Friday, October 30, 2009

business evaluation

Step 1: Idea Evaluation

How do you determine if a business idea is really worth the effort necessary to turn it into a business?
The answer to this question is highly dependent on the level of fundamental knowledge about the business and the ability to turn that knowledge into a profitable business venture.
It is critical to do an early and accurate self-assessment of the business climate for the idea and available resources. This early analysis is an important step in building confidence and knowledge of the business and will be critical in securing business partners, financing and even customers.
Spend time considering the questions in this section which will help to evaluate the level of preparedness for taking an idea beyond the conceptual stage. Taking the time to build a strong understanding of the business at this stage provides some of the most affordable risk-management. Detailed feasibility and market studies will come later; this process is designed to evaluate basic enterprise knowledge.
After reviewing the list of questions in the following activity, you will be asked to determine the amount of time it will take to research and become comfortable with the concepts. You will also need to make an estimate of the cost, if any, associated with finding the answers to the topics covered in these questions.
When you are ready to start the activities for this section, click on the button below
Step 1: Idea Evaluation

There are four main areas you need to consider when evaluating your idea. (Score yourself on each question from 1-5)
Business Experience:

Are necessary business skills and experience present to take this idea to the market? 12345
Is necessary capital identified and readily available if the enterprise starts? 12345

Is there currently another business(s) using your concept? If so: Why is your idea better or different? 12345
Customer Base:

Can a potential customer base be clearly identified? 12345
How will the business capture customers who are presently patronizing established competitors? 12345
What are the recent consumer trends in this area? 12345
Market Potential:

Is market potential large enough to be profitable? 12345
Is there a niche market that is not being satisfied? 12345
Estimated time needed to improve response level to the questions above. Days
Estimated budget needed to increase understanding of the questions above. Dollars

Step 1: Idea Evaluation

Summary & Conclusion
If you have areas in the above analysis that rank less than a four consider seeking out additional information before proceeding. Consider subscribing to trade publications, joining related associations or attending trade shows to build knowledge of the business you’re entering.
In the world of business and marketing, if your idea looks like it is going to be anything less than an ideal opportunity for you, be willing to let go of it. Invest your dollars, ingenuity, and effort where you can realize the greatest returns.
Step 2: Organization

One of the most important decisions entrepreneurs make is how to legally set up their businesses. The choice can be a wise move or a costly mistake with regard to taxes paid, protection from liability, and the amount of resultant flexibility in running the operation.
The form of organization selected depends on the following factors:
Capital structure
Tax considerations
Management method
Number of people associated in the venture
Kind of business or operation
Cost and formality of the organization
Ability and/or desire of owners to isolate personal assets from claims of the business' creditors
Perpetuation of the business

The initial choice of a business form, even if it achieves optimum results in the start-up phase, may require adjustment or alteration as the business matures. It is important to periodically re-examine the appropriateness of the type selected.
Basic types of business structure
This is the easiest and least costly way of starting a business. A sole proprietorship can be formed by finding a location and opening the door for business. There are likely to be fees to obtain business name registration, certificate and other necessary licenses. Attorney's fees for starting the business will be less than the other business forms because less preparation of documents is required and the owner has absolute authority over all business decisions.
A cooperative business belongs to the people who use it. The member/owners use the cooperative as a source for the goods and services they need. Member/owners share in the control of their cooperative, meet at regular intervals, review detailed reports, and elect directors from among themselves. The directors in turn hire management to oversee the day-to-day affairs of the cooperative in a way that serves the members' interests.
Over the last twenty years, "New Generation" cooperatives have evolved to provide more specialized services than those typically offered by traditional cooperative models. Although still member/owner organizations, the structures of value added cooperatives differ from those of traditional cooperatives in several ways:
Limited Liability Companies (LLCs) are a hybrid form of entity that combines some characteristics of a corporation with other characteristics of a partnership. The LLC offers limited liability for all of its members and the option of centralized management (which the LLC may choose not to adopt). The LLC also offers partnership tax status with flexibility in handling varied contributions and types of capital. The LLC requires a tailored agreement that spells out all details, whereas corporations may often be formed with standardized documents.
A general partnership can be formed simply by an oral agreement between two or more persons, but a legal partnership agreement drawn up by an attorney is highly recommended. Legal fees for drawing up a partnership agreement are higher than those for a sole proprietorship, but may be lower than incorporating. A partnership agreement could be helpful in solving any disputes. However, partners are responsible for the other partner's business actions, as well as their own.
Step 2: Organization
Overview (continued)
Limited Partnerships are much the same as Limited Liability Companies, but must include one partner (the general partner) having unlimited liability for the debts of the partnership. Special rules govern whether a corporate general partner is carrying enough risk to qualify the entity as a partnership versus a corporation for tax purposes.
Limited Liability Partnerships (LLPs) are general partnerships that have chosen LLP status. Partners of an LLP have unlimited liability for their own actions but limited liability for the actions of their partners. LLP status may work for businesses that have typically been conducted as general partnerships and whose partners now wish to limit their potential liability for each others' actions. Special rules govern the LLP election by partnership of licensed professionals.
Think of a corporation as legally separate from its shareholders. This is the most important feature distinguishing it from a partnership or proprietorship. It is definitely best to seek legal counsel when setting up a corporation.
This type of business is usually the most costly to form, especially if organizational problems are complex. People usually incorporate to limit personal liability for the debts and liabilities of the business. However, with many new businesses this limit of personal liability applies only to judgments brought against the company for negligence, defective products or frivolous suits.
In fact, the owner(s) of a new business will usually remain liable for the repayment of loans and other debts because most major creditors, especially lenders, will try to limit their risks by requiring owners to pledge their personal assets as security for a debt. In some cases, an officer or employee of a corporation may also be personally liable for failure to withhold taxes.
A corporation is a separate legal entity and a more structured form of business. It can continue to function even without the existence of original ownership or other key individuals. It also has advantages in terms of enabling employees to participate in various types of insurance and profit sharing. A corporation has more flexibility in terms of different approaches to taxation.
The "S" corporation provides the benefits of incorporation while also eliminating federal corporate income tax by passing the tax liability directly to the stockholders. The IRS allows all profits to pass through to the shareholders personal tax returns. "S" status is available to small companies with up to 35 individual shareholders. "S" corporations can only issue one class of stock, no corporate shareholders are allowed, and all shareholders must be U.S. citizens or taxpayers.
If a corporation does not qualify for "S" corporation status to be taxed as a small business, then it must be treated as a "C" corporation. The decision to be a "C" corporation is one of default - a corporation is automatically a "C" corporation unless it obtains approval from the Internal Revenue Service to be taxed under a different provision. If the corporation will offer its stock to the public via a stock exchange, for example, it would not qualify as an "S" corporation. Limited Liability Companies are not part of this discussion because they are taxed as partnerships and enjoy pass-thorough taxation similar to "S" corporations but without the restrictions, including the number and qualification of shareholders
Step 2: Organization
Answer each question on a scale of 1-5 based on the level of confidence that each factor has been considered in selecting the appropriate business structure.

Has capital availability and financial risks been identified? 12345
Have tax consideration been considered as part of the business structure? 12345
What business management system and structure best serves the business? 12345
What is the cost of establishing the business structure? 12345
Does the business structure provide adequate risk management and protection? 12345
Will the business structure allow for an easy exit strategy? 12345
Estimated time needed to improve response level to the questions above. Days
Estimated budget needed to increase understanding of the questions above. Dollars

Step 3: Feasibility

How does a Feasibility study differ from a business plan? The separate roles of the feasibility study and the business plan are frequently misunderstood. Although various components are common to both the feasibility study and the business plan, not all of the information developed in the feasibility study will be incorporated into the business plan and vice versa.
The feasibility study is conducted during the deliberation phase of the project development cycle - prior to completing the business plan.
A feasibility study is an analytical tool typically prepared by someone not directly associated with the project.
A thorough feasibility effort includes several scenarios for the decision-makers in determining the practicality and profitability of a proposed project idea.
The feasibility study is only applicable for project development
The business plan reflects the intended responses to the critical issues identified in the feasibility study.
The business plan is generally created internally by the main parties involved in the business.
The business plan elaborates on the most promising scenario. By the time the business plan is created, focus has been set on the most opportune concept.
The business plan is a blueprint for project management

Step 3: Feasibility

A feasibility study can be divided into two major phases: (Score yourself on each question from 1-5)
1. Analysis of Directly Influencing Factors
Market Determination - Determines the potential market for the proposed product.

Markets – Determined potential market for the proposed product? 12345
Market entry – Determined method and cost of introducing the product to consumers? 12345
Raw Product Supply - Determines economic availability of sufficient raw product.

Determined the amount of raw product supply available and the amount needed for 12345
Determined the risk factors that may effect raw product supply and developed solutions? 12345
Production Process - Determines facility needs, capital and financing requirements, potential costs and returns. 12345
Facility needs – Determined specific facilities (buildings, equipment and rolling stock) required? 12345
Investment capital needs – Determined initial investment requirements for facilities? 12345
Labor needs – Determined specific quantity and types of labor required? 12345
Cost of operation – Developed the cost budget to include costs of labor and management, raw material and operational and fixed components? 12345
Profitability – Determined potential profit by estimating returns and comparing with cost budgets. Also includes break-even analysis and preparation of projected income statement, balance sheet and cash flow statement? 12345
2. Analysis of Environmental Concerns
Availability of site - Determine adequacy of site in physical, ecological and economic terms? 12345
Availability of services - Determine adequacy and cost of required services such as utilities, financial services and educational services? 12345
Governmental structure - Determine type of governmental policies in area as they affect operations, such as assessment policies, taxes and zoning ordinances? 12345
Availability of transport facilities - Determine adequacy and cost of transportation facilities to be used by the firms? 12345
Estimated time needed to improve response level to the questions above. Days
Estimated budget needed to increase understanding of the questions above. Dollars

Step 3: Feasibility

Summary & Conclusions
What if the feasibility study indicates the idea may not work?
Feasibility studies do not become suddenly negative or positive. Instead, as research accumulates, the scales will gradually begin to tip one way or another. Often times, a failing scenario can be readily altered to restore a favorable balance. For instance, a concept that shows an inability to service intended debt loads might be made favorable if the owners provide more private capital and therefore avoid the costs of interest on borrowed monies. Costs of labor can be reduced by increased volunteerism, lack of market access might be solved by increasing the trade area, and so forth.
The best advice may be to work through problem scenarios completely before trying to force your project ahead. There is an old saying in the business world that goes something like, "The easiest way to avoid a bad situation in business is to avoid getting into it in the first place." Any producer who has ever been stuck axle-deep in a mudhole has found themselves wishing they would have heeded the signs that the ground was probably too wet to safely travel on. Avoiding a problem is virtually always easier than curing one after-the-fact. If the feasibility study says your idea will not be profitable - be wise and beware.
Where do I go for technical assistance for Feasibility Studies?
Where is there help?
There is an abundance of available business assistance. As you begin your search for people and agencies that can help you with the feasibility stage, begin by looking locally, then regionally, followed by searching for state and federal forms of assistance. Looking for help in this manner provides a logical process that tends to ensure you are absolutely getting all of the help that is out there for you. Finally, starting at home puts you in stride with the way many assistance programs are structured. Federal assistance is sometimes contingent on state participation; state participation sometimes requires regional and local support, etc.
The Agricultural Marketing Resource Center web site has information from each state that will help find resources for financing.

Step 4: Planning

Why do I need a business plan?
There are several very good reasons to prepare a business plan. The primary one is to enhance the opportunity for success. Other reasons include:
A well-assembled business plan provides a roadmap for business leadership.
A good plan will help business management stay on track while negotiating changes in directly influencing factors and environmental conditions.
The business plan assists financing. Whether you are a small business start-up, or an established concern, banks and other financial institutions want to see that you know where you are, where you are going and how you are going to get there.
The plan will show how much money is needed, when it will be needed, and how to get it; in other words, the business plans shows how to finance your operation.
A well-defined business plan facilitates thorough consideration of all aspects of the type of business that is being started.
Business plans raise the questions that need answers in order to achieve business success.
It establishes a system of checks and balances that will reduce business management errors.
A business plan establishes benchmarks that help to keep a business under control.
Planning helps develop the competitive spirit management must have to always be prepared and ready to operate.
The exercise of completing a business plan protects against oversight as it promotes careful consideration of the entire business process.
An excellent business plan will cause a thorough analysis and understanding of competitors.
Business plans facilitate a process that tends to eliminate emotion in reaching "LAUNCH", "HOLD", or "CANCEL" business decisions

Step 4: Planning

What are the parts of a good business plan? (each question will be scored 1-5)
No two business plans will look exactly alike, although all business plans tend to share certain common elements. A business plan usually is divided into four distinct sections plus supporting documents:
Description of the Business
A detailed description has been written that contains information about the products, markets and/or services of the business and the company’s location? 12345
Description of the Marketing Plan
Has the customers likes, dislikes and expectations for the product been determined? 12345
Has a marketing strategy been developed to fill the customer’s needs? 12345
Description of the Management Plan
Does management have the ability to manage employees, finances and make decisions? 12345
Financial Management Plan
Do key people have a strong understanding of accounting and financial principals? 12345
Estimated time needed to improve response level to the questions above. Days
Estimated budget needed to increase understanding of the questions above. Dollars

Step 4: Planning

Summary & Conclusions
Business plans should be written by the principals involved in the new venture because they are the ones with the vision of what the company should look like. A business plan requires information be gathered from many different areas of knowledge and experience. It is rare for any one person to possess all the skills necessary to create a well written and complete business plan. It is very important for the key planners to realize their skill limits. When necessary hire skilled people with the necessary experience.
Where do I go for assistance in writing a Business Plan?
The Agricultural Marketing Resource Center web site has information from each state that will help find resources for writing business plans.
The Agricultural Marketing Resource Center web site has information from each state that will help find resources for writing business plans
Step 5: Capital

What are some key considerations regarding financing?
The search for financing is similar to any other aspect of your business in that it takes time and effort to research the sources right for you. Examine your needs, plan how the funding will be utilized, and study what is available. The ability to secure sufficient funds to start and grow your business depends strongly on your preparation and demonstrated capacity to manage those funds efficiently and effectively.
Sufficient and ready capital is essential.
While poor management is cited most frequently as the catalyst for business failures, inadequate or ill-timed financing is a close second. It is simply not enough to have sufficient financing. You need to have the knowledge and planning ability to manage it well. That means avoiding such common mistakes as securing the wrong type of financing, overestimating or underestimating the amount required or the cost of borrowing money, and then finding it difficult to repay
Step 5: Capital

Before inquiring about financing, answer the following questions: (each question will be scored 1-5)
Is the management team knowledgeable about the sources of equity and borrowed capital? 12345
Are the uses for capital well defined and correctly timed? 12345
Do the uses for capital mesh with the business plan? 12345
Will future profits be able to timely pay lenders or dividends to stockholders? 12345
Estimated time needed to improve response level to the questions above. Days
Estimated budget needed to increase understanding of the questions above. Dollars

Step 5: Capital

Summary & Conclusion
How do the sources of financing differ? Not All Money Is The Same
There are two types of financing: equity and debt financing. When looking for financing to meet your needs, it is important to consider your company's debt-to-equity ration - the measurement between dollars you've borrowed and dollars you have injected into the business. The more money owners invest in their business, the easier it is to attract financing.
If your firm has a high proportion of equity to debt, you should probably seek debt financing. However, if your company has a high proportion of debt- to-equity, experts advise that you increase your ownership capital (equity investment) for additional funds. That way you won't be over-leveraged to the point of jeopardizing your company's survival.
Equity Financing
Most small or growth-stage businesses use equity financing in a limited way. As with debt financing, most of the time additional equity comes from non-professional investors such as friends, relatives, employees, customers or industry colleagues. However, the most common source of professional equity funding is that group of investors known as venture capitalists.
Venture capitalists are institutional risk takers and may be groups of wealthy individuals, government-assisted sources or major financial institutions. Most specialize in one or a few closely related industries. While public perception of venture capitalists may be of deep-pocketed financial gurus looking for "that hot new business" in which to invest their money, in reality they most often prefer three-to-five-year old companies that offer the potential to become major regional or national concerns and return higher-than-average profits to their shareholders.
Venture capitalists may scrutinize thousands of potential investments annually, while investing ultimately in only a handful. The possibility of a public stock offering is critical to venture capitalists. Quality management, a competitive or innovative advantage, and growth of the industry are also major concerns.
Venture capitalists differ in their approach to management of the business in which they invest. They generally prefer to passively influence a business, but will react when a business does not perform as expected and may insist on changes in management or strategies.
Relinquishing some of the decision making and some of the potential for profits comprise the major downside to equity financing. If venture capital financing still seems like the ideal source of funding for your business, you may contact these investors directly, although they are known to make most of their investments through referrals.
Debt Financing
There are many potential sources for debt financing. Banks, savings and loans, commercial finance companies and the U.S. Small Business Administration (SBA) and U.S. Department of Agriculture Rural Development are among the traditional sources. Over the last decade, the growing recognition of the contributions small firms make to the economy has stimulated the development of an increasing array of programs offered by state and local governments.
There is another important source for financing frequently overlooked by small business owners and prospective entrepreneurs. Family members, friends, and former associates are a potential financing source, especially where the capital requirements are smaller.
Traditionally, banks have been the major source of small business funding. Their principal role has been as a short-term lender offering demand loans, seasonal lines of credit and single purpose loans for machinery and equipment. Banks generally have been reluctant to offer long-term loans to small firms.
The USDA or SBA guaranteed lending program provides banks (and non-bank lenders) with the incentive to make long-term loans to small firms by reducing their risk and leveraging the funds they have available.
Whether pursuing a loan from a traditional lender or a government lender, prospective borrowers should be equipped with a business plan, profit and loss statements, tax returns for the last three years and a current balance sheet, and should be able to articulate the need for the loan and demonstrate the ability for repayment. Evidence of strong management is another plus. These requirements will vary if one business is a start-up compared to an existing business. Established businesses are expected to provide one-third of the equity injection, while the requirement for start-ups could be 50 percent or more.
In addition to the equity injection, lenders commonly require the borrower's personal guarantees to protect the lender in case of default. This ensures that the borrower has a sufficient personal interest at stake to give paramount attention to the business. For most borrowers this is a scary, but inherently necessary disposition.
Step 6: Marketing

Marketing is a “first, last, and always” consideration. Before production starts, make sure a market has been established. A fact that too many businesses discover too late, is that the world will not necessarily beat a path to their door just because they offer a better mousetrap. Although the product may be the best on the market, a good marketing program is essential for a business venture to realize its fullest potential. It may be necessary to do some test marketing or hire the services of a professional marketing organization.
Fundamentals of a good marketing strategy
The best marketing strategy will yield whatever level of sales it takes to make a business profitable. Identifying the fundamentals of the best strategy for any business venture calls for merging a thorough understanding of the needs of the potential buyers with a clear picture of the capabilities of the new business.
Five characteristics of the process managed within the Marketing Plan
Identification - Methods should be established to constantly scan the marketplace for areas of threat or opportunity. An up-to-date marketing plan should afford a head start on opportunity and an ability to handle threats prior to reaching crisis stage.
Analysis - Marketing priorities are set based on potential and customer demands. The ranking of priorities can be established by asking six questions:
How quickly will the marketing opportunity/threat develop?
How will it impact our products and operations?
How likely is it that it will come to be of major importance?
How would our investors expect us to act in relation to this marketing opportunity/threat?
What is our ability to react to this opportunity/threat?
What are the costs of not reacting to it?
Obviously, those opportunities/threats with the greatest bottom-line impact need to be addressed within the overall marketing plan as quickly as possible.
Strategy - The third step in the marketing process, developing strategy, is typically a committee exercise that includes top management, production, finance, and any other areas affected by the opportunity/threat.
Action - Marketing activities are a synchronized and integrated response to the nature of the marketplace. A marketing campaign constantly coordinates all available business capabilities. Some marketing activities might be short-lived while others might carry on over a longer period.
Evaluation - Evaluation is considered by some to be the final step of the process. Others argue that constant evaluation is the process. The point is: regular evaluation of the marketing plan is vital to making sure the marketing process being carried out is helping the business achieve its maximum potential

Step 6: Marketing

Score yourself from 1 to 5 on each question.
Have target markets been identified, prioritized and quantified? 12345
How much of the budget will be spent on market? 12345
Have the main competitors, and their strengths and weakness been identified? 12345
Have patents, branding or special labeling been examined? 12345
Has pricing been set based on market research and cost of production? 12345
What benefits does the customer receive by using this product? 12345
Estimated time needed to improve response level to the questions above. Days
Estimated budget needed to increase understanding of the questions above. Dollars

Step 6: Marketing

Summary & Overview
Other Considerations
Marketing is an unending process that continues throughout the life of a business. As a primary component of the business plan, the marketing plan needs to be continually reviewed to ensure every opportunity is being capitalized on. Even though production may be contractually committed at a set rate for periods of time, the marketing process is committed only to constantly seeking greater opportunities for business growth and expansion
Step 7: Production

First, keep in mind that no two businesses are going to share precisely the same concerns. The following discussion is meant to be general in nature.
As an overall concern, managing per unit cost of production will likely be the greatest challenge. Managing cost means gaining a total understanding of each and every fixed and variable expense to manufacture or offer the product or service.
The second greatest challenge is often identifying where assistance is needed and then finding and hiring that help, whether it is in the form of consultants or laborers, for instance.
There are many reasons for starting a business but if making money isn’t the most important reason, it is a safe assumption that it won’t (make money, that is). One of the ways to help manage production costs and to manage for success is by implementing business strategies like those included in most business Quality Management Systems.
Those principles are as follows:
Customer Focus: Clearly understand what the customer wants and what is important to them.
Leadership: Management needs to be actively involved and understand all aspects of the business.
Engaged Employees: All people involved in the business clearly understand the goals of the business
Process Approach: Each stage of the business is linked and managed as a process.
Systems approach to management: Each stage of the business is managed to maximize efficiency.
Continual Improvement: The business has a goal of continually improving – both quality and efficiency.
Factual decision making: Records are carefully kept and evaluated to make logical business decisions.
Strong business relationships: The business builds strong relationships with suppliers and buyers to strengthen both businesses

Step 7: Production

Answer each question on a scale of 1-5 based on your level of completion.
Has an organizational flow chart been developed showing accountability for all employees. 12345
Have training programs, employee benefits packages, employment guidelines and schedules been developed. 12345
Has an employment pool for labor and services been identified? 12345
Are company goals, quality policies and expectations developed for employees? 12345
Is a system in place to monitor and communicate with customers? 12345
Management is committed to the business, employees and customers? 12345
Appropriate recordkeeping and evaluation systems are identified? 12345
A list of service providers and suppliers has been established and evaluated? 12345
Estimated time needed to improve response level to the questions above. Days
Estimated budget needed to increase understanding of the questions above. Dollars
Gantt Chart
A gantt chart is a way to organize your tasks. Each slider represents a task. Drag them to the left and right to put them in the order you want to complete each task. Then do each task in the order you've chosen here.

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