Deck 7: The Business Plan: Creating and Starting the Venture

Question 1

As described in the Opening Profile to Chapter 7, even in his early days as an entrepreneur, Ted Rogers (deceased 2008 Dec.) used a rational method of cash flow management that was based in quantitative science.

Answer 1

False

Question 2

As described in the Opening Profile to Chapter 7, the challenge for Ted Rogers of Rogers Communications is in competition against Bell Canada, who dominates the local telephone service industry.

Answer 2

True

Question 3

Before developing the pro forma income statement, the entrepreneur should prepare operating and capital budgets.

Answer 3

True

Question 4

When developing operating and capital budgets, the entrepreneur may seek advice from experts and managers, but ultimately, the budgets are the entrepreneur's responsibility.

Question 5

When preparing the pro forma income statement, the entrepreneur will develop the manufacturing budget first, as these costs are more certain.

Question 6

Sales forecasting is relatively unimportant to the development of the pro forma income statement, as it is more important to be accurate on the operating expenses than the revenues.

Question 7

The purpose of developing the production or manufacturing budget is to forecast cash flows for the costs of goods produced.

Question 8

A manufacturing or production budget is necessary when high levels of inventory are required or the business experiences large seasonal fluctuations in demand.

Question 9

Fixed costs are those expenses in a business that change from month to month.

Question 10

Debt to Equity ratio - what is it? Why is it important?

Question 11

Estimating operating expenses for a business can be very difficult as there are very few industry standards or benchmarks that exist for these type of costs.

Question 12

Ethics: When a company lies or inflates its numbers, why is it a problem?

Question 13

Calculations of financial ratios - why do you do them? Are they useful?

Question 14

One major problem that new ventures face is cash flow. Many profitable firms fail because of lack of cash. Thus, using profit as a measure of success for a new venture may be deceiving if there is a significant negative cash flow.

Question 15

The most easy thing with projecting cash flows is determining exact monthly receipts and disbursements.

Question 16

Assets. These represent everything of value that is owned by the business. Value is not necessarily meant to imply the cost of replacement or what its market value would be but is the actual cost or amount expended for the asset.

Question 17

Break-even analysis is a useful technique for determining how many units must be sold or how much sales volume must be achieved in order to break even: break-even is that volume of sales at which the business will neither make a profit nor incur a loss.

Question 18

One unique aspect of break-even is that it is helpful information, but cannot be graphically displayed.

Question 19

Describe how an entrepreneur might develop and use a pro forma sources and applications of funds statement and why it might be important.

Question 20

Liquidity Ratios: Current Ratio; This ratio is commonly used to measure the short-term solvency of the venture or its ability to meet its short-term debts.

Question 21

As described in the Opening Profile to Chapter 9, early in his business career, Ted Rogers used which of the following methods of cash flow management when dealing with creditors?

A) first in, first paid
B) loudest complaint, first paid
C) the "invoice hat" random selection process
D) aging of payables
E) None of the answers apply.

Question 22

As described in the Opening Profile to Chapter 9, Ted Rogers of Rogers Communications operates in an industry that can best be described as __________.

A) capital intensive with soft competition and relatively low debt
B) having high cash flow, highly competitive and relatively low debt
C) having cutthroat competition, capital intensive, and high debt
D) highly conservative with low risk and debt
E) None of the answers apply.

Question 23

As discussed in the text, when developing the pro forma income statement, the first type of budget prepared is usually the __________.

A) breakeven analysis
B) cash flow budget
C) operating budget
D) sales budget
E) None of the answers apply.

Question 24

Andrew McGee is an entrepreneur looking to start a business manufacturing picnic tables from a new plastic resin material made from recycled soda bottles. This new material is harder in consistency than wood, rustproof, and essentially indestructible, which would be an advantage for furniture left out in the elements on a year round basis. Andrew estimates that each table would use $15 in materials, and take two hours of labour to put together, for which he would charge a rate of $12 per hour. He also estimates that each table would use another $4.50 in miscellaneous materials and supplies such as screws, glue, nuts, bolts, and other shop items. To start the business, Andrew estimates that he would need to purchase $2,500 in equipment, and spend $1,500 in developing a sales brochure and website. Other costs related to running the business are estimated to be $1,000 per year for communications, $2,500 for vehicle expenses, insurance of $750 and $500 for employee benefits. In his market research, Andrew was able to find another firm making a similar product in the United States, who were selling the table for $75 retail. Andrew believed that he could easily get that for his tables, given the substantial product advantages his table provided. Based on this information, answer the following questions:

A) Based on a selling price of $75, what is Andrew's gross profit per unit?
B) What is Andrew's breakeven point in units, assuming all of his startup costs are expensed in the first year?

Question 25

The sales budget tends to be produced early in the development of the pro forma income statement process for which of the following reasons?

A) It helps to know how much will be sold when making other planning decisions.
B) Inventory planning decisions depend on how much will be sold and when.
C) Sales revenue is the first item in an income statement.
D) Sales revenue is a large factor to be considered when determining the viability of a new venture.
E) All of the answers are correct.

Question 26

Discuss the concept of breakeven analysis, how it is calculated, and what an entrepreneur might use this information for.

Question 27

The production or manufacturing budget becomes a very important planning tool under which of the following conditions?

A) When the product experiences seasonal demand fluctuations.
B) When it is necessary to carry higher levels of finished goods inventory.
C) When the company uses marketing programs to stimulate demand during the year.
D) All of the answers are correct.
E) None of the answers apply.

Question 28

Fixed expenses __________.

A) are those expenses incurred regardless of sales volume
B) can be estimated by examining industry benchmarks
C) include items such as rent, insurance, and utilities
D) All of the answers are correct.
E) None of the answers apply.

Question 29

Discuss the reasons why the cash flow might be very different from the profitability of a business venture.

Question 30

To be accurate, amounts for the operating budget may come from which of the following sources?

A) personal experience
B) industry benchmarks
C) direct contact with suppliers
D) All of the answers are correct.
E) None of the answers apply.

Question 31

Discuss the difference between profit and cash flow, and why this might be important to a new venture.

Question 32

An example of a capital expenditure that should be budgeted for would be __________.

A) equipment purchase
B) computer system purchase
C) company vehicle(s) purchase
D) facility purchase or major renovation
E) All of the answers are correct.

Question 33

An entrepreneur should consider getting help when evaluating capital expenditures for which of the following reasons?

A) Capital expenditure decisions can be complex.
B) Capital expenditures have tax liability issues which can vary significantly.
C) Due to their size, capital expenditure decisions carry a high degree of risk.
D) All of the answers are correct.
E) None of the answers apply.

Question 34

The first step to creating a pro forma income statement is to ___________________________.

A) estimate the amount of profits
B) estimate the amount of sales for the coming 12 months.
C) Estimate sales costs and expenses.
D) Count the number of potential employees.
E) None of the answers apply.

Question 35

To estimate the amount of sales for the coming 12 months; this can be done by completing the market-share calculations, or by ___________________________.

A) estimate the amount of profits
B) determining from primary and secondary sources what competitors' sales are and making adjustments.
C) Estimate sales costs and expenses.
D) Count the number of potential employees.
E) None of the answers apply.

Question 36

As discussed in the text, when estimating sales revenue for the pro forma income statement, it is most important to __________.

A) be conservative so the numbers are more realistic
B) use your own judgement, as no one knows the market better than the entrepreneur
C) rely on market research
D) be optimistic so the numbers will be motivating
E) None of the answers apply.

Question 37

Estimates of sales revenue may be derived from which of the following sources of information?

A) marketing research
B) industry sales data
C) competitive financial information
D) sales forecasting techniques
E) All of the answers are correct.

Question 38

Discuss the recommendations presented in the text for helping an entrepreneur to reduce his or her expenses. Why should an entrepreneur be frugal in the first place?

Question 39

When estimating sales revenue and operating expenses for a new business venture, it is important to keep in mind that __________.

A) sales will likely build slowly at first
B) the cost of generating sales will be higher at first
C) fixed costs will decrease as volume builds due to the learning curve
D) sales will likely build slowly at first and the cost of generating sales will be higher at first
E) All of the answers are correct.

Question 40

It can be more difficult to estimate sales for an Internet startup businesses than for a traditional retail business due to which of the following reasons?

A) Traffic numbers for a traditional retail location are easier to estimate than for a virtual store.
B) Spending per customer on advertising for a retail location will be much higher than for a virtual business.
C) Traffic numbers for a traditional retail location are more difficult to estimate than for a virtual store.
D) There is very little information available on the relationship between "hits" and retail spending in stores.
E) All of the answers are correct.

Question 41

Recent corporate scandals involving the misrepresentation of financial information such as Enron Corp. and WorldCom had which of the following consequences?

A) Stockholders and investors of these companies were hurt by the loss in the value of their holdings.
B) The efficiency of financial markets was jeopardized as capital continued to flow to these industries.
C) Competitors in the same industries were hurt as they tried to match operating results that were not real.
D) The companies involved went bankrupt as their own reporting systems could no longer help them manage the business.
E) All of the answers are correct.

Question 42

Selling expenses as a percentage of sales may also be expected to be __________.

A) Lower when less calls made
B) A small part of monthly income statements for the first year
C) higher initially since more sales calls will have to be made to generate each sale
D) Easier online
E) None of the answers apply.

Question 43

Salaries and wages for the company should reflect the __________.

A) the more numbers, the better
B) number of personnel employed as well as their role in the organization
C) monthly balance sheets for the first year, annual for years 2 and 3
D) The sales produced by the employees
E) None of the answers apply.

Question 44

When evaluating financial information in a business plan, investors like to see __________.

A) the more numbers, the better
B) monthly income statements for the first year, annual for years 2 and 3
C) monthly balance sheets for the first year, annual for years 2 and 3
D) the fewer numbers, the better
E) None of the answers apply.

Question 45

Information on operating expenses for years 2 and 3 of the pro forma income statement may__________.

A) be calculated as a percentage of sales from year 1
B) be computed based on industry standards
C) be obtained from supplier cost estimates
D) All of the answers are correct.
E) None of the answers apply.

Question 46

When developing pro forma income statements for the business plan, it is important to __________.

A) be as optimistic as possible so that investors will be impressed at the opportunity that exists
B) be pessimistic, so that actual operating results will exceed expectations
C) be conservative, as a reasonable profit earned with conservative estimates lends credibility to the venture
D) be reasonable optimistic, as investors will sense a lack of confidence otherwise
E) None of the answers apply.

Question 47

By definition, cash flow __________.

A) is essentially the same as profit
B) is the result of subtracting expenses from sales
C) results from the differences between cash receipts and cash payments
D) None of the answers apply.

Question 48

Cash flow can be very different from profit due to which of the following?

A) Some sales are made on a credit basis and not paid for until the next reporting period.
B) Not all bills from suppliers are paid immediately, depending on cash reserves.
C) Some expenses such as depreciation do not involve the payment of cash.
D) All of the answers are correct.
E) None of the answers apply.

Question 49

Cash flow is an important concept to consider for a new venture for which of the following reasons?

A) Despite being profitable, a growing business can run out of cash and fail as a result.
B) Sales revenue is an important indicator of market success but profitability is what keeps the cash flowing.
C) In the early stages, investors are more concerned about the venture's profitability than its liquidity.
D) Profitability is a much easier concept to monitor than cash flow.
E) None of the answers apply.

Question 50

Which of the following would be an application of funds?

A) increasing assets such as inventory
B) retiring long-term liabilities
C) paying dividends
D) All of the answers are correct.
E) None of the answers apply.

Question 51

The pro forma sources and applications of funds statement __________.

A) summarizes the interrelationship of assets, liabilities, and net worth of the firm to working capital
B) shows the disposition of earnings from operations and financing
C) shows how net income was used to increase assets or to pay off debt
D) All of the answers are correct.
E) None of the answers apply.

Question 52

A simple determination of cash received versus cash paid out is known as the __________ method to projecting cash flow.

A) incremental
B) direct
C) pro forma
D) indirect
E) None of the answers apply.

Question 53

For the first year of a new venture, cash flow statements should be developed on a(n) __________basis.

A) annual
B) semi-annual
C) quarterly
D) monthly
E) None of the answers apply.

Question 54

For a new venture, the likelihood of incurring __________ in the first year is very high.

A) large negative cash flows
B) a significant equity to debt ratio
C) large positive cash flows
D) a significant profit to cash flow ratio
E) None of the answers apply.

Question 55

The most difficult problem with forecasting cash flows is __________.

A) knowing when to stop counting
B) in determining the exact monthly receipts and disbursements
C) keeping track of payments versus receipts
D) predicting who will pay cash versus buying on credit
E) None of the answers apply.

Question 56

When using the indirect method to project cash flow, uses (decreases) of cash include which of the following?

A) payments to suppliers
B) purchases of materials on credit
C) building up finished goods inventory
D) payments to suppliers and building up finished goods inventory
E) All of the answers are correct.

Question 57

Because pro forma cash flow and income statements are based on best estimates, it is sometimes useful to provide __________.

A) several scenarios, based on different levels of success
B) revisions of projections to provide accurate information
C) a cash cushion in liquid investment to be used during negative cash flow periods
D) All of the answers are correct.

Question 58

As discussed in the text, when Lissa D'Aquanni created a gourmet chocolate business in her Albany, New York, basement in 1998, her approach to financing was __________.

A) several scenarios, based on different levels of success
B) revisions of projections to provide accurate information
C) a cash cushion in liquid investment to be used during negative cash flow periods
D) conventional financing wasn't an option.

Question 59

The pro forma balance sheet __________.

A) is a picture of the business at a certain moment in time
B) covers a period of time
C) relies on the income and cash flow statements to justify some of the figures
D) is a picture of the business at a certain moment in time and relies on the income and cash flow statements to justify some of the figures
E) All of the answers are correct.

Question 60

It is most important for the entrepreneur to remember that the pro forma cash flow, like the income statement, is based on __________.

A) is a picture of the business at a certain moment in time
B) covers a period of time
C) relies on the income and cash flow statements to justify some of the figures
D) best estimates.
E) All of the answers are correct.

Question 61

The financial ratio used to evaluate the effectiveness of the pricing strategy and to calculate breakeven would be which of the following?

A) debt/equity ratio
B) working capital ratio
C) wages to sales ratio
D) inventory to sales ratio
E) gross profit margin

Question 62

Brenda's pro forma balance sheet shows assets of $18,000 and liabilities of $12,000. What is her owner's equity?

A) $30,000
B) $3,000
C) $6,000
D) -$6,000
E) need more information to calculate

Question 63

Jack plans to start his new business with $10,000 in savings from his full-time job, and a bank loan of $15,000 for his equipment. What will his owner's equity be on the pro forma balance sheet?

A) $10,000
B) $25,000
C) $5,000
D) $7,500
E) need more information to calculate

Question 64

Jack plans to start his new business with $10,000 in savings from his full-time job, a bank loan of $15,000 for his equipment, and his truck which he currently owns and has a value of $7,000. What will his owner's equity be on the pro forma balance sheet?

A) $10,000
B) $17,000
C) $22,000
D) $12,000
E) need more information to calculate

Question 65

As defined in the text, items that are owned or available to be used in the venture operations are known as__________.

A) assets
B) liabilities
C) owner's equity
D) materials, inventory, and supplies
E) None of the answers apply.

Question 66

Current assets include _________________ and anything else that is expected to be converted into cash or consumed in the operation of the business during a period of one year or less.

A) assets
B) liabilities
C) owner's equity
D) materials, inventory, and supplies
E) cash

Question 67

Fixed assets are those that are tangible and will be used ________________________.

A) immediately
B) over a long period of time.
C) For the owner's equity
D) To buy materials, inventory, and supplies
E) cash

Question 68

When preparing a balance sheet, the value recorded for an asset is __________.

A) the current market value of the item
B) the replacement cost of the item
C) the planned selling price for the item
D) the amount actually paid for the item
E) None of the answers apply.

Question 69

As defined in the text, cash and other items that are expected to be converted into cash or consumed in the operation of the business during a period of one year or less are known as __________.

A) current assets
B) current liabilities
C) consumables
D) inventories
E) None of the answers apply.

Question 70

The financial ratio that is used to monitor the sales rate of a business would be which of the following?

A) debt/equity ratio
B) working capital ratio
C) wages to sales ratio
D) inventory to sales ratio
E) gross profit margin

Question 71

Fixed assets are those that __________.

A) are tangible
B) will be used over a long period of time
C) include cash
D) are tangible and will be used over a long period of time
E) All of the answers are correct.

Question 72

The financial ratio that is considered crucial for restaurants, fast-food outlets, and construction firms would be which of the following?

A) debt/equity ratio
B) working capital ratio
C) wages to sales ratio
D) inventory to sales ratio
E) gross profit margin

Question 73

The financial ratio that indicates a company's ability to pay its short-term debts would be which of the following?

A) debt/equity ratio
B) working capital ratio
C) wages to sales ratio
D) inventory to sales ratio
E) gross profit margin

Question 74

Liabilities: Although prompt payment of what is owed (payables) establishes good credit ratings and a good relationship with suppliers, it is often necessary to delay payments of bills in order to____________________________.

A) Use those liabilities due for payment within a year
B) everything owed to creditors
C) more effectively manage cash flow.
D) those liabilities the business intends to pay within the next month
E) None of the answers apply.

Question 75

A business attempting to manage its cash flow might employ which of the following tactics?

A) delay paying its creditors
B) make an effort to collect from its customers
C) buy on credit whenever possible
D) offer discounts for customers willing to pay cash
E) All of the answers are correct.

Question 76

A business would want to pay its creditors promptly for which of the following reasons?

A) to establish a good credit rating
B) to take advantage of any early payment discounts or rebates offered
C) to develop a good relationship with suppliers
D) to establish a good credit rating and to develop a good relationship with suppliers
E) All of the answers are correct.

Question 77

Banks track several "ratios"when evaluating new businesses. One of those ratios decreases over time: which ratio would that be?

A) debt/equity ratio
B) working capital ratio
C) wages to sales ratio
D) inventory to sales ratio
E) gross profit margin

Question 78

If the total fixed costs are $850,000, the selling price is $110 and the variable cost per unit is $25, what is the breakeven volume?

A) 17,000 units
B) 10,000 units
C) 7,000 units
D) 1,000 units
E) need more information to calculate

Question 79

The breakeven point tells the entrepreneur __________.

A) when the business begins to make a profit
B) the volume of sales at which the business will neither make a profit nor incur a loss
C) the value of sales needed to cover total variable and fixed expenses
D) the volume of sales at which the business will neither make a profit nor incur a loss and the value of sales needed to cover total variable and fixed expenses
E) None of the answers apply.

Question 80

The major weakness in calculating the break-even lies in determining whether a cost is fixed or__________________________.

A) depreciation
B) commissions
C) variable
D) Commissions and raw materials
E) All of the answers are correct.