientation printing - no set-up string is required as the default page orientation is usually portrait, and the default margin is 80. The only change that must be made is to change EntreQuik's default setting of 66 lines per page to 60 lines per page (typical default setting for most laser printers in portrait orientation). -page length=60 -right margin=80 -set-up string=none required 1. Go to EntreQuik's print menu. 2. Select option N.Setup. and type the following Keystroke Description / brings up the EntreQuik command menu PP selects the Print and Printer command OP selects the Options Page-length command 60 <Enter> sets the page length to 60 lines QQ exits the print options and print command menus <F10> exits set-up and returns to the main menu 2. By printing in landscape orientation printing and compressed print, you will be able to print all EntreQuik's schedules and statements. You will need to change the default page length from 66 lines to 45 lines per page, and also set the right margin to 176. -page length=45 -right margin=176 -set-up string=\027&l10\027(s16.66H For example, if you want to print in a compressed mode and in landscape orientation on a HP Laserjet II, III, or IV printer you would make the following print setting changes: 1. Go to EntreQuik's print menu. 2. Select option N.Setup. and type the following Keystroke Description / brings up the EntreQuik command menu PP selects the Print and Printer command OP selects the Options Page-length command 45 <Enter> sets the page length to 45 lines M selects the Margins command R176 <Enter> sets the right margin to the maximum possible width S selects the Set-up command \027&l1O\027(s16.66H sets the printer to landscape orientation and compressed print (see note below) <Enter> processes the command QQ exits the print options and print command menus <F10> exits set-up and returns to the main menu Note: The print code \027&l1O\027(s16.66H is actually two printer command codes. The first code \027&l1O tells the Laserjet to print in landscape orientation, and the second code \027(s16.66H tells the printer to print 16.66 characters per inch (compressed printing). Printer Set-Up Strings ---------------------- EntreQuik allows you to send printer commands (also called printer set- up strings) to your printer to change printing variables such as page orientation, margins and font selection. A set-up string is a series of characters preceded by a \ (backslash). Set-up strings represent printer control codes that give instructions to the printer. For example, to instruct an Epson printer to print data in compressed print mode, use the set-up string \015. Check your printer manual for a list of control codes. Check with your printer manual to determine what printing features are available on your printer. If you are lucky, these features may be turned on through your printer's control panel. If not, you may be able to turn on a feature by getting EntreQuik to send a set-up string to your printer. Below are set-up strings for the more common printers on the market. If your printer is not listed, you can still use a set-up string if your printer can emulate an Epson FX, IBM Proprinter, or HP Laserjet printer. Printer Compress 10 Char. 12 Char. 6 Lines 8 Lines 20 CPI per in. per in. per in. per in. Epson FX, \015 \027P \027M \0272 \027O MX HP LaserJet \027&k2S \027&k0S \027(s12H \027&l6D \027&l8D HP LaserJet II \027&k2S \027&k0S \027(s12H \027&l6D \027&l8D HP Thinkjet \027&k2S \027&k3S \027&k0S \027&l6D \027&l8D IBM Proprinter \015 \018 \027 \027\050 \027\048 & XL IBM Q'writer \027\050 \027\048 Printer Portrait Landscape HP LaserJet, II, III, IV \027l0O \027&l1O When using the above set-up strings, note the differences in the following characters: l=lower case letter "L" 1=numeric one O=upper case letter "O" 0=numeric zero Note: To return a printer to its default printer attributes, press the printer's reset button (if available) or just turn the printer off and on again. Changing the Page Length ------------------------ The standard page length is 11 inches, and the standard line spacing is 6 inches per inch, which gives you a page length of 66 lines. EntreQuik uses a default page length of 66 lines per page (which is fine for most printers). Typical Page Lengths Narrow/wide carriage dot matrix printers = 66 lines Laserjet (portrait orientation) = 60 lines Laserjet (landscape orientation) = 45 lines If you are using an HP LaserJet printer you may have to change the page length, if you find EntreQuik's schedules and statements breaking in the middle of a page. Most LaserJet printers use a page length of 60 lines per page. Please check with your printer manual for your printer's page length specification. To change EntreQuik's default page length, go to the Set-up screen as described above. Then type /P Printer Option Pg-Length 60 <Enter>, and select Quit. You can return EntreQuik's main menu by pressing <F10>. Saving Your Print Changes To save your current print settings, execute a Save Session from the File menu.