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Unformatted text preview: Entrepreneur The Retail Entrepreneurship Simulation Jerald R. Smith, Florida Atlantic University Peggy A. Golden, Florida Atlantic University Charlottesville, Virginia, USA COPYRIGHT NOTICE This manual and the simulation described in it are copyrighted with all rights reserved by Interpretive Software, Inc. Under the copyright laws, neither this manual nor the software may be copied, in whole or in part, without written consent of the authors, except in the normal use of the simulation for educational purposes, and then only by those with a valid license for use. The same proprietary and copyright notices must be affixed to any permitted copies as were affixed to the original. This exception does not allow copies to be made for others, whether or not sold. Under the law, copying includes translating into another language or format. Purchasing the simulation experience gives the owner the right to participate in a unique learning event. Each student or participant must purchase the simulation to take part in the event or the institution sponsoring the event must purchase for the entire group participating in the event. Limited Warranty on Media and Manuals In no event, will Interpretive Software, Inc. be liable for direct, indirect, special, incidental, or consequential damages resulting from any defect in the software or its documentation, even if advised of the possibility of such damages. In particular, the authors shall have no liability for any programs or data stored in or used with the computer products, including the cost of recovering such programs or data. This simulation experience is sold, "as is," and you, the purchaser, are assuming the entire risk as to its quality and performance. The warranty and remedies set forth above are exclusive and in lieu of all other, oral or written, express or implied. For more information about other products from Interpretive Software, please contact: Interpretive Simulations 1421 Sachem Place, Suite 2 Charlottesville, VA 22901 Phone: (434) 979-0245 Fax: (434) 979-2454 Website: http://www.interpretive.com Discover a Better Way to Learn. Active Learning through Business Simulations. Copyright © 1987–2007 Peggy A. Golden and Jerald R. Smith Copyright © 2008–2009 Interpretive Software, Inc. All rights reserved. Printed in the United States of America. No part of this book may be used or reproduced in any manner whatsoever without written permission of Interpretive Software, Inc. ABOUT THE AUTHORS Dr. Peggy Golden . . . is currently Professor of Management and International Business at Florida Atlantic University teaching graduate and doctoral courses in Strategy and the Environment of Business. She has also taught courses on global competition in Spain and to computer industry executives in Asia. Prior to her arrival at FAU, Golden taught at the University of Louisville for five years in a variety of areas including the management of information systems. All courses are taught through extensive use of cases, experiential exercises, and simulation experiences to reinforce the learning process. In addition to teaching college courses, Dr. Golden has also conducted numerous workshops in the development of competitive strategy, general management principles, special topics for women managers, time management, decision-making, and team-building. Consulting activities include strategic planning, systems analysis and design, and management of change. Dr. Golden is an active researcher and writer. She is currently studying corporate reputation and the interaction of corporate governance on top management team pay disparity. She has published seven management simulation games and numerous articles and papers in the area of strategy formulation and implementation, and simulation development and use. Visit Dr. Golden's homepage at http://professorgolden.net Dr. Jerald Smith . . . is Professor Emeritus of Business Strategy and Policy at Florida Atlantic University. He is the author of eight simulation games spanning many interest areas in Management and Marketing. He has taught a broad range of courses at the undergraduate, masters, and doctoral level. He was one of the first to teach a course on the Internet as a host for professional MBA's who are on the go. Dr. Smith has consulted for Fortune 100 companies in diverse areas such as ethics training, supervision, and has helped formulate strategic initiatives for these companies. He is the author of numerous articles. Visit Dr. Smith's homepage at http://www.fau.edu/~jrsmith Acknowledgments A project of this magnitude cannot occur without the input and support of many people and organizations. Special thanks go to the following people: The Dean, Bruce Mallen, faculty in the Department of Management, International Business, and Entrepreneurship and its chair, Darab Unwalla, and the Graduate School of Business at Florida Atlantic University for support of our interest in management simulation and software. Our supportive families are always in the background: Adele, Barbara, Michael, Charles, David, Flossie, Susan, Jennifer, Matthew, and Willie. The genesis for this endeavor is in the strong entrepreneurship program at Florida Atlantic University. SUCCESS magazine studied over 250 entrepreneurship programs in the country and published their list of the "Top 50 Business Schools to Study Entrepreneurship." Florida Atlantic University was among the colleges listed. The Entrepreneurship team at FAU includes the director, Larry Klatt, and includes Paul Gugliemino, Kunal Banerji, Dennis Boyer and Bob Keltie. This team believes that simulations are valuable teaching tools for entrepreneurship. This is a real "Learn by Doing" pedagogical philosophy. Professor Richard Hoogerwerf at Miriam College for beta testing the simulation in his classes. Richard gave us 110% in testing and many valuable suggestions. Professor Marc Dollinger at Indiana University for a foundation in entrepreneurship, and Professor James Gray at Florida Atlantic University for making several suggestions in the field of retailing. Early adopters and champions of the cause include: Mary Beth Pinto, Jeff Jones, Richard Hoogerwerf, Judy Harris, Aston Moss, Salim Jiwa, Don Gudmenson, Ken Klatz, and John Pal. Thanks to the team at Houghton Mifflin, Kathy Hunter, Susan Kahn, Florence Cadran, and Melissa Russell. A special thanks to Pat Menard who is undoubtedly the most precise copy editor in the business. Not only does she edit for typos but makes helpful grammatical suggestions and makes sure all the numbers are correct. Those brave souls who tested the beta version were of great help: Steven Maranville, Mary Beth Pinto, Brian Hoekstra, Chris Scalzo, Connie Nott, Philip Little, Walt Bogumil, Rod Borer. Thanks to all! In this revision, we attempted to use all the comments and suggestions made by the many users of the first edition of this simulation. If we tried to name all the contributors we would surely omit one or more so we will simply thank all of you. We had some users who wanted a much more complex simulation with a heavy international emphasis. Others said keep the simplicity of the second edition in order that students who had never played a simulation could do so without getting deep in the many "rules" of a complex simulation. Unfortunately, we could not do both so we have opted for a less complex simulation in this edition. Table of Contents Introduction ................................................................................................................................... 1 Overview of Entrepreneur .......................................................................................................... 1 The Entrepreneur Manual ........................................................................................................... 5 Section 1: Entrepreneurship Essentials ..................................................................................... 7 Entrepreneurship Essentials ........................................................................................................ 7 Team Dynamics ........................................................................................................................ 10 Section 2: The Entrepreneur Case ........................................................................................... 13 Introduction............................................................................................................................... 13 Starting Situation and Startup Decisions .................................................................................. 13 Financial Considerations........................................................................................................... 17 Operations ................................................................................................................................. 18 Marketing .................................................................................................................................. 19 Staffing...................................................................................................................................... 20 Special Decisions ...................................................................................................................... 20 Integration ................................................................................................................................. 21 Next Step................................................................................................................................... 21 Section 3: Entrepreneur Operations Guide............................................................................. 23 Getting Started and Login ......................................................................................................... 23 Simulation Navigation .............................................................................................................. 24 Detail of Menu Choices ............................................................................................................ 26 Startup ................................................................................................................................... 27 Decisions ............................................................................................................................... 27 Analysis................................................................................................................................. 39 Accounting ............................................................................................................................ 41 Environment .......................................................................................................................... 44 Simulation ............................................................................................................................. 46 Forms and Worksheets ............................................................................................................... 47 Glossary ....................................................................................................................................... 55 Analyzing the Income Statement ............................................................................................... 61 Index ............................................................................................................................................. 63 Print Date 7/27/2009 INTRODUCTION Entrepreneur is a dynamic business simulation designed for undergraduate students enrolled in courses that feature the concepts of entrepreneurship, business, and/or retailing. By analyzing information, making decisions, and observing the results, you will experience firsthand the challenges and rewards of running a business. Welcome to the exciting world of simulation! Unlike most classroom exercises, a simulation provides an opportunity for the continuous practice of managing an organization. In Entrepreneur, you have the unique opportunity to make decisions, see how the decisions work out, and then try again! Thus, you will have a "hands-on" experience with manipulating key business variables in a dynamic setting. Simulation techniques have been used for some time in attempting to create business models that can aid in explaining the "real world." In this simulation we have attempted to combine the marketing reactions found in the real world along with the business environment found in this type of competitive situation. This model takes the decisions each team makes and simulates how the consumer will react. The relative "appropriateness" of each team's decisions will be displayed under the Comparative Results and Industry Newsletter sections of your course website each simulation quarter. In the real world, managers must make decisions without perfect information, under conditions of uncertainty, and within time constraints. This simulation is no different! You will need to get as much information as possible through the market research reports provided, keep good records in order to study the interactions among marketing variables, and then make your decisions for the next round. It is recommended that you do not use the "stab in the dark" approach of making decisions but rather plan to hold certain variables constant while manipulating others. This allows you to begin to determine which marketing elements are more effective in generating sales. Do not rely on information gathered from others who have competed in the simulation previously because your instructor has the option to change the competitive environment of the simulation for each class! Overview of Entrepreneur Briefly, the simulation involves the takeover and continuing operation of a retail-clothing store. In playing the simulation, students acting as management teams make a variety of decisions that will have an impact on their store's operations. These decisions include the type of merchandise that will be carried; selecting from among five different clothing product lines: modern, designer, Introduction—Page 1 A unique feature of the simulation is the inclusion of business environmental and social responsibility incidents that the firm faces during each decision period. Your decisions are entered directly into the software online and once advanced, financial results can be viewed and/or printed for your team. You and your team will analyze the financial reports that are produced each decision period, make a new set of decisions, and enter these. Each decision period is assumed to be one simulated quarter (3 months). regional/ethnic, ultra-trendy, and professional uniforms. Prices must be established for pants/jeans as well as tops/blouses/shirts. The amount of advertising and sales promotion expenditure must be determined and the size of the sales force established. Inventory management is an important element of the simulation and teams must determine the amount of clothing to purchase each decision period. Selecting the appropriate market research study can aid in compiling decision data. Each company in this simulation is composed of one to four class members who assume responsibility for the operation of their assigned firm. Instructors typically leave the organization of each team up to the individual teams. Your team will be competing with other teams (up to 18, total) in the dynamic retail clothing business. Teams are expected to establish objectives, plan their strategy, and then make the required business decisions dictated by these plans. Decisions are entered directly into the simulation software online which produces several financial reports for each team concerning the team's sales and profits. The process is repeated several times. Your instructor will determine the number of decision periods appropriate for your class objectives. A simulation cannot duplicate real life experience. However, just as pilots are trained in flight simulators, we feel that students can have some of the experience of operating a business through simulation. This simulation will allow you to plan, organize, direct, and control a business enterprise using a model that is as close as possible to actual conditions. It is strongly recommended that student teams approach the simulation as a "real world" environment of competition against other firms and not attempt to play "against" the computer. All teams will make a few mistakes throughout the simulation so don't allow a few setbacks to affect your play—mistakes happen in the real world too! Keep your spirits up and good luck! To get the most out of the Entrepreneur experience, we recommend the approach outlined on the following pages: Page 2—Entrepreneur Student Guide Sections 1 & 2 of this manual present a description of the retail clothing market and your industry's current situation. A thorough understanding of your company, potential markets, and decision variables will help your group decision-making process. Read Sections 1 and 2 of the Manual Learn How to Operate the Software Develop a Marketing Plan Section 3 (Operations Guide) provides information on how to use the simulation, as well as a detailed description of each menu option. In order to quickly learn the functions of the menu commands and become familiar with operating the program, it will be helpful to have access to your simulation as you work through this section. Market research reports are available for purchase as needed and contain data from studies conducted in the local casual clothing market. Your firm will find quarterly sales averages and product pricing, along with estimates of the average advertising budget, sales promotion budget, each firm's return policy, and its average wage rate. From this information, you will devise and implement an appropriate marketing plan and know how your competitors are positioned. Just as in real life, however, some information and reports will prove more useful than others. Part of your decision process will include deciding which information is most useful to your firm. After reviewing information about your company and the market, your team will decide how to manage your firm in terms of price, advertising, promotion, employee wages, and inventory purchases. Make sure you allow sufficient time to analyze your resources thoroughly and make informed decisions. Implement your Strategy Introduction—Page 3 . Enter Decisions Advance to the Next Period Review Results Repeat NOTE: You may find it helpful to print out some reports and step back from the computer from time to time. Analyzing information and determining an integrated business plan is a complex task. It is important to take time and reflect on the information, especially when working in groups. Page 4—Entrepreneur Student Guide When you enter your decisions, they are automatically saved to the web. When satisfied with your decisions, if playing in benchmark mode, you (or your team leader) can use the advance option under the simulation menu to move to the next quarter. If you are using the directly competitive version, the simulation will be advanced at a specified time according to your course schedule so that everyone competing in the industry will have a chance to enter their decisions. Information will be updated, and your firm will have access to the updated results. Once the simulation has been advanced, see how your team is doing compared with other teams in your class by viewing the comparative results screen on your class website. Review the results in the market before making decisions for the next quarter. Compare your results with those of the entire industry and consider how well your strategy is working. Repeat the decision-making process until all periods have been completed. At the end of the simulation, you will be able to see how your firm performed over the entire game and view comparative results with other teams. Competing firms will be following their own strategies and reacting to your decisions. The simulation always starts from the same position, but each game will proceed on a unique course depending on the strategy that each team chooses. This will allow competitive comparisons and illustrate how businesses can evolve differently. By competing in the Entrepreneur environment, you will gain a practical understanding of how various factors interact and affect one another. By analyzing information, making decisions, and observing the results, you will experience firsthand the challenges and rewards of running a business. Have fun and good luck! The Entrepreneur Manual The remainder of this manual is divided into three sections: Section 1: Entrepreneurship Essentials This section provides a brief introduction to entrepreneurial management: what it is, why it is important, and what concepts will be used in the simulation. . Section 2: The Entrepreneur Case The section presents the information on retail clothing store in a form similar to a business school case. This will also serve as an introduction to the situation at the start of the simulation. Section 3: Entrepreneur Operations Guide This section outlines the operational aspects of using Entrepreneur, including how to get started, the menu and help systems, and a detailed description of each report and decision screen. Introduction—Page 5 Page 6—Entrepreneur Student Guide SECTION 1: ENTREPRENEURSHIP ESSENTIALS Entrepreneurship is usually associated with the start-up of an innovative business. This simulation is more about the day-to-day operation of the small firm. However, the authors hope that students will carry into their play of the game the spirit of entrepreneurship, which includes risk and profits, operating under uncertainty, creation of new products and services, and innovative approaches to thinking. As Marc Dollinger suggests, an excellent role model for the entrepreneur is Sam Walton, founder of Wal-Mart. 1 Sam Walton's 10 rules of leadership and entrepreneurship are jewels for the student of any entrepreneurial endeavor. They are: NOTE: The spirit of entrepreneurship includes willingness to take risks, operating under uncertainty, creation of new products and services, and innovative approaches to thinking. • • • • • • • • • • Commit to your business and believe in it. Share your profits with your employees. Motivate your employees, challenge them, and keep score. Communicate everything. Appreciate your associates with well-chosen words. Celebrate your successes. Listen to everyone and get them talking. Exceed your customers' expectations. Control your expenses. Break all the rules. Swim upstream. Go the other way. A key to success as an entrepreneur is planning. After strategy for a business is formulated, the next step is to prepare the business plan. If a business is seeking outside financing for its operations, the bank, venture capitalist, or other lending entity often requires a business plan. The business plan has some of the same information as contained in the strategic plan but in addition, usually contains a great deal more marketing and financial information, e.g., market analysis, demand forecasts, production and operations management details, financial forecasts and plans, and human resource plans. Many texts describe the functions of a manager as planning what tasks are to be accomplished, organizing resources to accomplish the tasks, directing the accomplishment of the tasks, and controlling the tasks from inception to completion. 1 Marc J. Dollinger, Entrepreneurship (Austin Press, 1994). Entrepreneurship Essentials—Page 7 NOTE: Teams are expected to establish objectives, plan their strategy, and then make the required business decisions dictated by these plans. Planning, Organizing, and Controlling Mission The establishment of a mission for your store is the first step in the strategic planning process. This short statement denotes exactly what the organization should be doing and why it exists. It specifies the nature of the business and the markets served. An example might be: "To provide moderately priced clothes and accessories to support the lifestyle of young working professionals." Such a statement is broad enough to permit diversification but provides an image of the store's position in the marketplace. Objectives Objectives specify the action commitments that are being made to achieve the organization's purpose. They describe the results that the organization wishes to achieve. Objectives provide management with the direction needed for effective coordination of human, financial, physical, and information resources. They can also serve to motivate those in the organization and provide a basis for control processes. Objectives should be established in the following areas: • • • • • • • • Innovation and creativity in the business Market standing Financial resources Physical resources Management development Human resources Productivity Profitability Merely establishing objectives falls far short of completing the planning tasks. The management team must have a plan of action to accomplish the desired objectives. These plans have different names in different organizations including "action plans," "strategies," "tactical plans," etc. For the purpose of this simulation, the term action plan will be used. Policies After the team has established the general direction that the store should take, specific day-to-day guidelines must be prepared. These statements are called policies and they give guidance to daily activities while providing some latitude to the manager in his or her decision-making. Page 8—Entrepreneur Student Guide NOTE: Your company will be competing with other teams (up to 18 total) in the dynamic retail clothing business. Policies should be established in all of the areas for which there are objectives. An example of a marketing policy in this simulation is: "The advertising and promotion budget will be 5% of the previous quarter's gross revenues." A human resource policy might state, "All part-time employees will receive the equivalent of one working week vacation after one year." These policy statements facilitate routine decisions and continuity of business practices. Controlling―The Management Audit The management processes are not complete until there is some way of analyzing the outcomes of operations. This is called the control function of management. One method of accomplishing this is through an internal management audit. The purpose of this audit is to review your store's results over a certain period of time (generally four quarters or one year), compare them with your plans for the simulation when you started, and make any changes that you deem desirable in order to improve your performance and your own learning experience. If this audit occurs at the midpoint of the simulation, you will have the opportunity to take corrective action. If it occurs at the end, your conclusions will be a "report card" of your success. This differs from an accounting audit in that you will be concerned with management issues as well as variances from planned revenues and expenses. The audit process begins by reviewing the stated mission, objectives, action plans, and policies for your store. Even if you did not write them down at the beginning of the simulation, you may ask yourself "What was our original strategy? Are we still on course?" The next step is to measure progress toward achievement of this plan. Teams usually find it helpful to graph their revenues and expenses so they can monitor fluctuations more easily. Review your decisions log. Do your decisions seem to implement your plans? How might you have done things differently? COMPANY LOG: In order to provide continuity of decisions, each team may want to keep a logbook. Company Log In order to provide continuity of decisions, each team may want to keep a logbook containing some or all of the following items. An assortment of forms, worksheets, and charts (See Appendix A) will help management teams maintain the records needed for good decisionmaking. A suggested list of additional items is given below: • Written notes explaining your rationale for selection of business name Entrepreneurship Essentials—Page 9 • • • • • • Written notes explaining the rationale of each quarter's decisions Organization chart Objectives for your company A printout of each quarter's decision summary Printouts of the quarterly income statements, inventory, and balance sheets Any other information that would be of help in operating the firm Team Dynamics You will likely be making decisions as a team. It may be the first time you have done this. Since more firms are becoming increasingly participative in management style, this is a good time for you to practice your interpersonal skills in a team setting. In short, it takes a lot of give and take. It also requires participation by all team members. It is unfair for any team member to not do his or her fair share and equally unfair for any team member to monopolize the decision-making. GROUP VS. TEAM As you might imagine, a group does not automatically form from a team—it takes a lot of hard work on the part of group members and they have to WANT to succeed as a team. You may find a Peer Evaluation form online which your instructor will ask you to use for rating each team member's contribution/performance. Performance evaluation is one of the toughest jobs of a manager. You need to force yourself to be objective about the evaluation. If someone has not pulled his or her fair share, it is your responsibility to indicate that in the evaluation form online. In addition, if your team is having interpersonal problems, you should first try to work it out as you would do in an actual work situation and then discuss it with your instructor. Making decisions and playing a simulation game should be an enjoyable experience, and you need to approach it with that always in mind. A Team's Risk Quotient What is your risk quotient? What will be the risk quotient of your team? You may have some team members who want to stay very safe and others who want to go for it. The purpose of having teams to make and enter decisions in a simulation is to allow you to experience group dynamics in a team decision-making environment. At times you may have to give in and at other times, you will have your way. You need to understand your own level of risk-taking as well as that of your teammates. Page 10—Entrepreneur Student Guide Transforming Your Group into a Team There is a big difference between a group and a team. A group is a cluster of people whereas a team is a group that has been organized to get a job done. For a group to become a team, the members must have a high degree of trust, mutual respect for ideas, open communication, equal participation, and constructive confrontational skills. This process is not easy. The dynamics of a group becoming a team include four phases: 1. Forming - awareness and acceptance of others 2. Storming - conflict concerning leadership and style of decision making 3. Norming - cooperation results from involvement and support 4. Performing - achievement of the desired productivity Simulation Objectives A key objective of the simulation is to optimize profits. We should note that although profits in the short term should not be under emphasized, your team might choose to forgo some short-term profits while building the store for future higher payoffs. At the end of the simulation, the stockholders (represented by your instructor) will be expecting to evaluate a "healthy, going concern." Other important objectives that the instructor (or student teams) may want to establish include: NOTE: Do not "end play" the simulation to maximize profits at the end of the game. Such action would not be operating the firm in the best interest of the stockholders. • • • • • Implementation of marketing strategies that capture optimum market share. Management of operations in a cost-effective manner. Observation of good business ethics that will increase the value of the firm's goodwill. Maintenance of reasonable inventories. Accumulation of knowledge about certain marketing mix relationships through experimentation and good market research practices. Entrepreneurship Essentials—Page 11 Page 12—Entrepreneur Student Guide SECTION 2: THE ENTREPRENEUR CASE Introduction The tops and pants store that you will be operating is a specialty business in the retail apparel industry and has a long history in your local community. It has been a family-owned business for many years, selling casual tops and pants for work and recreation. The youngest members of the family pursued careers in other fields and the retiring owners are interested in selling the business to ambitious entrepreneurs who can update the image and carry the business forward. STARTUP NOTE: Three startup decisions must be made before the simulation can be advanced. They are: Financing Your Business, Store Location, and Naming your Business—all required in Period 1. Your store's relationship with its suppliers is excellent and a primary vendor has offered to buy back the existing stock when, or if, you change to a different product line. Since the store has always closed for a one-week vacation, you can spruce up and restock with merchandise of your own choice without disrupting service to existing customers. This occurs during your first week of ownership. Time Periods in the Simulation The simulation begins with Year 1, Quarter 1. Quarters 1 (1st year), 5 (2nd year), and 9 (3rd year) are the months of January through March. Quarters 2 (1st year), 6 (2nd year) and 10 (3rd year) are the months of April to June; Quarters 3 (1st year), 7 (2nd year), and 11 (3rd year) July to September, and Quarters 4 (1st year), 8 (2nd year), and 12 (3rd year) October to December. As a retailer, you should expect demand to be greater during the holiday buying season October to December and during the summer season July to September (school buying season). Starting Situation and Startup Decisions Business Name One of the most important decisions an entrepreneur makes is naming the business. This is also a legal issue since names are usually registered in a state office in which the business operates (usually the office of the secretary of state). Once your business has a new name, the image and reputation for the store immediately begins to take form. Although you can rename your business if the first name selected turns out to be unsatisfactory, it is important to select a name that will stand the test of time and perhaps even be adaptable to a new product line if you desire to change the product line sometime during simulation play. Factors you may want to take into consideration in naming your business and some right/wrong The Entrepreneur Case—Page 13 examples: NOTE: When your team has agreed upon a business name, your team captain must enter the name into the startup decision screen. ► Is the name descriptive of what you sell? • Campus Clothing Corner vs. The Corner Store ► Is the name descriptive of your product? • Designer Jeans Depot vs. Art's Apparel ► Is the name an ego trip or does it contain meaningless names/words representing the owners? • Peggy A. Golden's Rainbow vs. The Jeans Shop • The JGD Shop (first initials of the owners); or We Three ► Is the name distinctive, perhaps catchy, and easy to remember? • Will it be conducive to future advertising jingles and logos? • Jerry's Jazzy Jeans vs. Larry Lanahan's Clothing and Department Store ► Does the name lend itself to future changes in products or expansion of the product line (such as accessories and shoes)? • Casual Clothes & Etc. versus Only Tops Of course, some of these factors have conflicting requirements (e.g., not an ego trip but easy to remember: Jerry's Jeans). You will need to determine which factors are most important for your store's image. NOTE: Your lease expires during the first simulation period so you have the opportunity to renew the lease at the current rent or relocate. Location and Retail Space Layout The store you have purchased is located next to a convenience store and across from a university campus. The location appeals to the student body and there is a fair amount of trade from surrounding neighborhoods. The rent is $5,000 per quarter and the previous owners have been moderately successful here. Your lease expires now so you have the opportunity to renew the lease at the current rent or relocate. You will be given three other locations from which to select; any of which will be a viable option for your business. However your decision should be based on your motif, product line, price range, and potential customers. Small retail apparel stores can be found in a variety of locations. Although they are most evident in retail malls, successful operations can be found in shopping plazas, downtown stores, and other types of retail space (e.g., adjacent to drive-in grocery convenience stores, former gas Page 14—Entrepreneur Student Guide LOCATION NOTE: It is not intended that any location will be a "bad" location. The location decision should be based on your motif, product line, price range, and potential customers. The opportunity to relocate will not be available later in the simulation. stations, and hotel arcades). Each type of location attracts a unique clientele and it is important to be able to identify which population your store is serving and whether there is a large enough segment available to generate profits. Consider the customer base and segment population in your location and be aware of their needs and expectations. The average floor space required for this type of retail outlet is 1,000 to 3,000 square feet with additional stockroom space of 1,000 to 2,500 square feet. The choices for locating the store are listed below. 1. Stay where you are. Parking is limited. Rent would continue at $5,000 per quarter. 2. You may lease space in a shopping center in a newly developed subdivision located about a mile from the college. The rent is $6,000 per quarter, which includes a moderate amount of free advertising through flyers distributed by the shopping center Merchant's Association. Parking is close and plentiful. 3. You may lease a store along the main street of the metropolitan area for $6,000 per quarter. The street has been steadily becoming a shopping area and many stores are moving there and making many improvements. There is plenty of parking along the street and in back of the stores. Other merchants report there is usually enough parking available. 4. There is a corner piece of property near the college and downtown that has a closed service station on it. The owner is willing to convert it to a retail store and do all new interior and exterior improvements. There are enough parking spaces for several cars. The corner is a busy intersection and the store would have good visibility. The landlord is willing to rent it at a reduced rate of $4,000 for the first year with a clause that she may raise the rent the second year to no more than $4,200. Financing your Business Your accountant has audited the books and believes that the business is a healthy going concern although it could be operated more efficiently than the previous owners have been doing. In her opinion, the purchase price of $55,000 is fair since it includes goodwill, some residual advertising, and a small start-up inventory. Your team must put together the financing to purchase this business. There are several ways The Entrepreneur Case—Page 15 FINANCING NOTE: In choices 1, 2, and 4 there is an automatic payment of $2,500 on the principle of the loan applied each quarter. You may pay more if you want to and save interest on the balance. In choice 3 you may make payments at your discretion. In choice 5 there is no loan, so no loan payment is required unless additional capital is needed for the business. Incurred interest charges will appear quarterly on your Income Statement as "Interest Expense." In addition, any payments applied toward loan principal will appear as "Payment on Loan Principle" in your quarterly Cash Analysis Report. for your team to raise the capital needed to purchase the business. They include selling stock (to the team members, friends or a venture capitalist), and borrowing the balance of funds needed. You may use any combination of these to obtain needed capital. You must choose your method of financing as part of your startup decisions during the first simulation period. The purchase price is $55,000, the store rent deposit is $10,000, and working capital is $10,000. Therefore your team must raise $75,000. After you get started in the business, you may borrow additional funds from the bank that will have your business checking account. Your team has formed a corporation and has "pooled resources" of $50,000 that will become the equity in the business, e.g., common stock will be issued for $50,000. The possibilities for financing the required $25,000 balance are listed below: 1) The remaining $25,000 will be financed with a note at 11% interest from a local bank through a program with the Small Business Administration. The bank will charge your cash account each quarter $2,500 for an automatic payment on principal. 2) A venture capitalist has agreed to loan the business $25,000 at 9% interest with the stipulation that she may convert any or the entire loan into common stock at any time at a rate of $17 per share. Thus, if she converts immediately, she would have 29% ownership. She wants to be rewarded for the risk she is taking if the business does well. The bank will charge your cash account each quarter $2,500 for an automatic payment on principal. 3) The father of one of the stockholders will make the company a $25,000 loan at 12% interest with the stipulation that the firm can pay the loan principle in any amount at any time; therefore, the firm does not have an automatic loan payment each month. 4) A small eastern loan company has agreed to loan the firm $25,000 on a demand note at 10% interest. This note is paid off quarterly (as in choices 1 and 2 above) but a demand note may be called at any time for the full amount. The bank will charge your cash account each quarter $2,500 for an automatic payment on principal. 5) A venture capitalist has offered to purchase 50% of the shares of stock for $25,000. This would negate the need for a loan. Under Page 16—Entrepreneur Student Guide the arrangement the team would control 50% of the stock and the venture capitalist would control 50%. The advantage of this agreement is that you would have neither loan interest nor loan principle to pay each quarter. If any additional funds are needed during the year, a bank will loan funds at 12% interest. An automatic $2500 loan payment on principal will then be imposed. Startup Capital Allocation Capital obtained by team in Startup Decision Less purchase price Balance Rent deposit required for store Balance remaining for working capital CASH NOTE: If you have cash greater than $2,000, the bank will automatically invest the excess in a money market account that currently pays 4% annual interest (1% quarterly). $75,000 -55,000 $20,000 -10,000 $10,000 Financial Considerations Banking Cost and Money Market (Interest) Income You must pay for your purchases when ordered; this may cause your checking account balance to get low or become overdrawn (indicated by no value for the "money market funds" item on the balance sheet). A negative cash balance means that you have mailed checks to suppliers and they have not been good! This will affect your stock price and the loan interest rate the bank is charging. If your cash balance falls below zero, you will automatically receive an advance from your line of credit to cover the shortfall. 2 A cash flow analysis is available in the Entrepreneur software and can help you with cash planning. Stock Price and Number of Shares In Quarter 1 there will be 3,571 shares sold at $14 per share. If you choose response #5 during the Financing startup (the venture capitalist), there will be 5,356 shares (+1,785 shares / $25,000) with each party holding 2,678 shares. In either event, $14 will be the starting point for the stock price. You can compare how you are doing by using that as the starting point, and by comparing your stock price to other firms. The price of common stock will be published and made available on the 2 A line of credit is a type of open-ended loan that the entrepreneur may add to or pay back at any time without going through the formal motions of applying for a new loan every time the firm needs additional working capital. Working capital are those funds that are required for everyday business functions: buying supplies, paying utilities and rent, purchasing inventory, redecorating, adding an employee, etc. The Entrepreneur Case—Page 17 STOCK NOTE: The market value of your stock is not a precise indicator of the performance of your company but does give a rough estimate of the relative standings of the competing firms. Since stock market investors apply many non-quantifiable factors in valuing stock, you should not take the stock price as an absolute but rather as an overall relative picture of simulation standings. OPERATIONS NOTE During operation of your retail business, you will be determining inventory levels, selecting product price ranges, unit price averages, and establishing an appropriate return policy. class website each quarter. Although the company is actually "private" (e.g., the stock does not sell actively on the open market), it will be assumed the stock does have value in the over-the-counter market. Investor whims concerning poor performance one quarter could make the stock price decline perhaps more than it should. Investors may not know of the firm's overall plans and what it is trying to accomplish, thus undervaluing the stock. The point is that you need to continue to operate your company as best you can regardless of the stock price! Some of the factors that affect stock price are: 1) Total sales 2) Return on sales (e.g., profit divided by total sales) 3) Customer satisfaction (as reflected by the ability to maintain an optimum inventory and sales persons on the floor) 4) Company image (as reflected by advertising, promotion activities, and good business ethics) Operations Keep in mind that the appearance of your store can hurt or help sales. Both overstocked crowded shelves and under stocked shelves with poor selection can hurt sales; whereas a competent and helpful sales staff can help increase sales. It is up to your team to decide how these factors come into play and make your inventory and staffing decisions accordingly. Inventory management is an important element of the simulation and teams must determine the amount of clothing to purchase each decision period. Pricing Prices must be established for pants/jeans as well as tops/blouses/shirts. The markup to establish the selling price of each product is usually 100%; this means if the wholesale cost of the item is $10, the retail price will be $20; the resulting profit margin is 50%, end-of-season reductions run approximately 25-35% off the retail selling price, producing narrow profit margins on sale merchandise. Retail outlets occasionally take advantage of buyouts of job lots and pass the savings on to the customers at the same profit margins as the regular stock. These are commonly advertised as "special buys." Jeans and pants are the more popular products with approximately 1.5 units sold for each top sold. Page 18—Entrepreneur Student Guide Return Policy Your team will need to decide upon the type of return policy your store will have. As you have likely experienced yourself, there can be a vast difference in return policies from one store to another. A stringent policy could result in somewhat fewer sales but fewer goods would be returned soiled. The return policy can also affect shrinkage. A stringent policy will reduce shrinkage and a liberal policy will increase shrinkage. The results of a return policy will be indicated by the amount of shrinkage (goods that must be disposed of). You may change your policy in the future, but for customer satisfaction, you should not change frequently without thoughtful reasons. SHRINKAGE NOTE: Your firm will need to track shrinkage to determine the possible cause(s). Shrinkage Damaged, shopworn, and out of season merchandise will be listed as shrinkage. Anytime merchandise is displayed on open shelves and available for customer handling, there is the possibility of becoming soiled, stolen, lost in some way (getting swept off into the waste can), or perhaps returned for credit. Goods are often pushed back on shelves, in drawers, or in the stockroom until the goods are out of season and it is too late to have an end of season sale. In this case the merchandise will be given to a charitable institution. It is assumed that no monies are received for these units. They are simply written off the inventory at their cost. If there is not enough sales help on the floor, there is a greater chance of shoplifting. If inventory levels are kept at too high a level there is a greater chance of the goods becoming soiled and units being misplaced until they're out of season. Inexperienced, overworked, or lower-paid sales clerks will also be less inclined to notice shoplifting or incorrectly stored goods. The return policy can also affect shrinkage—a stringent policy will reduce shrinkage whereas a liberal policy will increase shrinkage. Marketing Creating Awareness It is important that your store communicates value to its customers. The right mix of products offered, competitive prices, a courteous and efficient staff, and effective marketing can maximize sales. Build a marketing strategy that promotes customer awareness in your community with the appropriate advertising media for the population segment you are targeting. Remember that your store can create a positive image or marketing presence through effective advertising. The Entrepreneur Case—Page 19 MARKET RESEARCH NOTE: You will need to get as much information as possible through the market research reports provided, keep good records in order to study the interactions among the marketing variables, and then make your decisions for the next round. NOTE: The effect resulting from the decisions you make for your firm has been programmed into the model from experience and probabilities found in the "real world." Retail apparel outlets advertise their merchandise in a number of ways. The most common is newspaper advertising that is prepared by an agency and paid for as an expense of the business. In addition, the manufacturer may provide co-op advertising if the retail outlet is carrying an item that the manufacturer selects for promotion. Advertising of this type promotes the item rather than the store, can save the retailer about 50% in advertising costs, and provides a residual image to consumers. An example is a Levi-Strauss promotion of a new line of jeans with an announcement that they can be purchased at a specified outlet. Some shopping centers include "flyer" advertising as a benefit of tenancy; alternatively, some shopping centers require that tenants participate in mall promotions and charge for the advertising. Clothing retailers are able to reach their target segments effectively through this flyer type of publication if they have chosen their location wisely. Other forms of advertising are effective only if the media are chosen carefully for their reach/cost relationship. All media are able to provide information on their audiences and a price list that is differentiated by time of day and audience. You will have the opportunity to select from a wide assortment of advertising venues and to decide upon a promotional budget for your store each quarter. It is recommended that you do not use the "stab in the dark" method of making decisions but rather plan to hold certain variables constant while manipulating others. This allows you to begin to determine which marketing elements are more effective in generating sales. Staffing Smaller retail pants and tops outlets of this size typically have a sales force of two people at all times except for weekend afternoons and peak seasons such as "back-to-school" and Christmas rush when more salespersons are necessary. Staffing includes a manager or assistant manager at all times. Productivity of retail outlets can be measured either by sales per square foot or sales per payroll dollar. Special Decisions Product Line Retailers report that they carry several types of pants and an equivalent array of tops depending on the clientele they wish to attract. The type of population or market segment will affect the type of inventory carried Page 20—Entrepreneur Student Guide NOTE: The ability to make a decision concerning an incident will be limited to the decision quarter for which it is offered. You cannot go back to a previous incident to take advantage of the incident at a later time. Incidents may have a financial impact on your company in either in the current quarter or a future quarter. in an individual store. The tops and pants store that you will be operating is a specialty business in the retail apparel industry. Although the early entrants in this market limited their inventory to jeans, most of the successful operations have broadened their inventory to include a variety of styles of pants and tops (jeans, slacks, fatigues, T-shirts, blouses, casual shirts, etc.). This provides a more complete product mix for customers. Depending on your local market, your team may wish to offer a specialty line of garments, such as ethnic, designer, or health care provider uniforms. Determine the type of merchandise that will be carried in your store. Choose from among five different clothing product lines: modern, designer, regional/ethnic, ultra-trendy, and professional uniforms. You may change to any of the clothing types at any time. However, after you have changed once, your instructor may require a written rationale for your decision to change clothing lines again. You will probably be charged $5,000 for the change. Keep in mind that when a clothing type is changed, it normally takes a few weeks to reach normal sales volume. Incidents Each simulated quarter, you be reading about a particular retail environment incident and entering a response decision into the simulation. Your instructor will inform you about the order of incident decisions. Integration Finally, an entrepreneur must think about the integration of business decisions. When reviewing your pricing decisions, can you determine the impact a change in price had on other functional areas of your business? What impact did a price reduction or price increase have on product demand? On your net income? As the owner of a small retail clothing store, you must make sure that all functional areas of your business are in line with your firm's overall objectives and that all of your decisions are integrated—working toward producing the desired results. Next Step The small retail-clothing store is a stable segment of the retail clothing business that can be organized and operated profitably if managed efficiently and effectively. It tends to be adaptable to many types of The Entrepreneur Case—Page 21 decisions and many others present challenges to the entrepreneur who wishes to operate this type of business for a profit. This simulation will allow you to try your hand at managing a retail specialty-clothing store without having to invest the actual money and to make mistakes without costing any money. Now that you have some background on the general context of Entrepreneur, the next section of the manual will introduce you to your new business and the decisions that you will be making in the simulation. Best of luck in running your retail-clothing store! Page 22—Entrepreneur Student Guide SECTION 3: ENTREPRENEUR OPERATIONS GUIDE Getting Started and Login Entrepreneur is designed to be easy to use and is compatible with most Internet browsers. This chapter contains the information needed to make the decisions for each quarter and an interpretation of the results found on the financial reports. This section will first detail simulation access and then will give an overview of the decision-making process of Entrepreneur. To use Entrepreneur, point your Internet browser to the student login page at www.interpretive.com as shown below. You will receive your login information either from your instructor or directly from Interpretive. After logging in (and placing your order if you haven't yet done so), click on the "Simulation" link at the top of the screen and you will go to your course website where you can access the simulation and manual, comparative results, and other pertinent information as shown below. Click here to see simulation related information Class simulation schedule Help and FAQs Information about your order Entrepreneur Operations Guide—Page 23 LAUNCH SIMULATION . Launch Simulation "Access Simulation" link Click on the Access Simulation link in the left hand column to access Entrepreneur. Then choose the Entrepreneur Simulation link and the simulation will launch, placing you on the main page as described in the following section on navigation. SIMULATION NAVIGATION Each page of the Entrepreneur site contains an easy-to-use menu system consisting of three parts: (1) specific menu options and links to decisionmaking tools and input screens, found on the left side of the Entrepreneur browser window; (2) green navigation and general control buttons across the top; and (3) pull-down menu to show the current week in the upper right-hand corner. Navigation buttons Menu system: seven categories & choices—will display after startup decisions have been entered and simulation has been advanced Store name and user info Change the quarter view Entrepreneur screen display Page 24—Entrepreneur Student Guide SIMULATION NAVIGATION NOTE: Until you make your startup decisions, no other menu options will be available. The left-hand menu is divided into six parts: Startup, Decisions, Analysis, Accounting, Environment, and Simulation. Each part includes menu links that correspond to different reports, decisions, or actions. For example, under Startup there are links for Case and Startup Decisions. The menu system is expandable and collapsible. For instance, click on the button to the left of Startup, and the Case and Startup Decisions will collapse back into Startup. The navigation and general control buttons found at the top of the simulation screen are: Back, Home, Print, Help, and Logout. The Print button applies to the report currently on the screen. For instance, if you click on the Print button when viewing the Income Statement, the statement will be sent to your default printer. Clicking on the Help button will open the operations guide. The Back button lets you reach the last page you visited and the Main button brings you to the homepage of the simulation that you were brought to when first entering the simulation. The box in the upper right-hand corner of the simulation screen has a pull-down menu that lets you choose which quarter you would like to view. It will automatically default to "current quarter" unless you change it. Changing this will show you your results for previous quarters once the simulation has been advanced. This can be helpful for reviewing historical information. Entrepreneur Operations Guide—Page 25 DETAIL OF MENU CHOICES STARTUP MENU The links on the left of the Entrepreneur window lead to all the information and tools you will need to analyze your current position, plan a strategy, and input your decisions. These links are divided into six categories: Startup, Decisions, Analysis, Accounting, Environment, and Simulation. One of the easiest ways to find out more about an option is just to try it out. If you need more information, use the onscreen HELP button to consult the student manual. All of the menu links may be expanded or contracted. For instance, after making your startup decisions, you can click on Decisions to expand that menu to see all the different decision areas for your decision process. Case Under the STARTUP section you can find a copy of the Entrepreneur case from this manual. The case presents information on your retail store in a form similar to a business school case and also serves as an introduction to the situation at the start of the simulation. Remember that not everything provided in the CASE is immediately available to you. For example, you may not be able to enter a decision in response to an incident unless your instructor has activated that option. Please make sure to carefully read the case before making ANY decisions. Startup Screen: Case Page 26—Entrepreneur Student Guide STARTUP MENU At the beginning of the simulation, there are three "startup" decisions that must be made before you can proceed past the startup menu. These decisions are: naming your business, financing your business, and choosing your store location. Startup Decisions Naming Your Business It is important to select a name that will stand the test of time and perhaps even be adaptable to a new product line as you may wish to change your product line sometime during the simulation play. After your team has thoughtfully agreed upon a business name, the team leader will need to enter the business name into the simulation decision screen. Financing Your team must put together the financing to purchase this business. You will be given five different financing options from which to select. Review each option carefully and enter your selection in the decision screen. Store Location You will be given four different locations from which to select. The location decision should be based on your motif, product line, price range, and potential customers. Please note that the opportunity to relocate will not be available later in the simulation. Enter your team's selection into the decision screen. Startup Decisions Input Screen Enter your business name. Select your store location. Select a financing option. Finalize and then submit your decisions. DECISIONS MENU Operations ► A suggestion for your first order (Quarter 1) is 2,000 to 2,500 pair of pants and 1,300 to 2,000 tops. This should be enough to build up your stock to an optimal level and still have enough to meet the coming quarter's sales. This is only a suggested order for Quarter 1; however, you may order any number you desire, depending on your pricing decision. Entrepreneur Operations Guide—Page 27 DECISIONS MENU The default inventory for Quarter 0 contains figures from the last quarter the previous owners had the store. You can use these values as a starting point for your team's discussion for Quarter 1. ► When you take over operation of the store, it will have an inventory of 1,000 pants and 600 tops. Using these levels, the first quarter may appear something like Table 2 (see next page.) ► Do not simply copy last Quarter's decisions for your first decisions! This will not give you any feedback as to the cost/benefit of changes. If your team is risk averse, you should try to change at least one or two variables such as advertising, promotion, or type of product. In addition, your instructor may not be too happy with your team's lack of competitiveness. Operations Decisions Input Screen Enter purchase quantities for pants and tops. Select a return policy. It is much better to have too much inventory than not enough. Have you ever walked in a store and found the shelves not very well stocked? It makes a customer think there is something wrong— possibly the store is having financial difficulty and cannot keep fresh stock on hand. Purchasing Inventory Your team must decide what quantity of pants and tops to purchase each quarter. While you want to carry enough merchandise to display your goods in an attractive manner at all times, too much inventory can not only stretch your finances but can also result in goods getting "shop worn." This would require you to conduct "clearance sales," which greatly dilute your profit margins. In addition, excess merchandise has a greater chance of being damaged or going out of style. It is suggested that you have at least 1,200 to 1,500 pair of pants and 750 to 1,000 tops at all times. These levels of inventory will be sufficient for a normal operating quarter. Of course, sales will vary due to the level of advertising and promotion, relative price of your goods compared to your competitors, and the business environment as indicated by the Business Index. You Page 28—Entrepreneur Student Guide DECISIONS MENU will need to adjust your order each quarter after considering these factors. Place the number of pants and tops you wish to order into the decision screen in the simulation. Your suppliers require that you order in lots of 100 (e.g., 3,100 rather than 3,150). The example given in Table 1 indicates that you would have a slight build up of inventory if you sell the same amounts as you sold during the past quarter. This is certainly the minimum inventory you would want to keep on hand. If you think your new advertising or pricing strategies are going to result in higher sales than is currently the case, you would want to order even more than shown. However, stocking additional inventory is not free. Since your firm is operating with a slim cash balance, the bank will need to cover all your purchases with a loan. Interest must be paid on the loan and any unsold inventory does deteriorate somewhat. These are the costs of carrying additional inventory. Table 1: Example of Projected Inventory Levels Projected Beginning Inventory + Products Ordered = Available For Sale – Less Shrinkage – Less Sales = Ending Inventory PANTS 1,000 + 2,000 = 3,000 – 100 – 1,700 = 1,200 TOPS 600 + 1,300 = 1,900 – 20 – 1,000 = 880 . Return Policy The next decision your team will need to make is the type of return policy the store will have. As you have likely experienced yourself, there can be a vast difference in return policies from one store to another. You may change your policy in the future, but for customer satisfaction you should not change frequently without thoughtful reasons. A stringent policy could result in somewhat fewer sales but fewer goods would be returned soiled. The results will be indicated by the amount of shrinkage (goods that must be disposed of). Table 2 lists the return policy choices available for your team. Your team may wish to create a policy it likes better than the selections offered. However, the simulation requires that one of the listed choices is selected, so please choose the return policy that is closest to the policy you desire. Entrepreneur Operations Guide—Page 29 DECISIONS MENU Table 2: Return Policies Policy 1 2 3 4 5 6 7 Description Refund or exchange any goods that have the same label as your store for any reason. No receipt is required. Refund or exchange any store brand goods for any reason but must be approved by the manager if there is no sales slip. Refund or exchange goods for any reason if accompanied by the sales slip and within 30 days of purchase. Refund or exchange goods for any reason within 10 days of purchase and accompanied by a sales slip. Refund or exchange goods within 10 days of purchase only if the goods are the wrong size (as for a gift) or defective. Sales slip is required. Refund or exchange goods within 7 days of purchase only if the goods are defective and with sales slip. Refund for defective goods only within 7 days of purchase and accompanied by sales slip. No return on goods that were purchased on sale. Pricing You have a choice of three price ranges in selling your pants and tops: low, medium, and high. Not everything in your store sells at the price you set; this is the average price for the quarter. The average includes some lower-priced goods and some higher-priced goods. It also reflects any special sales, promotional activity, and discount policies. The store is currently selling pants for $30 and tops for $20. While you may vary the average price somewhat from quarter to quarter to indicate a sale, your prices should remain in one of the price ranges to establish and maintain the image you want for your store (low, medium, and high price). For simplicity purposes, all products within a given range cost the same unit price. You will note the "gap" between ranges. This is simply a rule in the simulation and is done to clearly demarcate ranges. The price ranges and respective costs are given in Table 3. Page 30—Entrepreneur Student Guide DECISIONS MENU Table 3: Price Ranges and Cost Low Price Medium Price High Price Pants $20-24 $28-32 $36-40 Cost $11 $15 $19 Tops $10-14 $18-22 $26-30 Cost $6 $10 $14 Note: The prices in Quarter 0 were: Pants $30 Tops $20 One general principle about pricing should be mentioned. If one company lowers a price to a point below that of the competition, sales volume will increase somewhat. However, there is a point at which the revenues at the reduced price will not make up for the volume created by heavily discounted prices. At the other extreme, higher than usual prices may reduce sales somewhat but may yield a better profit on each unit sold. The optimal price depends on the clientele, the behavior of competitors, and various consumer behaviors. Enter the product price range and the average selling price for pants and tops into the simulation decision screen. The simulation will retain the figures you enter. During subsequent quarters, you will not need to reenter these amounts unless you wish to adjust the figures. Pricing Decisions Input Screen Select price ranges for pants and tops. Enter prices. Entrepreneur Operations Guide—Page 31 DECISIONS MENU A Note about Pricing Levels If you change the pricing level of your product line, your cash will be affected. If you move to a higher priced range, your goods are going to cost more and the inventory on hand (ending inventory from previous quarter) will need to be converted to the higher price goods. Therefore your loan will probably go up from $3,000 to $7,000. Since you have an automatic loan feature, you do not have to take any action. On the other hand, if you go to a lower price level, the goods in stock will need to be converted to a lower price. In this case, you will have additional cash flowing in. (In the real world situation, there would be costs associated with these inventory level changes but in the simulation you won't be charged.) If you go to a lower priced level for your product line, you can expect to sell significantly more goods, but at a lower profit per unit sold. If you decide to do this, you should order enough to have 4,000 pants and 3,000 tops available for sale (this is at the beginning of the simulation and may be different at a later quarter). The larger order may require additional cash but the bank will automatically cover you with an additional loan. If you go to a higher price range, you will need to order less as you will be selling fewer units but at a greater profit per unit. It is best to order your normal amount and then see what sales are going to be. Then you can adjust your order for the next quarter. You may also need additional cash to purchase the higher price goods but the bank will cover your needs with an automatic loan. Marketing The decision entry screen will allow a large amount to be entered for both advertising and promotion budgets; however this is to keep from restricting your decisions. The point of diminishing returns will be attained at lower budget amounts than the program maximums. Although the software allows a large dollar amount to be entered, it doesn't mean this is the best approach; this may be a waste of money. Advertising Media Advertising is a part of marketing that lures customers into the specific store. These subtle influences that affect consumer behavior are called "pull" marketing strategies. Stores such as yours advertise in a variety of media such as local radio and television, newspapers (campus and daily), and home delivered flyers. Each medium reaches different customers but all are intended to establish your store as a "presence" and give you a Page 32—Entrepreneur Student Guide DECISIONS MENU NOTE: In all of the budget decisions you make there is a point of diminishing returns. This is the point of dollar expenditure that does not add as much effect as the previous dollar. For example, if a firm were spending $X for advertising and increased it to $X+$1,000, the additional $1,000 will not produce as much effect as $X did. So be careful and don't raise various budgets in unusually large amounts. The cost will not be offset by the gains. better community image. The cost of various types of media varies based on how many people they reach effectively. (Again, this varies greatly from area to area, generally depending on the population in the market area.) You may select any combination of media for your store. There is a fine line between not enough and too much advertising. Your customers will be unaware of your presence if you do not broadcast your presence sufficiently; on the other hand, too much advertising will erode your profits without generating the marginal dollar of a new business. Advertising budgets in this area of the country range from 5% to 10% of gross sales. The store has been budgeting $4,500 per quarter for advertising prior to your assumption of ownership. Promotion Budget Sales promotion is known as a "push" marketing strategy. Typical promotional activities include coupons and attractive point-of-sale displays that push merchandise into a customer's hands. The costs vary from an in-store window display (designed by one of the owners) costing approximately $300 for supplies, to coupon programs costing $2,000–$6,000 (depending on the value of the coupon and the response). Most retailers use a combination of advertising and sales promotions. The store has been budgeting $500 for sales promotion. While there are no fixed offerings for promotion, it is assumed that the greater the budget, the stronger your promotional efforts will be. As a guide however, we suggest a range of $500 to $5,000. Marketing Decisions Input Screen Select advertising medium(s). Enter $ amount for promotions. Entrepreneur Operations Guide—Page 33 DECISIONS MENU Staffing Part-Time Employees and Hourly Wage Rate Your store normally has two people on the premises at all times. This includes someone from the management team and one additional employee. The cost and scheduling of these two are automatically taken care of by the simulation software. However, since the store is open 70 hours per week and since there may be times when added help may be required, you have the ability to add additional sales clerks. Currently, salespeople work 15 hours per week. For simplicity, you only need to schedule the number of additional part-time employees desired; it is assumed that each will work 15 hours. You may change the wage rate for sales clerks from the current $7 per hour up to a maximum of $12 per hour. Keep in mind, the hourly wage that you enter in this slot is the average wage rate. Your team must decide what part higher wages and experience has in influencing sales. Will experienced sales people sell enough extra goods to warrant a higher wage rate? As with any expenditure, it is possible to have too few or too many extra salespeople at one time. The software will retain the wages you set during the previous period. Unless you wish to change the $7 wage, you do not need to enter a wage figure each period. Staffing Decisions Input Screen Enter number of additional part-time sales people. Enter hourly wage rate. Page 34—Entrepreneur Student Guide DECISIONS MENU Finance NOTE: Finance Decisions Input Screen You may want to wait a quarter or two and ascertain how your firm is doing and then begin to pay dividends if your team decides to do so. You may want to start out with a dividend of $500 or $1,000 and then increase it according to your profits. You will need to enter two finance decisions: the dollar amount you wish to apply toward payment to stockholders (Dividends) and any extra amount you wish to apply toward your loan in addition to your regular loan payment (Additional Loan Payment). To declare a dividend, place the amount in dollars you wish to pay in the decision screen. If the dividend you want to pay is greater than the profits in a quarter, the computer will automatically adjust the dividend payment to an amount equal to the profits that quarter. If you want to make a payment in addition to your automatic $2,500 loan payment, or make a payment toward the demand note or personal loan an individual has made to you, enter the additional payment amount in the decision screen. . Enter $ amount for dividend payment. Enter $ amount for extra loan payment (in addition to regular payment amount). Dividends Dividends are a payment to stockholders for the investment they have made in the firm. Since the stockholders are the owners of a company, they have every right to be rewarded for the risk they have taken in investing capital funds in a firm. On the other hand, the firm may be in a high growth period and need all available profits for growth purposes. It is a difficult decision to know if the firm needs the dividends more than the stockholders do. If the firm does not have a ready need for profits then it should pay the profits to the rightful owners—the stockholders. One rule of thumb that many firms use is that the company retains 50% of net profits and pays 50% of net profits to the stockholders as dividends. However, in a closely held company, the dividend rate might be much higher. Whatever your payment rate is, always pay a dividend quarterly rather than once or twice a year. This is the standard practice by most firms and it makes the cash flow easier to predict. Never begin a dividend payment you cannot sustain. Stockholders will become disenchanted with your firm and your stock price will fall. Entrepreneur Operations Guide—Page 35 DECISIONS MENU In order to give you some idea as to what return on investment a certain amount of dividends would be, Table 4 might be useful. Note that the annualized return assumes the given dividend payment is made for four consecutive quarters. NOTE: Table 4: Results of Various Dividend Payments The program will zero out any dividend "declared" that is greater than the previous quarter's profits. It is standard practice in business to pay a dividend on the previous quarter's profits and the simulation will follow this practice. Amount of Stock Outstanding Quarterly Dividend Paid Return on Stockholders' Investment Outstanding Paid (Annualized) $ 50,000 $ 500 4% $ 50,000 $ 1,000 8% $ 50,000 $ 2,000 16 % $ 50,000 $ 4,000 32 % $ 50,000 $ 8,000 64 % Loan Repayment For simplicity in calculating your cash needs each quarter, a loan repayment of $2,500 will automatically be taken from cash each quarter if you selected choice 1, 2, or 4 on your financing during startup decisions (Financing). This figure will be displayed in the Cash Analysis report. However, you may make an extra payment on your loan at any time by entering the amount into the Extra Loan Payment box in the Finance decision screen. Special Special Decisions include your selection of product line and your team response to the current quarter's incident (if an incident is assigned by your instructor). Your team has a choice of five different types of product lines ranging from uniforms for health care and food service professionals to ultra-trendy pants and tops. There is no "pre-set" demand that makes any of the five choices of clothing a "poor choice" for a team; all have good growth potential. Incident Response Enter your team's incident decision response and results will be automatically updated once the simulation is advanced. The effect resulting from the decisions you make for your firm has been programmed into the model from experience and probabilities found in Page 36—Entrepreneur Student Guide DECISIONS MENU the "real world." Your instructor may assign various incidents to occur randomly throughout the simulation. Incident response options will be available for you to make your selection in the Special Decisions input screen. . Product Line Table 5 shows the clothing lines and their descriptions that are available to your team. Table 5: Product Types Available Prod. # Description 1 Specialty clothing of regional or ethnic interest, such as Western, Asian, Hispanic, European, etc. 2 Contemporary line generally found in sportswear department stores. Includes jeans, sweaters, etc. 3 Designer line with labels and logos displayed on the outside of garment 4 Ultra-trendy line including fad clothing and high fashion 5 Uniforms for health care and food service professionals; includes a casual line of surgical scrubs You may change the line of clothing once at any time and at no additional cost. However, after you have changed once, your instructor may require you to make a written request with the rationale for changing again. You may be charged $5,000 for the change. Specify your product line type in the decision screen. The demand for your product line is established by the amount of competition in your class of directly competing stores and the relative prices of products, not by a predetermined formula in the computer. You make the competitive environment in your industry (class). Some of the product lines may compete for the same customers (trendy jeans versus contemporary jeans). Other product lines would not compete (trendy jeans versus uniforms). However the same types of stores would compete (uniform store versus uniform store). Also a customer may buy Entrepreneur Operations Guide—Page 37 DECISIONS MENU khaki pants from the contemporary store and go to a designer store around the corner for a pair of designer jeans. Special Decisions Input Screen Select Product Line Select Incident Response Decision Summary Use the Decision Summary to review your decisions each week. It may also be worthwhile to print this out for your records, though you may always view old decisions by changing the week from the list box at the top of the screen. This printout will contain the same information as in each decision menu for the period, but all in one place. Please refer to the appropriate sections of the operations guide for more information on the specifics for each decision. IMPORTANT: Remember to check the DECISION SUMMARY screen at the end of your decision process to make sure all your choices have been entered and saved correctly. Also note that you can change your decisions as often as you like until the simulation is advanced. Decision Summary Screen Page 38—Entrepreneur Student Guide ANALYSIS MENU Inventory Analysis By keeping a close watch on the Inventory Analysis you can monitor your inventory and become more effective with your purchasing practices. You will want to manage inventory efficiently to minimize your cost while providing an attractive array of goods to the consumer. The Beginning Inventory shown is the merchandise that was left from the previous quarter. The Products Ordered reflects goods ordered for this quarter; the sums of these two represent all the merchandise that is Available for Sale. The amount of goods that were lost, stolen, became shopworn, or was returned in poor condition and had to be disposed of is listed under Shrinkage. The actual sales from the current quarter are subtracted and the Ending Inventory reflects the goods that are on the shelves at the end of the quarter. One important aspect to be considered is the cost of carrying inventory from one quarter to another. In a business like yours, clothing can become soiled, out of fashion, or out of season. In any of these cases, the merchandise might be sold at greatly reduced prices or returned to the supplier for a substantial handling charge. Due to the expenses associated with carrying merchandise from one quarter to another, you will want to determine the amount of inventory actually needed to make your establishment attractive without having too much inventory on hand. It may take several quarters until your team develops a sense of the "right" level for your operation. NOTE: The results displayed in the analysis screen are estimated results and do not reflect actual figures. Inventory Analysis Screen Enter quantities for projected shrinkage and projected sales for pants and tops. The Ending Inventory from the past quarter becomes the Beginning Inventory the next (upcoming) quarter. Entrepreneur Operations Guide—Page 39 ANALYSIS MENU Do not sell out of inventory! This is termed a stock out and your customers will go somewhere else and buy their clothing. So if the ending inventory is zero, take immediate measures to order a substantial amount of goods the next quarter. Retail stores have a "production function" similar to that of manufacturing companies; in non-manufacturing businesses this term is "operations management." The raw materials or "inputs" are the store, the salespeople, and the merchandise. The outputs are the sales generated. The ending inventory will also affect the amount of cash in your checking account; since these remaining units have been paid for in the quarter in which they were ordered, a large inventory would put a strain on the cash position whereas a small inventory will add to the cash position. Your cash balance can be verified using the Cash Budget Analysis form (see: Appendix A) or the simulation screen by the same name (see below). Cash Budget Analysis The Cash Budget Analysis contains a detailed list of all income and expenses accrued during the last quarter. Any changes in cash due to inventory re-evaluations caused by changing the product line price level will be shown in the cash budget analysis as "Price Change Cost." This will be a positive figure (indicating additional costs) if your prices are changed to a higher product level due to the increased cost of changing the lower priced goods to your higher priced level. Conversely, if you go to a lower level, the value in this account will be a negative number, indicating a lower cost of inventory on hand. This will only occur the quarter in which a change is made. Cash Budget Analysis Enter projected sales figures for pants and tops. Your projected ending cash appears here. Page 40—Entrepreneur Student Guide ANALYSIS MENU NOTE: At the end of each simulated quarter, your Income Statement, Balance Sheet, and Cash Analysis will be updated. The income statement is a record of your revenues and expenses for the quarter. The balance sheet shows your assets and claims against those assets. The cash analysis contains information about your cash balance, additions, and subtractions for the quarter. Breakeven Analysis In order to help establish prices and determine how much inventory to purchase, a business must analyze the relationship between costs, profit, and sales. The point at which the cost of operations equals the revenues from sales is called the breakeven point. Owners of retail businesses are concerned with the volume of product sold (i.e., the number of units) that produces breakeven as well as the dollar amount of sales necessary to break even. In order to make this determination, it is necessary to separate the fixed (ongoing) costs from the variable costs associated with each unit of product. To determine the break even number of unit sales, you first must allocate a percentage of your fixed costs to that unit category. For example, Pants: 70% x $40830. That dollar amount is then divided by the per unit selling price ($20) minus per unit cost ($11). This formula reveals the number of units (pants) you will need to sell in order to "break even." See the sample screen below. Breakeven Analysis Screen Enter your Fixed Cost % Allocation for pants and tops. Your Break Even sales quantities for pants and tops will display here. ACCOUNTING MENU Income Statement Your firm's Income Statement will be updated each simulation quarter and gives a detailed list of all income and expenses incurred during the previous quarter. The sales figures are from the previous quarter so that will give you some idea about sales levels and purchasing levels. The condition of the firm when you assume ownership will be very close to the Income Statement as shown during the starting quarter, Period 0. Brief explanations of income statement line items are given in the section titled, Analyzing the Income Statement. Entrepreneur Operations Guide—Page 41 ACCOUNTING MENU Income Statement Screen NOTE: Carefully reviewing these reports at the end of each quarter will assist your team in making purchasing and financing decisions. Remember you may also wish to purchase market research reports to remain informed about your competitors! Balance Sheet The simulation balance sheet is an abbreviated one. It shows the assets of the business and the claims of ownership against those assets. Your balance sheet includes only current Assets: cash, money market funds, rent deposit, and the value of inventory on hand (at cost). Since all of your property and fixtures are leased, there are no fixed assets shown. A non-standard line is "Balance Sheet Adjustment." This is simply a method to force the balance sheet to balance due to small rounding values. Your Liabilities will include your unpaid loan. Owner's Equity includes the stock that you sold (based on your original investment, and retained earnings. Retained earnings are the total profits of the firm, to date, less any dividends that were paid. Balance Sheet Screen Page 42—Entrepreneur Student Guide ACCOUNTING MENU The income statement and balance sheet for a quarter include only transactions during that quarter, which is a unique reporting period. Thus, for example, the income statement for Quarter 1 will include transactions during the period from January 1st – March 31st (of your 1st year of operation). Cash Analysis This report will detail your quarterly cash situation. It lists your beginning cash balance, all incoming and outgoing cash, and ending cash balance. Use this report to determine the amount of cash you will need to operate during the next quarter. If you are showing a negative cash balance, you will need to increase your loan for that amount plus enough for a safety factor. Cash Analysis Screen Cost of Goods Sold Versus Cost of Goods Purchased Your quarterly profits reflect only the cost of the items you actually sold that quarter. However, since you must pay for all goods ordered each quarter, whether sold or not, out of cash. Example: if you purchase 2000 pairs of pants ($30,000) during a quarter, that amount will be taken from cash; but you may only sell 1800 pairs ($27,000). In this case, Cost of Goods Sold will show $27,000 cost for the pants sold. The difference of $3,000 will be shown as an increase in your ending inventory dollar figure because you increased your pants inventory by $3,000. Therefore if you purchase extra heavily for an upcoming quarter and sales are not up to expectations, an extra portion of your cash will be invested in inventory on hand. This is not something you have to take action on but this information is provided for further understanding of actual business practice. Entrepreneur Operations Guide—Page 43 ENVIRONMENT MENU A market research firm has conducted studies of the local casual clothing stores and will sell current information to you as needed. The following studies are available: Sales Report Includes the average company sales (in units—pants/tops) during the last quarter and the number of companies competing in each product line. Cost $100. Pricing Report Provides the last quarter's pricing of your competitors' pants and tops, listed by company. Cost $200. Promotion Report Details advertising and promotion budgets and return policies for each company during the last quarter. It will also reveal competitors' parttime employee wage rates. Cost $400. Page 44—Entrepreneur Student Guide ENVIRONMENT MENU Newsletter The newsletter section of the simulation will provide instructor messages, the impact of your incident response, and other operational information including warnings. Monitor this section of your class website carefully each quarter so that you can make full use of the information contained here. The Business Index Some delicate mix of the correct product, attractive price, ample advertising, promotion, and a favorable economic environment generates demand for products. The simulation will provide information about the economic environment in the form of the actual business index in the current quarter and a forecasted business index for next quarter. There is no cost for this information. A one-point change in the index reflects a 1% change in the area's overall economic condition. For example, a change in the index from 100 to 103 indicates there is about a 3% increase. Of course, you must have the proper mix of price, advertising, and promotion to profit from this economic upturn. Remain alert to the business index and to the seasonality of sales and order accordingly. Newsletter Screen Entrepreneur Operations Guide—Page 45 SIMULATION MENU IMPORTANT: Advance, Replay and Restart would only be available if running the benchmark version of the simulation. In the direct competition version, everyone will be advanced based on a schedule set by your instructor. Please see your course website for the current schedule. This section of the menu contains links that control the game. The ADVANCE, REPLAY, and RESTART buttons may or may not be available during your simulation. If your instructor chooses, the advancement, replay and restart of the game may be turned off. If your instructor does allow students to use these options, only the team leader can perform them. Advance If the ADVANCE menu link is available to you during the simulation, the team leader can control when your game is advanced to the next week. In other words, once your decisions are made for one week, you can choose the advance link and see your results to then determine what changes will need to be made to your decisions for the following week. Replay If your instructor allows it, you can go back one week in time by having your team leader choose the REPLAY menu link. This will set you back one week in time and allow you to make adjustments to the most recent week's decisions. In effect, an undo button for the simulation. Restart The team leader may choose the RESTART menu link, if allowed by the instructor, to erase all decisions and results for all periods, and completely start over. Some instructors like students to do a few practice weeks and then restart, in which case this button would be used to reset you back to the beginning of the simulation. BE CAREFUL WHEN CHOOSING RESTART! Page 46—Entrepreneur Student Guide FORMS AND WORKSHEETS This section contains various worksheets and forms for analyzing the simulation. Your instructor will indicate if any are required work. You may want to replicate some of the forms as spreadsheets and keep the results of your team's progress electronically. The Marketing Data Analysis form will allow you to gain insight to how marketing variables relate to sales demand. A list of forms is given below: • • • • • • Marketing Data Analysis Quarterly Budget Variance Breakeven Analysis and Inventory Worksheet Log of Quarterly Decisions Selected Financial Ratios (Sample) Selected Financial Ratios Forms and Worksheets—Page 47 MARKETING DATA ANALYSIS Quarter _______ Industry _____________ Company ___________________________ This form should aid in analyzing relationships between price and sales, and marketing budget (advertising + promotion) and sales. Qtr # Advertising Budget Promotion Budget Price Tops Price Pants Sales Tops Sales Pants % Increase or Decrease 0 1 2 3 4 5 6 7 8 9 10 11 12 Marketing to Sales ratio = (Advertising$ + Promotion $) / Sales $ Page 48—Entrepreneur Student Guide Marketing to Sales Ratio QUARTERLY BUDGET VARIANCE Quarter ___ Industry____________ Company____________________________ Planned Sales Revenues Actual 1. Units pants sold ______ @ $ ________ = $_________ $_________ 2. Units tops sold ______ @ $ ________ = $_________ $_________ 3. Interest and Other Income $_________ $_________ 4. Total revenues and Interest (1,2,& 3) $_________ $_________ Expenses 5. Total pants ordered ______ @ $ ________ = $_________ $_________ 6. Total tops ordered ______ @ $ ________ = $_________ $_________ 7. Regular labor $_________ $_________ 8. Part-time labor $_________ $_________ 9. Advertising $_________ $_________ 10. Promotion $_________ $_________ 11. Rent and Utilities $_________ $_________ 12. Insurance and telephone $_________ $_________ 13. Credit card expenses $_________ $_________ 14. Market research $_________ $_________ 15. Loan payments $_________ $_________ 16. Interest expense $_________ $_________ 17. Payroll taxes $_________ $_________ 19. Total expenses & loan payments (Add 5 through 18 ) $_________ $_________ 2.0 Net Receipts ( Item 4 minus item 19 ) $_________ $_________ 18. Shrinkage Forms and Worksheets—Page 49 BREAKEVEN ANALYSES AND INVENTORY (SAMPLE) In order to help establish prices and determine how much inventory to purchase, a business must analyze the relationship between costs, profit, and sales. The point at which the cost of operations equals the revenues from sales is called the breakeven point. Owners of retail businesses are concerned with the volume of product sold (i.e., the number of units) that produces breakeven as well as the dollar amount of sales necessary to break even. In order to make this determination, it is necessary to separate the fixed (ongoing) costs from the variable costs associated with each unit of product. The variable cost in this case is the cost to purchase the product. In this simulation, the fixed costs of $52,089 apply to both products. However, the pants sell for approximately twice the price of the tops and a greater number are sold. Therefore, in this example, 87.5% of the fixed costs will be allocated to pants and 12.5% will be allocated to tops. The price for both items is assumed to be $30 for the pants and $20 for the tops. Breakeven volume can now be calculated for each product: Pants Breakeven .875 x (fixed costs) Volume unit price – unit cost Tops Breakeven .125 x (fixed costs) Volume unit price – unit cost = = .875 x (52,089) 30 – 15 .125 x 52,089 20 – 10 = = 3,038 pants 651 tops Note: Fixed costs include salaries and wages, payroll taxes, rent and utilities, telephone and insurance, advertising and promotion, credit card costs, interest expense, market research, and other expenses. Loan payments and taxes are not considered to be fixed costs. In some analysis of breakeven, only the costs that cannot be varied are used for the analysis. In such a case, advertising and sales promotion would be omitted from the total cost. However, since these two items are driving the fairly minimal sales, they are included in this example. Pants Breakeven Number .875 x Fixed costs unit price - unit cost = Breakeven number of pants Tops Breakeven Number .125 X fixed costs unit price - unit cost = Breakeven number of tops Inventory Worksheet – Forecast 1. Forecast sales this quarter 2. Ending inventory last quarter 3. Targeted ending inventory this quarter Pants ____________ ___________ ____________ ___________ ____________ ___________ Projected inventory turnover: Ending inventory last quarter + Targeted ending inventory Forecasted sales this quarter Page 50—Entrepreneur Student Guide Tops = LOG OF QUARTERLY DECISIONS Quarter _____ Industry__________________ Company___________________________ (Record key decisions and major changes in strategy. You may need to submit this log.) DECISION: _________________________________________________________________ RATIONALE: ______________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ DECISION: _________________________________________________________________ RATIONALE: ______________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ DECISION: _________________________________________________________________ RATIONALE: ______________________________________________________________ ____________________________________________________________________________ DECISION: _________________________________________________________________ RATIONALE: ______________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ DECISION: _________________________________________________________________ RATIONALE: ______________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ DECISION: _________________________________________________________________ RATIONALE: ______________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ DECISION: _________________________________________________________________ RATIONALE: ______________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ Forms and Worksheets—Page 51 SELECTED FINANCIAL RATIOS (SAMPLE) Quarter _____ Industry _____________ Company ________________________ (Examples are from Quarter 0) 1. Inventory Turnover (Indicates efficient inventory management.) Units Sold (Tops)___________ (Beginning Inventory + Ending Inventory)/2 = ____ 1,000____ = 1.69 (600+580)/2 2. Gross Profit Margin (Describes the relationships between the cost of buying goods and the amount of sales generated. An indication of how your price is affecting profitability.) Sales $-Cost of Goods Sold = Sales $ $79,900 - $39,950 $79,900 = 50% 3. Return on Sales (Describes the relationship between all expenses of operations and sales revenues generated. An indication of how costs are affecting profitability.) Quarterly Profits Total Sales $ = $2,234 $79,900 = 2.795% 4. Advertising and promotion as a Percent of Sales (Provides a benchmark for understanding the relationship between advertising and sales. Should be compared to an industry average.) Total Advertising & Promotion $ Total Sales $ = $5,000 = 6.25% 79,900 5. Sales Revenue per Dollar of Employee Time (Provides a benchmark for understanding the relationship between employee efficiency and sales.) Total Quarterly Sales $ = Total Wages & Salaries $79,900 $19,095 = $4.18 (Sales per dollar of employee cost) 6. Overhead as a Percent of Sales (Provides a benchmark for understanding the costs involved in generating a given level of sales. For simulation purposes, Overhead = Manager salary, rent and utilities, insurance and telephone, interest, and credit expense.) ____Total Overhead _ Total Quarterly Sales Page 52—Entrepreneur Student Guide = _$24,299_ $79,900 = 30.4% SELECTED FINANCIAL RATIOS Quarter ___ Industry _______________ Company __________________________ Prepared by ____________________________________________________ 1. Inventory Turnover (Indicates efficient inventory management) Units Sold (Tops) (Beginning Inventory + Ending Inventory) / 2 = _________________ = 2. Gross Profit Margin (Describes the relationships between the cost of buying goods and the amount of sales generated. An indication of how your price is affecting profitability.) Sales $-Cost of Goods Sold Sales $ = ____________________ = 3. Return on Sales (Describes the relationship between all expenses of operations and sales revenues generated. An indication of how costs are affecting profitability.) Quarterly Profits Total Sales $ = ________________ = 4. Advertising and Promotion as a Percent of Sales (Provides a benchmark for understanding the relationship between advertising and sales. Generally should be compared to an industry average.) Total Advertising & Promotion $ Total Sales $ = _____________________ = 5. Sales Revenue per Dollar of Employee Time (Provides a benchmark for understanding the relationship between employee efficiency and sales.) Total Quarterly Sales $ Total Wages & Salaries = _____________________ = 6. Overhead as a percent of Sales (For simulation purposes, Overhead = Manager salary, rent, utilities, insurance, telephone, interest, credit expense.) Total Overhead Total Quarterly Sales $ = ________________ = Forms and Worksheets—Page 53 Page 54—Entrepreneur Student Guide Glossary Action Plan Advertising Presence Annualized Return “Bait and Switch” Balance Sheet Also referred to as "strategies," "tactical plans," etc.; is the plan of action to accomplish management's desired objectives. Each advertising medium reaches different customers but all are intended to establish your store as a "presence" and give you a better community image. Your customers will be unaware of your presence if you do not broadcast your presence sufficiently. Annualized return, or "average annual return," describes the return gained, on average, each year of a multi-year period rather than a cumulative return. Most mutual funds must show average annual returns for one, three, five, and 10 year periods (when applicable). When off-quality merchandise is offered at extremely low prices yet is advertised as "designer" or "brand name" merchandise. Usually, the sale offering is a mix of low quality merchandise with a few (very small size) designer label goods added in, yet the advertiser claims there is actual designer and brand name merchandise on sale. The ads state the price is "below normal cost" or "a buy-out price" and the price appears in the ads to be well below the usual cost of high-quality, brand name goods. However, when customers get to this store's sale and compare the sale merchandise to the regular merchandise, they realize the quality is not the same and usually end up buying the regular line, which has the normal markup. The simulation balance sheet is an abbreviated one. It shows the assets of the business and the claims of ownership against those assets. Your balance sheet includes only current Assets: cash, money market funds, rent deposit, and the value of inventory on hand (at cost). Since all of your property and fixtures are leased, there are no fixed assets shown. A non-standard line is "Balance Sheet Adjustment." This is simply a method to force the balance sheet to balance due to small rounding values. Your Liabilities will include your unpaid loan. Owner's Equity includes the stock that you sold (based on your original investment, and retained earnings. Retained earnings are the total profits of the firm, to date, less any dividends that were paid. Breakeven The point at which the cost of operations equals the revenues from sales is called the breakeven point. Bureau of Illegal Practices Usually referred to as the Better Business Bureau. Better Business Bureaus are nonprofit organizations that work to maintain standards in business and advertising. Supported by local businesses, they aim to serve businesses and consumers by encouraging voluntary ethical business practices and providing services to the public. Glossary—Page 55 Business Index A statistical measure of change in an economy or a securities market. In the case of retail sales, the business index is essentially a delicate mix of the correct product, attractive price, ample advertising, promotion, and the overall economic environment. In this simulation, the Business Index will provide information about the economic environment in the form of the actual business index in the current quarter and a forecasted business index for next quarter. Business Objectives Objectives specify the action commitments that are being made to achieve the organization's purpose. They describe the results that the organization wishes to achieve. Objectives provide management with the direction needed for effective coordination of human, financial, physical, and information resources. They can also serve to motivate those in the organization and provide a basis for control processes. Business Plan Business Policies The business plan has some of the same information as contained in the strategic plan but in addition, usually contains a great deal more marketing and financial information, e.g., market analysis, demand forecasts, production and operations management details, financial forecasts and plans, and human resource plans. If a business is seeking outside financing for its operations, the bank, venture capitalist, or other lending entity often requires a business plan. After the team has established the general direction that the store should take, specific day-to-day guidelines must be prepared. These statements are called policies and they give guidance to daily activities while providing some latitude to the manager in his or her decision-making. Policies should be established in all of the areas for which there are objectives. These policy statements facilitate routine decisions and continuity of business practices. Cash Flow Analysis Analyzing a firm's cash position is essential to understanding its financial health. Investors need to know how the company is generating or obtaining its cash (the cash sources) and where that cash is being expended (cash uses). The cash flow analysis identifies cash flow cycle: accounts payable to inventory to accounts receivable. Control Function of Management An analysis of the outcomes of operations. One method of analysis is through an internal management audit. This differs from an accounting audit in that you will be concerned with management issues as well as variances from planned revenues and expenses. Page 56—Entrepreneur Student Guide Co-op Advertising Advertising of this type promotes the item rather than the store, can save the retailer about 50% in advertising costs, and provides a residual image to consumers. An example is a Levi-Strauss promotion of a new line of jeans with an announcement that they can be purchased at a specified outlet. Some shopping centers include "flyer" advertising as a benefit of tenancy; alternatively, some shopping centers require that tenants participate in mall promotions and charge for the advertising. Clothing retailers are able to reach their target segments effectively through this flyer type of publication if they have chosen their location wisely. Cottage Industry A small garment cooperative that represents many small shops in homes around the area. Often a "cottage industry" will produce a look-alike product of very high quality. Demand Note A personal loan that an individual has made to you, typically having no date for repayment, but due on demand of the lender. Dividends Dividends are a payment to stockholders for the investment they have made in the firm. Economic Development Commission A commission appointed by the county commission to recruit, assist, and retain businesses. Financial Report Gross Profit Margin An accounting statement detailing financial data, including income from all sources, expenses, assets and liabilities. A financial report may also be an itemized accounting that shows how grant funds were used by an organization. Gross profit margin equals gross profit divided by revenue; expressed as a percentage. The percentage represents the amount of each dollar of revenue that results in gross profit. Gross profit equals revenue minus cost of goods sold (COGS). It identifies the amount available to cover other operating expenses. Income Statement A quarterly or annual financial statement that shows a corporation's business results. It specifically shows all revenues, earnings, expenses, costs and taxes and how much money (expenses) was paid out. Subtracting the expenses from the revenue gives the net profit. Interest Income If your firm has any income other than sales and interest, it will be shown with interest income on the income statement. Typically, interest income is the type of income generated by bank deposits, bonds, GIC'S, treasury bills, fixed income investments, strip bonds, and strip coupons. Inventory Turnover A ratio for evaluating sales effectiveness that is often calculated by dividing annual sales by ending inventory i.e., how fast new inventory is purchased and then resold to customers. Low turnover is an unhealthy sign, indicating excess stocks and/or poor sales. Glossary—Page 57 Kickbacks Line of Credit Loan Management Audit A payment made to someone for referral of a customer or business. Generally speaking, kickbacks are illegal. The reason is that, unlike a commission, a kickback is made without the customer's knowledge; thus, the referral could have been made without the customer's best interest at heart. A line of credit is a type of open-ended automatic loan that the entrepreneur may add to or pay back at any time without going through the formal motions of applying for a new loan every time the firm needs additional working capital. Reviews your store's results over a certain period of time (generally four quarters or one year). For purposes of this simulation, the purpose of the management audit will be to make a comparison to these results with your plans for the simulation when you started, and then to make any changes that you deem desirable in order to improve your performance and your own learning experience. If this audit occurs at the midpoint of the simulation, you will have the opportunity to take corrective action. If it occurs at the end, your conclusions will be a "report card" of your success. This differs from an accounting audit in that you will be concerned with management issues as well as variances from planned revenues and expenses. Market Research Reports Contain data from studies conducted in the local casual clothing market. Markup: A percentage added to the cost to get the retail selling price. Negative Cash Balance A negative cash balance that appears on the balance sheet when the cash account in the general ledger has a credit balance. The credit or negative balance in the general ledger cash account is usually caused by a company or organization writing checks for more than the amount in the general ledger cash account. Organizational Chart An organizational chart is a chart which represents the structure of an organization in terms of rank. The chart usually shows the managers and sub-workers who make up an organization. The chart also shows relationships between staff in the organization. Overhead Refers to an ongoing expense of operating a business. The term overhead is usually used to group expenses that are necessary to the continued functioning of the business, but that do not directly generate profits. Typical examples of overhead expenses include rent, utilities, business permits, business name registration, and commercial liability insurance. For simulation purposes, overhead includes manager salary, rent and utilities, insurance and telephone, interest, and credit expense. Page 58—Entrepreneur Student Guide Payroll Taxes Taxes based on payroll (wages) that is used to finance the Social Security and Medicare programs. In the simulation, you will be charged (in a separate budget item) 10% of the total payroll for the employer's share of social security taxes and mandatory on-the-job accident insurance (termed workers' compensation in many states). This includes the manager's salary as well as the part-time wages. Point of Diminishing Returns This is the point of dollar expenditure that does not add as much effect as the previous dollar; the cost will not be offset by the gains. “Pull” Marketing Strategy Advertising is a part of marketing that lures customers into the specific store. These subtle influences that affect consumer behavior are called "pull" marketing strategies. Most retailers use a combination of advertising and sales promotions (“pull” and “push” strategies). “Push” Marketing Strategy Sales promotion is known as a "push" marketing strategy. Typical promotional activities include coupons and attractive point-of-sale displays that push merchandise into a customer's hands. Most retailers use a combination of advertising and sales promotions (“pull” and “push” strategies). Retail Clothing Local and state level retail associations, whose membership is typically comprised of small-to-mid-size independent retailers; varies by state. Merchants Association Return On Investment Return on Sales Risk Averse In finance, the return on investment (ROI), or rate of return (ROR,) or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. ROI is also known as rate of profit. Return can also refer to the monetary amount of gain or loss. ROI is usually given as a percent rather than decimal value. A ratio widely used to evaluate a company's operational efficiency. ROS is also known as a firm's "operating profit margin". This measure is helpful to management, providing insight into how much profit is being produced per dollar of sales. As with many ratios, it is best to compare a company's ROS over time to look for trends, and compare it to other companies in the industry. An increasing ROS indicates the company is growing more efficient, while a decreasing ROS could signal looming financial troubles. Risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff rather than accepting another bargain that has a more certain payoff, but with a possibly lower return. (Also referred to as risk tolerance.) Glossary—Page 59 Sales Revenue Per Dollar of Employee Time Shrinkage A formula that provides a benchmark for understanding the relationship between employee efficiency and sales; expressed as an equation. (Total Quarterly Sales / Total Wages & Salaries = Sales per dollar of employee cost) Any merchandise that has been soiled, stolen, lost in some way (getting swept off into the waste can), or perhaps returned for credit. It is assumed that no monies are received for these units. They are simply written off the inventory at their cost. The U.S. Small Business Administration (SBA) was created in 1953 as an independent agency of the federal government to aid, counsel, assist, and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall Small Business economy of our nation. The SBA helps Americans start, build, and grow Administration businesses. The SBA provides a number of financial assistance programs for small businesses. Though the SBA does not provide grants to help you start a business, it does provide information on organizations and sites that can assist you in locating special purpose grants. Stock Out Selling completely out of inventory is termed as a “stock out.” Venture Capitalist An investor or organization who provides capital to either start-up ventures or support small companies who wish to expand but do not have access to public funding. Typically, the venture capitalist is willing to invest in a medium-to high-risk business in exchange for a very high level of return in order to accept this level of risk. Page 60—Entrepreneur Student Guide ANALYZING THE INCOME STATEMENT This section will briefly describe the line items you will find on your income statement. The income statement gives a snapshot of your income and expenses at the end of your last quarter. The top portion of the Income Statement details your overall income (revenues) and gross margins. The lower portion of the statement lists business expenses. Income The income section will show your gross receipts (revenue) from the previous quarter, listing figures from pants and tops ($) sales. Listed below your revenue is the cost of goods sold (COGS). This represents the total direct cost associated with those revenues (costs of purchasing pants and tops). Subtracting the COGS from the revenue line, results in the gross margin. In order to be profitable, your monthly expenses will need to be less than your gross margin. Interest and Other Income If your firm has any income other than sales and interest, it will be shown with interest income on the Income Statement. This may come about as a result of an incident. Expenses Advertising and Promotion The advertising and promotional budget amounts you specified and entered during the last quarter are shown as separate line items. Manager & 1 Salesperson You will automatically be charged each quarter for the manager's salary ($8,000) and the cost to keep one salesperson at the store at all times ($7,000). Part-Time Employee Wages This line will show the expenses for additional part-time employees based upon your average wage rate, using figures from your last quarter's decisions. Payroll Taxes You will be charged (in a separate budget item) 10% of the total payroll for the employer's share of social security taxes and mandatory on-the-job accident insurance (termed workers' compensation in many states). This includes the manager's salary as well as the part-time wages. In Quarter 0 this was $2,200 (total wages $22,000 x 10%). Rent and Utilities This is the cost of your quarterly rent, which includes the cost of utilities (electric and water), and are paid monthly. The cost will depend on the location you choose for your store in startup decisions ("Store Location"). Analyzing the Income Statement—Page 61 Insurance and Telephone Insurance costs of $900 per quarter include fire protection, company liability, and group life and disability insurance (for full-time employees only). In addition, $200 per month or $600 per quarter will be charged for telephone services and Yellow Pages advertising. These two expenses will be totaled on the report ($1,500 per quarter) and will not change unless you receive notice from the instructor. Interest Expense The quarterly interest charge on your loan is calculated by multiplying your total outstanding loan balance by one-fourth of your total annual interest rate. (For example, 2.5% interest charge will be applied quarterly if your loan has 10% annual interest rate). The interest amount will be calculated on the outstanding balance after your loan payment has been applied. Interest rates may increase or decrease during the game, depending on national interest rate trends and your ability to keep from having a negative cash balance. In the latter case, you may expect your loan interest rate to increase. Credit Card Expense The credit card company will charge a 4% service fee on all credit card sales. The simulation assumes that 70% of your sales will be by credit card. Therefore, if you have sales of $80,000, the bank will charge 7% of $56,000 or $2,240 for the quarter. This is a contracted rate and may not be changed unless changed by the credit card company (your instructor). Other Expenses This item may contain any fines your instructor may assess, the cost of any incident expense, and any other costs that are not listed on the report in other places. Market Research This item will cost from $0 to $700, depending on the types of market research your team orders. The choices are detailed elsewhere in the manual. Shrinkage Cost Goods are often pushed back on shelves, in drawers, or in the stockroom until the goods are out of season and it is too late to have a season-end sale. In this case the merchandise will be given to a charitable institution. The total of such merchandise will be listed as shrinkage. It is assumed that no monies are received for these units. They are simply written off the inventory at their cost. Taxes (30%) Your income and other taxes are calculated at 30% of any quarterly profits. This includes all federal, state, and local taxes. Sales taxes are not a consideration in this simulation because of the different state sales tax laws. Quarterly Profit Your quarterly profits reflect all revenues and expenses for the quarter except your loan principal repayment. This is because principal repayments do not count as a valid expense for income tax purposes, although the interest on the loan is a tax expense. Dividends also are not an expense because they are a return on investment to the owners. (Both your dividend payment and loan repayment amounts will show up on the Cash Analysis statement.) Page 62—Entrepreneur Student Guide INDEX fixed costs, 50, 61 A accounting balance sheet, 42 income statement, 41 action plan, 8, 9 advertising, 32, 59 audit of your firm, 9, 56 G gross margin, 61 group dynamics, 10, 11 I B balance sheet, 42, 43, 55 breakeven analysis, 41, 50 business index, 45 name, 13 plan, 7 incident response, 36 income statement, 43 income taxes, 62 income, other, 57, 61 input screens, 24 inventory beginning and ending, 39 level of, 32 ordering levels, 32 purchasing, 28 C clothing types, 36 COGS, 61 company objectives, 8, 56 policies, 8, 56 control function of management, 9, 56 cost of goods, 30 cost of goods sold, 61 cost of goods sold (COGS), 43 costs credit card, 62 insurance and telephone, 62 interest income, 62 other, 62 payroll taxes, 59, 61 rent and utilities, 61 startup, 15 L labor cost, 61 loan interest, 17, 62 loan repayment, 36 logbook, 9 login, 23 M management audit, 9, 56 market research reports, 44 market segment, 20 menus brief descriptions of, 26 pull-down, 24 mission of your firm, 8 D decisions summary, 38 diminishing returns, 33 dividends, 35, 57 N naming your business, 13 navigation buttons, green, 25 newsletter, 45 E employee,part-time and wages, 34 entrepreneurship essentials, 7 expenses, 41 F financing your business, 15, 27 O operations guide, 5 operations management, 40 P peer evaluation, 10 planning tasks, 8 Index—Page 63 pricing, 18, 30 promotion budget, 33, 59 Q quarterly profit, 62 R retail clothing industry, 13 return policy, 19, 29 revenues, 41 review historical information, 25 your decisions, 38 risk quotient, 10 manual, 23 navigation, 24 REPLAY, 46 RESTART, 46 startup case, 25, 26 decisions, 25 stock price, 17 store location, 14 T team dynamics, 10 tools decision-making, 24 S shrinkage, 19 simulation access simulation, 23, 24 ADVANCE, 46 Page 64—Entrepreneur Student Guide V view old decisions, 38 Y your retail store, 13 ...
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This note was uploaded on 10/05/2009 for the course BUS 161A taught by Professor Londoty during the Fall '09 term at San Jose State.

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