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Noah Harding Professor of Statistics

Teaching Excellence Award Winner 2008, 2007

BusinessWeek named Professor Ed Williams one of the top two of the nation's best entrepreneurship teachers. He believes exposure to entrepreneurship is essential to a business education. "That's where the jobs are going to be," he said. "Even students who go to work for big corporations don't know what opportunities are going to come their way that may send them down the entrepreneurial path." Williams speaks from experience: an academic, who has always kept a hand in business, he is a member of the board of directors of several companies, including Service Corporation International, the world's largest operator of funeral homes. Williams teaches the Enterprise Exchange (Buying and Selling a Business) in all three MBA programs at the Jones School. "When I look at a company, I want to know everything that makes it work," Williams said. "We cover it all. Even students who don't go on to be entrepreneurs say it is excellent as a capstone because it integrates the economics, marketing, finance, and accounting they've learned in earlier courses." Williams' latest books include Preparing an Entrepreneurial Business Plan Revised Edition (2006), Models for Investors in Real World Markets (2003), and Business Planning: 25 Keys to a Sound Business Plan (1999) exhibit his equally well-informed academic side, but he insists, "In entrepreneurship, theory is not enough. In the eyes of a student, there's nothing better than the war stories of somebody who's actually seen these problems and solved them."

Key 25: Venture capital is not available for most entrepreneurs, but it can be attractive for the few that qualify

Key 24: Selling common stock to outsiders may be a big mistake

Key 23: Factoring may be an important source of funds available to a new business

Key 22: Bank financing may be available to certain businesses

Key 21: Trade credit is often overlooked as a key source of short-term financing

Key 20: Deciding when and how the business reaches the break-even point is critical to its success

A company’s operating leverage is often analyzed by using break-even analysis. The break-even point is specified as the level of sales where expenses exactly equal sales. A company with no fixed costs has a break-even sales point of zero. The variable cost ratio is an important factor in break-even analysis, because a firm’s contribution to fixed costs (and profit in excess of the break-even point) is dependent on how much of each additional dollar of sales is used to cover variable costs. For the example in Key 19, the variable cost ratio for the ABC Company is assumed to be 0.5. Therefore the contribution to cover fixed costs and profit for each additional dollar of sales is $0.50. Thus, sales must be $240,000 in the case of a fixed cost level of $120,000 for the organization to break even. For every dollar of sales less than $240,000, then the firm incurs an operating loss of $0.50. On the flip side, there is an operating profit of $0.50 for every dollar of sales in excess of $240,000.

Key19: Operating leverage is a key element in determining the riskiness of a business

When a company has a volatile sales pattern, it lacks a sure inflow of cash. Such a situation has two distinct disadvantages: (1) the firm may not be able to meet its cash payment obligations on a timely basis, an (2)a risky pattern of cash flows will usually result in an unstable income pattern. In the first situation, the possibility of insolvency increases, and in the second situation the variability may reduce the value of the business.

Key 18: Long-term growth may depend on the ability to get long-term financing

Once the entrepreneur has specified a growth strategy, he must determine how to finance the growth. Essentially, there are two principal ways to finance growth: (1) internally generated funds and (2) funds obtained from external financial sources. In the financial literature, the distinction is also often made between gross and net sources. All the funds available to finance the firm’s operations from operating income, depreciation flow, other non-cash charges and asset conversions are considered gross internal sources.

Key 17: Growth calculations may be expanded to include return on investment (R.O.L.) analysis

The simply growth calculations shown in Key 16 may be expanded to include return on investment, or R.O.L., analysis. Generally, an enterprise must acquire and deploy assets to produce a product or service. While the investments may be in fixed assets such as property, plant and equipment, the amount of dollars in current assets should also be considered. For many companies the amount of capital invested in receivables, inventories and cash may be an important determinant of R.O.L. As noted previously, revenue growth is probably the most important factor for profit growth. Furthermore, the most significant determinant for improving R.O.L. is profit growth. However, even when profits are decreasing, an enterprise can increase its return on investment by reducing the volume of assets necessary to create sales.

Key 16: Simple growth calculations are easy to make and should be a focal point for the entrepreneur

In their simplest format, growth calculations are merely the ratios of two (or more) numbers expressed for a specific time horizon. Therefore, if ABC Company had sales of $400,000 in 2000 and $500,000 in 2001, then the growth rate for the company would be: ($500,000-$400,000)/$400,000=25% during the one year period. A convenient formula that can be used to express the growth relationship is:

Key 15: There is no law that requires a business to grow

When the entrepreneur develops long-range goals and objectives beyond the first year in business, she needs to think about the role growth should play in the future of the company. Remember that there is no requirement that a business must grow. In fact, because some entrepreneurs do not want the managerial, administrative and other problems that accompany a big business, they actively resist growth.

Key 14: Growth strategies may be affected by the goals and objectives of the business

Growth strategies may be affected by the goals and objectives of the business. Previously in this book we indicated that a key starting point in the business planning proves was the specification of broad (narrative) goals and specific (quantitative or numerical) objectives for the business venture. This was true because different goals/objectives require different strategies.

Key 13: The first year of operations is an important time for a new enterprise

The first year of operations is an important time for a new enterprise. The entrepreneur must work diligently during this period in order to make plans become realities. In the first year, revenues may be less than forecasted amounts and the company may have only enough cash to support a few months of operations. If the enterprise is fortunate and revenues grow more rapidly than expected, the entrepreneur may have difficulty controlling the levels of accounts receivable and inventories. Growth in both of these items may cause the company to exceed its financial capacities. Moreover, a supposedly profitable company may only be profitable from an accounting standpoint. All the profits may show up in receivables (that may not be collected) or inventories (that may not be sold). For the first year in any case, it is cash in the bank and not accounting profit that the entrepreneur should focus on. As a consequence, planning for the first year of operations must be done in detail.

Key 12: An operating plan should be prepared to determine how to run the business effectively

Key 11: A strategic plan should be developed to determine what products or services the business is going to offer

Key 10: Financial statements are the heart of the business plan

Key 9: The business plan should be specific and well written

The business plan should be specific and well written. It should begin with an executive summary that answers several important questions: