Interpretive airline simulation how to win

Simulation Assignment

1. What clothing product line do you intend to offer? What other kinds of products can you envision selling at your store?

2. Describe your “target market” (the customer segment you want to serve):

3. List some advertising mottos, jingles, or lines to which your target market might relate to:

4. Which name did you choose? Why? Enter the name in the start-up decisions in the simulation once the simulation is open for play.

Part 2:Simulation Business Plan Assignment

***This assignment is based on the Simulation, not on your own business idea.***

Planning is essential in any business. This assignment is designed to help you develop a basic “game plan” that can help you make decisions as well as to reflect on the decision-making process for your retail store in the Simulation. Use the guide questions below to write a business plan to describe who you are, what market your business will serve, and how you will ensure success. Use the context of the simulation for your plan, and be sure to address all major decision areas.

Limit your plan to 600-800 words total. Use proper spelling and grammar. Refer to the rubric for grading. Click here to learn more about business plans. (Links to an external site.)Links to an external site.

Answer the following questions in paragraph format.

1. Company Description – Who are we?

2. Market Analysis – What market are we serving?

3. Marketing – How will we market our business?

4. Projections – Where do we expect the company to be in two years?

Click here to view a sample assignment.

Part 3: Simulation Marketing Assignment

Marketing is the process by which a company creates and distributes something of value to its customers. It encompasses a wide range of activities in your business. The 4P's of marketing – product, price, promotion, and place – provide a framework for understanding the process of creating and distributing value to customers.

Complete the following questions as it relates to your Simulation.

1. Who is your target customer? Be specific! It should not be everyone.

2. How would you define the product offered at your store? Is it just clothing, or something more than that?

3. What methods can you use for setting the price? What tools are available for measuring the impact on your price decision? (hint: refer to page 11 in the student case manual

Actions for more about pricing, and look at possible tools you could use to measure impact - i.e. Breakeven Analysis)

4. What is the role of advertising/promotion in your marketing mix? How might you measure the effectiveness of your decisions?

Please use correct spelling and grammar in paragraph format. The word count should be between 500-700 in total (not per question). Refer to the rubric for grading. Click here to view a sample assignment.

Actions

Entrepreneur The Retail Entrepreneurship Simulation

Jerald R. Smith, Florida Atlantic University Peggy A. Golden, Florida Atlantic University Michael Deighan, Interpretive Simulations

Charlottesville, Virginia, USA

ii

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 © 2008–2018 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. Cover image © BigStock. Incident images, audio, and video © iStockPhoto, GettyImages, and BigStock. Graphic images used in manuals © BigStock and iStockPhoto.

http://www.interpretive.com/
iii

Contents

Introduction 1 Entrepreneur Quick Start Guide 3 Entrepreneur Manual 4

Entrepreneur Case 5 Entrepreneur Case 6 Location 6 Product Line 7 Business Name 8 Finance 9 Inventory Management 10 Hours 11 Return Policy 11 Pricing 11 Marketing 12 Staffing 13 Overhead and Other Expenses 13 Incidents 14 Reports 14 Performance Measures 16 Next Step 17

Entrepreneurship Essentials 19 Planning, Organizing, and Controlling 21 Financial Statements 23 Team Dynamics 25 Simulation Objectives 26

Appendix 27 Worksheets 28 Marketing Data Analysis 29 Quarterly Budget Variance 30 Log of Quarterly Decisions 31 Glossary 32 Index 38

Printed March 26, 2018

iv

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. Michael Deighan is a coauthor on the web-based editions of Airline, Entrepreneur, and HRManagement. His expertise, insight, and creativity proved invaluable and made it possible to convert these models to their current web-based versions. Michael joined Interpretive Simulations in 1989 as lead software developer and is now Manager of Content Development. He is coauthor on a number of Interpretive simulations: PharmaSim, AutoSim, BizCafe, StratSimMarketing, StratSimManagement, StratSimChina, ServiceSim, CountryManager, and MarketShare. In addition to developing software, he has been teaching computer programming classes at Piedmont Virginia Community College in Charlottesville, Virginia, since 1990. Michael received his B.A. in German and Economics from Washington and Lee University, and an M.A. in German from the University of Virginia.

v

Acknowledgements 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.

vi

1

Introduction

ENTREPRENEUR

2

Welcome to the exciting world of simulations! The Entrepreneur simulation provides an opportunity for you to manage a small retail clothing store in a college town. You have the unique opportunity to make business decisions, see how the decisions work out, and then try again! In the process, you will get "hands-on" experience operating a retail store. In Entrepreneur, you will typically be making decisions as part of a student management team. Teamwork is increasingly important in business today, and a valuable part of the simulation experience is learning how to make the best decisions when confronted with several different opinions. Your group will have to decide how to sort out your priorities and objectives in the context of limited resources and a changing environment.

At startup, your team will need to name the shop, decide its location, how to finance it, and pick a product line to best meet your business objectives. You will then make weekly decisions to purchase product, price and promote your line of clothing, set shop hours and hire staff. In addition, you may have to respond to issues raised by "incidents" (mini-cases), and complete supplemental assignments chosen by your instructor. You will need to understand the business in order to make good decisions. Therefore, take some time to familiarize yourself with the case before beginning the simulation. While working through your decisions, you will find it helpful to refer to the manual for information and management tips. To get the most out of the Entrepreneur experience, we recommend the approach outlined on the following page.

Entrepreneur is a dynamic business simulation covering entrepreneurship, ownership, retailing, and the ethical dimensions of management.

You compete against your peers in an Entrepreneur industry. All teams start from the same position and compete in the same environment.

You will gain experience with management, marketing, operations, and finance.

3

Entrepreneur Quick Start Guide

PERIOD DECISIONS • Operations • Pricing • Marketing • Staffing • Finance

SIM ADVANCES • Check Schedule for times • Complete Decisions BEFORE Deadline

SIMULATION ENDS • Evaluate team performance • Review what you have learned

STARTUP DECISION • Access simulation from course website • Input a company name • Choose location, financing and product • Team leader MUST finalize startup to allow access to period decisions

READ THE CASE • Industry background • Company starting situation

Your instructor may require additional assignments during the simulation. Check the schedule and messages on your course website for details.

DECISION ANALYSIS • Break-even • Forecast

EVALUATE RESULTS • Company reports • Environment

4

Entrepreneur Manual

The remainder of this manual is divided into the sections described below. Your understanding and success in Entrepreneur will be greatly enhanced by reading this manual before you begin the simulation. The sections listed below will answer most of the questions students typically have during the simulation experience, and reading them has the added benefit of improving your competitiveness. Finally, the case and help notes are available on-line in the simulation software. Section 1: The Entrepreneur Case presents information on your retail clothing store in a form similar to a business school case. A thorough understanding of your business, its current situation, and opportunities will help your group decision- making process. Section 2: Entrepreneurship Essentials provides a brief introduction to entrepreneurial management: what it is, why it is important, and what concepts will be used in the simulation. In addition, each of the basic functional areas covered in Entrepreneur are discussed. Appendix: This section includes worksheets to help with decision making, a glossary containing business terms that are used in the simulation, and an index.

5

Entrepreneur Case

ENTREPRENEUR

6

Entrepreneur Case You are purchasing a store that sells casual clothes, a specialty business in the retail apparel industry with a long history in the local community. It has been a family-owned business for many years, selling tops and pants for work and recreation at moderate prices. 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.

Location The store has been in the same location for many years, across from the college campus. The college location appeals to the student population and there is a fair amount of trade from surrounding neighborhoods. Rent is $5,000 per quarter, and the store is about 1,500 square feet, including both display area and storage space. While parking is limited, foot traffic in the area is constant, and the previous owners have been moderately successful in this location. Their sales last year were $400,000 and their after-tax profit was just over $11,000. The lease expires now, so you have the opportunity to renew the lease at the current rent or relocate. If you plan to continue selling a medium-priced casual line of clothing, then staying at the college location should be a good choice. On the other hand, if you are targeting a different customer base, another location might make more sense. Small retail apparel stores can be found in a variety of locations. Although they are most prevalent 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 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 2,000 square feet with additional stockroom space of 500 to 1,500 square feet. In addition to the college location, you have three other choices, as described next.

• You may lease space in a shopping mall located in a newly developed subdivision, about a mile from the college. The rent is $6,000 per quarter for 2,000 square feet. The Merchants Association at the mall provides a moderate amount of free advertising through flyers. Parking is close and plentiful.

• A store along the main street of the town is available for lease at $6,000 per quarter. The street is steadily becoming a shopping area; many stores are moving there and making improvements.

7

There is parking along the street and in back of the stores. Other merchants report there is usually enough parking available. The store is 1,800 square feet.

• A corner property between the college and downtown is available. It currently has a closed service station on it, but the owner will convert it to a retail store of 1,500 square feet with new interior and exterior. There is parking for several cars, and it is located on a busy intersection with good visibility. The landlord will rent it at $4,000/quarter for the first year, with a clause to raise the rent in the second year to no more than $4,500.

None of the locations is "bad". The location decision should be based on your product line, price range, and customer base. However, your team needs to choose the location carefully, since the opportunity to relocate will not be available later in the simulation

Product Line The tops and pants store that you will be operating is a specialty business in the retail apparel industry. 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 in an individual store. Although the early entrants in this market limited their inventory to jeans, most of the successful operations have broadened their offerings 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 uniforms for healthcare, food, and other service professionals. Your store's relationship with its suppliers is excellent. Your primary vendor has offered to replace the existing stock if you change your product line when you take over the business, as long as the product is in the same price range. You can choose one of the following lines of clothing.

• Ethnic: You can choose to sell specialty clothing specific to a region or ethnicity. This includes African, Asian, and Hispanic styles, as well as Western Cowboy.

• Casual: Your current inventory is casual clothing for the contemporary shopper. It includes jeans,

t-shirts, sweaters, and sports apparel.

• Designer: Designer clothes display the label or logo of a fashion designer. Designer brands use name recognition to help sell the pants and tops.

• Ultra-Trendy: Ultra-trendy apparel appeals to the more fashion-conscious buyer. It includes pants

and tops that are the latest fad, as well as higher fashion clothing.

• Uniforms: The uniforms line provides apparel for healthcare, food, and other service professionals. This choice includes a casual line of surgical scrubs.

8

You can be successful with any of the product lines, though you need to coordinate your choice with your location and target customers. While you may change to any of the product lines at any time, you will be charged a 10% restocking fee for your inventory of old product. Also, keep in mind that when you switch clothing lines, it will take some time to reach normal sales volume. Frequently changing your product line will confuse customers.

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 governmental office for the locale in which the business operates. Once your business has a new name, the image and reputation for the store immediately begins to take form. Although it is possible to 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. It should also be adaptable to a new product line if you desire to change the line sometime during simulation play. Factors you may want to take into consideration in naming your business and some good/bad examples follow.

• Is the name descriptive of what you sell?

Campus Clothing Corner vs. The Corner Store • Does it avoid meaningless words or initials?

The Jeans Shop vs. The JGD Shop • Is the name distinctive and easy to remember?

Jerry's Jeans vs. Emily Lanahan's Clothing Store • Does the name adapt to changes in products?

Casual Clothes, Etc. vs. Just Tops

Of course, some of these factors have conflicting requirements. It can be difficult to come up with a name that is both descriptive and flexible. You will need to determine which factors are most important for your store's image. In any event, be sure to choose a business name that is descriptive, yet flexible.

9

Finance Sales for the past four quarters have ranged from $80,000 in the first quarter (January–March) to $110,000 in the fourth (October–December), with average quarterly revenue of $100,000. After-tax profit for the year was about $11,200. Your accountant has audited the books and believes that the business is a healthy going concern, especially since it could be operated more efficiently than it had been by the previous owners. In her opinion, the purchase price of $55,000 is fair since it includes $21,000 in inventory, some residual advertising, and the good reputation of the firm. Below is a summary of the income statement for last year, along with the balance sheet at of the end of the year.

Figure 1: Income Statement (last year)

Gross Revenue $400,000 100.0% Cost of Goods Sold $200,000 50.0% Gross Margin $200,000 50.0% Marketing $45,000 11.3% Staffing $96,000 24.0% Overhead & Other $43,000 10.8% Total Expenses $ 184,000 46.0% Profit Before Taxes $16,000 4.0% Less Tax (30%) $4,800 1.2% Profit after Taxes $11,200 2.8%

Figure 2: Balance Sheet (end of year)

Cash $15,000 Loans Payable $8,000 Rent Deposit $5,000 Total Liabilities $8,000 Inventory $21,000 Retained Earnings $33,000 Total Equity $33,000 Total Assets $41,000 Total Liab. and Equity $41,000

Your team must put together $75,000 to get the business started: $55,000 to purchase the business, $10,000 for rent deposit, and $10,000 in working capital. There are several ways to raise the capital needed, including selling stock (to the team members, friends or an angel investor) and borrowing the balance of funds needed. Your team has formed a corporation and

10

has "pooled resources" of $50,000 that will become the equity in the business, That is, 5,000 shares of common stock will be issued at $10 a share, for $50,000 in equity. For the remaining $25,000, you have three options.

• You have been pre-approved for a $25,000 loan at 8% interest from a local bank through a program with the Small Business Administration. In addition to the interest due, the bank will automatically deduct $2,500 each quarter for principal reduction. This loan is a good choice for those who want to have scheduled payments to pay back their debt.

• The father of one of the stockholders will grant a $25,000 loan to the company at 10% interest. The terms require you to pay quarterly interest, but you can repay the loan principal at any time. This is an interest-only loan; it is up to you to make principal repayments to reduce the debt. While the interest rate is higher than the bank loan, you will have more flexibility in managing your cash flow.

• An angel investor has offered to buy 50% of the stock shares for $25,000; the team would then

control the remaining 50% of the stock. The total number of shares would remain at 5,000. Advantage: no loan interest or loan principal to pay each quarter. If additional funds are needed, a bank will loan funds at 12% interest, and an automatic $2,500 loan payment on principal will then be imposed.

In addition to cash to purchase the business, you will need working capital to operate it. Liquid assets are required for everyday business functions: adding employees, purchasing inventory, paying utilities and rent, etc. While you start with $10,000 in working capital, there may be times when cash gets tight and you need additional funds. In that case, your lender will advance you additional funds from a line of credit, charging you a one-time fee of 3% of the advance, plus interest at the regular annual rate (8%, 10%, or 12%, depending on your financing choice).

Inventory Management Good inventory management is critical to running your business. Before you can sell to customers each quarter, you will need to purchase tops and pants. You must pay for your purchases in the quarter you order them, and the value of the unsold product will be shown as an asset on the inventory line of the balance sheet. Buying too much product can cause problems with cash flow, so you will need to coordinate your sales projections with your product purchases to avoid running short of cash. Also, keep in mind that the appearance of your store can affect sales. Both overstocked, crowded shelves and under-stocked shelves with poor selection can hurt sales. Sales forecasting is difficult, especially when you do not have a sales history to review. The previous owners averaged about $100,000 in sales per quarter, or about 2,000 tops and 2,000 pants in the medium-price range per quarter. Keep in mind that this is an average, and demand will be lower in the first quarter of the year (January–March) than around the holiday season

11

(October–December). Demand for your products will also vary with your choice of pricing (low, medium, high) and you should also not expect to sell exactly the same number of tops as pants, so be sure to adjust your forecast, keeping all these factors in mind. While your initial forecast may be off a bit, your projections will improve as you gain experience. Whenever merchandise is displayed on open shelves and available for customer handling, there is the possibility of it becoming soiled, stolen, lost in some way (getting swept off into the waste can) or returned for credit. Goods are often pushed back on shelves, in drawers, or in the stockroom until they are out of season and it is too late to have an end-of-season sale. No money is received for these items, and they are written off the inventory at cost, with the expense assigned to shrinkage. The more inventory you carry, the higher your shrinkage.

Hours Your store should be open at times that are convenient to customers. While longer hours will provide more convenience for your customers, they will also require more staff. The former owners kept their shop open 10 hours per day, but you have the option to be open as few as 8 hours each day or as many as 12 hours. You will have to decide if it is better to be open more or fewer hours, based on customer traffic at your store and the cost of staffing.

Return Policy Your team will need to decide on 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 will reduce shrinkage. A liberal policy will please customers but increase shrinkage. You may change your policy in the future, but for customer satisfaction, you should not change frequently without thoughtful reasons.

Pricing Prices must be established for pants/jeans as well as tops/blouses/shirts. Markup is the amount added to the cost of goods to establish the selling price of a product. This is usually 100% of cost, meaning if the wholesale cost of the item is $10, the retail price will be $20 ($10 + 100% x $10 = $20). However, retailers often express markup as a percentage of retail price, in which case a product that cost $10 and retails for $20 has a markup of 50% of retail ($10 ÷ [100% - 50%] = $20). 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 their customers at the same profit margins as the regular stock. These are commonly advertised as "special buys."

12

The previous owners of the store offered medium-priced clothing for sale (around $20 for tops, $30 for pants). You will have the option of offering low ($10–14 tops, $20–24 pants), medium ($18–22 tops, $28–32 pants), or high priced ($26–30 tops, $36–40 pants) apparel in your store. Your choice will affect the quality of the products you purchase, and should target the population to whom you are trying to sell. In the simulation, any time you change the price range (e.g., from medium to low), you will need to return your existing inventory and pay a 10% restocking fee, which will be charged to "other expense". You must then order more product of the appropriate quality to replenish your stock. You may price your tops in a different range from your pants, but if the difference is too great, it could affect customer perception of your products, and sales may suffer.

Marketing It is important that your store communicates value to its customers. The right mix of products, 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. 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, a manufacturer may provide co-op advertising if the retail outlet is carrying an item that the manufacturer selects for promotion. Advertising of this type (that promotes the item rather than the store) can save the retailer about 50% in advertising costs, and provide 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. For example, the campus newspaper may reach students, but have trouble reaching the typical downtown customer. When trying new media, it is recommended that you do not use a random, unthinking 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. Expect to spend from 5% to 10% of gross sales on advertising.

13

While advertising can help get customers into the store, promotional activity will help get product into their hands. Your promotion budget will be used for special discounts and creating attractive displays. As a guide, you should spend from $500 to $5,000 on promotion.

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 salespeople are necessary. Staffing includes a full-time manager or assistant manager at all times, but you will need to hire additional part-time help to sufficiently staff the store. Part-timers work 15 hours per week, and the number of workers you need will vary, depending on the number of hours you are open, as well as the time of year. For the average quarter, if you are open 10 hours per day (60–70 hours a week), you will need 4–5 part-timers to bring the store to full staff. Insufficient staff will result in lost sales when customers cannot find assistance, while having too many staff may overwhelm customers and be unproductive. If there is not enough sales help on the floor, there is a greater chance of shoplifting. Inexperienced, overworked, or lower-paid sales clerks will also be less inclined to notice shoplifting or incorrectly stored goods. Full-time staff cost is fixed at $15,000 per quarter, which covers salary, vacation and sick pay benefits. Part-time staff receive no benefits, but you need to decide on their hourly wage. Higher wages will attract better employees, which may be especially important when selling higher-end products. In addition to wages and salaries, your payroll costs include a 10% tax to cover social security and accident insurance. New hires will need training to get up to speed working in the store. Even experienced employees benefit from extra training which can show them better ways to handle their job. Each quarter, you should expect to spend $100–$200 on training for each new hire, and $50–$100 for existing staff.

Overhead and Other Expenses Overhead refers to the ongoing expense of operating your business, regardless of the level of sales. Each quarter you will need to pay a fixed amount for rent (which includes electric and water), telephone, and insurance. Telephone expense is estimated at $600 per quarter. The basic insurance cost of $700 includes group life and disability for full-time employees, and store liability, but not property insurance to cover loss in case of fire or storms. You may have the opportunity to buy a separate insurance policy to cover property loss as an "incident" decision.

14

The simulation assumes that 70% of your sales will be by credit card. The credit card company will charge a 4% service fee on all credit card sales. Therefore, if you have sales of $100,000, the bank will charge 4% of $70,000, or $2,800 for the quarter. From time to time you may incur expenses that do not fit one of the regular categories. For example, your response to certain incidents may involve a cost, and returning inventory when you change the quality of your stock (due to a price level change) will result in a one-time restocking fee. These kinds of costs will be shown as "other expenses" on your income statement.

Incidents If your instructor selects this option, each week you will have an “incident” which you will need to address. An incident is like a mini-case. Your team will need to discuss the issue presented and enter an appropriate response. Any costs associated with an incident will automatically appear on the income statement under “other expenses”.

Reports An entrepreneur must think about the integration of business decisions. When reviewing your pricing decisions, can you determine the impact a change in price has on other functional areas of your business? What impact does it have on product demand? ...on staffing needs? ...on your product purchases? ...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. There are a number of reports you can use to track performance as you operate your business. These include the Balance Sheet, Income Statement, Cash Analysis, and Inventory reports. You can access these reports from your Company Dashboard. Be sure to check the messages tab as well for tips on running your business, alerts about upcoming decisions, and feedback on issues in the store. The Inventory report gives an accounting of your stock of tops and pants, showing purchases, sales, and shrinkage. By keeping a close watch on the report 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 inventory/sales ratio is especially helpful in determining if you have the “right” amount of product on hand. In the simulation, a ratio of 0.5 is a good target. The Cash Analysis shows the sources and uses of cash in running your store. When you purchase product, pay employees, advertise, and pay rent and utilities, cash goes out. When you sell tops and pants, cash comes in. Monitoring your cash balance will give you a good idea of how good a

15

job you are doing at keeping a positive cash flow. Note that cash going out is not always the same as an expense. For example, when you purchase more product, you are exchanging one asset (cash) for another (inventory). Only when you sell your inventory will the cost of goods be booked as an expense. You must keep at least $2,000 in cash on hand for operating expenses. If you fall below the minimum, cash will be brought up to $2,000 using a draft on the line of credit and the borrowed amount added to your loan balance. Any cash over $2,000 will be invested in a money market fund and the interest will appear on the income statement the following period. In addition to your cash flow, you will want to keep track of the bottom line—your after-tax profit. The Income Statement provides a summary of the revenues and expenses each quarter, and how profitable your business was for the quarter. Use the sales line items for tops and pants to identify sales trends. Tracking marketing and staffing expenses as a percent of revenue over time is a good way to monitor the effectiveness of your decisions in those areas. The Balance Sheet provides a summary of your assets and liabilities, as well as your equity in the company. The simulation balance sheet is an abbreviated one. It includes only current assets: cash, money market funds, rent deposit, and the value of inventory (at cost). Since all of your property and fixtures are leased, there are no fixed assets shown. Your liabilities include any unpaid loan balance. Owner's equity includes the stock that you sold and retained earnings. Retained earnings are the total profits of the firm, to date, less any dividends that were paid. If you are playing in competitive mode, a market research firm will conduct studies of the local clothing stores and sell information to you as needed, after the 1st quarter. The cost varies from $100 to $400 per report each period. Your firm may purchase these reports to learn how your competitors are positioned. Selecting the appropriate market research report can aid in compiling decision data. Such data will keep your firm informed about unit sales and pricing, product line, and marketing expenditures for each competitor in your industry.

16

ROI = cumulative profit / investment

Performance Measures There are several measures you can use to track performance as you operate your business. The first is to look at your sales revenue. Since seasonality can affect performance independent of your decisions, it is best to compare current sales with the previous year's sales during the same quarter. Unfortunately, that is not possible in your first year of operation, so an alternative would be to track sales per employee. To do this, you will need to convert the hours worked by part- time employees to the equivalent of full-time employees, then divide sales by the calculated number of full time employees. Since you have two full time employees, the full calculation is shown below: Tracking profit after taxes each quarter will give you a good idea of overall performance, but you may also want to calculate return on sales (ROS) to measure the efficiency of your business. This ratio shows how much profit you are making per dollar of sales, and is calculated by dividing profit by revenue. Both numbers can be found on the Income Statement, though you will need to add sales of tops and pants to get total revenue. Return on sales will vary by industry, but in Entrepreneur an ROS of 7% indicates an efficient operation. Return on investment (ROI) is another useful profitability measure. It allows you to compare the profitability of your company with other investment opportunities. This measure divides the cumulative profit of the store by the investment made to acquire the business. Both numbers are found on the Balance Sheet, with the stock line item showing the investment, and the retained earnings the cumulative profit, though you will need to add back any dividends distributed. The calculation is: In order to purchase the store, your team contributed $50,000 in exchange for 5,000 shares of stock at $10 per share. If you choose the angel investor option to finance the rest of the purchase, then 2,500 of those shares will be sold to the investor for $25,000. In any case, $10 will be the starting stock price. You can check how you are doing by comparing your stock price in a given quarter with its starting price. Although the company is actually "private" (i.e., 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

Sales per Employee = total sales / ( PT employees × 15/40 + 2 FT )

17

Your team will first have to make startup decisions. The team leader must finalize startup decisions to get access to the quarterly decisions.

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:

• Total sales • Return on sales (profit divided by total sales) • Customer satisfaction (optimum inventory and good service) • Company image (advertising, promotion, good business ethics) • Dividends paid

Next Step

The small retail-clothing store is in a stable segment of the retail clothing business and can be operated profitably, if organized and managed efficiently. What you learn, and the challenges you face in the Entrepreneur simulation, are adaptable to many types of businesses and situations. Any entrepreneur who attempts to operate a profitable business will face similar circumstances. The simulation provides you with an opportunity to manage a retail specialty-clothing store, make decisions, test marketing options, and make mistakes— all without any actual money being spent. Now that you have some background on the general context of Entrepreneur, we wish you success in running your retail-clothing store!

18

Decision Description Value Ranges Company

Name Enter a name for your business before making the first period decision. Up to 30 characters.

Location The existing location is near the college. You can move to a different location when you acquire the business.

Choose: College, Mall, Main St., or Corner

Financing You need to raise $25,000 in addition to a $50,000 investment.

Choose: Bank Loan, Personal Loan, or Angel Investor

Product Line The store you are acquiring sold casual clothing. You can choose another product line at startup, or change the line at a later time.

Chose: Ethnic, Casual, Designer, Trendy, or Uniforms

Hours Open Select the number of hours to be open each day. 8-12 Product

Purchase Tops and pants must be purchased each quarter to provide stock for the store. 0-10,000

Return Policy Customers are more likely to shop the store if it has a generous return policy, while a more restrictive policy can reduce shrinkage.

Choose: no receipt, 30 days, 10 days, 10 days if defective, or 7 days if defective

Tops Price Choose a price range (low, medium, high) and price for your tops. This represents an average for tops sold.

Low: 10-14 Med: 18-22 High: 26-30

Pants Price Choose a price range (low, medium, high) and price for your pants. This represents an average for pants sold.

Low: 20-24 Med: 28-32 High: 36-40

Advertising Advertising makes potential customers aware of your store. Select media options appropriate for your location and target market.

Choose 0 or more: Web Site, Radio, Television, Social Media, Community News, Campus News, Direct Mail, Flyers

Promotion Promotion spending is used for special discounts and displays. 0-25,000

Hiring The store has two full-time employees, but requires part-time staff to help serve customers. Use a negative number to fire staff.

0-20

Hourly Wage Part-time staff are paid an hourly wage. Higher wages may attract more qualified employees and reduce turnover.

7-25

Training Training employees helps with customer experience, shrinkage, and retention. 0-10,000

Dividend Profits distributed to stockholders. 0-quarterly profit Extra Loan Payment

If there is a loan outstanding, extra payments can be made to reduce the balance. 0-loan balance

Incident Each period you may have to respond to issues raised by an “incident” (mini-case). Choices vary by incident.

19

Entrepreneurship Essentials

ENTREPRENEUR

20

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. Sam Walton's 10 rules of leadership and entrepreneurship are jewels for the student of any entrepreneurial endeavor. They are:

• 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. NOTE: The spirit of entrepreneurship includes willingness to take risks, operating under uncertainty, creation of new products and services, and innovative approaches to thinking.

21

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. 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.

22

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, and action plans 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 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 decision-making. A suggested list of additional items is given next.

• Written rationale for selection of business name • Written 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

23

Assets = Liabilities + Equity

Financial Statements Tracking results is essential to the control function of management, and the financial statements provide necessary data to decide if you are meeting your goals. The balance sheet tells where the business stands at a particular point in time, while the income statement tells how well the business did over a period of time. Financial transactions are recorded using a double-entry system of debits and credits and the results are reported on the income statement and balance sheet at the end of each quarter. The Balance Sheet The balance sheet shows the financial condition of a business at a point in time. The business owns certain assets which it uses to produce something of value. The product is then sold in exchange for other assets, typically cash. In order to acquire the assets needed for operating the business, the company can raise capital either by borrowing or issuing stock. Loans must be paid back, and are considered liabilities on the balance sheet. Stock represents an investment in the company, and gives the owner a share in the equity, but there is no guarantee that the investment will be returned. If the company is managed well, then income from the business will be added to the equity in the form of retained earnings. The balance sheet is a list of assets, liabilities, and equity, and is "balanced" by the following equation:

Assets can be current or fixed, tangible or intangible. Current, or liquid, assets can be exchanged for goods, services, or other assets quickly. Examples of current assets are cash, short-term investments, inventory, and accounts receivable. Fixed, or long-term, assets cannot be easily converted into cash, but are used in the operation of the company. They can be tangible or intangible. Examples of tangible fixed assets are buildings and equipment. Goodwill and trademarks are examples of intangible assets. Like assets, liabilities can be current or long term. Current liabilities must be paid within the next accounting period. Examples are accounts payable (bills that are due) and bank overdrafts. Installment loans and mortgages are examples of long-term liabilities. Equity can be thought of as whatever is left over when the liabilities are subtracted from the assets. It consists of the investment of the owners through the original purchase of stock plus all the retained earnings from the operation of the company. Note that there is a difference between the book value of a company and the market value. The book value is the owner's equity from the balance sheet, while the market value is the stock price times the number of shares outstanding. Book value is calculated from the balance sheet, and shows the state of the company at the end of the reporting period. Market value indicates what investors think the

24

Net Income = Revenues - Expenses

company is worth, and includes sentiment about what might happen in the future. Comparing the book value with the market value of a business can provide information about whether a stock is overvalued or undervalued. Looking at the owner's equity on a balance sheet provides a quick check of the health of a company. A more detailed analysis involves matching up current assets with current liabilities to see if there may be a problem with cash flow in the company's future. The Income Statement The purpose of the Income Statement, also called a statement of Profit & Loss, is to show how well a company performed over a period of time, such as a year or a quarter. It shows the revenue received for products or services, and the expenses required for producing the products or services. The difference between the two is net income, or profit. Revenue can come from the direct sale of product, or it can come from other sources such as interest earned on investments owned by the company. Sales may be shown in the aggregate, or broken down by product category. When an expense is directly connected with the sale of a product, it is often useful to show it as the cost of goods sold, and report the difference as gross profit. In a retail store, for example, the total revenue from the sale of a product would be reduced by the cost of acquiring the product to calculate the gross margin. Expenses can be a direct, or variable, cost of a sale or service, or a cost that is incurred during the period regardless of how much product is sold. Marketing expense, payroll, rent and utilities, and interest on loans are examples of expenses that do not vary with revenue. Expenses that are fixed and cannot be changed from period to period are considered overhead. Examples would be rent, utilities, insurance, and interest expense. Salaries of full-time employees could be considered overhead, while the wages of part-time employees might not if they are seasonal. It is important to distinguish here between an expense and the purchase of an asset. When product is purchased to stock a store, we are converting one asset (cash), into another (inventory). It is only when the product is sold that the cost of acquiring it is booked as an expense. In short, purchasing inventory affects the balance sheet, while selling the product affects both the balance sheet and the income statement. Other fixed assets, such as buildings or equipment, are depreciated, or expensed over time, as they are used. Subtracting expenses from revenue yields the taxable income for the business. The tax paid on this amount is then subtracted to produce the net income or profit for the period. The profit can then be distributed to the owners in the form of dividends, or it can be kept by the company and added to retained earnings. At the end of each financial period, all revenue and expense accounts

25

are zeroed out after the net income has been transferred to retained earnings and reports have been generated. The Accounting Cycle Following the accounting steps involved in purchasing inventory, then selling it to a customer may help in understanding the purpose of the balance sheet and income statement. The sequence starts with the purchase of inventory. This transaction involves an increase in one asset (inventory) and a decrease in another (cash). Both sides of the transaction must be recorded; these are the debits and credits of accounting. As long as the inventory sits in the store, there is no change in the financial statements. But when a customer comes and buys the goods, the transaction needs to be accounted for. Cash is exchanged for the product, so cash increases while inventory decreases. But inventory decreases only by what the company paid for the product, not the full sale price, so the credit will not match the debit. The mismatch is handled by offsetting the increase in cash by an increase in revenue, and the decrease in inventory by a corresponding increase in cost of goods sold. Now the assets are accounted for correctly on the balance sheet, and the difference in revenue and expense will be captured as profit on the income statement. Note that during a financial period, assets will not equal liabilities plus equity, as transactions are posted as revenues and expenses. At the end of the financial period, the net income is added to retained earnings on the balance sheet, bringing it back into balance. With the income statement and balance sheet produced, the period can be closed and the cycle starts again.

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. 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.

26

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. 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 over 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. 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 objectives that the instructor or you may want to establish may include:

• Use 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 marketing mix relationships through experimentation

and good market research practices.

27

Appendix

ENTREPRENEUR

28

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 • Log of Quarterly Decisions

29

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

Marketing to Sales

Ratio

0

1

2

3

4

5

6

7

8

9

10

11

12

Marketing to Sales ration = (Advertising $ + Promotion $) / Sales $

30

Quarterly Budget Variance Quarter _______ Industry _____________ Company ___________________________

Sales Revenues Planned 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 $_________ $_________

18. Shrinkage $_________ $_________

19. Total expenses & loan payments (Add 5 through 18 ) $_________ $_________

2.0 Net Receipts ( Item 4 minus item 19 ) $_________ $_________

31

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:

32

Glossary

Advertising Presence

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.

Angel Investor

An individual who provides capital to either start-up ventures or small companies who wish to expand but do not have access to public funding. Typically, the angel is willing to invest in a medium- to high-risk business in exchange for a high rate of return.

Annualized Return

Annualized return, or "average annual return," describes the return gained, on average, each year of a multi-year period rather than a cumulative return. The calculation is:

Annualized Return = [(investment + gain) / investment](1 / years) – 1 See also: "Return on Investment"

Assets Things a company owns, such as inventory or cash deposits.

“Bait and Switch”

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.

Balance Sheet

The balance sheet shows the assets of the business and the claims of ownership against those assets at the end of each period. 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. Your Liabilities will include your unpaid loan. Owner's Equity includes the stock that you sold 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. It is calculated using the formula:

Breakeven Volume = fixed costs / (unit selling price – unit cost) In the simulation, fixed costs include both overhead (rent, utilities, insurance) and decision expenses that do not vary with sales (marketing, staffing expenses). Since tops and pants have different unit costs, fixed costs are allocated to each and the breakeven for each is calculated separately.

33

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.

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

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.

Business 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. 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).