1 SMALL BUSINESS MANAGEMENT Chapter Three Evaluation of a Business Opportunity

2 Non Quantitative Assessment of Business Opportunities u Goals u Content of Work u Lifestyle u Capabilities – Good health, management fundamentals, financial base u Experience

3 Breaking Into The Market u Three ways – offer a totally new product – offer an existing product to a different market – offer a product or service similar to those existing in the same market

4 Collection of Information u Sources of Information u Secondary data u Primary data – observations – experiments – surveys F Mail surveys, Telephone surveys, Personal interviews, Focus groups

5 Quantitative Assessment of Business Opportunities u Preparing the Feasibility Analysis – Step One - Calculate the market Potential – Step Two - Calculate the market Share – Step Three - Calculate the Net Income and Cash Flow

6 Quantitative Assessment of Business Opportunities u Step One - calculate the Market Potential – Determine the Market Area and its population – Obtain revenue, sales statistics for type of product or service in the area – Adjust the market potential as necessary

7 Quantitative Assessment of Business Opportunities u Step Two - Calculate the Market Share u Retail Firm – 1. Estimate the total amount of selling space in the market devoted to the new business will sell – 2. Estimate the size of the proposed store – 3. Calculate the market share based on selling space

8 Quantitative Assessment of Business Opportunities u Step Two - Calculate the Market Share u Retail Firm – 4. Make adjustments to reflect any competitor strengths and weaknesses regarding the proposed store – 5. Multiply the revised market share percentage by the market potential estimate obtained in Step One.

9 Quantitative Assessment of Business Opportunities u Step Two - Calculate the Market Share u Manufacturing Firm – 1. Estimate the total productive capacity in the market for the product to be manufactured – 2. Estimate the total productive capacity of the proposed manufacturing plant. – 3. Calculate the market share based on productive capacity

10 Quantitative Assessment of Business Opportunities u Step Two - Calculate the Market Share u Manufacturing Firm – 4. Make adjustments to reflect competitive strengths and weaknesses the competitive plant may possess – 5. Multiply the estimated market share percentage by the market share potential estimate obtained in Step One.

11 Quantitative Assessment of Business Opportunities u Step Two - Calculate the Market Share u Service Firm – 1. Estimate the total capacity of the se4rvice available in the market area – 2. Estimate the service capacity of the proposed business – 3. Calculate the market share based on the capacity base Step Two - Calculate the Market Share Retail Firm

12 Quantitative Assessment of Business Opportunities u Step Two - Calculate the Market Share u Service Firm – 4. Make adjustments similar to those made for a retail store –5. Multiply the revised market share percentage by the market potential estimated in step 1.

13 Quantitative Assessment of Business Opportunities u Step Three - Calculate net income and cash flow – 1. Using the market share from Step Two, calculate the expenses expected F cost of goods sold and gross profit percentages; cash operating expenses; interest and depreciation – 2. Subtract expenses from revenue to determine projected net income in the first year and subsequent years.

14 Self Assessment for a Small Business Opportunity u Personality u Nature u Abilities u Experience u Financial base u Feasibility

15 Concept Checks u 1. What non quantitative factors should be considered in the selection of a small business? u 2. What are three ways of entering the market? u 3. What are two methods of collecting information? In what situations would they be most useful?

16 Concept Checks u 4. What are the three methods of collecting primary data? Which is the most relevant to a small business? u 5. What steps are involved in determining the financial feasibility of a retail store?