1.

This is use by entrepreneurs who plan to enter business endeavor; to have a guide throughout
the process of the enterprise. Answer: Business Plan 11

2.– 4. Business plan have many users/ masters. Enumerate the three main users of a business plan.

Answers: Entrepreneurs, Investors and Cautious Financiers, Managers and Staff 12-14

5. – 9. Enumerate at least 5 parts out of 10 parts of a business plan

I. Introduction

II. Executive Summary

III. Business proponents: Organizers with their Capabilities and Contributions

IV. Target Customers and Main Value Proposition to the Customers

V. The Market

VI. The Product and Services of the Market

VII. The Enterprise Strategy and Enterprise Strategy System

VIII. The Financial Forecasts and Expected Returns, Risks, and Contingencies

IX. Environmental and regulatory Compliance.

X. The Capital Structure and Financial Offering: ROI

10. What do you call the returns receive by the investors or shareholders after the end of the
business cycle? Answer: ROI or Return of Investment 15

11. This contains the essence of the enterprise in a concise but powerful manner and stresses the
value of product offering to the target customer who would likely buy it.

Answer: Business Concept

12. A business concept is translated into ________________. Answer: Product Concept

13. It is a business formula of how the enterprise plans to make money out of the business.
(moneymaking) Answer: Business Model

14. There are four areas of money making which the business model must address. Give at least one
question out of four.

1. How will the business raise revenues? What critical factors will cause the revenues to
materialize?

2. What will be the cost of the enterprise products and other cost of doing business? How will
this cost be managed to ensure comfortable profits? What critical factors will drive the costs?
How can these factors be controlled?

3. What will be the major investments of the enterprise? Why will these investments give the
enterprise a competitive edge?
 4. How will the enterprise finance the investment? How will the enterprise fund it's growth?

15. These shows the future and long term prospects of the enterprise? Answer: Business Goals

16. – 20. Business goal is composed of 5 important parts; what are these parts?

Answer: vision, mission, objectives, key result areas (KRA), performance indicators

21. What is the main goal of every enterprise or businesses for establishing a company? Answer: Profit

22. This is a part of the business goals which answers the question “why”. Why you started the
business? Answer: Mission

23. This is a part of the business goals which answers the question “what”. What will you do to
accomplish your mission? Answer: Vision

24. These are more specific that the mission and vision statements. They should be measurable,
achievable and time bounded. Answer: Objectives

25. These are qualitative manifestations that the objectives are being achieved? Answer: Key Result
Areas. (KRA)

8 This statement is also called financial position?

9 This statement is where you can see the owner’s/stockholders Capital?

28-30) A balance sheet is composed of 3 parts what are the 3 parts?

10 financial statements

4 types of financial statement

Vocabulary Review.

 Entrepreneur: o A person who starts a business and is willing to risk loss in order to make money. One
who organizes, manages, and assumes the risks of a business or enterprise. The word Entrepreneur is
derived from the French word entreprendre, which means “to undertake.” It ultimately has come to
mean, someone who is willing to undertake a new venture in order to present an idea to the
marketplace.  Employee: o A person employed for wages or salary. Therefore, an employee is a person
working for another person or a business firm for pay.  Entrepreneurship: o Entrepreneurship is the
pursuit of opportunity without regard to resources currently controlled. Including business situations
where one engages in projects involving risk where profit is uncertain.  Business: o Business is the
activity of making, buying, selling or supplying goods or services for money. o A business is a commercial
organization such as a company, shop/store or factory.  Expense: o The economic costs that a business
incurs through its operations to earn revenue. In order to maximize profits, businesses must attempt to
reduce expenses without also cutting into revenues. Because expenses are such an important indicator
of a business's operations, there are specific accounting rules on expense recognition.  Revenue: o
Revenue is the amount of money that is brought into a company by its business activities. Revenue is
calculated by multiplying the price at which goods or services are sold by the number of units or amount
sold.  Profit: o Profit is the money a business makes after accounting for all the expenses. Regardless of
whether the business is a couple of kids running a lemonade stand or a publicly traded multinational
company, consistently earning profit is every company's goal. In short, Revenue – Expenses = Profit.

True or False Exercise: Read each sentence below and determine whether or not it is True or False (circle
one), based on the definitions previously provided. Interactive classroom activity to follow. 1. A person
who was hired to be a manager for a large company is an entrepreneur. T/F 2. A person who buys a
handful of bicycles, and rents them out to people to try and earn enough money to make a living is an
entrepreneur. T/F 3. A person who creates an e-book showing people how to fix an iPod, and sells this e-
book to those interested in learning how to fix their own iPod, is an entrepreneur. T/F 4. A person who is
paid to wait tables at a restaurant is an entrepreneur. T/F 5. A person who opens up a restaurant with
money they borrowed from a bank, hires cooks, management, and staff, then begins selling and serving
food to customers is an entrepreneur. T/F 6. An entrepreneur creates a business without experiencing
any risks. T/F

esson 1 - T/F section: 1. F - An entrepreneur is typically a founder/creator of a business. As such they are
not hired. Instead entrepreneurs create the business and hire employees to help make the business a
success. 2. T - A person who risks his own or someone else’s money in an attempt to create a desirable
service or product that serves the needs of people is an entrepreneur. In this case, the person risked his
own money, starting a business that provides the service of bicycle rentals. 3. T - A person who risks his
time, effort, and money in the creation of a business that provides a product or service that other
people desire is an entrepreneur. 4. F - A person who waits tables at a restaurant is a paid employee. As
such, they are not entrepreneurs. 5. T - A person who risks their own or someone else’s money in an
attempt to create a desirable service/product that serves the needs of people is an entrepreneur. This
person borrowed money from a bank to hire employees and open up a restaurant. 6. F – Typically,
entrepreneurs have to face up to some type of risk, be it social risk, financial risk, time/effort related
risk, or career and reputational risk.

BUSINESS PLAN: QUESTIONS & ANSWERS

What is a Business Plan

entrepreneurs, and the like with an overview of a new or existing business and a long and short
term strategic plan for its operation.

Why does my company need a Business Plan

Most of all, the writing a business plan is that it “forces” company owners and management to
sit down together and think constructively about the company, its aims, progress made so far,
alternative business strategies and implementation, and how to realize future business and
financial goals.
What does a Business Plan include

A business plan is essentially a written summary of the various aspects of a business’s operation
and their influence on financial results.

What are the key features of a good Business Plan

A good business plan should include among other things: a general description of the business
and its products and/or services; an industry and competitor overview; an analysis of the
advantages/disadvantages of the product/service. In addition, a well written business plan will
identify progress targets, consolidate operating and marketing policy, describe the
organizational structure of the business and its human resources, summarize the necessary
investment needs, and finally forecast how these elements combined will impact future Profit &
Loss Statements and cash flow.

Are all Business Plans the same

Generally speaking, a good business plan will tailor itself to the intended audience and the
specific client’s purposes.

The most common reasons for writing a business plan include:

1. Raising capital – directed at investors outside the company.

2. Improvements or changes in the business strategy – directed internally.
3. An operational business plan – generally directed internally.
Who is a Business Plan intended for

Business plans written to raise capital are usually directed at banks, technological incubators,
venture capitalists and/or private investors as well as other sources of capital such as State
guaranteed funds.

Business plans written with the intention of altering an existing business strategy or improving
financial results are usually written for existing investors, shareholders and managers who wish
to increase efficiency.

Should Business Plans be kept up-to-date? How do I know when to change mine

Nowadays, businesses evolve rapidly and unexpectedly due to advances in technology,

diversified products and changing marketing techniques. Thus, it is recommended that you keep
your business plan as current and relevant as you would any other aspect of your business.

Which aspects of a Business Plan should be up-dated?

A well written business plan will accommodate dynamic changes. The variable parameters are
those which connect to the market and include the entering of new competitors, advances in the
relevant technology, marketplace and shifting consumer preferences with regards the general
market and your specific product/service.
You should also consider updating your business plan if you are making changes to your
product’s features, adding to your product mix or improving an existing product or service. Also,
any changes to your promotion, marketing and advertising budgets, changes in predicted
revenues or expenditure, and even global macro – economic shifts such as significant
adjustments in exchange and interest rates are all good reasons to update your business plan.

When updating your business plan you must consider whether you have been able to realize the
goals that you previously set for yourself, and if not, why not? Has your business maintained its
focus and continued to operate within the same industry, or has your business strategy
somewhat shifted?

How often should I update my Business plan

Companies are advised to up-date their business plans once a year as part of their annual or
perennial budget deliberations.

Is it possible to write a business plan without any specialist assistance?

It is possible to update business plans internally, as long as the original business plan was
written in such a way as to accommodate changes. However, companies are advised to make
use of objective observers whenever possible, who can specialist financial advice and ensure that
expectations are kept reasonable.

Questions and Answers

 1.
What is the component of business plan?

o A.

Marketing Strategy

o B.

Sales Strategy

o C.

Executive Summary

o D.

All of the above

 2.
What is a component(s) of business plan? (You can answer more than one choice)
 o A.

Executive Summary

o B.

Financial Plan

o C.

Safety Plan

o D.

Operation Plan

 3.
The stockholder may read only the executive summary of business plan to decide about
the investment on that business.

o A.

True

o B.

False

 4.
___________ in a business plan shows the estimated profit and expenses of venture.

 5.
Please match between

o A. Product & Sales

o A.

o B. Marketing Strategy
o B.

o C. Executive Summary
o C.

 2.
What does the expression "to be in the black" mean?
 o A.

To use the black market to sell your goods.

o B.

To do things only when it is dark outside.

o C.

To do something that might not be completely legal.

o D.

To be making a profit.
Questions and Answers
 1.
Why complete a Business Plan?

o A.

To get finance

o B.

To impress your mum

o C.

To set out clear goals for your start-up

o D.

To make sure you know what you are doing

 2.
Which section is completed last?

o A.

Finance detail

o B.

Marketing budget
 o C.

About your business

o D.

Executive summary

 3.
According to research, without a business plan firms are more likely to close down.

o A.

True

o B.

False

 4.
The business' goals and competitive advantages can be described by...

o A.

Mission statement

o B.

Objectives

o C.

Core values

 5.
You should describe your products and services and discuss the market that you
are ..........

o A.

Goaling

o B.

Aiming
 o C.

Targeting

o D.

Goading

 6.
If you wish to interest investors, you need to emphasize the company's profit ..........

o A.

Potential

o B.

Chance

o C.

Taking

o D.

Deal

 7.
Preparation of a business plan is optional for some small businesses.

o A.

True

o B.

False

 8.
......... the strong and weak points of any firms in competition with yours and look for
marketplace opportunities.

o A.

Evaluate
 o B.

Investigate

o C.

Eliminate

 9.
SMART means...

o A.

Sertain, Measurable, Achieveable, Realistic, Timed

o B.

Specific, Measurable, Achieveable, Realistic, Timed

o C.

Smart, made-up, actual, real, true

 10.
You should examine customer ......... and the benefits of your products and services.

o A.

Needs

o B.

Pockets

o C.

Returns
A . . . is a formal statement of a set of business goals, the reasons why they are
believed attainable, and the plan for reaching those goals. It may also contain
background information about the organization or team attempting to reach those goals.

A. X Marketing plan

B. ? Operational plan
 C. Business plan

Business plan composition:

A. Background information, a marketing plan, an operational plan,

a financial plan, and criteria

B. ? The other two answers are wrong

C. ? Background information, a marketing plan, an occasional plan, a financial

plan, and criteria

A . . . plan is a written document that details the necessary actions to achieve one or
more marketing objectives. It can be for a product or service, a brand, or a product line.
It covers between one and five years

A. Marketing

B. ? Financial

C. ? Operational

. . . is working for one's self rather than for another person or company. In other sense,
it is, earning one's livelihood directly from one's own trade or business rather than as an
employee of another.

A. Self-employment

B. ? Free-labour

C. ? Autonomous

Which of the follwing statements is correct?

A. A business owner is not required to be hands-on with the day-to-

day operations of his or her company, while a self-employed person has to utilize
a very hands-on approach in order to survive

B. ? A self-employed person is not required to be hands-on with the day-to-day

operations of his or her company, while a business owner has to utilize a very
hands-on approach in order to survive
 C. ? The other two answers are correct

Pricing, demand management, distribution, and promotion and brand development are
part of:

A. Marketing plan (in the business plan)

B. ? Operational plan (in the business plan)

C. ? Financial plan (in the b

Manufacturing/deployment plan, information and communications technology plan,

staffing needs, training requirements, intellectual property plan, acquisition plan,
organizational learning plan, and cost allocation model are part of:

A. Operational plan (in the business plan)

B. ? Marketing plan (in the business plan)

C. ? Financial plan (in the business plan)

Supply chain requirements, production inputs, facility requirements - size, layout,

capacity, location, equipment requirements, warehousing needs for raw materials,
finished goods, and space requirements are part of:

A. X Acquisition plan (in the operational plan)

B. Manufacturing/deployment plan (in the operational plan)

C. ? Information and communications technology plan (in the operational plan)

List of roles, management structure, head count approval, job descriptions, number of
employees, proposed compensation, and availability are part of:

A. Staffing needs

B. ? Organizational learning plan

C. ? Training requirements

Training requirements should look to address:

A. X Developing the capability of the organisation to deliver the business objectives

 B. X A benefit to motivate staff

C. ? The other two answers are correct

The . . . plan discusses what lessons will be learned from the marketing, operational,
and finance plans and how those lessons will be consolidated to gain strategic
advantage

A. ? Marketing

B. Organizational learning

C. ? Operational

Which of the following statements is correct?

A. ? While a financial plan refers to estimating future income, expenses and

assets, a financing plan or finance plan usually refers to the means by which
cash will be acquired to cover future expenses, for instance through earning,
borrowing or using saved cash

B. X While a financing plan or finance plan refers to estimating future income,

expenses and assets, a financial plan usually refers to the means by which cash
will be acquired to cover future expenses, for instance through earning,
borrowing or using saved cash

C. X The other two answers are wrong

Part A-20 multiple choice questions (2 marks per question, total 40 marks). Circle the right
answer 1. Which of the following is the main purpose for writing a business plan? A) The plan
helps the company develop a "road map" to follow. B) The plan introduces potential investors
and other stakeholders to the business opportunity. C) Both A and B are equally important. D)
Neither A nor B captures the true purpose of a business plan.

2. The document that does the best job of introducing potential investors and other
stakeholders with the business opportunity the firm is pursuing and how it plans to pursue it is
the: A) business plan B) feasibility analysis C) opportunity analysis D) industry analysis

3. Which of the following statements is incorrect regarding business plans? A) A firm's business
plan is typically the first aspect of a proposed venture that will be seen by an investor. B) To
make the best impression, a business plan should follow an unconventional structure, so it will
stand out. C) A business plan has both an external and an internal audience. D) A company's
business plan is typically written by its founders.

4. There are three types of business plans: A) functional business plan, full business plan,
feasibility plan B) summary business plan, contingency plan, full business plan C) functional
business plan, contingency plan, full business plan D) summary business plan, full business plan,
 operational business plan 5. Financial management deals with two things raising money and: A)
operations management B) inventory control C) managing a company's finances D) production
management 6. The four main financial objectives of a firm are: A) efficiency, effectiveness,
strength, and flexibility B) power, success, efficiency, effectiveness C) control, effectiveness,
liquidity, and power D) profitability, liquidity, efficiency, and stability

7. A financial statement is a(n): A) set of ratios which depict relationships between a firm's financial
items B) estimate of a firm's future income and expenses C) hybrid statement of cash flows D written
report that quantitatively describes a firm's financial health 8. ________ are itemized forecasts of a
company's income, expenses, and capital needs and are also an important tool for financial planning and
control. A) Profitability statements B) Financial statements C) Owners' equity statements D) Budgets 9. A
________ is the group of founders, key employees, and advisers that move a new venture from an idea
to a fully functioning firm. A) new venture panel B) startup team C) new venture team D) new project
team 10. The high failure rate among new ventures is due in part to the liability of newness, which refers
to the fact that new companies often falter because: A) they are underfunded and the founder's of the
firms don't move quickly enough to put together boards of directors and boards of advisors that can
provide them direction and advice B) they underestimate the complexities involved with starting a new
business and the firm lacks a "track record" with outside buyers and sellers C) the people who start the
firms can't adjust quickly enough to their new roles and the firm lacks a "track record" with outside
buyers and sellers D) the people who start the firms can't adjust quickly enough to their new roles and
they are underfunded 11. Which of the following was not identified in the textbook as an element of a
new venture team? A) board of advisors B) suppliers and vendors C) key employees D) lenders and
investors 12. According to the textbook, many entrepreneurs go about the task of raising capital
haphazardly because: A) they are uncomfortable talking about money and they haven't written a
business plan B) they lack experience in this area and because they don't know much about their choices
C) they are focused on the nuts and bolts of starting their business D) they haven't completed a
feasibility analysis or business plan

A) cash flow challenges, capital investments, and lengthy product development cycles B) business
research, cash flow challenges, and costs associated with building a brand C) bonuses for members of
the new venture team, attorney fees, and lengthy product development cycles D) attorney fees, capital
investments, and marketing research 14. According to the textbook, beyond their own funds, the second
source of funds for many new ventures is: A) government grants B) business angels C) friends and family
D) banks 15. The first step in selecting a target market is to study the industry in which the firm intends
to compete and determine the different potential target markets in that industry. This process is called:
A) market positioning B) market splitting C) market targeting D) market segmentation 16. One a firm has
segmented the market, the next step is to: A) decide on a position within the segment B) select a critical
market C) select a target market D) select a focal market 17. A product attribute map is used to help a
firm determine if its: A) if it is emphasizing benefits rather than features B) branding strategy is
appropriate C) market segmentation is correct D) positioning strategy is appropriate 18. Which of the
following is an example of an internal growth strategy? A) licensing B) merger C) new product
development D) strategic alliance 19. Which of the following is an example of an external growth
strategy? A) strategic alliances and joint ventures B) improving an existing product or service C)
increasing the market penetration of an existing product or service D) extending product lines
20. Entrepreneurial businesses that grow by expanding from their original location to additional
geographic sites are pursuing a: A) common expansion strategy B) market penetration strategy C)
universal networking strategy D) geographic expansion strategy Part B- 6 essay questions (Total 60
marks). Please answer all six questions. Question 1: What is an "executive summary?" Why is the
executive summary often called the most important part of a business plan? (10 marks) Question 2:
Describe the purpose of the income statement, the balance sheet, and the statement of cash flows. (10
marks) Question 3: Are more firms started by individuals or founding teams? What are the advantages
to founding a firm as a team rather than as an individual? (10 marks) Question 4: Why do most firms
need funding? Provide a brief explanation of each reason. (10 marks) Question 5: Why is it better to sell
benefits rather than features? Provide an example that illustrated this point. (10 marks)

Question 6: Explain the difference between internal and external growth strategies? Provide examples
of each. (10 marks)

Multiple Choice
This activity contains 10 questions.

Writing a business plan can ensure that an entrepreneur

figures out how to make her business work.

meets his target revenue goals.

achieves her expense projections.

Making the beliefs, values, and behavioral norms explicit and intentional builds
the __________ of an organization.

mission

culture
 vision

Publicity is _______ promotion through media outlets.

free

paid

discounted

The _________ analysis addresses the roles of the community, region, nation,
and world in a business.

environmental

industry

business

The cover page of a business plan should contain

key financial highlights.

 contact information.

the funding request.

The quick verbal summary of a business plan is called a(n)

elevator pitch.

concept pitch.

business pitch.

Dividing fixed costs by gross profit per unit yields

cost ratio.

breakeven units.

profitability ratio.

A _____________ is a document that thoroughly explains a business idea and

how it will be carried out.
 marketing plan

financial analysis

business plan

The ______________ section of the business plan should be written last.

financial statements

executive summary

appendices

A business plan should be _______________ to convey critical information to

potential investors.

long and detailed

crisp and concise

complex and technical

1. The Business Plan is

a valuable management tool.
not used as a reference guide.
a powerful money-raising tool.
Both A and C
2. The properly developed Business Plan should answer questions such as:
Does the proposed business have a reasonable chance for success at the start?
Can the product and the marketing of the product be economically financed?
Both A and B
Neither A and B

3. The Business Plan should convey ideas, research findings, and

proposed plans.
detailed information concerning competitors.
past failed business ventures.
suggestions concerning personal investment strategies.

4. An important element of the Business Plan is the _______________, which is a

brief statement that captures the essence of the organization and provides direction
and guidance to everyone in the company.
Mission Statement
Executive Summary
Objective Statement
Company Description

5. An important element of the Business Plan is the _______________, which is a

statement that specifies the company's time-based goals that can be monitored and
measured.
Mission Statement
Executive Summary
Objective Statement
Company Description

6. An important element of the Business Plan is the _______________, which outlines

specific actions that the company will take in attempt to interest potential customers
in, and to persuade them to buy, their products/services.
SWOT Analysis
Marketing Plan
Operating Procedures
Industry Analysis
7. An important element of the Business Plan is the _______________, which
identifies the internal and external forces affecting the company.
SWOT Analysis
Marketing Plan
Operating Procedures
Industry Analysis

8. The Business Plan must identify potential customers within the target market. The
dividing up of the target market is called
Industry Analysis
the External Audit
the Internal Audit
Market Segmentation

9. The ''Opportunities'' and ''Threats'' of the Business Plan can be found in the
_____________ portion of the SWOT Analysis.
External Audit
Internal Audit
Industry Analysis
Market Segmentation

10. The financial data section of the Business Plan contains the following elements:
Break-even Analysis, Cash Flow Statements, Start-Up Budget
Financial WriteUp
Balance Sheet and Income Statements (Profit/Loss)
All of the above

11. The purpose of Industry Analysis is to determine the performance of other firms in
related industries and markets.
TRUE
FALSE

12. The Target Market consists of defined segments of people that possess common
characteristics and have a greater tendency to purchase a particular product or
service.
 TRUE
FALSE

13. Geographics, Demographics, and Psychographics are all elements researched in

the Industry Analysis.
TRUE
FALSE

3. An entrepreneur is one who creates a new business in the face of risk and uncertainty, for the
purpose of achieving profit and growth by identifying opportunities, and assembles the necessary
resources to capitalize on those opportunities.
a. True
b. False

4. Which of the following is not a characteristic of the typical entrepreneur?

a. confidence, in their ability to succeed
b. value of money over achievement
c. desire for immediate feedback
d. a future orientation

5. Which sector dominates the U.S. economy today?

a. retal
b. services
c. manufacturing
d. wholesale
e. real estate and financial

6. The primary cause of small business failures is,

a. lack of capital
b. management incompetence
c. poor location
d. improper inventory control

7. The business plan has two essential functions: it helps the entrepreneur determine if the business will
succeed, and it helps recruit management talent to run the new company.
a. True
b. False

8. The wise entrepreneur will hire a professional to prepare his business plan for him.
a. True
b. False

9. ( _ ) is an entrepreneur's best insurance against launching a business destined to fail or mismanaging a

prtentially successful company.
a. Bankrolling the business with plenty of startup capital
b. Creating a solid business plan
c. Spending lots of money on marketing and advertising
d. Hiring a team of accountants and attorneys as advisors

10. The primary purpose of a business plan is to

a. attract lenders and investors.
b. enable an entrepreneur to take his or her company public.
c. guide a company by plotting a strategy for its success.
d. meet SEC and other legal requirements designed to protect lenders and investors.

11. ( _ ) define a company's overall direction and answer the fundamental question, "Why am I in
business"?
a. Goals
b. Strategies
c. Objectives
d. Key performance factors

12. ( _ ) are short term, specific targets which are attainable, measurable, and controllable.
a. Objectives
b. Policies
c. Goals
d. Standard operating procedures

13. The business strategy section of the business plan,

a. should be built around a "me too" strategy, one that imitates the products, sources, and images of
already successful businesses.
b. should describe how the entrepreneur plans to satisfy the key success factors he has identified in the
business.
c. should describe how the entrepreneur plans to achieve the mission, goals, and objectives he or she
has established for their business venture
d. two of the above
e. all of the above

Questions 14 and 15 refer to the following information

Describing her company's revolutionary design for a bottle cap, Kyoto says. "It has a special locking
mechanism that you know is engaged when a red panel is showing through this little window on top of
the cap. If you want to keep unauthorized hands, for instance, those of children from opening the
bottle, you engage the locking mechanism. Unlike other childproof caps, however, this design does not
frustrate adults who might have arthritis and elderly people whose grip may not be as strong as it once
was." Removing the cap from the bottle in no time with just a few turns, Kyoto says, "They can open the
cap quite, easily by disengaging the locking mechanism this way... see? You get the safety of a childproof
cap without the problems most adults have getting them off."

14. The fact that with Kyoto's new cap "you get the safety of a childproof cap without the problems
most adults have getting them off" is a,
a. feature.
b. trait.
c. benefit.
d. none of the above.

15. Which of the following would be considered a feature of Kyoto's new cap?
a. The special locking mechanism
b. The red panel showing through the little window on top of the cap signaling that the locking
mechanism is engaged
c. The fact that you get the safety of a childproof cap without the problems most adults have getting
them off
d. Two of the above

16. Which of the following questions should be in the marketing strategy section of the business plan
addresses?
a. Who are my target customers?
b. How many potential customers are in my company's trading area?
c. What should be the basis for differentiating my business from its competitors in my customers'
minds?
d. All of the above

17. To be effective, the small business manager should limit strategic analysis to only the two or three
most significant opportunities facing the firm.
a. True
b. False

18. "Improving the company's cash flow" is a good example of an effective objective.
a. True
b. False

19. Before an entrepreneur can build a successful strategy, they must establish a clear mission, goals,
and objectives in order to have appropriate targets at which to aim their strategy.
a. True
b. False

20. The focus strategy depends on creating value for the customer either by being the low cost producer
or by differentiating the product or service in a unique fashion, but doing it in a narrow target segment.
a. True
b. False

21. ( _ ) involves developing a game plan to guide a company as it strives to accomplish its mission,
goals, and objectives to keep it on its desired course.
a. Competitive advantage
b. Mission
c. Strategic management
d. Market segmentation

22. The aggregation of factors that sets a company apart from its competitors and gives it a unique
position in the market is its,
a. mission statement
b. competitive advantage
c. competitive profile
d. strategic plan

23. The relationship between core competencies and competitive advantage is best described by which
statement?
a. Strengthening a company's competitive advantage strengthens its core competencies.
b. A company's core competencies become the nucleus of its competitive advantage.
c. As a company's core competencies become stronger, its competitive advantage becomes weaker.
d. There is no relationship between core competencies and competitive advantage.

24. Skatell's, a small jewelry store with three locations, designs and manufactures much of its own
jewelry while its competitors (many of them large department stores) sell standard, "off the shelf'
jewelry. As a result, many customers see, Skatell�s as the place to go for unique pieces of jewelry.
Skatell's reputation for selling unique and custom designed jewelry is a(n),
a. strength
b. weakness
c. opportunity
d. threat

25. Refer to the previous question. Skatell's business strategy would best be described as
a. low cost
b. differentiation
c. focus
d. generic

26. The relationship between a company's mission, goals, and objectives and its strategy is best
described by which of the following statements?
a. Developing a company's strategy lays the groundwork for creating its mission, goals, and objectives.

b. The mission, goals, and objectives spell out the ends the company wants to achieve, and the strategy
defines the means for reaching them.

c. Although managers must change a company's mission, goals, and objectives as competitive conditions
change, they should avoid adjusting the company's strategy to prevent the company from losing its
focus and momentum.

d. There is no real link between a company�s mission, goals, and objectives and its strategy.

27. Shere Vincente operates a travel service that specializes in arranging trips for women, giving special
attention to their needs and preferences from security and comfort to activities and events designed to
appeal to her target customers. Vincente is pursuing a ( _ ) strategy.
a. cost leadership
b. differentiation
c. focus
d. positioning

28. The foundation of every business is satisfying the customer.

a. True
b. False

29. By 2050, the largest minority group in the U.S. will be Hispanics.
a. True
b. False

30. Modem consumers are more concerned about health, nutrition, and the environment than in the
past, and they shop accordingly
a. True
b. False

31. Businesses currently marketing goods and services to the elderly will be forced to reformulate their
strategies in the near future as that market segment continues to shrink in size.
a. True
b. False

32. One of the primary objectives of market research is to identify a small company's target market
a. True
b. False
33. In relationship marketing, the level of customer involvement which a company makes its customers
an all encompassing part of its culture is "Customer Partnership"
a. True
b. False

34. Without a clear picture of its target market, a small company will try to reach almost everyone and
usually ends up appealing to almost no one.
a. True
b. False

35. Because 70 percent of the average company's Wes come from present: customers, few can afford to
alienate any customers.
a. True
b. False

36. It takes much less money and time to keep existing customers than it does to attract new ones.
a. True
b. False

37. When an employee in a business treats a customer poorly, that customer usually does not complain;
however, she does tell her "horror story" about that business to at least nine other people.
a. True
b. False

38. Sales start a customer relationship service turns it into a profitable one.
a. True
b. False

39. The owner of a small sandwich shop who opens a second location in a town 20 miles away is using a
market development strategy
a. True
b. False

40. Successful marketing requires a business owner to,

a. understand what her target customers� needs, demands, and wants before her competitor can
b. offer customer products and services that will satisfy their needs, demands, and wants.
c. provide customers with service, convenience, and value so that they will keep coming back.
d. all of the above.
41. A marketing plan should,
a. determine customer needs and wants through market research.
b. pinpoint specific target markets the company will serve.
c. analyze the firm's competitive advantages and build a marketing Strategy around them.
d. create a marketing mix that meets customer needs and wants.
e. all of the above

42. The first step in the market research process is to

a. collect data.
b. define the problem.
c. design the research,
d. determine the relevant information.

43. An individualized (one to one) marketing campaign requires business owners to

a. collect information on their customers, linking their identities to their transactions.
b. calculate the long term value of their customers so they know which ones are most desirable and
most profitable.
c. practice "just in time marketing" by knowing what their customers' buying cycle is and time their
marketing efforts to coincide with it.
d. all of the above

44. When managers and employees understand the central role of the customer and spend considerable
time talking to them and about them, a company is at which level of customer involvement?
a. Level 1 Customer Awareness
b. Level 2 Customer Sensitivity
c. Level 3 Customer Alignment
d. Level 4 Customer Partnership

45. The majority of customers who stop patronizing a particular store do so because
a. its prices are too high
b. its quality is too low
c. an indifferent employee treated them poorly
d. it failed to advertise enough

46. Attracting a new customer costs as much as keeping an existing one.

a. twice
b. five times
c. half
d. three fourths

47. In the phase of the product life cycle, sales volume climbs, but profits peak and then begin to fall as
competitors enter the market.
a. introduction
b. growth and acceptance
c. maturity and competition
d. market saturation
e. product decline

48. What can a company do to achieve stellar customer service and satisfaction?
a. Listen to customers with the help of suggestion boxes, focus groups, surveys, and other tools.
b. Define what "superior service" means so that customers and employees know exactly what to expect
and what to provide.
c. Hire friendly, courteous sales and service representatives.
d. Use technology to provide better customer service.
e. All of the above

49. Which of the following is not an element of the marketing mix?

a. Price
b. Place
c. Profit
d. Promotion
e. None. All of the above are part of the marketing mix.

50. The product life cycle concept means that small businesses must
a. constantly be involved in product innovation.
b. trace demographic and psychographic trends carefully.
c. create both place and time utility if they are to survive.
d. use a market penetration strategy if they are to be successful.

1. Writing a business plan can ensure that an entrepreneur

Your Answer: meets his target revenue goals.

Correct Answer: figures out how to make her business work.

2. Making the beliefs, values, and behavioral norms explicit and intentional
builds the __________ of an organization.

Your Answer: culture

3. Publicity is _______ promotion through media outlets.

Your Answer: paid

Correct Answer: free
4. The _________ analysis addresses the roles of the community, region,
nation, and world in a business.

Your Answer: environmental

5. The cover page of a business plan should contain

Your Answer: contact information.

6. The quick verbal summary of a business plan is called a(n)

Your Answer: business pitch.

Correct Answer: elevator pitch.

7. Dividing fixed costs by gross profit per unit yields

Your Answer: cost ratio.

Correct Answer: breakeven units.

8. A _____________ is a document that thoroughly explains a business idea

and how it will be carried out.

Your Answer: business plan

9. The ______________ section of the business plan should be written last.

Your Answer: executive summary

10. A business plan should be _______________ to convey critical

information to potential investors.

Your Answer: crisp and concise

4. Profit Motive:

Profit is an indicator of success and failure of business. It is the difference between income and expenses of the business. The

primary goal of a business is usually to obtain the highest possible level of profit through the production and sale of goods and

services. It is a return on investment. Profit acts as a driving force behind all business activities.

Image Courtesy : 3.bp.blogspot.com/-erNdUH9C7aw/UPcFmqGl3YI/concept-5232812.jpg

Profit is required for survival, growth and expansion of the business. It is clear that every business operates to earn profit.

Business has many goals but profit making is the primary goal of every business. It is required to create economic growth.

5. Risk and Uncertainties:

Risk is defined as the effect of uncertainty arising on the objectives of the business. Risk is associated with every business.

Business is exposed to two types of risk, Insurable and Non-insurable. Insurable risk is predictable.

What is a product description?

A product description is the marketing copy that explains what a product is and why it’s worth purchasing. The purpose of a
product description is to supply customers with details around the features and benefits of the product so they’re compelled to
buy.

What is a product, and what is a service? We give you the definition of Product and Service.

A product can be defined as anything that we can offer to a market for attention, acquisition, use or consumption that could

satisfy a need or want.

What is a service? And if the definition of product already includes services, where is the difference? Indeed, services are a

special form of product which consists of activities, benefits or satisfactions offered for sale that are intangible and do not

result in the ownership of anything.

A product is tangible (visible). It has physical existence. By acquiring a product a person may acquire an asset, e.g., a television
set. A product may be capable of being reused for a certain time. Examples are soap, toothbrush, etc. On the other hand, a
person while availing a certain service. Example — Transport, medical, legal, etc., incur expenditure. Service is intangible in
nature.

Definition of Service

Product Service

1. It is tangible. It is intangible

2. Quality standards can be attained. It is very difficult to attain quality standards.

3. It may be an asset sometimes,. e.g., fridge, television set, etc. It involves expenditure without any tangible return benefit.

4. Physical possession is possible. Physical possession is not possible.

5. It can be stored. It cannot be stored.

6. It can be transported. It cannot be transported.

7. The producer and the seller may be different persons. The producer of service is the seller too, e.g., medical and legal services.

8. Assembling is very important. Assembling has no relevance at all.

Skill of the service provider is the deciding factor in most cases, e.g., legal,
9. Skill of the seller alone cannot determine sale. catering and medical services.

10. Production and distribution need not take place Production and distribution of service will have to be done simultaneously,
simultaneously. e.g., provision of electricity.

11. Packing plays a crucial role in the marketing of any product. It has no relevance in the marketing of service.

12. Both Brand name and Trade name are important in the
marketing of any product. Brand mark and Trade name are important in the marketing of services.

13. Labelling is an integral part of marketing. It is required as per

law. It has no relevance.

Definition: A product is the item offered for sale. A product can be a service or an item. It can be physical or in virtual or cyber
form. Every product is made at a cost and each is sold at a price. The price that can be charged depends on the market, the

quality, the marketing and the segment that is targeted. Each product has a useful life after which it needs replacement, and a
life cycle after which it has to be re-invented. In FMCG parlance, a brand can be revamped, re-launched or extended to make it

more relevant to the segment and times, often keeping the product almost the same.

Description: A product needs to be relevant: the users must have an immediate use for it. A product needs to be functionally

able to do what it is supposed to, and do it with a good quality.

A product needs to be communicated: Users and potential users must know why they need to use it, what benefits they can

derive from it, and what it does difference it does to their lives. Advertising and 'brand building' best do this.

A product is an offering that can be sold to customers. It is common to think of products as having a physical presence such as a

mobile device. As a business term, product has no such connotation. Particularly in marketing, it is common to call anything
that can be sold a product, physical or not. For example, flights and software services may be considered products.

A service is an offering that includes intangible elements. Servicesmight include physical things such as commodities, devices,

buildings and equipment. However, they always include something intangible such as management, customer service,

maintenance and experiences. For example, a hotel may offer managed properties and facilities, security, customer service,

entertainment, dining, room service, cleaning, concierge services, transportation and recreation.

Everything is a Service

There is a significant shift in many industries towards wrapping all products in value added services. This is done to earn more

revenue by offering more to customers. Services also allow businesses to establish closer relationships with customers and

charge them according to attractive models such as subscriptions.

Product vs Service

The line between products and services is extremely blurred. It is common to refer to services as products from a marketing

perspective. It is common to wrap products in services to add more value. Products are traditionally thought of as physical

things and services as intangible things. This distinction is fading.

Product vs Service
 Product Service

Definition An offering that can be sold to An offering that derives value from intangible

customers. elements.

Associated With Physical Items Management

Service

Experiences

A target market is a group of customers within a business's serviceable available market that the business has decided to aim
its marketing efforts towards. Target markets consist of consumers who exhibit similar characteristics (such as age, location,
income, and lifestyle) and are considered most likely to buy a business's product or service.

 Geographic – Addresses, Location, Climate, Region.

 Demographic/socioeconomic segmentation – Gender, age, wage, career, education.
 Psychographic – Attitudes, values, religion, and lifestyles.
 Behavioral segmentation – (occasions, degree of loyalty)
 Product-related segmentation – (relationship to a product)[3]
Market segmentation divides the market into four main sub categories – demographic, geographic, psychographic and
behavioural segmentation. Identifying consumer demand and opportunity along these subdivisions enables businesses to align
and calibrate their marketing strategy to address variable market factors.
Demographic segmentation refers to aspects of a market such as age, gender, race, occupation and education. Creating a
message aimed at a particular demographic allows the sender to reach a wide range of receivers, while still staying within the
confines of a specific segment. "Demographic segmentation almost always plays some role in a segmentation strategy"
(Thomas, 1980),[5] and is often paired with other segments to create a slightly more specific segment. A luxury good or service
may be marketed to high income earners if the marketer believes that it would be relevant across a large enough portion of the
segment to make it profitable for the sender, or create the awareness intended. Certain brands only target working
professionals whereas others might only target people who are at high school.
Geographic segmentation divides the market by location. This could be divided into countries, cities, towns and neighborhoods
etc. Different geographic locations usually have different aspects to their environment, which allows marketers to appeal to the
specific needs of each location. For example, marketers could target tractors specifically towards rural areas where there are
likely to be a number of farmers who operate tractors. In contrast, it would not make sense to market those same tractors in an
urban area where people are not likely to find them as useful (Thomas, 1980).[5]
Psychographic segmentation relates to dividing a market based on how they live their everyday lives. This could encompass
their values, as well as their personality, attitudes and general interests (A. S. Boote, 1984).[6] According to Boote (1984),[6] a
popular psychographic segment in marketing is personal values. In the example used, a segment categorised by how much
money a consumer is willing to spend on a product could be defined by certain inclinations when shopping. One being –
"spending no more money than is necessary…even if it means not buying the best." Another orientation being – "shopping
around to get the best price once I have decided on the kind of product I want to buy." By learning about these orientations,
the marketer is able to gauge different attitudes of the consumers potentially being targeted.
Behavioural segmentation subdivides the market depending on how consumers behave towards a product. Consumers behave
differently depending on occasions and the frequency of usage of a product. For example, a spouse may not usually spend
money on flowers for their significant other, but might on Valentine's Day, as it is a special occasion. "Many Marketers believe
that behaviour variables are the best starting points for building market segments" (Tatum, 2007).[7]
One key to identifying the best target market is assessing brand loyalty involving attitudes and behaviors toward the
brand.[8] Buyer groups can be divided into the following: those loyal to the brand, those who buy your brand but also buy from
competing brands, those who buy more than one competing brand, those who are regularly loyal to another brand, and new
users who are entering for the first time or re-entering.[8] Loyalty, which concerns consumer attitudes in terms of interest in
competitive alternatives, overall satisfaction, involvement, and intensity, has become increasingly important in competitive
markets.
Demographic[edit]
Demographic segmentation is the process of dividing the total market according to particular characteristics such as age,
gender, family size, family life cycle, income, occupation, education, religion, race, and nationality. Age and gender are two of
the most commonly used demographic variables used to segment markets.[2] Demographics are useful and widely used but
should be coupled with other segmentation variables to effectively define a target market.[8]

 Gender: Due to physiological differences, males and females have very different product demands and preferences, for
example, in clothing, hair care, and other lifestyle items.
 Age: Consumers of different ages have different demand characteristics. Young people, for example, might demand bright,
fashionable clothing, while the elderly prefer dignified and simple but elegant dress.
 Income: Lower income and higher income consumers will be quite different in product selection, leisure time
arrangement, social communication and communication and so on.
 Occupation and education: Consumers with different occupations education levels desire different products. For example,
farmers prefer to buy load-carrying bicycles while students and teachers love light, beautiful style bikes.
 Family life cycle: Families can be divided into five stages based on age, marital status, and children. These are newly
married, full nest, empty nest and lonely. In different stages, family purchasing power and interest in particular goods and
services vary greatly.
Geographic[edit]
Geographic segmentation is the process of dividing the total market according to geographic location, for instance region
(urban, suburban, rural, city size), climate and land type. Businesses may do this because different regions may present
different needs and provide different commercial opportunities. For instance, an ice cream shop would be more likely to start
up in a hot location than a cold climate.[2] Identifying regional preferences and attitudes can help campaigns to be better
targeted for particular geographic areas.[8]
Psychographic[edit]
Psychographic segmentation is based on personality characteristics, mainly includes the consumer's personality, the life style,
the social class, the motive, the value orientation. Businesses can do this by researching consumer's preferences, likes and
dislikes, habits, interests, hobbies, values and socioeconomic group. These variables are concerned with why people behave the
way they do and are often used effectively in conjunction with other segmentation variables.[2] Psychographics also relates to
attitudes toward certain activities like fitness, willingness to take risks, concern for the environment, political opinions, concern
with fashion, and innovativeness.[8] Values and culture are strongly linked to how people think and behave and are important
aspects of segmentation variables, especially in global campaigns. Personality traits such as self-esteem, intelligence, and
introversion/extroversion also affect the processing and persuasiveness of communication.
Lifestyle: Lifestyle is a particular habit of individuals or groups in the consumption, work and entertainment. Different lifestyles
tend to produce different consumer demand and purchase behavior, even on the same kind of goods, there will be different
needs in the quality, appearance, style, and specifications. Today, many consumers does not only buy goods to meet the
material needs, it is more important to show the performance of their lifestyle, to meet the psychological needs, such as
identity, status, and the pursuit of fashion.
Social class: Due to the different social class have a different social environment, different backgrounds, and different
characteristics of different consumer preferences, demand for goods or services are quite different. Philip Kotler divided
American society into six classes.

 Upper uppers: Inheritance property, family background has famous celebrities.

 Lower uppers: The extraordinary vitality in the occupation or business and get higher income or wealth.
 Upper middles: They are extremely concerned about their careers, they are doing special occupations, independent
entrepreneurs and managers.
 Lower middles: Middle-income white-collar and blue collar workers.
 Upper lowers: Low wages, life is just at the poverty line, the pursuit of wealth but no skills.
 Lower lowers: The poor, often rely on long-term unemployment, or public charity relief to the people. People in different
social classes, the demand for cars, clothing, furniture, entertainment, reading, there is a big difference. [9]
Personality: Personality refers to the individual's unique psychological characteristics, this psychological characteristics of
individuals and their environment to maintain a relatively consistent and lasting response. Everyone has a unique personality
affecting their buying behavior. To distinguish between different personality, there is a strong correlation between the premise
and specific personality with the product or brand choice, so personality can become the market segments of the psychological
variables.
Behavioural[edit]
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Behavioral segmentation relates to customers' knowledge, attitude, use of product and the purchase occasion, such as special
one-off or regular loyal buying. Identifying what customers want from products and the benefits they seek are important to
behavioural segmentation to allow marketers to better design and select products that satisfy these needs.[2] Many marketers
believe that behavioral variables are the best starting point for market segmentation.

 Opportunity: It is the time consumers buy and use the product. these opportunities include marriage, divorce, purchase,
moving, demolition, admission, study, retirement, travel, tourism, holidays, and so on. It will help improve brand usage
and marketing targeted. Such as travel agencies can provide specialized travel services at Christmas, stationery enterprises
can begin to provide more learning supplies before new semester.
 Benefit: Benefit segmentation is a kind of classification method based on the different interests of consumers from the
brand products.Using the benefit segmentation method, what must be determined is the benefit people are seeking for,
who are seeking these benefits, how important to them these benefits are, what brand can offer these benefits, what
benefits have not been met.
 User status: According to the state of use, consumers can be classified into once users, nonusers, potential users, the
primary user, occasionally users and often user type, for different type of consumers the brand should use different
marketing strategies and methods. The brand who has a high market share can focus more on the potential users to
change them to the actual users, such as leading brands; some small businesses can only be used as an often user services.
 Brand loyalty: Consumer loyalty is the most valuable wealth of enterprises. Consumers can be divided into four types
according to their brand loyalty: True Friends, Butterflies, Barnacles and Strangers.
 True Friends: They are the highest level of the four types and the most important part of the customer group. For
example, a fan of a Swiss knife, they will keep telling their friends and neighbors the benefits of this knife, their frequency
of use. These loyal customers will be free of charge to the brand, and continue to recommend to others. For any business,
this is the most popular type of customer.
 Butterflies: Butterflies are not particularly loyal, but have spent money on your products and brought in good revenue. An
example of a butterfly would be someone that supports Microsoft in general, but buys the iPhone since it happened to be
the best available phone on the market.
 Barnacles: Here is where some companies, especially B2B companies, find a surprising amount of their customer base falls
into. Barnacles are loyal customers, but they are loyal customers that rarely make a purchase, and may not bring in much
of a profit. A great example would be a customer that buys one cup of coffee at your coffee shop, and then comes in every
day for the next month to use your free WiFi without making a purchase.
 Strangers: Due to different reasons, some customers are not loyal to certain brands. Generally speaking, enterprises
should avoid targeting strangers, because they will never become a sincere customer, they have little contribution to the
development of enterprises.[10]
Market segmentation is a marketing strategy that categorises or segments the market based on their characteristics. These
categories or segments are demographic, geographic, psychographic, psychological and behavioural (market segmentation [11]).
Market segmentation is an effective tool for marketers and is said to be a fundamental concept in modern marketing. It realises
that individuals have different motivations, desires, lifestyles and tastes. Market segmentation's effectiveness is in ability to
divide a market into segments which management can then use to effectively make further informed decisions. By targeting
individuals with similar characteristics, management can create an effective marketing plan for their targeted buyers. They can
market their brand and develop and advertise products that relate at deeper and personal level with their targeted customers
(market segmentationi[11]).
Demographic
Demographic segmentation is the division of the market based on an individual's sex, age, income and life style. Demographic
segmentation is used the most frequently by businesses in comparison to the other market segments. This is possibly because
of the ability to easily collect this kind of information. The national census of a country collects this kind of information.
Demographic segmentation has been challenged with scholars stating that demographic segmentations such as age and sex are
poor behaviour predictors. However, other studies have showed that demographic segmentation is accurate and effective
when analysed as a group rather than looking at an individual's behaviour.
Geographic
Geographic segmentation is the division of the market based on an individual's location. This can be either nationally, regionally
or locally and was said to be the first kind of segmentation used practically. Geographic segmentation can be used to compare
certain habits and characteristics of different locations. UK's National Food survey showed that Scotland's consumption of
vegetables and beverages was much lower than England and Wales.
Psychological
Psychological segmentation is the division of the market based on an individual's personality, attitudes and interests. This type
of segmentation is based around understanding an individual's traits, habits and reason. Segmenting the market based on
personality has been met with controversy. Some scholars state that personality is too complex of a segment and shows
disappointing results. Psychological studies have seen trends in certain traits displayed by individuals. Mothers who were
difficult to persuade to buy products for their child displayed high-esteem personality traits. In contrast, those portraying low
self-esteem were easily influenced. Studies have also shown a correlation between aggression and cigarette smokers in men.
This kind of research can prove beneficial to a company segmenting their target market psychologically.
Behavioural
Behavioural segmentation is the division of the market based on how individuals react or respond to a product. Behavioural
segmentation relates to a consumer's brand loyalty, usage rate and usage situation, to name a few. Consumer's purchase
products primarily for their value or benefits and this is the basic element of this segmentation. Many marketers believe the
best starting point for constructing market segmentation is behavioural segmentation. This is understandable as this segment
deals an individual's reaction to the product exclusively. Businesses can use an individual's reaction to price drops, technology
changes and product status to determine how to market their product or service effectively.

Marketing mix (4 Ps)[edit]

The 4Ps, also widely known as the marketing mix or occasionally as the marketing program, is a framework commonly used in
marketing that covers four activities that make up the responsibilities of a marketing department or the marketing function.
The marketing mix or marketing program is understood to refer to the "set of marketing tools that the firm uses to pursue its
marketing objectives in the target market".[12] The traditional marketing mix refers to four broad levels of marketing decision,
namely: product, price, promotion, and place.[13] When implemented successfully, these activities should deliver a firm's
products or services to target consumers in a cost efficient manner. The four core marketing activities include: product, price,
place and promotion.[14]
The marketing mix is the combination of all of the factors at the command of a marketing manager to satisfy the target
market.[15] The elements of the marketing mix are: Product – the item or service that is being offered, through its features and
consumer benefits and how it is positioned within the marketplace whether it be a high or low quality product. Price, is a
reference to the sacrifices made by a consumer to acquire a product and may include both monetary and psychological costs
such as the combination of the ticket price, payment methods and other associated acquisition costs. Place refers to the way
that a product physically reaches the consumer – where the service or item is sold; it also includes the distribution channels in
which the company uses to get products or services to market. Finally, Promotion refers to marketing communications used to
convey the offer to consumers and may include; personal selling, advertising, public and customer relations, sales promotion
and any other activities to communicate with target markets.[16]
The first reference to the term, the 'marketing mix' was claimed to be in around 1950 by Neil H. Borden.[17][18] Borden first used
the term, 'marketing mix' in an address given while he was the President of the American Marketing Association in the early
1950s. For instance, he is known to have used the term 'marketing mix' in his presidential address given to the American
Marketing Association in 1953.[19] However, at that stage, theorists and academics were not in agreement as to what elements
made up the so-called marketing mix. Instead, they relied on checklists or lengthy classifications of factors that needed to be
considered to understand consumer responses.[20] It wasn’t until 1960 when E. Jerome McCarthy published his now-classic
work, Basic Marketing: A Managerial Approach that the discipline accepted the 4 Ps as constituting the core elements of the
marketing mix.[21] In the 1980s, the 4Ps was modified and expanded for use in the marketing of services, which were believed to
possess unique characteristics which necessitated a different marketing program. The commonly accepted 7Ps of services
marketing include: the original four Ps of product, price, place, promotion plus participants (people), physical evidence and
process.[22]
Product[edit]
A ‘Product’ is either a good or service, which is offered to the market by a company. The definition is "something or anything
that can be offered to the customers for attention, acquisition, or consumption and satisfies some want or need" (Riaz &
Tanveer (n.d); Goi (2011) and Muala & Qurneh (2012)). The product is the main part of the marketing mix where the company
can show the different parts of their product compared to that of another product created by another company. The
differences can include quality, look, brand name or size. By creating a unique product it allows for a gap in the market to be
filled or a new market to be created increasing profits for the company.
Price[edit]
Price is the most important factor in determining customer satisfaction; the customer weighs up the price of the item or service
and then work out if it will benefit them (Virvilaite et al., 2009). The value of the item to consumers will be different for each
individual and therefore the amount that the customer is willing to pay to get the item or service also changes (Nakhleh, 2012).
Price is the only one of the 4Ps that is required to be set at a certain amount after the other 3 Ps have been set. This means that
the price of an item can fluctuate dramatically. Out of the 4Ps price is also the most important for a business due to the fact
that it is the only way that a company can make profit and therefore making sure that the price is right is the most important
thing that a company can do. The 3 remaining Ps are what are called the variable costs for an organization. The company has to
use money to promote, design and distribute a product and the price of the item means has to allow the company to make a
profit. The price of the item or service must reflect the supply and demand so that the company is losing out on possible profits
from having the price too low or losing sales due to the price being too high. Price can be very influential, a high price may be
the best way to gain large short term profits it may not be suitable to keep it at this high price as time goes on. Price can also be
used as a means to advertise, short stints of lower prices increase sales for a short time promoting the company.
Place[edit]
Riaz & Tanveer (n.d) wrote that Place refers to the availability of the product to the targeted customers. So a product or
company doesn’t have to be close to where its customer base is but instead they just have to make their product as available as
possible. This improves efficiency and therefore price can be dropped intern increasing sales and profit. For max profits a
company's distribution channels must be effective in enticing the customer.
Promotion[edit]
Promotion refers to "the marketing communication used to make the offer known to potential customers and persuade them
to investigate it further".[23] May comprise elements such as: advertising, PR, direct marketing and sales promotion.
Strategies for reaching target markets[edit]

Marketers have outlined four basic strategies to satisfy target markets: undifferentiated marketing or mass marketing,
differentiated marketing, concentrated marketing, and micromarketing/ nichemarketing.
Mass marketing (undifferentiated marketing)[edit]
Undifferentiated marketing/Mass marketing is a method which is used to target as many people as possible to advertise one
message that marketers want the target market to know (Ramya & Subasakthi). When television first came out,
undifferentiated marketing was used in almost all commercial campaigns to spread one message across to a mass of people.
The types of commercials that played on the television back then would often be similar to one another that would often try to
make the viewers laugh, These same commercials would play on air for multiple weeks/months to target as many viewers as
possible which is one of the positive aspects of undifferentiated marketing. However, there are also negative aspects to mass
marketing as not everyone thinks the same so it would be extremely difficult to get the same message across to a huge number
of people (Ramya & Subasakthi).
Differentiated marketing strategy[edit]
Differentiated marketing is a practice in which different messages are advertised to appeal to certain groups of people within
the target market (Ramya & Subasakthi). Differentiated marketing however is a method which requires a lot of money to pull
off. Due to messages being changed each time to advertise different messages it is extremely expensive to do as it would cost
every time to promote a different message. Differentiated marketing also requires a lot time and energy as it takes time to
come up with ideas and presentation to market the many different messages, it also requires a lot of resources to use this
method. But investing all the time, money and resources into differentiated marketing can be worth it if done correctly, as the
different messages can successfully reach the targeted group of people and successfully motivate the targeted group of people
to follow the messages that are being advertised (Ramya & Subasakthi).
Concentrated marketing or niche marketing[edit]
Niche marketing is a term used in business that focuses on selling its products and services solely on a specific target market.
Despite being attractive for small businesses, niche marketing is highly considered to be a difficult marketing strategy as
businesses may need thorough and in-depth research to reach its specific target market in order to succeed.[24]
According to (Caragher, 2008),[25] niche marketing is when a firm/ company focuses on a particular aspect or group of
consumers to deliver their product and marketing to. Niche marketing, is also primarily known as concentrated marketing,
which means that firms are using all their resources and skills on one particular niche. Niche marketing has become one of the
most successful marketing strategies for many firms as it identifies key resources and gives the marketer a specific category to
focus on and present information to. This allows companies to have a competitive advantage over other larger firms targeting
the same group; as a result, it generates higher profit margins. Smaller firms usually implement this method, so that they are
able to concentrate on one particular aspect and give full priority to that segment, which helps them compete with larger
firms.[25]
Some specialities of niche marketing help the marketing team determine marketing programs and provide clear and specific
establishments for marketing plans and goal setting. According to, (Hamlin, Knight and Cuthbert, 2015), [26] niche marketing is
usually when firms react to an existing situation.
There are different ways for firms to identify their niche market, but the most common method applied for finding out a niche
is by using a marketing audit. This is where a firm evaluates multiple internal and external factors. Factors applied in the audit
identify the company's weaknesses and strengths, company's current client base and current marketing techniques. This would
then help determine which marketing approach would best fit their niche.
There are 5 key aspects or steps, which are required to achieve successful niche marketing. 1: develop a marketing plan; 2:
focus your marketing program; 3: niche to compete against larger firms; 4: niche based upon expertise; 5: develop niches
through mergers.[25]
Develop A Marketing Plan:
Developing a market plan is when a firms marketing team evaluates the firms current condition, what niches the company
would want to target and any potential competition. A market plan can consist of elements such as, target market, consumer
interests, and resources; it must be specific and key to that group of consumers as that is the speciality of niche marketing.[25]
Focus Your Marketing Program:
Focusing your marketing program is when employees are using marketing tools and skills to best of their abilities to maximise
market awareness for the company. Niche marketing is not only used for remaining at a competitive advantage in the industry
but is also used as a way to attract more consumers and enlarge their client database. By using these tools and skills the
company is then able to implement their strategy consistently.[25]
Niche To Compete Against Larger Firms:
Smaller and medium-sized firms are able to compete against niche marketing, as they are able to focus on one primary niche,
which really helps the niche to grow. Smaller firms can focus on finding out their clients problems within their niche and can
then provide different marketing to appeal to consumer interest.[25]
Niche Based Upon Expertise:
When new companies are formed, different people bring different forms of experience to the company. This is another form of
niche marketing, known as niche based on expertise, where someone with a lot of experience in a specific niche may continue
market for that niche as they know that niche will produce positive results for the company.[25]
Developing Niches Through Mergers:
A company may have found their potential niche but are unable to market their product/ service across to the niche. This is
where merging industry specialist are utilised. As one company may have the tools and skills to market to the niche and the
other may have the skills to gather all the necessary information required to conduct this marketing. According to (Caragher,
2008),[25] niche marketing, if done effectively, can be a very powerful concept.[25]
Overall, niche marketing is a great marketing strategy for firms, mainly small and medium-sized firms, as it is a specific and
straightforward marketing approach. Once a firm's niche is identified, a team or marketers can then apply relevant marketing
to satisfy that niche's wants and demands.[25]
Niche marketing also closely interlinks with direct marketing as direct marketing can easily be implemented on niches within
target markets for a more effective marketing approach.
Direct marketing[edit]
Direct marketing is a method which firms are able to market directly to their customers needs and wants, it focuses on
consumer spending habits and their potential interests. Firms use direct marketing a communication channel to interact and
reach out to their existing consumers (Asllani & Halstead, 2015). Direct marketing is done by collecting consumer data through
various means. An example is the internet and social media platforms like Facebook, Twitter and Snapchat. Those were a few
online methods of which organisations gather their data to know what their consumers like and want allowing organisations to
cater to what their target markets wants and their interest (Lund & Marinova, 2014). This method of marketing is becoming
increasingly popular as the data allows organisations to come up with more effective promotional strategies and come up with
better customize promotional offers that are more accurate to what the customers like, it will also allows organisations to uses
their resources more effectively and efficiently and improve customer management relationships. An important tool that
organisations use in direct marketing is the RFM model (recency-frequency-monetary value) (Asllani & Halstead, 2015). Despite
all the benefits this method can bring, it can be extremely costly which means organisation with low budget constraints would
have trouble using this method of marketing..

Psychology[edit]

A principal concept in target marketing is that those who are targeted show a strong affinity or brand loyalty to that
particular brand. Target Marketing allows the marketer or sales team to customize their message to the targeted group of
consumers in a focused manner. Research has shown that racial similarity, role congruence, labeling intensity of ethnic
identification, shared knowledge and ethnic salience all promote positive effects on the target market. Research has generally
shown that target marketing strategies are constructed from consumer inferences of similarities between some aspects of
the advertisement (e.g., source pictured, language used, lifestyle represented) and characteristics of the consumer (e.g. reality
or desire of having the represented style). Consumers are persuaded by the characteristics in the advertisement and those of
the consumer.[27]

Online targeting[edit]
See also: Online advertising

Targeting in online advertising is when advertisers use a series of methods in order to showcase a particular advertisement to a
specific group of people.[28] Advertisers use these techniques in order to find distinct individuals that would be most interested
in their product or service. With the social media practices of today, advertising has become a very profitable
industry.[28] People are constantly exposed to advertisements and their content, which is key to its success. In the past,
advertisers had tried to build brand names with television and magazines; however, advertisers have been using audience
 targeting as a new form of medium.[29] The rise of internet users and its wide availability has made this possible for
advertisers.[28] Targeting specific audiences has allowed for advertisers to constantly change the content of the advertisements
to fit the needs and interests of the individual viewer. The content of different advertisements are presented to each consumer
to fit their individual needs.[30]
The first forms of online advertising targeting came with the implementation of the personal email message.[31] The
implementation of the internet in the 1990s had created a new advertising medium;[32] until marketers realized that the
internet was a multibillion-dollar industry, most advertising was limited or illicit.[33]
Many argue that the largest disadvantage to this new age of advertising is lack of privacy and the lack of transparency between
the consumer and the marketers.[34] Much of the information collected is used without the knowledge of the consumer or their
consent.[34] Those who oppose online targeting are worried that personal information will be leaked online such as their
personal finances, health records, and personal identification information.[34]
Advertisers use three basic steps in order to target a specific audience: data collection, data analysis, and
implementation.[28] They use these steps to accurately gather information from different internet users. The data they collect
includes information such as the internet user's age, gender, race, and many other contributing factors. [30] Advertisers need to
use different methods in order to capture this information to target audiences. Many new methods have been implemented in
internet advertising in order to gather this information. These methods include demographic targeting, behavioral targeting,
retargeting, and location-based targeting.[28]
Much of the information gathered is collected as the consumers are browsing the web. Many internet users are unaware of the
amount of information being taken from them as they browse the internet. They don't know how it is being collected and what
it is being used for. Cookies are used, along with other online tracking systems, in order to monitor the internet behaviors of
consumers.[35]
Many of these implemented methods have proven to be extremely profitable.[36] This has been beneficial for all three parties
involved: the advertiser, the producer of the good or service, and the consumer. [28] Those who are opposed of targeting in
online advertising are still doubtful of its productivity, often arguing the lack of privacy given to internet users. [37]Many
regulations have been in place to combat this issue throughout the United States.[38]

Target Market

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What is a Target Market?

A target market is a group of consumers or organizations most likely to buy a company’s products or services. Because those
buyers are likely to want or need a company’s offerings, it makes the most sense for the company to focus its marketing efforts
on reaching them. Marketing to these buyers is the most effective and efficient approach. The alternative - marketing to
everyone - is inefficient and expensive.

Finding Your Target Market

To determine who your best target market consists of, start by answering three basic questions:

 What problem does your product or service solve? Does it help soothe teething babies? Does it make men feel taller? Does
it help companies garner more publicity?
 Who is most likely to have this problem? In what situations do they use it? This is where you start breaking down who you
should be focusing on. Is it individuals? Businesses? Families?
 Are there different groups with different needs? You may have more than one target market, or market segment, based on
how they use a product or service. For example, a bike shop may help families with young children choose a safe bike for
their 5-year-old, while a 30-something athlete may want advice in choosing a professional racing bike.
 Get a little more specific about what pain points your product or service addresses and then who typically feels that pain.

Zeroing in On Your Target Market

Once you are clear about who is most likely to need or want your product or service, it’s time to get even more specific about
this group, or groups, of people. There are several different ways to define your target market, based on different
characteristics. You should decide which approach comes closest to exactly describing your perfect customer:

 Consumer or business – Start by clarifying if you have a B2B (business-to-business) or a B2C (business-to-consumer) offering.
 Geographic – Local brick-and-mortar stores may find that their most likely customers are within a two-mile radius of their
store, or within a particular zip code. This target market is defined geographically, based on where they live or work or
vacation or do business.
 Demographic – Describing your best customer demographically means that you define your target market in terms of their
gender, age, income level, education level, marital status, or other aspect of their life.
 Psychographic – Sometimes customers don’t fit into a particular group based on outward characteristics, but more based on
internal attitudes and values. These are psychographic characteristics.
 Generation – Many companies today define their target market based on which generation they were born in, such as baby
boomers or Gen Y.
 Cohort – Other companies find that their target market is better defined by looking at cohorts, or groups of people who had
similar experiences during childhood, such as being raised by a single mom or attending boarding school.
 Life stage – Other target markets are more alike because of the stage of life they are in, whether it’s post-college,
retirement, newly married, newly divorced, or parenting young children, for example.
 Behavioral – Another approach is simply based on frequency of use, or behavior, which could be a good choice for nail
salons, car washes, or vacation rentals, for example.
Armed with a clear understanding of your target market(s), you can now begin to craft marketing messages that appeal to that
particular group’s pain points and preferences.

Target Market

Definition: A specific group of consumers at which a company aims its products and services

Your target customers are those who are most likely to buy from you. Resist the temptation to be too general in the hopes of
getting a larger slice of the market. That's like firing 10 bullets in random directions instead of aiming just one dead center of
the mark--expensive and dangerous.

Try to describe them with as much detail as you can, based on your knowledge of your product or service. Rope family and
friends into visualization exercises ("Describe the typical person who'll hire me to paint the kitchen floor to look like marble...")
to get different perspectives-the more, the better.

Here are some questions to get you started:

 Are your target customers male or female?

 How old are they?
 Where do they live? Is geography a limiting factor for any reason?
 What do they do for a living?
 How much money do they make? This is most significant if you're selling relatively expensive or luxury items. Most
people can afford a carob bar. You can't say the same of custom murals.
 What other aspects of their lives matter? If you're launching a roof-tiling service, your target customers probably own
their homes.
Once upon a time, business owners thought it was enough to market their products or services to "18- to 49-year olds." Those
days are a thing of the past. Because the consumer marketplace has become so differentiated, it's a misconception to talk
about the marketplace in any kind of general way anymore. Now, you have to decide whether to market to socioeconomic
status or to gender or to region or to lifestyle or to technological sophistication. There's no end to the number of different ways
you can slice the pie.

Further complicating matters, age no longer means what it used to. Fifty-year-old baby boomers prefer rock 'n' roll to Geritol;
30-year-olds may still be living with their parents. People now repeat stages and recycle their lives. You can have two men who
are 64 years old, and one is retired and driving around in a Winnebago, and the other is just remarried with a toddler in his
house.

Generational marketing, which defines consumers not just by age, but also by social, economic, demographic and psychological
factors, has been used since the early 80s to give a more accurate picture of the target consumer.

A newer twist is cohort marketing, which studies groups of people who underwent the same experiences during their formative
years. This leads them to form a bond and behave differently from people in different cohorts, even when they're similar in age.
For instance, people who were young adults in the 50s behave differently from people who came of age during the tumultuous
60s, even though they're close in age.

To get an even narrower reading, some entrepreneurs combine cohort or generational marketing with life stages, or what
people are doing at a certain time in life (getting married, having children, retiring) and physiographics, or physical conditions
related to age (nearsightedness, arthritis, menopause).

Today's consumers are more marketing-savvy than ever before and don't like to be "lumped" with others--so be sure you
understand your target market. While pinpointing your market so narrowly takes a little extra effort, entrepreneurs who aim at
a small target are far more likely to make a direct hit.

Definition of 'Target Market'

Definition: Target market is the end consumer to which the company wants to sell its end products too. Target marketing

involves breaking down the entire market into various segments and planning marketing strategies accordingly for each

segment to increase the market share.

Description: In simple words, not all products can be consumed by all customers and each product has a different set of

consumers who want to purchase the product. In order to attract a particular segment of the market, the company at times,

modifies the product accordingly. Creating the target market involves conceptualizing the product, understanding the need of

the product in a market, studying its target audience etc. Target marketing would revolve around deploying marketing

techniques for a particular segment of markets which could be key to attract new customers, expand business opportunities

across geographies and expand distribution network to widen the reach.

There are various steps involved in defining the target market. The first is to understand the problem of a customer whom you

are addressing. Once it is done, the customers can be identified who are interested in that product. For example, you make

water purifiers – so you address the problem of contaminated water quality. We know that farm houses do not have a regular
water connection and the water they get from underground is hard. So, there is a wide opportunity for water-purifier makers to
 enter into this segment and tap the market. The next step is to understand your customer according to the region, income

level, etc. Always think about the market, know your competition and the pricing of the product. It will help you in creating a

benchmark.

There are two important features, which the company should always consider before it decides to capture a separate market

segment. First is the attractiveness of the segment, which means that it has less competition, high margin business etc. The
second is that it falls in line with the company’s objective, vision etc.

Target Market

What is a 'Target Market'

A target market is the market a company wants to sell its products and services to, and it includes a targeted set of customers

for whom it directs its marketing efforts. Identifying the target market is an essential step in the development of a marketing

plan. A target market can be separated from the market as a whole by geography, buying power, demographics and
psychographics.

Next Up

1. PROFIT TARGET

2. INFLATION TARGETING
3. RISK ARBITRAGE
4. DEMOGRAPHICS

5.

BREAKING DOWN 'Target Market'

A company invests significant amounts of time and capital to define and monitor its target market. Not all products and services

are meant for all types of consumers, and consumers are often cautious with their spending power. For this reason, target

markets are typically segregated by age, location, income and lifestyle. A company defines its target market by the consumers

that are likely to have a need for its product. Defining a specific target market allows a company to hone in on specific market
factors to reach and connect with customers through sales and marketing efforts.

Testing of the target market often occurs in a phase before the product release. In this phase, a company may use limited

product rollouts and focus groups, allowing the product managers to get a feel for which aspects of the product are the

strongest. Once a product is released, the company can continue to monitor the demographics of its target market through
sales tracking, customer surveys and various other activities that allow the company to understand what its customers demand.

Target Market and Product Sales

The target market is a central focus within a marketing plan that determines other essential factors for the product, such as
distribution, price and promotion efforts. The target market also determines significant factors about the product itself. In fact,
a company may tweak certain aspects of a product, such as the amount of sugar in a soft drink, so that it is more likely to be
purchased by consumers with varying tastes.

As a company’s product sales grow, it may also be able to expand its target market internationally. International expansion

allows a company to reach a broader subset of its target market in different regions of the world. In addition to international

expansion, a company may also find that its domestic target market expands as its products gain more traction in the

marketplace. Expanding and growing target markets are all the more reason for companies to monitor their sales and customer
preferences for evolving revenue opportunities.

What is Target Market Identification?

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•••
BY LAURA LAKE

Updated April 12, 2018

Target market identification, by definition, is the method used to sort potential clients for sales and marketing campaigns,

advertising and promotions using income, demographic, and lifestyle characteristics of a market and census information. This

method is managed in several ways depending on the products and/or services that are the main focus of a business.

How Businesses Identify Target Markets

Target market identification begins with a study of where sales and marketing efforts produce the maximum results. For

example, a law firm mainly offers legal services. However, many law firms specialize in certain types of legal issues. It presents

the best picture of target market identification because it specifies where potential clients exist. It is also true for products that

are sold to the public. Another example of this is a major food producer of food and beverages. Although the business may

have several products, its sales and marketing planning focuses on particular target markets for each product.

Thus, they may study target markets for each product to finely hone the scope of their target market identification.

Steps to Identify Target Markets

Generally, most large businesses invest in marketing research consultants to do the work of studying, identifying and creating

target markets. In small businesses, marketing research may be done by the business owner or by staff specialists. In marketing

research, there are several elements that comprise the identification of target markets. This include:
  Defining sources where products and/or services are most likely needed.

 Researching the volume of products and services sold and used over a broad demographic area.

 Studying sources of raw materials that are required to produce products or services.

 Identifying major competitors to determine the location of target markets.

Where Products Are Needed and Used Most

The key to identifying a target market lies with defining specific sources where products and services are most needed and also

most used. For example, a business that sells hand tools would identify large residential areas and small repair businesses that

are most likely to purchase hand tools. Take notice that grocery stores are located in areas of high visibility, high consumer

traffic, and within a short distance from large residential complexes.

Understanding How Volumes and Quantities Identify Target Markets

To properly identify target markets, it is necessary to perform thorough market research on the volume of products and

services sold and used over a broad demographic area. As an example, the marketing research group of a large corporation

provides data that provides past, present and future volumes of products and services nationally or, if applicable,

internationally. It is important to know the quantities and volumes of goods and services sold to facilitate identifying the most

advantageous sales and marketing regions.

Study Sources of Raw Materials and Identify Competitors

When a product-oriented business knows the source of raw materials, they also identify the users of these raw materials. It is

also a way of identifying competitors for market share and those that may represent their greatest competitor for the target

markets.

The Importance of Target Market Identification

Once businesses know the definition of target market identification, the job of market research opens a wider window of

opportunity.

Target Marketing Can Be the Key to Increasing Sales

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•••

BY SUSAN WARD

Updated July 17, 2017

Definition:

Target Marketing involves breaking a market into segments and then concentrating your marketing efforts on one or a few key
segments consisting of the customers whose needs and desires most closely match your product or service offerings. It can be
the key to attracting new business, increasing your sales, and making your business a success.

The beauty of target marketing is that by aiming your marketing efforts at specific groups of consumers it makes
the promotion, pricing, and distribution of your products and/or services easier and more cost-effective.

It provides a focus to all of your marketing activities.

So if, for instance, a catering business offers catering services in the client’s home, instead of advertising with a newspaper
insert that goes out to everyone, after identifying the target market for their services, the catering company could target the
desired market with a direct mail campaign, a flyer delivery that went only to residents in a particular area, or a Facebook
ad aimed at customers within a specific geographic area, increasing the return on investment on their marketing - and bringing
in more customers.

Social media platforms such as Facebook, LinkedIn, Twitter, and Instagram have sophisticated options to allow businesses to
target users based on market segments. A Bed and Breakfast business could target married Facebook followers with an ad for a
romantic weekend getaway package, for example. LinkedIn is more B2B oriented - you can target businesses by a variety of
criteria such as number of employees, industry, geographic location, etc.

While market segmentation can be done in many different ways, depending on how you want to slice up the pie, three of the
most common types are:

Demographic Segmentation

Demographic grouping is based on measurable statistics, such as:

 gender
 age
 income level
 marital status
 education
 race
 religion

Demographic segmentation is usually the most important criteria for identifying target markets, making knowledge of
demographic information crucial for many businesses.

A liquor vendor, for instance, might want to target their marketing efforts based on the results of Gallup polls, which indicate
that beer is the beverage of choice for people below the age of 54 (particularly in the 18-34-year-old age range) while those
aged 55 and older prefer wine.

Geographic Segmentation
Geographic segmentation involves segmenting the market based on location. Home addresses are one example. However,
depending on the scope of your business this could be done by:

 neighborhood
 postal/zip code
 area code
 city
 province/state
 region
 country (if your business is international)

Geographic segmentation relies on the notion that groups of consumers in a particular geographic area may have specific
product or service needs; for instance, a lawn care service may want to focus their marketing efforts in a particular village or
subdivision that has a high percentage of seniors.

Psychographic Segmentation

Psychographic segmentation divides the target market based on socio-economic class, personality, or lifestyle preferences. The
socio-economic scale ranges from the affluent and highly educated at the top to the uneducated and unskilled at the bottom.
The UK-based National Readership Survey defines social class according to the following categories:

Social Grade Social Status Occupation

A upper middle class higher managerial, administrative or professional

B middle class intermediate managerial, administrative or professional

C1 lower middle class supervisory or clerical, junior managerial, administrative or professional

C2 skilled working class skilled manual workers

D working class semi and unskilled manual workers

those at lowest level of state pensioners or widows (no other earner), casual or lowest grade
E
subsistence workers

The lifestyle classification involves values, beliefs, interests, etc. Examples include those who prefer an urban as opposed to
rural or suburban lifestyle, or those who are pet lovers or have a keen interest in environmental issues.

Psychographic segmentation is based on the theory that the choices that people make when purchasing goods or services are
reflections of their lifestyle preferences or socio-economic class.

Target Marketing Case Study - McDonald's Restaurants

McDonald's Restaurants is the largest fast food chain in the world and one of the most successful examples of
demographic target marketing, aiming their products at children, teenagers, and young urban-dwelling families by offering
"Play Places", free wifi, "Happy Meals" that include toys such as Walt Disney characters, and ad campaigns with slogans such as
"Feed Your Inner Child". Targeted advertising combined with aggressive pricing has enabled McDonald's to capture 25% of the
fast food market share in the U.S.

However, in recent years as millennials have surpassed baby boomers to become the largest generation in the U.S., McDonald's
sales have been in decline as fast food style menu items such as the ubiquitous Big Mac and fries have lesser appeal to
millennials. In response, McDonald's has altered their marketing strategy to target the millennial generation by advertising
fresher, healthier menu options and upscale coffee products such as espressos.
More information on Target Marketing

If you’re interested in target marketing, the first step is to do the research that will help you define and zero in on your
market. The following articles will help you get started:

An organizational structure defines how activities such as task allocation, coordination and supervision are directed toward the
achievement of organizational aims.[1] Organizations need to be efficient, flexible, innovative and caring in order to achieve a
sustainable competitive advantage.[2] Organizational structure can also be considered as the viewing glass or perspective
through which individuals see their organization and its environment.[3]
Organizations are a variant of clustered entities.[4]
An organization can be structured in many different ways, depending on its objectives. The structure of an organization will
determine the modes in which it operates and performs. Organizational structure allows the expressed allocation of
responsibilities for different functions and processes to different entities such as the branch, department, workgroup,
and individual.
Organizational structure affects organizational action in two ways:

1. it provides the foundation on which standard operating procedures and routines rest.
2. it determines which individuals get to participate in which decision-making processes, and thus to what extent their
views shape the organization’s actions.[3]

History[edit]

Organizational structures developed from the ancient times of hunters and collectors in tribal organizations through highly
royal and clerical power structures to industrial structures and today's post-industrial structures.
As pointed out by Lawrence B. Mohr,[5] the early theorists of organizational structure, Taylor, Fayol, and Weber "saw the
importance of structure for effectiveness and efficiency and assumed without the slightest question that whatever structure
was needed, people could fashion accordingly. Organizational structure was considered a matter of choice... When in the
1930s, the rebellion began that came to be known as human relations theory, there was still not a denial of the idea of
structure as an artifact, but rather an advocacy of the creation of a different sort of structure, one in which the needs,
knowledge, and opinions of employees might be given greater recognition." However, a different view arose in the 1960s,
suggesting that the organizational structure is "an externally caused phenomenon, an outcome rather than an artifact." [6]
In the 21st century, organizational theorists such as Lim, Griffiths, and Sambrook (2010) are once again proposing that
organizational structure development is very much dependent on the expression of the strategies and behavior of the
management and the workers as constrained by the power distribution between them, and influenced by their environment
and the outcome.[7]

Operational and informal[edit]

See also: Informal organization and Formal organization

The set organizational structure may not coincide with facts, evolving in operational action. Such divergence decreases
performance, when growing. E.g., a wrong organizational structure may hamper cooperation and thus hinder the completion of
orders in due time and within limits of resources and budgets. Organizational structures should be adaptive to process
requirements, aiming to optimize the ratio of effort and input to output.

Types[edit]
See also: Hierarchical organization and Flat organization

Pre-bureaucratic structures[edit]
Pre-bureaucratic (entrepreneurial) structures lack standardization of tasks. This structure is most common in smaller
organizations and is best used to solve simple tasks. The structure is totally centralized. The strategic leader makes all key
decisions and most communication is done by one on one conversations. It is particularly useful for new (entrepreneurial)
business as it enables the founder to control growth and development.
They are usually based on traditional domination or charismatic domination in the sense of Max Weber's tripartite classification
of authority.
Bureaucratic structures[edit]

Large international organisation bureaucratic structure: the League of Nations in 1930.[8]

Weber (1948, p. 214) gives the analogy that “the fully developed bureaucratic mechanism compares with other organizations
exactly as does the machine compare with the non-mechanical modes of production. Precision, speed, unambiguity, … strict
subordination, reduction of friction and of material and personal costs- these are raised to the optimum point in the strictly
bureaucratic administration.”[9] Bureaucraticstructures have a certain degree of standardization. They are better suited for
more complex or larger scale organizations, usually adopting a tall structure. The tension between bureaucratic structures and
non-bureaucratic is echoed in Burns and Stalker's[10] distinction between mechanistic and organic structures.
The Weberian characteristics of bureaucracy are:

 Clear defined roles and responsibilities

 A hierarchical structure
 Respect for merit
Bureaucratic structures have many levels of management ranging from senior executives to regional managers, all the way to
department store managers. Since there are many levels, decision-making authority has to pass through more layers than
flatter organizations. A bureaucratic organization has rigid and tight procedures, policies and constraints. This kind of structure
is reluctant to adapt or change what they have been doing since the company started. Organizational charts exist for every
department, and everyone understands who is in charge and what their responsibilities are for every situation. Decisions are
made through an organizedaucratic structures, the authority is at the top and information is then flowed from top to bottom.
This causes for more rules and standards for the company which operational process is watched with close supervision. Some
advantages for bureaucratic structures for top-level managers are they have a tremendous control over organizational
structure decisions. This works best for managers who have a command and control style of managing. Strategic decision-
making is also faster because there are fewer people it has to go through to approve.[citation needed] Some disadvantages in
bureaucratic structures are it can discourage creativity and innovation in the organization. This can make it hard for a company
to adapt to changing conditions in the marketplace.
Post-bureaucratic[edit]
The term of post bureaucratic is used in two senses in the organizational literature: one generic and one much more
specific.[11] In the generic sense the term post bureaucratic is often used to describe a range of ideas developed since the 1980s
that specifically contrast themselves with Weber's ideal type bureaucracy. This may include total quality management, culture
management and matrix management, amongst others. None of these however has left behind the core tenets of Bureaucracy.
Hierarchies still exist, authority is still Weber's rational, legal type, and the organization is still rule bound. Heckscher, arguing
along these lines, describes them as cleaned up bureaucracies,[12] rather than a fundamental shift away from bureaucracy.
Gideon Kunda, in his classic study of culture management at 'Tech' argued that 'the essence of bureaucratic control - the
formalization, codification and enforcement of rules and regulations - does not change in principle.....it shifts focus from
organizational structure to the organization's culture'.
Another smaller group of theorists have developed the theory of the Post-Bureaucratic Organization.,[12] provide a detailed
discussion which attempts to describe an organization that is fundamentally not bureaucratic. Charles Heckscher has developed
an ideal type, the post-bureaucratic organization, in which decisions are based on dialogue and consensus rather than authority
and command, the organization is a network rather than a hierarchy, open at the boundaries (in direct contrast to culture
management); there is an emphasis on meta-decision-making rules rather than decision-making rules. This sort of horizontal
decision-making by consensus model is often used in housing cooperatives, other cooperativesand when running a non-
profit or community organization. It is used in order to encourage participation and help to empower people who normally
experience oppression in groups.
Still other theorists are developing a resurgence of interest in complexity theory and organizations, and have focused on how
simple structures can be used to engender organizational adaptations. For instance, Miner et al. (2000) studied how simple
structures could be used to generate improvisational outcomes in product development. Their study makes links to simple
structures and improviser learning. Other scholars such as Jan Rivkin and Sigglekow,[13] and Nelson Repenning[14] revive an older
interest in how structure and strategy relate in dynamic environments.
Functional structure[edit]
A functional organizational structure is a structure that consists of activities such as coordination, supervision and task
allocation. The organizational structure determines how the organization performs or operates. The term organizational
structure refers to how the people in an organization are grouped and to whom they report. One traditional way of organizing
people is by function. Some common functions within an organization include production, marketing, human resources, and
accounting.
This organizing of specialization leads to operational efficiency, where employees become specialists within their own realm of
expertise. On the other hand, the most typical problem with a functional organizational structure is that communication within
the company can be rather rigid, making the organization slow and inflexible. Therefore, lateral communication between
functions becomes very important, so that information is disseminated not only vertically, but also horizontally within the
organization. Communication in organizations with functional organizational structures can be rigid because of the
standardized ways of operation and the high degree of formalization.
As a whole, a functional organization is best suited as a producer of standardized goods and services at large volume and low
cost. Coordination and specialization of tasks are centralized in a functional structure, which makes producing a limited amount
of products or services efficient and predictable. Moreover, efficiency can further be realized as functional organizations
integrate their activities vertically so that products are sold and distributed quickly and at low cost.[15] For instance, a small
business could make components used in production of its products instead of buying them.
Even though functional units often perform with a high level of efficiency, their level of cooperation with each other is
sometimes compromised. Such groups may have difficulty working well with each other as they may be territorial and unwilling
to cooperate. The occurrence of infighting among units may cause delays, reduced commitment due to competing interests,
and wasted time, making projects fall behind schedule. This ultimately can bring down production levels overall, and the
company-wide employee commitment toward meeting organizational goals.
Divisional structure[edit]
The divisional structure or product structure consists of self-contained divisions. A division is a collection of functions which
produce a product. It also utilizes a plan to compete and operate as a separate business or profit center. According to
Zainbooks.com, divisional structure in America is seen as the second most common structure for organization today. [citation needed]
Employees who are responsible for certain market services or types of products are placed in divisional structure in order to
increase their flexibility. Examples of divisions include regional (a U.S Division and an EU division), consumer type (a division for
companies and one for households), and product type (a division for trucks, another for SUVS, and another for cars). The
divisions may also have their own departments such as marketing, sales, and engineering.
The advantage of divisional structure is that it uses delegated authority so the performance can be directly measured with each
group. This results in managers performing better and high employee morale.[citation needed] Another advantage of using divisional
structure is that it is more efficient in coordinating work between different divisions, and there is more flexibility to respond
when there is a change in the market. Also, a company will have a simpler process if they need to change the size of the
business by either adding or removing divisions. When divisional structure is utilized more specialization can occur within the
groups. When divisional structure is organized by product, the customer has their own advantages especially when only a few
services or products are offered which differ greatly. When using divisional structures that are organized by either markets or
geographic areas they generally have similar function and are located in different regions or markets. This allows business
decisions and activities coordinated locally.
The disadvantages of the divisional structure is that it can support unhealthy rivalries among divisions. This type of structure
may increase costs by requiring more qualified managers for each division. Also, there is usually an over-emphasis on divisional
more than organizational goals which results in duplication of resources and efforts like staff services, facilities, and personnel.
Matrix structure[edit]
The matrix structure groups employees by both function and product simultaneously. This structure can combine the best of
both separate structures. A matrix organization frequently uses teams of employees to accomplish work, in order to take
advantage of the strengths, as well as make up for the weaknesses, of functional and decentralized forms. An example would
be a company that produces two products, "product a" and "product b". Using the matrix structure, this company would
organize functions within the company as follows: "product a" sales department, "product a" customer service department,
"product a" accounting, "product b" sales department, "product b" customer service department, "product b" accounting
department.

 Weak/Functional Matrix: A project manager with only limited authority is assigned to oversee the cross- functional
aspects of the project. The functional managers maintain control over their resources and project areas.
 Balanced/Functional Matrix: A project manager is assigned to oversee the project. Power is shared equally between the
project manager and the functional managers. It brings the best aspects of functional and projectized organizations.
However, this is the most difficult system to maintain as the sharing of power is a delicate proposition.
 Strong/Project Matrix: A project manager is primarily responsible for the project. Functional managers provide technical
expertise and assign resources as needed.
Matrix structure is only one of the three major structures. The other two are Functional and Project structure. Matrix
management is more dynamic than functional management in that it is a combination of all the other structures and allows
team members to share information more readily across task boundaries. It also allows for specialization that can increase
depth of knowledge in a specific sector or segment.
There are both advantages and disadvantages of the matrix structure; some of the disadvantages are an increase in the
complexity of the chain of command. This occurs because of the differentiation between functional managers and project
managers, which can be confusing for employees to understand who is next in the chain of command. An additional
disadvantage of the matrix structure is higher manager to worker ratio that results in conflicting loyalties of employees.
However the matrix structure also has significant advantages that make it valuable for companies to use. The matrix structure
improves upon the “silo” critique of functional management in that it diminishes the vertical structure of functional and creates
a more horizontal structure which allows the spread of information across task boundaries to happen much quicker. Moreover,
matrix structure allows for specialization that can increase depth of knowledge & allows individuals to be chosen according to
project needs. This correlation between individuals and project needs is what produces the concept of maximizing strengths
and minimizing weaknesses.
Organizational Circle[edit]
The flat structure is common in small companies (entrepreneurial start-ups, university spin offs). As companies grow they tend
to become more complex and hierarchical, which leads to an expanded structure, with more levels and departments.
However, in rare cases, such as the examples of Valve Corporation, GitHub, Inc. and 37signals, the organization remains very
flat as it grows, eschewing middle managers.[16](However, GitHub subsequently introduced middle managers.) All of the
aforementioned organizations operate in the field of technology, which may be significant, as software developers are highly
skilled professionals, much like lawyers. Senior lawyers also enjoy a relatively high degree of autonomy within a typical law firm,
which is typically structured as a partnership rather than a hierarchical bureaucracy. Some other types of professional
organizations are also commonly structured as partnerships, such as accountancy companies and GP surgeries.
Often, growth would result in bureaucracy, the most prevalent structure in the past. It is still, however, relevant in former
Soviet Republics, China, and most governmental organizations all over the world. Shell Group used to represent the typical
bureaucracy: top-heavy and hierarchical. It featured multiple levels of command and duplicate service companies existing in
different regions. All this made Shell apprehensive to market changes,[17] leading to its incapacity to grow and develop further.
The failure of this structure became the main reason for the company restructuring into a matrix.
Starbucks is one of the numerous large organizations that successfully developed the matrix structure supporting their focused
strategy. Its design combines functional and product based divisions, with employees reporting to two heads. [18]
Some experts also mention the multinational design,[19] common in global companies, such as Procter &
Gamble, Toyota and Unilever. This structure can be seen as a complex form of the matrix, as it maintains coordination among
products, functions and geographic areas.
With the growth of the internet, and the associated access that gives all levels of an organization to information and
communication via digital means, power structures have begun to align more as a wirearchy, enabling the flow of power and
authority to be based not on hierarchical levels, but on information, trust, credibility, and a focus on results.
In general, over the last decade, it has become increasingly clear that through the forces of globalization, competition and more
demanding customers, the structure of many companies has become flatter, less hierarchical, more fluid and even virtual. [20]
Team[edit]
One of the newest organizational structures developed in the 20th century is team and the related concept of team
development or team building. In small businesses, the team structure can define the entire organization.[19] Teams can be both
horizontal and vertical.[21] While an organization is constituted as a set of people who synergize individual competencies to
achieve newer dimensions, the quality of organizational structure revolves around the competencies of teams in totality.[22] For
example, every one of the Whole Foods Market stores, the largest natural-foods grocer in the US developing a focused strategy,
is an autonomous profit centre composed of an average of 10 self-managed teams, while team leaders in each store and each
region are also a team.[23] Larger bureaucratic organizations can benefit from the flexibility of teams as well. Xerox, Motorola,
and DaimlerChrysler are all among the companies that actively use teams to perform tasks.
Network[edit]
Another modern structure is network. While business giants risk becoming too clumsy to proact (such as), act and react
efficiently,[24] the new network organizations contract out any business function, that can be done better or more cheaply. In
essence, managers in network structures spend most of their time coordinating and controlling external relations, usually by
electronic means. H&M is outsourcing its clothing to a network of 700 suppliers, more than two-thirds of which are based in
low-cost Asian countries. Not owning any factories, H&M can be more flexible than many other retailers in lowering its costs,
which aligns with its low-cost strategy.[25] The potential management opportunities offered by recent advances in complex
networks theory have been demonstrated[26] including applications to product design and development,[27] and innovation
problem in markets and industries.[28]
Virtual[edit]
Virtual organization is defined as being closely coupled upstream with its suppliers and downstream with its customers such
that where one begins and the other ends means little to those who manage the business processes within the entire
organization. A special form of boundaryless organization is virtual. Hedberg, Dahlgren, Hansson, and Olve (1999) consider the
virtual organization as not physically existing as such, but enabled by software to exist. [29] The virtual organization exists within
a network of alliances, using the Internet. This means while the core of the organization can be small but still the company can
operate globally be a market leader in its niche. According to Anderson, because of the unlimited shelf space of the Web, the
cost of reaching niche goods is falling dramatically. Although none sell in huge numbers, there are so many niche products that
collectively they make a significant profit, and that is what made highly innovative Amazon.com so successful.[30]
Hierarchy-community phenotype model[edit]
Hierarchy-Community Phenotype Model of Organizational Structure

In the 21st century, even though most, if not all, organizations are not of a pure hierarchical structure, many managers are still
blind to the existence of the flat community structure within their organizations.[31]
The business is no longer just a place where people come to work. For most of the employees, the firm confers on them that
sense of belonging and identity –– the firm has become their “village”, their community.[32] The firm of the 21st century is not
just a hierarchy which ensures maximum efficiency and profit; it is also the community where people belong to and grow
together, where their affective and innovative needs are met.[7]
Lim, Griffiths, and Sambrook (2010) developed the Hierarchy-Community Phenotype Model of Organizational Structure
borrowing from the concept of Phenotype from genetics. "A phenotype refers to the observable characteristics of an organism.
It results from the expression of an organism’s genes and the influence of the environment. The expression of an organism’s
genes is usually determined by pairs of alleles. Alleles are different forms of a gene. In our model, each employee’s formal,
hierarchical participation and informal, community participation within the organization, as influenced by his or her
environment, contributes to the overall observable characteristics (phenotype) of the organization. In other words, just as all
the pair of alleles within the genetic material of an organism determines the physical characteristics of the organism, the
combined expressions of all the employees’ formal hierarchical and informal community participation within an organization
give rise to the organizational structure. Due to the vast potentially different combination of the employees’ formal hierarchical
and informal community participation, each organization is therefore a unique phenotype along a spectrum between a pure
hierarchy and a pure community (flat) organizational structure."[7]
"The Hierarchy-Community Phenotype Model of Organisational Structure views an organisation as having both a hierarchy and
a community structure, both equally well established and occurring extensively throughout the organisation. On the practical
level, it utilises the organizational chart to study the hierarchical structure which brings across individuals’ roles and formal
authority within their designated space at the workplace, and social network analysis to map out the community structure
within the organisation, identifying individuals’ informal influences which usually do not respect workplace boundaries and at
many times extend beyond the workplace."[2]

Configurations of organizational structure according to Mintzberg[edit]

Parts of organization[edit]
Diagram, proposed by Henry Mintzberg, showing the main parts of organisation, including technostructure

Henry Mintzberg considers five main parts of organization:[33]

 Strategic apex (leaders of organization)

 Middle line (managers of lower level)
 Operating core (workers of lowest level, directly producing something or providing services)
 Technostructure (analysts)
 Support staff (helping other members of organisation to perform their function)
An additional element is organisational ideology.[33]
Mechanisms of coordination[edit]
Mintzber considers six main mechanisms of coordination of work:[33]

 Mutual adjustment (without formal, standartised mechanisms)

 Direct supervision (when one person, leader of organization, gives direct orders to others)
 Standartization of work processes (based on the documents that regulate work and are produced by technostructure)
 Standartization of outputs (only the results of work are regulated)
 Standartization of skills (based on preparing the specialists outside the organization)
 Standartization of norms (based on organisation's values, ideology)
Configurations of organizations[edit]
Mintzberg considers seven main configurations of organizational structure: [33]

1. Entrepreneurial organization (strategic apex, direct supervision dominate)

2. Machine organization (technostructure, standartization of work processes dominate)
3. Professional organization (operating core, standartization of skills dominate)
4. Diversified organization (middle level, standartization of outputs dominate)
5. Innovative organization (support staff, mutual adjustment dominate)
6. Missionary organization (ideology, standartization of norms dominate)
7. Political organization (no part or mechanism of coordination dominates)
Entrepreneurial organisation or Simple structure has simple, informal structure.[34] Its leader coordinates the work using direct
supervision.[34] There is no technostructure, little support staff.[35] Such structure is usually found in organizations with
environment that is simple (so that one man could have significant influence), but changing (so that flexibility of one man would
give a significant advantage over the bureaucratic structures).[34]
Machine organisation or Machine bureaucracy has formal rules regulating the work, developed technostructure and middle
line, is centralised, hierarchical.[34] Such structure is common when the work is simple and repetitive.[34] Organizations also tend
to achieve such structure when they are strongly controlled from outside.[34] Also, such structure is common for organizations
that perform work that is related to some sort of control (for example, prisons, police), or organizations with special safety
requirements (for example, fire departments, airlines).[34]
Professional configuration or Professional bureaucracy mostly coordinates the work of members of operating core,
professionals, through their training (for example, in university).[34]Operating core in such organisation is large, middle line
insignificant, as the professionals perform complex work and have significant autonomy.[34] Technostructure is also
insignificant.[35] Tarnautojų, padedančių profesionalams atlikti savo darbą, daug.[34] Professionals participate in administrative
work, thus there are many committees.[34] Such structure is common for universities, hospitals, law firms.[34]
Diversified Configuration or Divisionalized form consists of several parts having high autonomy.[34] Such structure is common for
old, large organizations.[34]
Innovative Configuration or Adhocracy gathers the specialists of different fields into teams for specific tasks. [34] Such
organizations are common when environment is complex and dynamic.[34] Mintzberg considers two types of such organization:
operating adhocracy and administrative adhocracy.[34] Operating adhocracy solves innovative problems for its
clients.[34] Examples of such organisation can be advertising agency or firm that develops the prototypes of
products.[34] Administrative adhocracy has teams solving problems for the organization itself.[34] As an example of such
organization Mintzberg gives NASA when it worked on Apollo program.[34]
Missionary organisation coordinates the work through organisational ideology.[34] Formal rules in such organization are not
numerous.[34] Such organizations are decentralized, the differences between levels are not significant.[34]
Political configuration happens when the power is mostly used through workplace politics.[34]

Organizational Structure

What is an 'Organizational Structure'

An organizational structure is a system that outlines how certain activities are directed in order to achieve the goals of an

organization. These activities can include rules, roles and responsibilities. The organizational structure also determines how

information flows from level to level within the company. For example, in a centralized structure, decisions flow from the top
down, while in a decentralized structure, the decisions are made at various levels.

Why Have an Organizational Structure?

Not having a formal structure in place may prove difficult for certain organizations. For instance, employees may have difficulty

knowing to whom they should report. That can lead to uncertainty as to who is responsible for what in the organization. Having

a structure in place can help improve efficiency and provide clarity for everyone at every level. That also means that each and
every department can be more productive, as they are likely to be more focused on energy and time.

Centralized vs. Decentralized Organizational Structures

At its highest level, an organizational structure is either centralized or decentralized. Traditionally, organizations have been

structured with centralized leadership and a defined chain of command. The military, for example, is an organization famous for

its highly centralized structure, with a long and specific hierarchy of superiors and subordinates. However, there has been a rise

in decentralized organizations, as is the case with many technology startups. This allows the companies to remain fast, agile and
adaptable, with almost every employee receiving a high level of personal agency.
 Common Types of Organizational Structures

Four types of common organizational structures are implemented in the real world. The first, and most common, is a functional

structure. This is also referred to as a bureaucratic organizational structure and breaks up a company based on the

specialization of its workforce. Most small-to-medium sized businesses implement a functional structure. Dividing the firm into
departments consisting of marketing, sales and operations is the act of using a bureaucratic organizational structure.

The second type is common among large companies with many business units. Called the divisional or multidivisional structure,

a company that uses this method structures its leadership team based on the products, projects or subsidiaries they operate. A

good example of this structure is Johnson & Johnson. With thousands of products and lines of business, the company structures
itself so each business unit operates as its own company with its own president.

Flatarchy, a newer structure, is the third type and is used among many startups. As the name alludes, it flattens the hierarchy

and chain of command and gives its employees a lot of autonomy. Companies that use this type of structure have a high speed
of implementation.

The fourth and final organizational structure is a matrix structure. It is also the most confusing and the least used. This structure

matrixes employees across different superiors, divisions or departments. An employee working for a matrixed company, for
example, may have duties in both sales and customer service.

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Trading Center

What is organizational structure? Definition and meaning

The organizational structure of, for example, a company is a system used to define its hierarchy. Each employee’s position is
identified, including their function and who they report to within the firm. It is the way in which a company or organization is
organized, including the types of relationships that exist between the directors, managers and employees.

The organizational structure, which may refer to the hierarchy of not just a business, but also any entity such as a charity,
government department, agency or education establishment, is developed to establish how an entity operates and helps the
organization in achieving its goals and objectives.

The organizational structure outlines how activities including task allocation, supervision and coordination are directed towards
its individual aims. It is also a ‘viewing glass’ or perspective through which employees may see their organization and its
environment.
 In this type of structure the
organization is divided into different functional work activities – departments. A level of top managers usually oversees the work
carried out by employees in each functional area.

Organizational structure helps firm meet goals

Put simply, it refers to how an organization arranges its staff and jobs so that its work can be performed and its objectives and
goals met.

There are many different ways in which a company or organization may be structured, depending on why it exists and what its
objectives are.

For the rest of this article, I shall use the terms ‘company’, ‘business’ or ‘firm’ when referring to an organization. Unless
otherwise stated, they could also refer to any other type of organization.

In a small company, face-to-face communication is common and a formal structure is probably not required. However, in larger
corporations, decisions need to be made regarding the delegations of several tasks. So procedures are set up that assign tasks
and responsibilities for a number of functions. It is these decisions that determine the company’s organizational structureThis
type of organization divides the functional areas into divisions – each one with its own resources in order to operate
independently. Divisions may be defined according to products/services, geographical area or any other measurement.

In any medium- or large-sized businesses, employees’ job descriptions are typically defined by what they do, their immediate
supervisors (who they report to), and who reports to them if they are managers or directors.
Types of organizational structures

There are many kinds: vertical & tall with many tiers, or flat with just a couple of levels separating top from bottom. Below are
the four most common:

Functional: also known as a bureaucratic organizational structure. It divides the company based on specialty, with a marketing
department customer service department, sales department, HR department, etc.

In a functional structure, each employee is dedicated to a single function. These clearly-defined job descriptions and
expectations reduce confusion. One drawback with this type is that it makes it harder to facilitate inter-departmental
communications.

Dan Rasky: Start Ups’ Organizational Structure https://t.co/7uQfYTpiRR

— S Rodger Bock (@SRodgerBock) May 1, 2016

Divisional: this type of organization structures leadership according to different projects or products. For example, while
International Consolidated Airlines Group, S.A. (IAG) is the company, there are four different airlines underneath – British
Airways, Iberia, Vueling and IAG Cargo. Each one operates as an individual company, but they are ultimately under IAG.

Matrix: in this kind of organization the workers have several different bosses and reporting lines. They report to, for example, a
divisional manager, and also have project managers for certain project.

A matrix organization is more likely to experience confusion and complications, especially when staff members have to carry
out conflicting tasks.

Morgan hefutureorganization.com: “They can be more hierarchical and then have ad-hoc teams for flat structures or they can
have flat structures and form ad-hoc teams that are more structured in nature. Organizations with this type of structure are very
dynamic in nature and can be thought of a bit more like an amoeba without a constant structure.” (Image:
thefutureorganization.com)

Flatarchy: more common in new startups and smaller companies. These types of businesses have a bit of vertical hierarchy but
also flat structures, i.e. they may be more hierarchical and then have ad-hoc teams for flat structures, or vice-versa.

Flatarchy structures are very dynamic in nature and are typically constantly evolving and changing.

ICAS (Institute of Chartered Accountants of Scotland) says the following about flatarchy:

“Odd name, but not such an odd concept. The flatarchy aims to combine the organisational strengths of the hierarchy with the
innovative freedom of the flat structure. It’s not so much an organisational structure as an ad-hoc way of working.”

“For example, this method is favoured by many companies with in-house incubators or innovation teams. The overall business
maintains a relatively traditional model, but teams of people are allowed to create flat spin-offs for specific projects. This leaves
employees free to explore new ideas in a more fast-paced, open environment. Tech firms such as Google have used such a
practice to great effect.”
 Video – What is organizational structure?

This BusinessDictionary video walks you through the definition of organizational structure with easy-to-understand terms and
examples.

Administrative Organizational Structure Definition

An administrative organizational structure is a typically hierarchical arrangement of lines of authority. It determines how the

roles, power and responsibilities are assigned, and how the work process flows among different management levels.

The example below gives a perfect demonstration:

Applications of Administrative Organizational Structure

Administrative organizational structures provide a visual representation of how a business or government is organized. Thus

they can depict the exact relationships among roles and groups in an organization. They are usually represented in org charts

and can be applied in various ways.

Here are the common uses for administrative organizational structures:

Political Application: national leadership or government departments such as police department,

1. Business Application:

 Business organizations such as companies or enterprises,

 Company departments such as Human Resources Department, Marketing Department, Financial Department, etc.

2. Other Applications: other groups or organizations.

Administrative organizational structure can help the organization to manage resources and people in a more efficient manner.

Usage of administrative organizational structure can be greatly helpful.

organizational structure
Definition

The typically hierarchical arrangement of lines of authority, communications, rights and duties of an organization.
Organizational structure determines how the roles, power and responsibilities are assigned, controlled, and coordinated, and
how information flows between the different levels of management.
A structure depends on the organization's objectives and strategy. In a centralized structure, the top layer of management has
most of the decision making power and has tight control over departments and divisions. In a decentralized structure, the
decision making power is distributed and the departments and divisions may have different degrees of independence.

A company such as Proctor & Gamble that sells multiple products may organize their structure so that groups are divided
according to each product and depending on geographical area as well.
An organizational chart illustrates the organizational structure.
Types of Organizational Structures

Companies come in different sizes. Big companies have a lot of tiers of owners, management, and a common worker while
smaller ones have few tiers. The larger the company, therefore, the more detailed its organizational structure will be.

To meet organizational needs, different companies embrace different structures as explained below;

1) Divisional Structure

Best suited for organizations that operate with business units that are very distinct. I.e. projects or products of these companies
are governed independently or distinctly of each other. Examples of companies with this type of structure include retailers like
the Banana Republic, GAP, and Old Navy among others. They all operate as distinct companies but form the GAP Inc. and the
GAP brand.

With divisional structures, the company responds easily to market changes. Again communication is easier within divisions and
team identification is paramount. On the other hand, inefficiency might arise as some efforts may be duplicated. Again, there is
a higher chance of conflict between divisions especially if one division is more successful than the other

2) Functional Structure

This type of structure is entirely based on each person’s job duties and responsibilities. It is also referred to us the ‘bureaucratic
organizational structure’ and it divides the company on the basis of specialty. E.g. under this structure, different divisions are
assigned to marketing, sales or even accounting. Again, with this structure, the organization benefits from the fact that
employees specialize on one function, therefore, guaranteeing efficiency.

The downside of this type of structure is that it’s not easy to enhance strong communication lines between departments i.e. if
departments are in different locations and this might lead to unnecessary conflicts.

3) The Matrix Structure

For every project or role there are two supervisors to report to in the matrix structure. It might be complicated but very
essential in large corporations functional in different areas or localities.

The Matrix combines different structures with different functions. Teams made up of skilled individuals from various
departments are assembled and assigned a project. As such, a person reports to two bosses i.e. the divisions’ supervisor the
project supervisor. Here, all departments are well represented in organizational projects. Again all departments are included in
all function of the organization i.e. from actual productfabrication to final product marketing.

The only downside of matrix structures is that jurisdiction and responsibilities may not be clearly spelled and this may cause
unnecessary confusion. Also, sometimes matrix organizations may favor a select group when it comes to development or
sensitive projects.

4) Geographical Structure

This structure provides a hierarchy for those organizations which have operations in different locations. Either locally or
internationally

Despite the fact that different organizational structures are developed to meet different organizational needs’, all of them
report to a centralized group of professional executives i.e. the Chief Executive Officer or President depending on member
ranking. While companies may adopt any of the above structures, some may not strictly adhere to the set structural guidelines.
A good example is a startup with a few employees controlled by the secretary or personal assistant to the manager who
handles everything from accounting to the management of payroll.

Elements of Organizational Structure :

The elements of organizational structure help management in effecting change for the achievement of organizational goals. The
six elements include;

1) Company size and number of employees

The more the employees, the more the tiers of management. This is for efficiency and effective running of the organization. The
organizational structure needs to be evenly elastic so as to accommodate more employees and possibly more managers in
future.

Room for growth is an important factor in the companies’ structure. Structures that allow for growth are easily edited for salary
scales and different job descriptions with very minimal or no disruptions to the company’s operations

2) Geography

Organizational structure may at times depend on the number of corporate locations that are needed to account for planning.
The more locations the business has the more autonomous each location will be in order to be efficient. Hierarchy
communication sometimes becomes a challenge during the creation of an organizational structure within a larger geographical
area. Those managers with their seniors in a different location must, therefore, establish a clear way of communication so as to
obtain proper instructions and guidance.

3) Product Evolution

During startup, companies start with single line products that comprehensively cover the industry. As time goes by and as the
company grows, departments that cater for other products are created leading to product development and thus adverse
effects and changes to the company’s organizational structure.

4) Authority of Distribution

According to research carried out recently, an organization’s structure is adversely influenced by the authority preferred.
Authority can either be centralized or decentralized. Decentralized management allows lower-level managers to have an
influence on the decision making process. Centralized management keeps key decisions with specific executives.

5) The marketplace

The target market and location also influence the company’s structure. E.g. manufacturing companies may opt to sell their
products via wholesalers or directly to consumers. For this to be successful, the structure needs to be set up in such a way that
these factors are kept separate. This will also include a different marketing team and sales force

6) Control

Most management Gurus comply to the fact that companies with a higher level of quality products have more strict rules and
operate in a regimented environment; this mostly affects companies that manufacture high-end technology products, medical
equipment, and some handcrafts. Those companies in mass production may not have much control over product quality and
will, therefore, have a different organizational structure.
Who Uses an Income Statement?
There are two different groups of people who use this financial statement: internal users and external users.

Internal users like company management and the board of directors use this statement to analyze the business as a whole and
make decisions on how it is run. For example, they use performance numbers to gauge whether they should open new branch,
close a department, or increase production of a product.

External users like investors and creditors, on the other hand, are people outside of the company who have no source of
financial information about the company except published reports. Investors want to know how profitable a company is and
whether it will grow and become more profitable in the future. They are mainly concerned with whether or not investing their
money is the company with yield them a positive return.

Creditors, on the other hand, aren’t as concerned about profitability as investors are. Creditors are more concerned with a
company’s cash flow and if they are generating enough income to pay back their loans. Classified Balance Sheet
Home » Financial Statements » Classified Balance Sheet
What is a Classified Balance Sheet?
A classified balance sheet is a financial statement that reports asset, liability, and equity accounts in meaningful subcategories
for readers’ ease of use. In other words, it breaks down each of the balance sheet accounts into smaller categories to create a
more useful and meaningful report.
There’s no standardized set of subcategories or required amount that must be used. Management can decide what types of
classifications to use, but the most common tend to be current and long-term.

This format is important because it gives end users more information about the company and its operations. Creditors and
investors can use these categories in their financial analysis of the business. For instance, they can use measurements like the
current ratio to assess the company’s leverage and solvency by comparing the current assets and liabilities. This type of analysis
wouldn’t be possible with a traditional balance sheet that isn’t classified into current and long-term categories.

Example
Let’s take a look at a classified balance sheet example.
As you can see, each of the main accounting equation accounts is split into more useful categories. This format is much easier
to read and more informational than a report that simply lists the assets, liabilities, and equity in total. You can use this
example as a template for your homework or business.

Remember, there are no set subcategory requirements across industries. For instance, a manufacturer might list different
categories than a retailer. You can do the same thing.

Let’s walk through each one of these sections and answer the question what is a classified balance sheet.

Format
Assets Section
The assets section is typically broken down into three main subcategories: current, fixed assets, and other.

Current assets include resources that are consumed or used in the current period. Cash and accounts receivable the most
common current assets. Also, merchandise inventory is classified on the balance sheet as a current asset.

Fixed assets consist of property, plant, and equipment that are long-term in nature and are used to produce goods or services
for the company. These long-term assets are typically depreciated over time and reported at their historical cost along with the
associated accumulated depreciation.

The other assets section includes resources that don’t fit into the other two categories like intangible assets. Here’s a list of the
most common assets found in each section.

 Current Assets
 Cash
 Accounts receivables
 Prepaid expenses
 Inventories
 Investments held for sale
 Fixed Assets
 Furniture and fixtures
 Leasehold improvements
 Buildings
 Vehicles
 Less: Accumulated depreciation
 Other Assets
 Copyrights
 Trademarks
 Less: Accumulated Amortization
 Goodwill
Liabilities Section
The liabilities section is typically broken into three main subcategories: current, long-term, and owner/ officer debt.

Current liabilities include all debts that will become due in the current period. In other words, this is the amount of principle
that is required to be repaid in the next 12 months. The most common current liabilities are accounts payable and accrued
expenses.

The long-term section lists the obligations that are not due in the next 12 months. These obligations could be 5, 10, or 30-year
notes. Keep in mind a portion of these long-term notes will be due in the next 12 months. Thus, this portion is always reported
in the current section.

The owner/officer debt section simply includes the loans from the shareholders, partners, or officers of the company. This
section gives investors and creditors information about the source of debt and more importantly an insight into the financing of
the company. For instance, if there is a large shareholder loan on the books, it could mean the company can’t fund its
operations with profits and it can’t qualify for a commercial loan. This information is important to any potential investor or
creditor.

Here’s an example of what the liabilities section typically looks like:

 Current Liabilities
 Accounts payable
 Accrued expenses
 Line of credit
 Current portion of long-term debt
 Long-term Liabilities
 Commercial loans payable
 Mortgages payable
 Deferred taxes payable
 Owner’s Liabilities
 Due to shareholder/partner
 Due to officer

Equity Section
The equity section of a classified balance sheet is very simple and similar to a non-classified report. Common stock, additional
paid-in capital, treasury stock, and retained earnings are listed for corporations. Partnerships list member capital accounts,
contributions, distributions, and earnings for the period.

Statement of Financial Position

Home » Financial Statements » Statement of Financial Position
What is the Statement of Financial Position?
The statement of financial position, often called the balance sheet, is a financial statement that reports the assets, liabilities,
and equity of a company on a given date. In other words, it lists the resources, obligations, and ownership details of a company
on a specific day. You can think of this like a snapshot of what the company looked like at a certain time in history.
This definition is true in the sense that this statement is a historical report. It only shows the items that were present on the day
of the report. This is in contrast with other financial reports like the income statement that presents company activities over a
period of time. The statement of financial position only records the company account information on the last day of an
accounting period.

In this sense, investors and creditors can go back in time to see what the financial position of a company was on a given date by
looking at the balance sheet.

Example
Let’s take a look at a statement of financial position example.
As you can see from our example template, each balance sheet account is listed in the accounting equation order. This
organization gives investors and creditors a clean and easy view of the company’s resources, debts, and economic position that
can be used for financial analysis purposes.
Investors use this information to compare the company’s current performance with past performance to gauge the growth and
health of the business. They also compare this information with other companies’ reports to decide where the opportune place
is to invest their money.

Creditors, on the other hand, are not typically concerned with comparing companies in the sense of investment decision-
making. They are more concerned with the health of a business and the company’s ability to pay its loan payments. Analyzing
the leverage ratios, debt levels, and overall risk of the company gives creditors a good understanding of the risk involving in
loaning a company money.

Obviously, internal management also uses the financial position statement to track and improve operations over time.

Now that we know what the purpose of this financial statement is, let’s analyze how this report is formatted in a little more
detail.

Format
The statement of financial position is formatted like the accounting equation (assets = liabilities + owner’s equity). Thus, the
assets are always listed first.
Assets Section
Assets are resources that the company can use to create goods or provide services and generate revenues. There are many
ways to format the assets section, but the most common size balance sheet divides the assets into two sub-categories: current
and non-current. The current assets include cash, accounts receivable, and inventory. These resources are typically consumed
in the current period or within the next 12 months.

The non-current assets section includes resources with useful lives of more than 12 months. In other words, these assets last
longer than one year and can be used to benefit the company beyond the current period. The most common non-current assets
include property, plant, and equipment.

Liabilities Section
Liabilities are debt obligations that the company owes other companies, individuals, or institutions. These range from
commercial loans, personal loans, or mortgages. This section is typically split into two main sub-categories to show the
difference between obligations that are due in the next 12 months, current liabilities, and obligations that mature in future
years, long-term liabilities.

Current debt usually includes accounts payable and accrued expenses. Both of these types of debts typically become due in less
than 12 months. The long-term section includes all other debts that mature more than a year into the future like mortgages and
long-term notes.
Equity Section
Equity consists of the ownership of the company. In other words, this measures their stake in the company and how much the
shareholders or partners actually own. This section is displayed slightly different depending on the type of entity. For example a
corporation would list the common stock, preferred stock, additional paid-in capital, treasury stock, and retained earnings.
Meanwhile, a partnership would simply list the members’ capital account balances including the current earnings,
contributions, and distributions.

In the world of nonprofit accounting, this section of the statement of financial position is called the net assets section because
it shows the assets that the organization actually owns after all the debts have been paid off. It’s easier to understand this
concept by going back to an accounting equation example. If we rearrange the accounting equation to state equity = assets –
liabilities, we can see that the equity of a non-profit is equal to the assets less any outstanding liabilities.

Does the Balance Sheet always balance?

Notice that the balance sheet is always in balance. Just like the accounting equation, the assets must always equal the sum of
the liabilities and owner’s equity. This makes sense when you think about it because the company has only three ways of
acquiring new assets.

It can use an asset to purchase and a new one (spend cash for something else). It can also take out a loan for a new purchase
(take out a mortgage to purchase a building). Lastly, it can take money from the owners for a purchase (sell stock to raise cash
for an expansion). All three of these business events follow the accounting equation and the double entry accounting
system where both sides of the equation are always in balance.
Statement of Cash Flows Direct Method
Home » Financial Statements » Statement of Cash Flows Direct Method
What is the Statement of Cash Flows Direct Method?
The cash flow statement presented using the direct method is easy to read because it lists all of the major operating cash
receipts and payments during the period by source. In other words, it lists where the cash inflows came from, usually
customers, and where the cash outflows went, typically employees, vendors, etc.

After all of the sources are listed, the total cash payments are then subtracted from the cash receipts to compute the net cash
flow from operating activities. Then the investing and financing activities added to arrive at the net cash increase or decrease.
Let’s take a look at how this report is formatted and structured.

Format
Here’s a list of the most common types of receipts and payments used in the direct method format:

 Receipts received from Customers

 Payments paid to Suppliers
 Payments paid to Employees
 Interest Payments
 Income Tax Payments
As you can see, listing these payments gives the financial statement user a great deal of information where receipts are coming
from and where payments are going to. This is one of the main advantages of the direct method compared with the indirect
method. Investors, creditors, and management can actually see where the company is collecting funds from and whom it is
paying funds to. The indirect method doesn’t list these types of details. That’s exactly why FASB recommends that all
companies issue their statement of cash flows in the direct method.
The problem with this method is it’s difficult and time consuming to create. Most companies don’t record and store accounting
and transactional information by customer, supplier, or vendor. Business events are recorded with income statement and
balance sheet accounts like sales, materials, and inventory. It’s laborious for most companies to compile the information with
this method.

For example, in order to figure out the receipts and payments from each source, you have to use a unique formula. The receipts
from customers equals net sales for the period plus the beginning accounts receivable less the ending accounts receivable.
Similarly the payments made to suppliers is calculated by adding the purchases, ending inventory, and beginning accounts
payable then subtracting the beginning inventory and ending accounts payable.

Keep in mind that these formulas only work if accounts receivable is only used for credit sales and accounts payable is only used
for credit account purchases. This is why most companies don’t issue this method. It’s difficult to gather the information.

Plus, the direct method also requires a reconciliation report be created to check the accuracy of the operating activities. The
reconciliation itself is very similar to the indirect method of reporting operating activities. It stars with net income and adjusts
non-cash transaction like depreciation and changes in balance sheet accounts. Since creating this reconciliation is about as
much work as just preparing an indirect statement, most companies simply choose not to use the direct method.

I know what you are probably thinking. If you have to do an additional reconciliation, why is it called the direct method. It
seems like a whole like more work. Well, it is. The reason why it’s called that has nothing to do with how much work is involved
in preparing the report. It has to do with how the operating cash flows are derived. This method looks directly at the source of
the cash flows and reports it on the statement. The indirect method, on the other hand, computes the operating cash flows by
adjusting the current year’s net income for changes in balance sheet accounts.

This is the only difference between the direct and indirect methods. The investing and financing activities are reported exactly
the same on both reports.

Let’s look at an example.

Example
Here’s an example of a cash flow statement prepared using the direct method.

Current Assets
Home » Current Assets
What are Current Assets?
Definition: A current asset, also called a current account, is either cash or a resource that are expected to be converted into
cash within one year.
These resources are often referred to as liquid assets because they are so easily converted into cash in a short period of time.
Take inventory for example. Inventory can easily be sold for cash in the next 12 months. Contrast that with a piece of
equipment that is much more difficult to sell. Also, inventory is expected to be sold in the normal course of business for
retailers. Equipment, on the other hand, are not.

This concept is extremely important to management in the daily operations of a business. As monthly bills and loans become
due, management must convert enough current resources into cash to pay its obligations.
Management isn’t the only one interested in this category of assets, however. Investors and creditors use several
different liquidity ratios to analyze the liquidity of the company before they invest in or lend to it. Investors want to know that
their invest will continue to grow and the company will be able to pay returns in the future. Creditors, on the other hand,
simply want to know that their principle will be repaid with interest.
Let’s take a look a few examples of current assets.

What is included in Current Assets?

Example List of Current Asset Types and Classes
There are many different assets that can be included in this category, but I will only discuss the most common ones.

Cash – Cash is all coin and currency a company owns. This includes all of the money in a company’s bank account, cash
registers, petty cash drawer, and any other depository. This can include domestic or foreign currencies, but investments are not
included.
Cash Equivalents – Cash equivalents are investments that are so closely related to cash and so easily converted into cash, they
might as well be currency. An example of an equivalent is a US Treasury Bill. T-bills can be exchanged for cash at any point with
no risk of losing their value.
Accounts Receivable – Accounts receivable is essentially a short-term loan to customers and vendors who purchase goods on
account. Typically, customers can purchase goods and pay for them in 30 to 90 days. Accounts receivable keeps track of these
loans.
Inventory – Inventory is the merchandise that a company purchases or makes to sell to customers for a profit. This could be
anything from pencils to cars to houses. It depends on the business. For example, a car dealership is in the business of reselling
cars. Thus, their cars are considered inventory, even though they have plenty of pencils in their offices.
Prepaid Expenses – Prepaid expenses are exactly what they sound like—expenses that have been paid before they were
consumed. Insurance is a good example. A six-month insurance policy is usually paid for up front even though the insurance
isn’t used for another six months. Even though these assets will not actually be converted into cash, they will be consumed in
the current period.
Investments – Investments that are short-term in nature and expected to be sold in the current period are also included in this
category. These typically include investments in stock called available for sale securities.
Notes Receivable – Notes that mature within a year or the current period are often grouped in the current assets section of the
balance sheet.
Due from Officer Notes – Often times the officers or owners loan money to the company on a short-term basis. These 90-180
day loans are typically considered current.

How is Total Current Assets Calculated?

The total current assets formula is calculated by adding up the following types of assets:
  Cash
 Cash Equivalents
 Accounts Receivable
 Inventory
 Prepaid Expenses
 Investments
 Current Portion of Notes Receivable
 Current Portion Due from Officer Notes

How Are Current Assets Reported on Financial Statements

The balance sheet is a financial statement that reports the chart of accounts in order of the accounting equation: assets,
liabilities, and equity. Current assets are always the first items listed in the assets section. They are also always presented in
order of liquidity starting with cash.
Going back to our list of current assets, we would report them in this order: cash, accounts receivable, inventory, prepaid
expenses, short-term investments, due from affiliates.

These assets are initially recorded at their fair market value or cost. For instance, cash and accounts receivable are recorded at
their cash values. Inventory, on the other hand, is recorded at its cost.

It’s important for each of these accounts to be evaluated and adjusted throughout time with valuation accounts. For example,
accounts receivable can become worthless over time if customers and vendors are unwilling or unable to make their payments.
Thus, the receivables account must be adjusted to reflect the amount of receivables that management expects to convert into
cash in the current period.

This concept is also true for inventory and investments. Overstating current assets can mislead investors and creditors who
depend on this information to make decisions about the company.

Current Assets and Liquidity Ratios

Both investors and creditors look at the current assets of a company to gauge the value and risk involved in doing business with
the company. They typically use liquidity ratios to compare the assets with liabilities and other obligations of the company.
Some common ratios are the current ratio, cash ratio, and acid test ratio.
It’s important to note that the current assets definition is somewhat misleading for investors and creditors since not all of these
assets are always liquid. For example, old, outdated inventory that can’t be sold isn’t that liquid. No one wants it.

The same is true for accounts receivable. If customers and vendors won’t pay their debts, the AR isn’t that liquid. This is another
reason why management should always evaluate the current accounts for value at the end of each period.
Current vs Non-Current
The difference between current and non-current assets is pretty simple. Current assets are resources that are expected to be
used up in the current accounting period or the next 12 months. Non-current assets, on the other hand, are resources that are
expected to have future value or usefulness beyond the current accounting period. Some examples of non-current assets
include property, plant, and equipment.

Assets
Home » Assets
What are Assets?
Definition: An asset is a resource that has some economic value to a company and can be used in a current or future period to
generate revenues.
These resources take many forms from cash to buildings and are recorded on the balance sheet until they are used. Once these
resources are used or spent, they are transferred from the balance sheet to the income statement and called expenditures.
Here are some of the most common examples.

 Current
 Cash and Equivalents
 Accounts Receivable
 Inventory
Still asking yourself, what is an asset? Let’s look at each with an example of a business formation because a company can
acquire its resources in a number of different ways.

Example
Tom and Bob are starting a machine shop that will do general fabrication. When a company is first started, it doesn’t have any
resources. Thus, the Tom and Bob must invest their own money or equipment to get the company started. This initial
investment is considered owner’s equity. Both Tom and Bob contribute a piece of machinery to the new company.

Once the business receives the equipment, it can start using that resource to generate income. When the company sells its
parts, it receives cash. As the business brings in more jobs, Tom and Bob start to use their profits to purchases more equipment
to fulfill additional orders.

Tom and Bob work throughout the year growing the business until they run out of room at their current location. They need to
look for a new building, but they don’t have enough money to purchase it with the cash they have in the bank, so they get a
loan. The bank lends the enough capital to purchase a building where they can keep their operations going.

In our short example, we saw three ways three different assets were acquired. First, the company acquired equipment by a
contribution from its owners. Second, the company used its own assets to purchases more assets when it bought additional
equipment with its cash. Third, the company took out a loan to purchase a building.

It’s important to note that nowhere in the assets definition do I say that the company must own these resources. Remember
the asset definition, it’s simply a resource that the company has control of and can use to generate revenues. Many businesses
have loans, notes, and leases on equipment that either directly or indirectly eliminates their true ownership of the resources,
but they still have control of it.

Now that you know how assets are acquired, let’s look at how they are classified.
Types of Asset Classes
So what is an asset class? When assets are presented on the balance sheet, they are typically divided into different classes or
categories based on when they will be used. Resources that are expected to be consumed within the current period are
classified as current assets while resources that expected to be used in future periods are called non-current assets. Another
class of resources is intangible assets. There resources typically consist of intellectual property. Resources that don’t fit into any
of these three classes are simply called other assets.

Let’s take a look at a common list of assets and a few examples in each class.

Current Assets
Cash and equivalents – Cash is any currency in the possession of the business. This could be cash in a register, money in the
bank, or treasure bills in a safe deposit box. These liquid assets can be used to purchase any other resource, settle debts, or pay
investors.
Accounts Receivable – Accounts receivable is an IOU from a customer. Many businesses allow customers to purchase goods on
account and pay for them at a future date. Accounts receivable is the acknowledgement that the customer owes the company
money for the goods.
Inventory – Inventory is merchandise that the company intends to sell for a profit. This merchandise could be purchased or
manufactured by the company.
Investments – Investments that management intends to sell in the current period are considered current resources. These
investments typically consist of stocks and bonds.

Long-Term Assets
Land – Property is a resource that is considered long-term in nature because it will be used over time and will not be consumed
in the current period.
Buildings – A building is obviously a resourced used over time. Many companies stay in the same building for decades. Thus, it
is considered a long-term resource.
Equipment – Equipment like machinery, vehicles, and furniture all has a useful life of more than one year.

Intangible Assets
Patents/Trademarks/Copyrights – These are all examples of intellectual property that a company can own or control to
generate revenues over time. In fact, some of the most value assets in the world are intangible in nature. Think about Walt
Disney’s Mickey Mouse or Apple’s iPhone designs.

Other Assets
Investments – Investments like stocks, bonds, and property that are intended to be held for more than one year are typically
listed separately from the investments that management believes will sell in the current period.

Short-Term vs. Long-Term

Short term assets, also called current assets, are resources that are expected to be used or could be used in the current period.
These resources include examples like cash and accounts receivable. Keep in mind that a company might doesn’t always use all
of its cash every period, but it could. That’s what makes it short-term.

Long term assets, on the other hand, are resources that are expected to last more than one accounting period. Some examples
include fixed assets, equipment, and buildings. All of these resources have longer useful lives than one period.

Tangible vs. Intangible

Tangible assets include any resources with a physical presence. Some examples include cash, fixed assets, and equipment.
Some of these resources are depreciated while others are not.

Intangible assets are resources that don’t have a physical presence. You can think of these like ideas. You can’t touch an idea,
but it is real and it’s a thing. Some examples include patents, copyrights, and trademarks. Most of these resources are
amortized over their useful lives or periodically checked for impairment losses.

How are Assets Valued and Recorded in Accounting?

Notice when I define assets, I didn’t talk about how they were valued or recorded on the books of a company. Each resource is
valued somewhat differently depending its nature and how it was acquired.

According to the historical cost principle, assets are recorded on the books at the price the company paid for them. This is true
for all assets except for a few different types of investments that are adjusted to fair market value and some intangible assets
that are purchased indirectly like goodwill.
Since a company depends on its resources to generate revenues, many businesses are often valued by their level of asset
ownership. In other words, an investor could calculate a rough value of a business by subtracting the outstanding loans from
the assets of the company to see what resources the company actually owns.

A company with more resources is generally deemed to be worth more than one with fewer resources. This isn’t always the
case, however. Most investors predict return rates on assets. If the company doesn’t perform well, the company valuation
could go down simply because it isn’t using its resources effectively.

Assets and Depreciation

In accrual accounting, if an resource can be used for more than one period, it shouldn’t be expensed immediately. Instead, it is
capitalized and the cost of the asset is recognized over the life of the assets. Depreciation is a way to assign the cost of the an
asset over its useful lives. It’s also a way to recognize the use of the asset and record the devaluation of it over time.

Fixed assets and other long-term assets like buildings are depreciated while land is not. Other assets, like intangibles, are
amortized.
As you can see, all of the operating activities are clearly listed by their sources. This categorization does make it useful to read,
but the costs of producing it for outweigh the benefits to the external users. This is why FASB has never made it a requirement
to issue statements using this method.
Statement of Cash Flows Indirect Method
Home » Financial Statements » Statement of Cash Flows Indirect Method
What is the Statement of Cash Flows Indirect Method?
The statement of cash flows prepared using the indirect method adjusts net income for the changes in balance sheet accounts
to calculate the cash from operating activities. In other words, changes in asset and liability accounts that affect cash balances
throughout the year are added to or subtracted from net income at the end of the period to arrive at the operating cash flow.

The operating activities section is the only difference between the direct and indirect methods. The direct method lists all
receipts and payments of cash from individual sources to compute operating cash flows. This is not only difficult to create; it
also requires a completely separate reconciliation that looks very similar to the indirect method to prove the operating
activities section is accurate.

Companies tend to prefer the indirect presentation to the direct method because the information needed to create this report
is readily available in any accounting system. In fact, you don’t even need to go into the bookkeeping software to create this
report. All you need is a comparative income statement. Let’s take a look at the format and how to prepare an indirect method
cash flow statement.

Format
The indirect operating activities section always starts out with the net income for the period followed by non-cash expenses,
gains, and losses that need to be added back to or subtracted from net income. These non-cash activities typically include:
 Depreciation expense
 Amortization expense
 Depletion expense
 Gains or Losses from sale of assets
 Losses from accounts receivable
The non-cash expenses and losses must be added back in and the gains must be subtracted.

The next section of the operating activities adjusts net income for the changes in asset accounts that affected cash. These
accounts typically include:
 Accounts receivable
 Inventory
 Prepaid expenses
 Receivables from employees and owners
This is where preparing the indirect method can get a little confusing. You need to think about how changes in these accounts
affect cash in order to identify what way income needs to be adjusted. When an asset increases during the year, cash must
have been used to purchase the new asset. Thus, a net increase in an asset account actually decreased cash, so we need to
subtract this increase from the net income. The opposite is true about decreases. If an asset account decreases, we will need to
add this amount back into the income. Here’s a general rule of thumb when preparing an indirect cash flow statement:

Asset account increases: subtract amount from income

Asset account decreases: add amount to income
The last section of the operating activities adjusts net income for changes in liability accounts affected by cash during the year.
Here are some of the accounts that usually are used:
 Accounts payable
 Accrued expenses
Get ready. If you weren’t confused by the assets part, you might be for the liabilities section. Since liabilities have a credit
balance instead of a debit balance like asset accounts, the liabilities section works the opposite of the assets section. In other
words, an increase in a liability needs to be added back into income. This makes sense. Take accounts payable for example. If
accounts payable increased during the year, it means we purchased something without using cash. Thus, this amount should be
added back. Here’s a basic tip that you can use for all liability accounts:

Liability account increases: add amount from income

Liability account decreases: subtract amount to income
All of these adjustments are totaled to adjust the net income for the period to match the cash provided by operating activities.

Example
It might be helpful to look at an example of what the indirect method actually looks like.
As you can see, the operating section always lists net income first followed by the adjustments for expenses, gains, losses, asset
accounts, and liability accounts respectively.

Although most standard setting bodies prefer the direct method, companies use the indirect method almost exclusively. It’s
easier to prepare, less costly to report, and less time consuming to create than the direct method. Standard setting bodies
prefer the direct because it provides more information for the external users, but companies don’t like it because it requires an
additional reconciliation be included in the report. Since the indirect method acts as a reconciliation itself, it’s far less work for
companies to simply prepare this report instead.

Statement of Retained Earnings

Home » Financial Statements » Statement of Retained Earnings
What is the Statement of Retained Earnings?
The statement of retained earnings is a financial statement that is prepared to reconcile the beginning and ending retained
earnings balances. Retained earnings are the profits or net income that a company chooses to keep rather than distribute it to
the shareholders.
In other words, assume a company makes money (has net income) for the year and only distributes half of the profits to its
shareholders as a distribution. The other half of the profits are considered retained earnings because this is the amount of
earnings the company kept or retained.

The retained earnings calculation or formula is quite simple. Beginning retained earnings corrected for adjustments, plus net
income, minus dividends, equals ending retained earnings. Just like the statement of shareholder’s equity, the statement of
retained is a basic reconciliation. It reconciles how the beginning and ending RE balances. In other words, how did the RE
balance on January 1 turn into the RE balance on December 31?
Although this statement is not included in the four main general-purpose financial statements, it is considered important to
outside users for evaluating changes in the RE account. This statement is often used to prepare before the statement of
stockholder’s equity because retained earnings is needed for the overall ending equity calculation.

Format
This statement has five main sections:

 — Beginning RE
 — Prior Period Adjustments
 — Additions
 — Subtractions
 — Ending Balance
The beginning equity balance is always listed on its own line followed by any adjustments that are made to retained earnings
for prior period errors. These adjustments could be caused by improper accounting methods used, poor estimates, or even
fraud. The sum or difference is usually subtotaled at this point.

Next, additions and subtractions are listed. Additions include net income if the company is profitable. If the company is not
profitable, net loss for the year is included in the subtractions along with any dividends to the owners. Dividends are always
subtracted from RE because once dividends are declared, the company owes its shareholders the funds and must take these
funds out of its retained earnings even if they are simply declared and not paid.

The last line on the statement sums the total of these adjustments and lists the ending retained earnings balance.
Like all financial statements, the retained earnings statement has a heading that display’s the company name, title of the
statement and the time period of the report. For example, an annual income statement issued by Paul’s Guitar Shop, Inc. would
have the following heading:

 Paul’s Guitar Shop, Inc.

 Statement of Retained Earnings
 For the Year Ended December 31, 2015

Example
Here is an example of how to prepare a statement of retained earnings from our unadjusted trial balance and financial
statements used in the accounting cycle examples for Paul’s Guitar Shop.

As you can see, the beginning retained earnings account is zero because Paul just started the company this year. There were no
retained earnings in prior years. Likewise, there were no prior period adjustments since the company is brand new.

Paul’s net income at the end of the year increases the RE account while his dividends decrease the overall the earnings that are
kept in the business.

This ending retained earnings balance can then be used for preparing the statement of shareholder’s equity and the balance
sheet.

Competitors are also external users of financial statements. They use competitors’ P&L to gauge how well other companies are
doing in their space and whether or not they should enter new markets and try to compete with other companies.

Income Statement Format

There are two income statement formats that are generally prepared.

Single-step income statement – the single step statement only shows one category of income and one category of expenses.
This format is less useful of external users because they can’t calculate many efficiency and profitability ratios with this limited
data.
Multi-step income statement – the multi-step statement separates expense accounts into more relevant and usable accounts
based on their function. Cost of goods sold, operating and non-operating expenses are separated out and used to calculate
gross profit, operating income, and net income.
In both income statement formats, revenues are always presented before expenses. Expenses can be listed alphabetically or by
total dollar amount. Either presentation is acceptable.

P&L expenses can also be formatted by the nature and the function of the expense.

All income statements have a heading that display’s the company name, title of the statement and the time period of the
report. For example, an annual income statement issued by Paul’s Guitar Shop, Inc. would have the following heading:
  Paul’s Guitar Shop, Inc.
 Income Statement
 For the Year Ended December 31, 2015

Income Statement Example

Here is an example of how to prepare an income statement from Paul’s adjusted trial balance in our earlier accounting
cycle examples.
Single Step Income Statement

As you can see, this example income statement is a single-step statement because it only lists expenses in one main category.
Although this statement might not be extremely useful for investors looking for detailed information, it does accurately
calculate the net income for the year.
This net income calculation can be transferred to Paul’s statement of owner’s equity for preparation.

Common Income Statement Questions

What is considered an expense on the income statement?
Expenses are outlays of resources for goods or services. These costs include wages, depreciation, and interest expense among
others. They are reported on several sections of the income statement. Cost of goods sold expenses are reported in the gross
profit reporting section while the operating expenses are reported in the operations section. Other expenses are reported
further down the statement in the other gains and losses section.

How do you calculate the income statement?

The income statement is used to calculate the net income of a business. The P&L formula is Revenues – Expenses = Net Income.
This is a simple equation that shows the profitability of a company. If revenue is higher than expenses, the company is
profitable. If revenue is lower than expenses, the company is unprofitable.

What is a multi step income statement?

A multi-step statement splits the business activities into operating and non-operating categories. The operating section includes
sales, cost of goods sold, and all selling and admin expenses. The non-operating section includes other income or expenses like
interest or insurance proceeds.

How do you make an income statement?

Creating an income statement is fairly easy. Simply follow these steps:

1. Determine the Time Period

2. Transfer Income Accounts for Trial Balance into our template
3. Transfer Expense Accounts for Trial Balance into our template
4. Transfer Other Gains and Losses
5. Calculate the Net Income
Use one of our templates to list the sales, expenses, and other gains or losses in the correct format. At the bottom of the
statement, compute the net income for the company.

Balance Sheet
Home » Financial Statements » Balance Sheet
What is a Balance Sheet?
The balance sheet, also called the statement of financial position, is the third general purpose financial statement prepared
during the accounting cycle. It reports a company’s assets, liabilities, and equity at a single moment in time. You can think of it
like a snapshot of what the business looked like on that day in time.
Unlike the income statement, the balance sheet does not report activities over a period of time. The balance sheet is essentially
a picture a company’s recourses, debts, and ownership on a given day. This is why the balance sheet is sometimes considered
less reliable or less telling of a company’s current financial performance than a profit and loss statement. Annual income
statements look at performance over the course of 12 months, where as, the statement of financial position only focuses on
the financial position of one day.

The balance sheet is basically a report version of the accounting equation also called the balance sheet equation where assets
always equation liabilities plus shareholder’s equity.
In this way, the balance sheet shows how the resources controlled by the business (assets) are financed by debt (liabilities) or
shareholder investments (equity). Investors and creditors generally look at the statement of financial position for insight as to
how efficiently a company can use its resources and how effectively it can finance them.
Format
This statement can be reported in two different formats: account form and report form. The account form consists of two
columns displaying assets on the left column of the report and liabilities and equity on the right column. You can think of this
like debits and credits. The debit accounts are displayed on the left and credit accounts are on the right.
The report form, on the other hand, only has one column. This form is more of a traditional report that is issued by companies.
Assets are always present first followed by liabilities and equity.

In both formats, assets are categorized into current and long-term assets. Current assets consist of resources that will be used
in the current year, while long-term assets are resources lasting longer than one year.

Liabilities are also separated into current and long-term categories.

Let’s look at each of the balance sheet accounts and how they are reported.

Asset Section
Similar to the accounting equation, assets are always listed first. The asset section is organized from current to non-current and
broken down into two or three subcategories. This structure helps investors and creditors see what assets the company is
investing in, being sold, and remain unchanged. It also helps with financial ratio analysis. Ratios like the current ratio are used
to identify how leveraged a company is based on its current resources and current obligations.

The first subcategory lists the current assets in order of their liquidity. Here’s a list of the most common accounts in the current
section:

 Current
 Cash
 Accounts Receivable
 Prepaid Expenses
 Inventory
 Due from Affiliates
The second subcategory lists the long-term assets. This section is slightly different than the current section because many long-
term assets are depreciated over time. Thus, the assets are typically listed with a total accumulated depreciation amount
subtracted from them. Here’s a list of the most common long-term accounts in this section:

 Long-term
 Equipment
 Leasehold Improvements
 Buildings
 Vehicles
 Long-term Notes Receivable
Many times there will be a third subcategory for investments, intangible assets, and or property that doesn’t fit into the first
two. Here are some examples of these balance sheet items:

 Other
 Investments
 Goodwill
 Trademarks
 Mineral Rights
According to the historical cost principle, all assets, with the exception of some intangible assets, are reported on the balance
sheet at their purchase price. In other words, they are listed on the report for the same amount of money the company paid for
them. This typically creates a discrepancy between what is listed on the report and the true fair market value of the resources.
For instance, a building that was purchased in 1975 for $20,000 could be worth $1,000,000 today, but it will only be listed for
$20,000. This is consistent with the balance sheet definition that states the report should record actual events rather than
speculative numbers.

Liabilities Section
Liabilities are also reported in multiple subcategories. There are typically two or three different liability subcategories in the
liabilities section: current, long-term, and owner debt.

The current liabilities section is always reported first and includes debt and other obligations that will become due in the
current period. This usually includes trade debt and short-term loans, but it can also include the portion of long-term loans that
are due in the current period. The current debts are always listed by due dates starting with accounts payable. Here’s a list of
the most common current liabilities in order of how they appear:

 Current Liabilities
 Accounts Payable
 Accrued Expenses
 Unearned Revenue
 Lines of Credit
 Current Portion of Long-term Debt
The second liabilities section lists the obligations that will become due in more than one year. Often times all of the long-term
debt is simply grouped into one general listing, but it can be listed in detail. Here are some examples:

 Long-term Liabilities
 Mortgage Payable
 Notes Payable
 Loans Payable
A lot of times owners loan money to their companies instead of taking out a traditional bank loan. Investors and creditors want
to see this type of debt differentiated from traditional debt that’s owed to third parties, so a third section is often added for
owner’s debt. This simply lists the amount due to shareholders or officers of the company.

Equity Section
Unlike the asset and liability sections, the equity section changes depending on the type of entity. For example, corporations list
the common stock, preferred stock, retained earnings, and treasury stock. Partnerships list the members’ capital and sole
proprietorships list the owner’s capital.

Like all financial statements, the balance sheet has a heading that display’s the company name, title of the statement and the
time period of the report. For example, an annual income statement issued by Paul’s Guitar Shop, Inc. would have the following
heading:

 Paul’s Guitar Shop, Inc.

 Balance Sheet
 December 31, 2015
Example
Here is an example of how to prepare the balance sheet from our unadjusted trial balance and financial statements used in the
accounting cycle examples for Paul’s Guitar Shop.
Account Format Balance Sheet

Report Format Balance Sheet

As you can see, the report format is a little bit easier to read and understand. That is why most issued reports are presented in
report form. Plus, this report form fits better on a standard sized piece,b-
of paper.

One thing to note is that just like in the accounting equation, total assets equals total liabilities and equity. This is always the
case. If you are preparing a balance sheet for one of your accounting homework problems and it doesn’t balance, something
was input incorrectly. You’ll have to go back through the trial balance and T-accounts to find the error.
Now that the balance sheet is prepared and the beginning and ending cash balances are calculated, the statement of cash
flows can be prepared.

Balance Sheet Analysis

Now that you can answer the question what is a balance sheet. Let’s look at how to read a balance sheet. Investors, creditors,
and internal management use the balance sheet to evaluate how the company is growing, financing its operations, and
distributing to its owners. A single sheet won’t tell you that much about the company, but a comparative report that shows two
to three years of trend will tell you how cash is being spent, the amount of debt being paid off, and the level of investments
being made each year. It will also show the if the company is funding its operations with profits or debt.

Statement of Stockholders Equity

Home » Financial Statements » Statement of Stockholders Equity
What is the The Statement of Stockholders Equity?
statement of stockholder’s equity, often called the statement of changes in equity, is one of four general purpose financial
statements and is the second financial statement prepared in the accounting cycle. This statement displays how equity changes
from the beginning of an accounting period to the end.
The statement of stockholder’s equity displays all equity accounts that affect the ending equity balance including common
stock, net income, paid in capital, and dividends. This in depth view of equity is best demonstrated in the expanded accounting
equation.
In other words, the statement of stockholder’s equity is a basic reconciliation of how the ending equity is calculated. How did
the equity balance on January 1 turn into the equity balance on December 31?

First, the beginning equity is reported followed by any new investments from shareholders along with net income for the year.
Second all dividends and net losses are subtracted from the equity balance giving you the ending equity balance for the
accounting period.

As you can see, net income is needed to calculate the ending equity balance for the year. This is why the statement of changes
in equity must be prepared after the income statement.

Format
This statement has four sections:

 — Beginning balance
 — Additions
 — Subtractions
 — Ending Balance
The beginning equity balance is always listed on its own line followed by two indented sections: additions and subtractions.
Additions include new investments and net income if the company is profitable. If the company is not profitable, net loss for
the year is included in the subtractions along with any dividends to the owners. The last line on this statement always lists the
ending equity balance.
Like all financial statements, the statement of stockholder’s equity has a heading that display’s the company name, title of the
statement and the time period of the report. For example, an annual income statement issued by Paul’s Guitar Shop, Inc. would
have the following heading:

 Paul’s Guitar Shop, Inc.

 Statement of Stockholder’s Equity
 For the Year Ended December 31, 2015

Example
Here is an example of how to prepare a statement of stockholder’s equity from our unadjusted trial balance and financial
statements used in the accounting cycle examples for Paul’s Guitar Shop.

As you can see, the beginning equity is zero because Paul just started the company this year. Paul’s initial investment in the
company, issuance of common stock, and net income at the end of the year increases his equity in the company. Conversely,
his dividends decrease the overall equity.

This ending equity balance can then be cross-referenced with the ending equity on the balance sheet to make sure it is
accurate.
Cash Flow Statement
Home » Financial Statements » Cash Flow Statement
What is the Cash Flow Statement?
The statement of cash flows, also called the cash flow statement, is the fourth general-purpose financial statement and
summarizes how changes in balance sheet accounts affect the cash account during the accounting period. It also reconciles
beginning and ending cash and cash equivalents account balances.
This statement shows investors and creditors what transactions affected the cash accounts and how effectively and efficiently a
company can use its cash to finance its operations and expansions. This is particularly important because investors want to
know the company is financially sound while creditors want to know the company is liquid enough to pay its bills as they come
due. In other words, does the company have good cash flow?

The term cash flow generally refers to a company’s ability to collect and maintain adequate amounts of cash to pay its
upcoming bills. In other words, a company with good cash flow can collect enough cash to pay for its operations and fund its
debt service without making late payments.

Format and Template

The cash flow statement format is divided into three main sections: cash flows from operating activities, investing activities, and
financing activities.

Operating Activities
Cash flows from operating activities include transactions from the operations of the business. In other words, the operating
section represent the cash collected from the primary revenue generating activities of the business like sales and service
income. Operating activities are short-term and only affect the current period. For example, payment of supplies is an operating
activity because it relates to the company operations and is expected to be used in the current period.
Operating cash flows are calculated by adjusting net income by the changes in current asset and liability accounts.

Investing Activities
Cash flows from investing activities consist of cash inflows and outflows from sales and purchases of long-term assets. In other
words, the investing section of the statement represents the cash that the company either collected from the sale of a long-
term asset or the amount of money spent on purchasing a new long-term asset. You can think of this section as the company
investing in itself. The investments are long-term in nature and expected to last more than one accounting period.

Investing cash flows are calculated by adding up the changes in long-term asset accounts.

Financing Activities
Cash flows from financing consists of cash transactions that affect the long-term liabilities and equity accounts. In other words,
the financing section on the statement represents the amount of cash collected from issuing stock or taking out loans and the
amount of cash disbursed to pay dividends and long-term debt. You can think of financing activities as the ways a company
finances its operations either through long-term debt or equity financing.

Financing cash flows are calculated by adding up the changes in all the long-term liability and equity accounts.

Here’s a tip!
Here is a tip on how I keep track of what transactions go in each cash flow section.

Operating Activities: includes all activities that are reported on the income statement under operating income or expenses.
Investing Activities: includes all cash transactions used to buy or sell long-term assets. Think of these as the company investing
in itself.
Financing Activities: includes all cash transactions that affect long-term liabilities and equity. Whenever long-term debt or
equity is involved, it is considered a financing activity.
Like all financial statements, the statement of cash flows has a heading that display’s the company name, title of the statement
and the time period of the report. For example, an annual income statement issued by Paul’s Guitar Shop, Inc. would have the
following heading:

 Paul’s Guitar Shop, Inc.

 Cash Flow Statement
 December 31, 2015

Example
Here is the statement of cash flows example from our unadjusted trial balance and financial statements used in the accounting
cycle examples for Paul’s Guitar Shop.
How to Prepare a Cash Flow Statement
The statement of cash flows is generally prepared using two different methods: the direct method and the indirect method.
Both result in the same financial statement showing how financial transacations affected would have affected the bank account
of the company. Each method is used for a slightly different reason and typically used for different sized companies. Let’s take a
look at how to create a statement using both the direct and the indirect methods in the next aritcles.

How to Write the Financial

Section of a Business Plan
An outline of your company's growth strategy is essential to a business
plan, but it just isn't complete without the numbers to back it up. Here's
some advice on how to include things like a sales forecast, expense
budget, and cash-flow statement.

By Elizabeth Wasserman

7 COMMENTS
A business plan is all conceptual until you start filling in the numbers and terms. The
sections about your marketing plan and strategy are interesting to read, but they don't
mean a thing if you can't justify your business with good figures on the bottom line.
You do this in a distinct section of your business plan for financial forecasts and
statements. The financial section of a business plan is one of the most essential
components of the plan, as you will need it if you have any hope of winning over
investors or obtaining a bank loan. Even if you don't need financing, you should
compile a financial forecast in order to simply be successful in steering your business.

"This is what will tell you whether the business will be viable or whether you are
wasting your time and/or money," says Linda Pinson, author of Automate Your
Business Plan for Windows (Out of Your Mind 2008) and Anatomy of a Business
Plan (Out of Your Mind 2008), who runs a publishing and software business Out of
Your Mind and Into the Marketplace. "In many instances, it will tell you that you should
not be going into this business."

The following will cover what the financial section of a business plan is, what it
should include, and how you should use it to not only win financing but to better
manage your business.
Dig Deeper: Generating an Accurate Sales Forecast

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NEXT ▷

How to Write the Financial Section of a Business Plan: The Purpose of the Financial
Section

Let's start by explaining what the financial section of a business plan is not. Realize
that the financial section is not the same as accounting. Many people get confused
about this because the financial projections that you include--profit and loss, balance
sheet, and cash flow--look similar to accounting statements your business generates.
But accounting looks back in time, starting today and taking a historical view.
Business planning or forecasting is a forward-looking view, starting today and going
into the future.

"You don't do financials in a business plan the same way you calculate the details in
your accounting reports," says Tim Berry, president and founder of Palo Alto
Software, who blogs at Bplans.com and is writing a book, The Plan-As-You-Go
Business Plan. "It's not tax reporting. It's an elaborate educated guess."

What this means, says Berry, is that you summarize and aggregate more than you
might with accounting, which deals more in detail. "You don't have to imagine all
future asset purchases with hypothetical dates and hypothetical depreciation schedules
to estimate future depreciation," he says. "You can just guess based on past results.
And you don't spend a lot of time on minute details in a financial forecast that
depends on an educated guess for sales."

The purpose of the financial section of a business plan is two-fold. You're going to
need it if you are seeking investment from venture capitalists, angel investors, or even
smart family members. They are going to want to see numbers that say your business
will grow--and quickly--and that there is an exit strategy for them on the horizon,
during which they can make a profit. Any bank or lender will also ask to see these
numbers as well to make sure you can repay your loan.
But the most important reason to compile this financial forecast is for your own
benefit, so you understand how you project your business will do. "This is an ongoing,
living document. It should be a guide to running your business," Pinson says. "And at
any particular time you feel you need funding or financing, then you are prepared to
go with your documents."

If there is a rule of thumb when filling in the numbers in the financial section of your
business plan, it's this: Be realistic. "There is a tremendous problem with the hockey-
stick forecast" that projects growth as steady until it shoots up like the end of a hockey
stick, Berry says. "They really aren't credible." Berry, who acts as an angel investor
with the Willamette Angel Conference, says that while a startling growth trajectory is
something that would-be investors would love to see, it's most often not a believable
growth forecast. "Everyone wants to get involved in the next Google or Twitter, but
every plan seems to have this hockey stick forecast," he says. "Sales are going along
flat, but six months from now there is a huge turn and everything gets amazing,
assuming they get the investors' money."

The way you come up a credible financial section for your business plan is to
demonstrate that it's realistic. One way, Berry says, is to break the figures into
components, by sales channel or target market segment, and provide realistic
estimates for sales and revenue. "It's not exactly data, because you're still guessing the
future. But if you break the guess into component guesses and look at each one
individually, it somehow feels better," Berry says. "Nobody wins by overly optimistic
or overly pessimistic forecasts."
Dig Deeper: What Angel Investors Look For
How to Write the Financial Section of a Business Plan: The Components of a
Financial Section
A financial forecast isn't necessarily compiled in sequence. And you most likely won't
present it in the final document in the same sequence you compile the figures and
documents. Berry says that it's typical to start in one place and jump back and forth.
For example, what you see in the cash-flow plan might mean going back to change
estimates for sales and expenses. Still, he says that it's easier to explain in sequence,
 as long as you understand that you don't start at step one and go to step six without
looking back--a lot--in between.

 Start with a sales forecast. Set up a spreadsheet projecting your sales over the
course of three years. Set up different sections for different lines of sales and
columns for every month for the first year and either on a monthly or quarterly
basis for the second and third years. "Ideally you want to project in spreadsheet
blocks that include one block for unit sales, one block for pricing, a third block
that multiplies units times price to calculate sales, a fourth block that has unit
costs, and a fifth that multiplies units times unit cost to calculate cost of sales
(also called COGS or direct costs)," Berry says. "Why do you want cost of sales in
a sales forecast? Because you want to calculate gross margin. Gross margin is
sales less cost of sales, and it's a useful number for comparing with different
standard industry ratios." If it's a new product or a new line of business, you have
to make an educated guess. The best way to do that, Berry says, is to look at past
results.
 Create an expenses budget. You're going to need to understand how much it's
going to cost you to actually make the sales you have forecast. Berry likes to
differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e.,
most advertising and promotional expenses), because it's a good thing for a
business to know. "Lower fixed costs mean less risk, which might be theoretical
in business schools but are very concrete when you have rent and payroll checks
to sign," Berry says. "Most of your variable costs are in those direct costs that
belong in your sales forecast, but there are also some variable expenses, like ads
and rebates and such." Once again, this is a forecast, not accounting, and you're
going to have to estimate things like interest and taxes. Berry recommends you
go with simple math. He says multiply estimated profits times your best-guess
tax percentage rate to estimate taxes. And then multiply your estimated debts
balance times an estimated interest rate to estimate interest.
 Develop a cash-flow statement. This is the statement that shows physical dollars
moving in and out of the business. "Cash flow is king," Pinson says. You base this
partly on your sales forecasts, balance sheet items, and other assumptions. If you
are operating an existing business, you should have historical documents, such as
 profit and loss statements and balance sheets from years past to base these
forecasts on. If you are starting a new business and do not have these historical
financial statements, you start by projecting a cash-flow statement broken down
into 12 months. Pinson says that it's important to understand when compiling
this cash-flow projection that you need to choose a realistic ratio for how many
of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on. You
don't want to be surprised that you only collect 80 percent of your invoices in the
first 30 days when you are counting on 100 percent to pay your expenses, she
says. Some business planning software programs will have these formulas built
in to help you make these projections.
 Income projections. This is your pro forma profit and loss statement, detailing
forecasts for your business for the coming three years. Use the numbers that you
put in your sales forecast, expense projections, and cash flow statement. "Sales,
lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses,
interest, and taxes, is net profit."
 Deal with assets and liabilities. You also need a projected balance sheet. You have
to deal with assets and liabilities that aren't in the profits and loss statement and
project the net worth of your business at the end of the fiscal year. Some of those
are obvious and affect you at only the beginning, like startup assets. A lot are not
obvious. "Interest is in the profit and loss, but repayment of principle isn't," Berry
says. "Taking out a loan, giving out a loan, and inventory show up only in assets--
until you pay for them." So the way to compile this is to start with assets, and
estimate what you'll have on hand, month by month for cash, accounts receivable
(money owed to you), inventory if you have it, and substantial assets like land,
buildings, and equipment. Then figure out what you have as liabilities--meaning
debts. That's money you owe because you haven't paid bills (which is called
accounts payable) and the debts you have because of outstanding loans.
 Breakeven analysis. The breakeven point, Pinson says, is when your business's
expenses match your sales or service volume. The three-year income projection
will enable you to undertake this analysis. "If your business is viable, at a certain
period of time your overall revenue will exceed your overall expenses, including
interest." This is an important analysis for potential investors, who want to know
that they are investing in a fast-growing business with an exit strategy.
Dig Deeper: How to Price Business Services
How to Write the Financial Section of a Business Plan: How to Use the Financial
Section

One of the biggest mistakes business people make is to look at their business plan, and
particularly the financial section, only once a year. "I like to quote former President
Dwight D. Eisenhower," says Berry. "'The plan is useless, but planning is essential.'
What people do wrong is focus on the plan, and once the plan is done, it's forgotten.
It's really a shame, because they could have used it as a tool for managing the
company." In fact, Berry recommends that business executives sit down with the
business plan once a month and fill in the actual numbers in the profit and loss
statement and compare those numbers with projections. And then use those
comparisons to revise projections in the future.

Pinson also recommends that you undertake a financial statement analysis to develop
a study of relationships and compare items in your financial statements, compare
financial statements over time, and even compare your statements to those of other
businesses. Part of this is a ratio analysis. She recommends you do some homework
and find out some of the prevailing ratios used in your industry for liquidity analysis,
profitability analysis, and debt and compare those standard ratios with your own.

"This is all for your benefit," she says. "That's what financial statements are for. You
should be utilizing your financial statements to measure your business against what
you did in prior years or to measure your business against another business like
yours."

If you are using your business plan to attract investment or get a loan, you may also
include a business financial history as part of the financial section. This is a summary
of your business from its start to the present. Sometimes a bank might have a section
like this on a loan application. If you are seeking a loan, you may need to add
supplementary documents to the financial section, such as the owner's financial
statements, listing assets and liabilities.
All of the various calculations you need to assemble the financial section of a business
plan are a good reason to look for business planning software, so you can have this on
your computer and make sure you get this right. Software programs also let you use
some of your projections in the financial section to create pie charts or bar graphs that
you can use elsewhere in your business plan to highlight your financials, your sales
history, or your projected income over three years.

"It's a pretty well-known fact that if you are going to seek equity investment from
venture capitalists or angel investors," Pinson says, "they do like visuals."
Dig Deeper: How to Protect Your Margins in a Downturn
Related Links:
Making It All Add Up: The Financial Section of a Business Plan
One of the major benefits of creating a business plan is that it forces entrepreneurs to
confront their company's finances squarely.

Persuasive Projections
You can avoid some of the most common mistakes by following this list of dos and
don'ts.

Making Your Financials Add Up

No business plan is complete until it contains a set of financial projections that are not
only inspiring but also logical and defensible.

How many years should my financial projections cover for a new business?
Some guidelines on what to include.

Recommended Resources:
Bplans.com
More than 100 free sample business plans, plus articles, tips, and tools for developing
your plan.

Planning, Startups, Stories: Basic Business Numbers

An online video in author Tim Berry's blog, outlining what you really need to know
about basic business numbers.

Out of Your Mind and Into the Marketplace

Linda Pinson's business selling books and software for business planning.

Palo Alto Software

Business-planning tools and information from the maker of the Business Plan Pro
software.

U.S. Small Business Administration

Government-sponsored website aiding small and midsize businesses.

Financial Statement Section of a Business Plan for Start-Ups

A guide to writing the financial section of a business plan developed by SCORE of
northeastern Massachusetts.

Editor's Note: Looking for Business Loans for your company ? If you would like information
to help you choose the one that's right for you, use the questionnaire below to have our
partner, BuyerZone, provide you with information for free:
What type of business financing are you interested in obtaining at this
time?
Business loan
Cash advance against credit card income
Loan for equipment purchase
Equipment lease
Commercial mortgage loan

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These articles are editorially independent - that means editors and reporters research
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Financial Planning Business Plan

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Financial Plan
The following sections will outline important financial information.

7.1 Important Assumptions

The following table details important financial assumptions.

 GENERAL ASSUMPTIONS

YEAR 1 YEAR 2 YEAR 3

Plan Month 1 2 3

Current Interest Rate 10.00% 10.00% 10.00%

Long-term Interest Rate 10.00% 10.00% 10.00%

Tax Rate 30.00% 30.00% 30.00%

Other 0 0 0

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Create your own business plan

7.2 Break-even Analysis

The Break-even Analysis indicates what will be needed in monthly revenue to reach the
break-even point.
Need actual charts?

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BREAK-EVEN ANALYSIS

Monthly Revenue Break-even $8,518

Assumptions:

Average Percent Variable Cost 8%

 Estimated Monthly Fixed Cost $7,837

7.3 Projected Profit and Loss

The following table will indicate projected profit and loss.

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Need actual charts?

We recommend using LivePlan as the easiest way to create graphs for your own business plan.

Create your own business plan

Need actual charts?

We recommend using LivePlan as the easiest way to create graphs for your own business plan.

Create your own business plan

Need actual charts?

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Create your own business plan

PRO FORMA PROFIT AND LOSS

 YEAR 1 YEAR 2 YEAR 3

Sales $86,891 $128,000 $147,090

Direct Cost of Sales $6,951 $10,240 $11,767

Other Production Expenses $0 $0 $0

TOTAL COST OF SALES $6,951 $10,240 $11,767

Gross Margin $79,940 $117,760 $135,323

Gross Margin % 92.00% 92.00% 92.00%

Expenses

Payroll $63,120 $67,000 $72,000

Sales and Marketing and Other Expenses $1,200 $1,200 $1,200

Depreciation $456 $456 $456

Leased Equipment $0 $0 $0
Utilities $0 $0 $0

Insurance $1,800 $1,800 $1,800

Rent $18,000 $18,000 $18,000

Payroll Taxes $9,468 $10,050 $10,800

Other $0 $0 $0

Total Operating Expenses $94,044 $98,506 $104,256

Profit Before Interest and Taxes ($14,104) $19,254 $31,067

EBITDA ($13,648) $19,710 $31,523

Interest Expense $0 $0 $0

Taxes Incurred $0 $5,776 $9,320

Net Profit ($14,104) $13,478 $21,747

Net Profit/Sales -16.23% 10.53% 14.78%

7.4 Projected Cash Flow

The following chart and table will indicate projected cash flow.

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PRO FORMA CASH FLOW

YEAR 1 YEAR 2 YEAR 3

Cash Received
Cash from Operations

Cash Sales $86,891 $128,000 $147,090

SUBTOTAL CASH FROM OPERATIONS $86,891 $128,000 $147,090

Additional Cash Received

Sales Tax, VAT, HST/GST Received $0 $0 $0

New Current Borrowing $0 $0 $0

New Other Liabilities (interest-free) $0 $0 $0

New Long-term Liabilities $0 $0 $0

Sales of Other Current Assets $0 $0 $0

Sales of Long-term Assets $0 $0 $0

New Investment Received $0 $0 $0

SUBTOTAL CASH RECEIVED $86,891 $128,000 $147,090

Expenditures Year 1 Year 2 Year 3

Expenditures from Operations

Cash Spending $63,120 $67,000 $72,000

Bill Payments $34,142 $46,475 $52,409

SUBTOTAL SPENT ON OPERATIONS $97,262 $113,475 $124,409

Additional Cash Spent

Sales Tax, VAT, HST/GST Paid Out $0 $0 $0

Principal Repayment of Current Borrowing $0 $0 $0

Other Liabilities Principal Repayment $0 $0 $0

Long-term Liabilities Principal Repayment $0 $0 $0

Purchase Other Current Assets $0 $0 $0

Purchase Long-term Assets $0 $0 $0

 Dividends $0 $0 $0

SUBTOTAL CASH SPENT $97,262 $113,475 $124,409

Net Cash Flow ($10,371) $14,525 $22,681

Cash Balance $8,429 $22,954 $45,635

7.5 Projected Balance Sheet

The following table will indicate the projected balance sheet.

PRO FORMA BALANCE SHEET

YEAR 1 YEAR 2 YEAR 3

Assets

Current Assets

Cash $8,429 $22,954 $45,635

Other Current Assets $0 $0 $0

TOTAL CURRENT ASSETS $8,429 $22,954 $45,635

Long-term Assets

Long-term Assets $2,300 $2,300 $2,300

Accumulated Depreciation $456 $912 $1,368

TOTAL LONG-TERM ASSETS $1,844 $1,388 $932

TOTAL ASSETS $10,273 $24,342 $46,567

Liabilities and Capital Year 1 Year 2 Year 3

Current Liabilities

Accounts Payable $3,277 $3,868 $4,347

Current Borrowing $0 $0 $0

Other Current Liabilities $0 $0 $0

SUBTOTAL CURRENT LIABILITIES $3,277 $3,868 $4,347

 Long-term Liabilities $0 $0 $0

TOTAL LIABILITIES $3,277 $3,868 $4,347

Paid-in Capital $22,000 $22,000 $22,000

Retained Earnings ($900) ($15,004) ($1,526)

Earnings ($14,104) $13,478 $21,747

TOTAL CAPITAL $6,996 $20,474 $42,220

TOTAL LIABILITIES AND CAPITAL $10,273 $24,342 $46,567

Net Worth $6,996 $20,474 $42,220

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7.6 Business Ratios

The following table outlines some of the more important ratios from the Portfolio Fund
Managing industry. The final column, Industry Profile, details specific ratios based on the
industry as it is classified by the NAICS code, 523920.

RATIO ANALYSIS

YEAR 1 YEAR 2 YEAR 3 INDUSTRY

PROFILE

Sales Growth 0.00% 47.31% 14.91% 11.35%

Percent of Total Assets

Other Current Assets 0.00% 0.00% 0.00% 34.12%

Total Current Assets 82.05% 94.30% 98.00% 95.71%

Long-term Assets 17.95% 5.70% 2.00% 4.29%

TOTAL ASSETS 100.00% 100.00% 100.00% 100.00%

Current Liabilities 31.90% 15.89% 9.33% 32.96%

Long-term Liabilities 0.00% 0.00% 0.00% 17.78%

Total Liabilities 31.90% 15.89% 9.33% 50.74%

NET WORTH 68.10% 84.11% 90.67% 49.26%

Percent of Sales

Sales 100.00% 100.00% 100.00% 100.00%

Gross Margin 92.00% 92.00% 92.00% 56.89%

Selling, General & Administrative 108.23% 81.47% 77.22% 19.06%

Expenses

Advertising Expenses 0.00% 0.00% 0.00% 4.69%

Profit Before Interest and Taxes -16.23% 15.04% 21.12% 11.71%

Main Ratios

Current 2.57 5.93 10.50 2.34

Quick 2.57 5.93 10.50 2.11

Total Debt to Total Assets 31.90% 15.89% 9.33% 55.75%

Pre-tax Return on Net Worth -201.61% 94.04% 73.58% 2.50%

Pre-tax Return on Assets -137.29% 79.10% 66.71% 5.64%

Additional Ratios Year 1 Year 2 Year 3

Net Profit Margin -16.23% 10.53% 14.78% n.a

Return on Equity -201.61% 65.83% 51.51% n.a

Activity Ratios

Accounts Payable Turnover 11.42 12.17 12.17 n.a

Payment Days 27 28 28 n.a

Total Asset Turnover 8.46 5.26 3.16 n.a

Debt Ratios

Debt to Net Worth 0.47 0.19 0.10 n.a

Current Liab. to Liab. 1.00 1.00 1.00 n.a

 Liquidity Ratios

Net Working Capital $5,152 $19,086 $41,288 n.a

Interest Coverage 0.00 0.00 0.00 n.a

Additional Ratios

Assets to Sales 0.12 0.19 0.32 n.a

Current Debt/Total Assets 32% 16% 9% n.a

Acid Test 2.57 5.93 10.50 n.a

Sales/Net Worth 12.42 6.25 3.48 n.a

Dividend Payout 0.00 0.00 0.00 n.a

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Financial Statements for a Small

Business
(Last Updated On: January 22, 2018)
Preparing and understanding financial statements for a small business.
Do you prepare financial statements for your small business?
What do you do with them after you prepare and print them out?

Are they stuck in a file never to see the light of day again?

If you have been following the last few months’ series on my monthly newsletter “Basic
Accounting Help”…
you realize the importance of recording and tracking your income and expenses …

and understanding basic accounting concepts.

Now we are going to collect that information we have been recording in our accounting records
and put it in “report” form. Then we can take that information and analyze it to see how our
business has been doing and what direction it is headed.
The financial statements for a small business are the maps of your business. They show where
you have been, where you are right now, and where you are going.

There are three main reports that make up financial statements for a small business.
 Profit and Loss Statement
 Balance Sheet
 Statement of Cash Flows
The income statement shows where you have been, the balance sheetshows where
you are now, and the cash flow statement shows if you got the money to go where
you need and want to go.

Importance of Financial Statements for a

Small Business…
Some of you are thinking you can figure all that out without going to the trouble of preparing
financial statements for a small business. Good luck with that; however, let me give you some
for instances where you might wish you had taken the time to prepare some financial
statements:

 You get an unbelievable offer to buy your business…but they want to see your financial
statements for the last 5 years.
 You find a piece of equipment at a ridiculously low price that you just have to have, but
your banker wants your financial statements for the last 3 years first.
 You found a supplier that is going to be able to provide you with better materials at a
cheaper price, but he wants to see a copy of your financial statements first.
 Your brother-in-law just won the lottery and wants to invest in your business, but his
financial adviser wants to see your financial records first.

I could go on and on…but you catch my drift

Financial statements for a small business are important!

I have a friend that goes to all the trouble to record her financial transactions in QuickBooks
but has not taken the time to visit the report section and browse the unbelievable variety of
reports in there. That’s like setting all the ingredients out to bake a cake and never putting it in
the oven:)

Ok now that I have emphasized the importance of financial statements; let’s take a closer look
at the 3 reports that make up financial statements for a small business.

We will start with the Balance Sheet. It is what most investors, bankers, suppliers, etc. will look
at and analyze to determine if they want to do business with you. The balance sheet can also
give you some valuable information about your business because it is a snapshot of your
company’s worth.

Read this page to see a sample of a Balance Sheet and to better understand what an accounting
balance sheet is and what it consist of.
The balance sheet shows the financial position of the firm at a point in time. The left side of the
balance sheet (called the debit side) shows the resources of the company (assets), whereas on
the right side (or, credit side), it shows how these resources have been funded. By definition,
the funding is either by the owners (equity) or by others (liabilities).

Asset: economic resources (with future value), or, things worth money.
Liability: an obligation resulting from a past transaction to pay money, render services, or
deliver goods.
Equity: funding by the owners, or ‘residual claim’ (to the assets), which always equals total
assets minus total liabilities.

Example balance sheet

The assets of the fictitous company ABCD Inc. (which is also used later) on January 31st, 20X0
consist of cash and equipment, 41,500 in total. This amount has been funded with 400
liabilities, and 41,100 equity. The equity consists of 40,000 paid-in capital, which is the amount
of money raised by issuing shares. Retained earnings of 1,100 is the total of profits that have
not (yet) been paid out as dividend.
For corporations the amount raised by issuing shares is presented separately from the profits
retained in the company. For sole proprietorships – a business owned and ran by a single
individual with no separate legal entity for the business – paid-in capital and retained earnings
are not shown
separately. Instead, these items are added and labeled ‘capital’.

Liabilities and equity are a means to attract capital for funding of assets. More debt or equity
means that the firm can buy more assets. Conversely, paying accounts payable, repaying a loan,
buying back shares or paying out a dividend decreases the assets.
The optimal amount of debt and equity, as well as the optimal mix between the two is outside
the domain of financial accounting.

Since the balance sheet shows the assets and the funding of the assets (liabilities and equity) at
a point in time, it is not possible to infer the performance of the firm from the balance sheet.
This is because
performance is measured over a period. The income statement and the cash flow statement are
used for this purpose (discussed later).

The accounting equation

The accounting equation (Assets = Liabilities + Equity) tells us that the balance sheet is
balanced by definition, as all assets will be financed either by the owners themselves (equity)
or by other people (liabilities).

Since assets are presented on the debit side of the balance sheet and liabilities and equity on
the credit side, the accounting equation implies
the fundamental equation in accounting that total debits should equal total credits at all times.

It is important to know that the accounting process is governed by accounting principles that
sometimes are very binding and sometimes provide some flexibility. Well known principles
include International Financial Reporting Standards (IFRS) and U.S. GAAP (Generally Accepted
Accounting Principles).

Sometimes economic assets are not allowed to be recognized as accounting assets by

accounting principles. In other words: some assets may not be on the balance sheet.
This generally is the case when it is difficult to determine the value of the asset.

In general, application of accounting principles results in the situation where the book value of
assets (and equity) is below the market value of assets (and equity), since book assets are
usually understated.
This difference is expressed by the market-to-book ratio (dividing the market value of equity
by the book value of equity).

Key Points
 The balance sheet shows the financial position at a point in time (a financial ‘snapshot’)

 The accounting equation states that the value of the resources (assets) always equals total funding of these assets
(liabilities and equity)

 It is not possible to infer a firm’s profitability from (the) balance sheet(s)

 Sssets are usually understated relative to the market value, whereas liabilities are not (or to a lesser extent), as a
result, equity is usually understated (as equity is defined as the difference between the understated assets and total
liabilities)

Using the accounting equation to record

transactions
The method to record transactions described in this section is based on the accounting
equation. Hence, it only keeps track of items on the balance sheet.
This method is extended in the next lesson double entry bookkeeping, where also changes over
time are recorded.
The accounting equation for transactions
The accounting equation states that all assets are funded by either the owners (equity) or
others (liabilities):
Assets = Liabilities + Equity.

The accounting equation refers to the balance sheet, where assets are shown on the debit side
and the funding (liabilities and equity) on the credit side.
If the accounting equation holds for the balance sheet at a point in time, it must hold for the
beginning of period balance sheet as well as the end of period balance sheet.
It then logically follows the accounting equation must also hold for changes; i.e., for each
transaction the change in assets must equal the change in liabilities plus the change
in equity:
ΔAssets = ΔLiabilities + ΔEquity.

Example

Example transactions for newly incorporated firm ABCD Inc. which offers services for garden
design and landscaping. For each transaction the accounting equation is shown.

Jan 1: The firm is incorporated on the 1st of January, 20X0. The owner, Betty, pays 40,000 cash
for 10,000 shares.

Following the accounting equation, cash (an asset) will increase by 40,000, as well as paid in
capital (equity) increases by 40,000.

Assets = Liabilities + Equity

Cash Paid-in Capital

40,000 = 0 + 40,000

Jan 2: ABCD Inc. buys a Grasshopper lawn mower for 8,000 cash.

Cash (assets) decreases with 8,000, while equipment (assets) increases by the same amount.
The net change in assets is therefore 0.

Assets = Liabilities + Equity

Cash

-8,000
 Equipment = 0 + 0

8,000

Jan 10: ABCD Inc. pays 500 cash for advertising in the local newspaper.

Cash (an asset) will decreases with 500, and retained earnings (equity) decreases with 500.

Assets = Liabilities + Equity

Retained
Cash earnings

-500 = 0 + -500

Jan 15: ABCD Inc receives 3,000 cash for services delivered in January.

Cash (an asset) and retained earnings (equity) increase with 3,000.

Assets = Liabilities + Equity

Retained
Cash earnings

3,000 = 0 + 3,000

Jan 26: ABCD joins the Association of Landscapers, and receives an invoice of 400 to be payable
in February.

Accounts payable (liability) increases with 400, and retained earnings (equity) decreases with
400.

Assets = Liabilities + Equity

Accounts Retained
payable earnings

0 = 400 + -400

Jan 31: The company pays a 1,000 cash dividend.

Cash (an asset) and retained earnings (equity) decreases with 1,000.
 Assets = Liabilities + Equity

Retained
Cash earnings

-1,000 = 0 + -1,000

The worksheet
The transactions during an accounting period can be recorded in a worksheet, with columns for
each balance sheet item (cash, equipment, etcetera).
Each transaction is written in a row, with the increases/decreases added/subtracted in the
columns of the affected balance sheet items.
For each transaction, the accounting equation will hold: ΔAssets = ΔLiabilities + ΔEquity.

The first row is the opening balance (in the worksheet below this row contains all zeros since
in the example the company was newly incorporated).
The last row, holding the column totals, contains the ending balance values.

Worksheet with transactions

Note that at all times total assets equal total liabilities plus equity.

Also, note that the example balance sheet shown earlier (section ‘The balance sheet’) is the
ending balance sheet based on this worksheet.
When the accounting equation is used to keep track of the balance sheet, the balance sheet can
be constructed by adding the columns after each transaction.
In other words, the balance sheet is always up-to-date. Since the balance sheet shows the
financial position at a point in time, the main drawback
of this method is that it is not clear how well the firm has performed over time. This is because
the expenses and revenues are added to
retained earnings and are not recorded separately. In the next lesson double entry
bookkeeping, changes in retained earnings (expenses, revenues as well as dividends) are
separately recorded.
Key Points
 The accounting equation can be the basis for a simplified bookkeeping method to keep track of balance sheet
items only

 Sales and expenses are included in retained earnings and are not separately recorded, hence, no information about
the performance is readily available

Next is the Profit and Loss Statement (also called an Income Statement). This report will show
how your business did in a specified period of time. It will also show you how much money you
spent on expenses and if and hopefully how much profit you made in that time frame.

Read this page to see a sample of a Profit and Loss Statement and what this income statement
consist of.

Where the balance sheet shows the financial position at a point in time, the income statement
shows the change in equity as a result of expenses and revenues
(equity can also change for example as a result of issuing shares, repurchasing shares, and
paying dividends).
Hence, the income statement shows the performance of the firm over some period. In public
financial reports, this period typically is a quarter or a year.
Within the firm monthly reporting is common practice as well. The income statement is used to
assess profitability, as the expenses for the period are deducted from the revenues. When net
income is positive, it is a called profit. When negative, it is a loss.

The income statement is sometimes called the profit and loss statement (or, ‘P&L’).

Continuing the worksheet example, the income statement can be derived from the expenses
and revenue which were added to retained earnings (transactions on
10, 15 and 26 January; the transaction on 31st of January is a dividend payment, which is not
an expense).

Example income statement

Naturally, for-profit firms will engage in activities to maximize net income. Net income
increases when assets increase relative to liabilities (abstracting from cash transactions
between the firm and the shareholders such as issuing new shares or paying a dividend). For
example, a trading firm will try to exchange inventory for more than they have paid for. At the
same time, other assets may decline in value (machines need repairs, wages need to be paid,
etc) and liabilities may increase (interest expenses are incurred). Thus, the balance sheet has a
direct relation with the income statement.

It is important to realize that revenue and expenses are not (always) the same as cash inflows
and outflows. For a given cash outflow, an expense can be recognized in a period prior to
payment, the same period or a later period. The same idea holds for revenues and incoming
cash flows. This is what accounting makes very flexible and at the same time it opens the door
for manipulation of net income. Accounting principles provide guidance and rules on when to
recognize revenue and expenses.

Example

Generally, accounting principles require that a company recognized revenue when it has
delivered the goods/services to the customer, even if the customer has not paid yet.

This is quite common in business-to-business transactions where companies grant credit to

their customers. Payment by the customer needs to be reasonably certain though for the
revenue to be recognized. (i.e., selling goods on credit to customers who are unlikely to pay
would not result in revenue.)

The technicalities of this relation as well as the timing differences between cash flows and
revenues/expenses are discussed in accrual accounting.

Key Points
 The income statement shows net income over some period (usually a quarter or a year)

 The income statement is sometimes called the profit and loss statement (or, ‘P&L’)

 Net income equals revenues minus expenses

 accounting principles determine when revenues and expenses need to be recognized- the balance sheet and
income statement are interconnected

Last is the Statement of Cash Flow. It will show you and your investors the cash flowing in and
out of your business. Most bankers and investors are going to want you to prepare one;
however, if you have a very small business and none of your outside people are requesting it,
you may not need to bother with the official formatted report until you get big enough for
investors.

The cash flow statement gives insight how cash has been generated and used over the period.
The reader of an annual report can tell by comparing the end of year cash balance with the
beginning of year cash balance what the change in cash over the year is. However, this
information is not very revealing by itself. For example, a decline in the cash balance does not
necessarily mean it was a ‘bad’ year. A decline in cash could be due to repaying a loan or
investing in new assets.

The cash flow statement shows the change in cash over the period as the sum of cash
generated/used by three categories: cash from operating, investing and financing activities.

Cash from operating activities shows how much cash has been generated by daily operations. It
is equal to cash received from customers minus cash paid to suppliers, cash paid to employees,
interest paid, and other operating items. A positive operating cash flow shows that the business
has generated cash. A negative operating cash flow means that cash has been used during the
period. Start-up companies usually have negative operating cash flows.

Cash from operating activities shows the balance of cash that has been invested in long term
assets and cash received from disinvestments (selling long term assets).

Cash from financing activities shows the cash flows related to the financing of the companies. It
equals the cash inflows for attracting funding by issuing shares or obtaining new loans and the
cash outflows for repaying loans, paying out dividends, etcetera.

The example cash flow statement below is based on the previous example. The entries in the
column ‘cash’ in the worksheet (40,000, -8,000, -500, etcetera) are organized by type:
operating, investing and financing cash flows. Since the corporation is newly incorporated, the
beginning of period cash is zero. Hence, the change in cash equals the end of period’s cash
balance.

Example cash flow statement

Note: For those who use the free spreadsheets from this site, I am in the process of building a
new spreadsheet that will include a basic cash flow spreadsheet in it. See more details below.
Read this page for examples of a Statement of Cash Flow and the two methods for preparing
one.

Key Points
 A negative cash flow means cash has been used

 A positive cash flow means cash has been generated

 The cash flow statement shows operating cash flow, investing cash flow and financing cash flow which add up to
the change in cash over the period

 Operating cash flow is cash generated/used by day-to-day operations

 Investing cash flow is cash generated/used with (dis)investing in/of long term assets

 Financing cash flow is cash generated/used with the funding of the company (issue shares, new debt, paying
dividend or repaying debt)

Now let’s briefly go over some things that you and your investors will look at in your financial
statements for a small business.
Comparative Analysis
In most accounting software you can print out comparative financial statements which
compare a specified period of time to a previous period…or just pull out last year’s or quarter’s
financial statement and compare it to your current one.

 Are sales better or worse?

 Are costs more or less (compare each expense)?
 Is your cash flow improving?
If you are a new business compare, your actual performance with your planned one. Look
closely at your pro forma statements (Pro forma financial statements are forecasts of the
financial position of a business at some defined point in the future.)

 Do you have less sales than you predicted…if so why?

 Where any expenses greater than you predicted? Is there a way to lower them?
Existing businesses can use their budgets to do this comparative analysis also.

Relations Between the Financial

Statements
In the figure below the relations between the financial statements are shown for another
fictitous company (the company used in the previous examples is not used as the company has
no beginning balance).

As mentioned above, the balance sheet shows the financial position at a point in time. It
therefore cannot contain information that is related to some period, such as sales or wages
expense.
It is common practice to include a beginning of period balance sheet as well as an end of period
balance sheet in a financial report. This way the reader can form an opinion about how the
firm’s financial position has changed.

The cash flow statement and the income statement both give information about the firm’s
performance over the period, albeit from different angles. The cash flow statement explains the
change in cash. In other words, it explains how the beginning of period cash has turned into the
end of period cash by differentiating between operating, investing and financing activities.

The income statement shows a presentation of the sales, the main expenses and the resulting
net income over the period. Net income is based on accounting principles
which gives guidance/rules on when to recognize revenues and expenses, whereas cash from
operating activities, obviously, is cash based.

As dividends do not reduce net income, the income statement does not always explain the
change in retained earnings over the year. (Net income only equals the change in retained
earnings when no dividend is paid out). The statement of retained earnings (or a similar
statement) is included to show how equity has changed because of net income and possible
dividend payments. It shows the beginning value of retained earnings, to which net income is
added and dividends subtracted, resulting in end of year retained earnings.

Key Points
  The balance sheet is used to assess the firm’s financial position at a point in time

 The cash flow statement and the income statement are used to assess performance over the period. The cash flow
statement explains the change cash from the beginning of year versus end of year

 The income statement shows the performance over the year

 The statement of retained earnings shows how beginning of year retained earnings increases with net income and
decreases with dividends, resulting in end of year retained earnings.

Industry Comparisons
Many bankers and investors will analyze your financial statements against others in your
industry and their own set of standards. They make their comparisons by using some common
financial ratios.
So in conclusion, understanding financial statements for a small business is imperative to the
success of your company. Prepare them, print them out, and study them. If you need help it
would be worth your time and investment to take them to an accountant or financial adviser
the first time.

Remember the sky’s the limit when it comes to growing your business!

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3 Essential Financial Reports for Your Small
Business Bookkeeping
June 21, 2017 Posted by Elise Fajen to Accounting, Business Advice, Business

My colleague recently wrote about the importance of closing your business’s books at
the end of your fiscal year. A few of you reached out to us after reading her post, asking
for more about some of the financial statements that Melissa mentioned.
We’re happy you asked!
Many entrepreneurs are intimidated by their accounting, and choose to hide from it. But
when they do this they lose sight of the value and intelligence financial reports add to
their small business and to them as a business owner. After all, the idea of inDinero
came to our very own fearless leader when she realized how managing the money
was the best way to actually make more of it.
No matter how big or small your business is, whether you do your own bookkeeping or
you have an entire accounting team, there are three financial reports that all
entrepreneurs must know like the back of their hands:

 Balance Sheet
 Profit & Loss (or Income) Statement
 Cash Flow Statement
The following infographic from The Business Backer provides a visual guide to
understanding your business's financial statements. You can also click on each report
name in the list above to jump to an in-depth breakdown of each statement.
Breaking Down Your Business's Three Go-
To Financial Reports:
1. Balance Sheet
Of the Big Three Financial Statements, the balance sheet is the only one that shows the
financial health of a company at a given moment. Instead of listing your business’s
income and expenses like the P&L does, the balance sheet is a two-sided chart with
three components (Assets on one side and Liabilities and Equity on the other):
One side lists the value of what you owe (your liabilities) and any owner equity
(including your retained earnings) while the other lists the value of what you own and
who owes you (assets):

The total of each of the two sides of the balance sheet should show the same amount to
evaluate whether your balance sheet is properly balanced–accountants LIVE by this
formula. To determine the relationship between the three amounts, accountants use
a simple equation:
For corporations, the equation looks like this:
Assets = Liabilities + Shareholder’s Equity
And for sole proprietors and partnerships, it looks like this:
Assets = Liabilities + Owner’s Equity
2. Profit & Loss Statement
The profit & loss (P&L) statement (aka income statement) shows your revenue, costs,
and expenses during any given period of time. The P&L is the best view into your
bottom line, or net income, which is why it’s typically used to show business lenders and
investors whether your company has made or lost money during a given period.
Your business’s net income is also what will be used to determine its taxable
income each year. This is calculated by subtracting your business’s expenses from its
total revenue, which you can find using your P&L.
If you are familiar with the differences between cash and accrual accounting, you can
probably guess that the method you chose can really dictate the figures reported on
your P&L. Because each method has its own timing for recognizing revenue (cash
requires money to change hands and accrual recognizes income and expense as they
are earned in real-time), the P&L for any given period will reflect different transactions or
values.

3. Cash Flow Statement

Your cash flow statement shows each and every one of your company’s incoming and
outgoing transactions—how you’re spending your money and how you’re earning your
income—over a period of time. The cash flow statement takes your business’s net
income (from your P&L, remember?) and takes any non-cash transactions into account
from operations, investing or financing activities to give you a picture of exactly what
happened to company’s cash during that period.
So, if a company gets $1M in capital, but their P&L shows a net income loss of $50k
during the same period, their cash flow statement will show a $950k net increase in
cash for that period.
From there, your cash flow statement provides a more comprehensive view of how your
business operates, where it’s making money, and how you make choices about
expenses. For this reason, investors typically scrutinize the cash flow statement.
A cash flow statement accounts for three types of activities:

 Operations: the business functions you need to operate, including accounts receivable,
accounts payable, and inventory.
 Investing: long-term changes to equipment, acquiring or selling assets, etc.
 Financing: acquiring debts, repaying loans, etc. which don’t affect your bottom line, but
they do affect the amount of cash in the bank!
How do these 3 reports make for 1
financially-savvy business owner?
Immersing yourself in your business’s accounting can be eye-opening. It’s the best way
to see how money actually flows in and out of your business and gain the context you
can use to ask yourself, your employees, and your stakeholders the right questions.
Understanding these three financial statements is an important step in becoming a
smarter, more data-driven business owner.
From here, you’re on the right track to being able to apply your own financial savvy as a
primary decision maker of your business. For 99 more accounting and tax terms that
can help drive your business, download our glossary, Accounting Alphabet for Business
Owners and CEOs.
About the author
Elise Fajen
After founding Wind-Blox in her freshman year of college, Elise has an obsession with
all things entrepreneurial. She's an alumna of George Fox University and lover of all
things covered in glitter. Get in touch with Elise today at [email protected] or
(503) 388- 3546.
Tariq Gill

10/23/2017, 3:52:13 PM

Thanks for all these stuff. you pleased it in a very descriptive way. thanks for it.
stay blessed
Reply to Tariq Gill

Zee

2/4/2018, 12:15:25 PM

Good information for a non accounting background small business owner.

Reply to Zee

Gia Glad

2/9/2018, 6:00:45 PM

Good stuff
Reply to Gia Glad

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Profit & loss and balance sheets

 Profit and loss
 Balance sheet
 Financial health indicators

Where forecasts provide an estimate of your financial position, financial

statements are historical and outline the actual results achieved. Financial
statements are usually produced monthly and at the end of the financial
year.

It is important to set aside time each month to analyse your financial

statements, to enable you to control and improve your business

Financial statements may include:

 profit and loss

 balance sheet

Profit and loss (P&L)

Usually produced monthly, this is a summary of income and expenses for
your business. The P&L will inform you whether your business made or lost
money for the month under review.
A P&L usually has five main components:

 revenue (sales/turnover)
 cost of goods sold (COGS)
 gross profit (revenue minus COGS)
 expenses
 net profit (gross profit minus expenses)

Formula: Sales – COGS = gross profit – expenses = net profit

The net profit will show whether your business has earned or lost money.

When reviewing your P&L it is useful to analyse four key benchmarks or

performance indicators (KPIs).

Analysis KPI Formula

What percentage of the sales price covers the cost of

COGS as a percentage of sales/revenue COGS ÷ revenue x
providing or producing the product or service?

Gross profit margin

Gross profit ÷ rev
Is my business running profitably?
Net profit ÷ reven
Net profit margin

What percentage of the sale price covers the fixed costs

Expenses as a percentage of sales/revenue Expenses ÷ reven
of my business?

Gross profit is an indicator of efficiency. The higher the gross profit margin
the better, as your business keeps more from each dollar of sales. If your
gross profit margin decreases over time you will need to determine the
reason and take action to address the decline.

The net profit margin is an indicator of how much profit you make (before
tax) from every dollar you spend. A fall in net profit margin generally means
you are paying more in expenses, which needs to be monitored. More
profitable businesses generally spend less of their income on expenses.
View our example profit and loss statement

Your business structure will determine how some expenses are calculated.
Your accountant can provide detailed advice regarding your structure.

Sole traders – drawings (money taken by the owner for personal use) are
not an expense. You pay tax on the net profit regardless of how much you
have taken in drawings.

Partners – if there is a partnership agreement, net profit is allocated

according to the proportion set out in the agreement. If there is no
agreement, net profit is shared equally between the partners. Each partner
pays tax on the amount of net profit they receive, regardless of how much
the partner may have taken out as drawings.

Companies – salaries for working directors are treated as an expense

along with employees’ wages. Net profit is available for distribution to
shareholders as dividends. Net profit and taxable income can be different
because for tax purposes some expenses may or may not be allowable
and some income may be assessable or not assessable.

Balance sheet
A balance sheet is a snapshot of what a business owns (assets) and owes
(liabilities) at a specific point in time. A balance sheet is usually completed
at the end of a month or financial year and is an indicator of the financial
health of your business.

A balance sheet is in three sections:

 assets – including cash, stock, equipment, money owed to business,

goodwill
 liabilities – including loans, credit card debts, tax liabilities, money
owed to suppliers
 owner’s equity – the amount left after liabilities are deducted from
assets

Assets and liabilities are divided into current (short-term) and non-current
(long-term) as shown below.
 Items of value that are expected to be consumed or converted into cash within the next
Current assets
stock that turns over regularly and payments from debtors.

Items not expected to be consumed or converted into cash within the next 12 months, s
Non-current assets
vehicles, buildings, and goodwill.

Items expected to be paid within the next 12 months, such as credit card debts, tax owe
Current liabilities
and stock purchases.

Items not expected to be settled within the next 12 months, such as mortgages on build
Non-current liabilities
loans.

View our example balance sheet

Financial health indicators

Your P&L and balance sheet can be analysed in more detail to determine
key performance indicators (KPIs) as outlined below.

Analysis KPI Formula

What level of sales do I need to cover all my

Breakeven point COGS + expenses
expenses?

Gross profit margin Gross profit ÷ revenue x 100

Is my business operating profitably?
Net profit margin Net profit ÷ revenue x 100

Does my business have too much debt? Debt to income ratio Total liabilities ÷ sales x 100

Can my business survive an economic downturn? Debt to equity ratio Total liabilities ÷ equity x 100

Can my business afford to pay its bills? Liquidity ratio Current liabilities ÷ current as

How much working capital should I retain in the

Working capital ratio Current assets ÷ current liabil
business?

Is my business earning a worthwhile return? Return on investment Net profit ÷ equity x 100
How quickly is my stock turning over? Inventory turnover Closing stock ÷ COGS x 365

How many days do customers take to pay me? Accounts receivable Accounts receivable ÷ net sal

How quickly am I paying invoices? Accounts payable turnover Accounts payable ÷ purchase

COGS + total expenses - (depr

Are my expenses under control? Expenses ratio
interest) ÷ revenue x 100

ndividual Performance Commitment and Review Form (IPCRF)

Template
By Mark Anthony Llego Last updated Apr 5, 2016

21

ShareFacebookTwitterGoogle+

This rating scale is based on the Civil Service Commission Memorandum Circular No. 06,
series of 2012 that sets the guidelines on the establishment and implementation of the
Strategic Performance Management System (SPMS) in all government agencies.

Update: OPCRF of School Heads and IPCRFs of Teaching and Non-Teaching Employees in
Schools

NUMERICAL ADJECTIVAL DESCRIPTION OF MEANING OF RATING

RATING RATING

5 OUTSTANDING Performance represents an extraordinary level of achievement and

commitment in terms of quality and time, technical skills and knowledge,
ingenuity, creativity and initiative. Employees at this performance level
should have demonstrated exceptional job mastery in all areas of
 responsibility. Employee achievement and contributions to the organizations
are of marked excellence.

4 VERY Performance exceeded expectations. All goals, objectives and target were
SATISFACTORY achieved above the established standards.

3 SATISFACTORY Performance met expectations in terms of quality of work, efficiency and

timeliness. The most critical annual goals were met.

2 UNSATISFACTORY Performance failed to met expectations, and/or one or more of the most
goals were not met.

1 POOR Performance was consistently below expectations, and/or reasonable

progress toward critical goals was not made. Significant improvement is
needed in one or more important areas.

The overall rating/assessment for the accomplishments shall fall within the following
adjectival ratings and shall be in three (3) decimal points.

RANGE ADJECTIVAL RATING

4.500-5.000 Outstanding

3.500-4.499 Very Satisfactory

2.500-3.499 Satisfactory

1.500-2.499 Unsatisfactory
 below 1.499 Poor

Competencies shall be monitored for developmental purposes. In evaluating the individual’s

demonstration of competencies, this rating scale shall apply.

SCALE DEFINITION

5 Role Model

4 Consistently demonstrates

3 Most of the time demonstrates

2 Sometimes demonstrates

1 Rarely demostrates

MORE FROM TEACHERPH

TEACHING & EDUCATION

RPMS Frequently Asked Questions (FAQs)

Apr 10, 2016

TEACHING & EDUCATION

OPCRF of School Heads and IPCRFs of Teaching and Non-Teaching Employees in Schools
Apr 5, 2016

TEACHERS' LIFE

IPCRFs for Teacher I – III

Apr 5, 2016

TEACHING & EDUCATION

MOVs for Teachers

Apr 4, 2016

Grievances and Appeals

 1. A grievance Committee shall be created in each level of the organization to act as
appeals board and final arbiter of all issues relating to the implementation of RPMS.
2. The office performance assessment as discussed in the performance review and
evaluation phase shall be final and not appealable. Any issue/appeal on the initial
performance assessment of an office shall be discussed and decided during the
performance review conference.
3. Individual employees who feel aggrieved or dissatisfied with their final performance
ratings can file an appeal with the Grievance Committee at their level within ten (10)
working days from date of receipt of notice of their final performance evaluation
rating from the rater. The ratee, however, shall not be allowed to protest the
performance ratings of co-employees. Ratings obtained by the ratee can used as
basis for reference for comparison in appealing the individual performance rating.
4. The Grievance Committee shall decide on the appeals within one (1) month from
receipt. Appeals lodged at any grievance Committee shall follow the hierarchical
jurisdiction of various Grievance Committees within the agency. For example, the
decision of the Division Grievance Committee is appealable to the Regional
Grievance Committee, which decision is in turn appealable to the Central Office
Grievance Committee.

Individual Performance Commitment and

Review Form (IPCRF) Template
Download: https://www.facebook.com/groups/teacherph/ –
Group Files
Download: https://www.facebook.com/groups/teacherph/ –
Group Files
Read:

1. Guidelines on the Enhanced School Improvement Planning (SIP) Process and the
School Report Card (SRC)
2. Guidelines on the Establishment and Implementation of the Results-Based
Performance Management System (RPMS)
3. Portfolio and Rubrics Assessment Tool for RPMS Evaluation
4. School Improvement Plan Guidebook
5. Collage Templates for Brigada Eskwela and Senior HS Souvenir Books
 6. DepEd Computerization Program (DCP) Guide

inventory of major immediate output