Part 1: Simulation Naming Your Business Assignment
After you decide on a name for your simulation clothing store, enter your start-up decisions in the simulation and respond to the following questions.
Answer the following questions. There is no minimum word count, but be detailed.
1. What clothing product line do you intend to offer? What other kinds of products can you envision selling at your store?
2. Describe your “target market” (the customer segment you want to serve):
3. List some advertising mottos, jingles, or lines to which your target market might relate to:
4. Which name did you choose? Why? Enter the name in the start-up decisions in the simulation once the simulation is open for play.
Part 2:Simulation Business Plan Assignment
***This assignment is based on the Simulation, not on your own business idea.***
Planning is essential in any business. This assignment is designed to help you develop a basic “game plan” that can help you make decisions as well as to reflect on the decision-making process for your retail store in the Simulation. Use the guide questions below to write a business plan to describe who you are, what market your business will serve, and how you will ensure success. Use the context of the simulation for your plan, and be sure to address all major decision areas.
Limit your plan to 600-800 words total. Use proper spelling and grammar. Refer to the rubric for grading.
Click here to learn more about business plans. (Links to an external site.)Links to an external site.
Answer the following questions in paragraph format.
1. Company Description – Who are we?
2. Market Analysis – What market are we serving?
3. Marketing – How will we market our business?
4. Projections – Where do we expect the company to be in two years?
Click here to view a sample assignment.
Part 3: Simulation Marketing Assignment
Marketing is the process by which a company creates and distributes something of value to its customers. It encompasses a wide range of activities in your business. The 4P’s of marketing – product, price, promotion, and place – provide a framework for understanding the process of creating and distributing value to customers.
Complete the following questions as it relates to your Simulation.
1. Who is your target customer? Be specific! It should not be everyone.
2. How would you define the product offered at your store? Is it just clothing, or something more than that?
3. What methods can you use for setting the price? What tools are available for measuring the impact on your price decision? (hint: refer to
page 11 in the student case manual
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for more about pricing, and look at possible tools you could use to measure impact – i.e. Breakeven Analysis)
4. What is the role of advertising/promotion in your marketing mix? How might you measure the effectiveness of your decisions?
Please use correct spelling and grammar in paragraph format. The word count should be between 500-700 in total (not per question). Refer to the rubric for grading. Click here to view a sample assignment.
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SampleAssignment: Simulation Business Plan
We are Urban Trends, an “ultra trendy” fashion retail store that focuses on mixing street wear clothing designs
with current and retro pop culture for styles of clothing ranging from vintage to futuristic, yet trendy all the
same. This idea to provide the public with this type of product began with a collective vision to “storm the
norm”, or in other words, produce an ever changing style that transcends the typical casual lifestyle attire that
is commonly seen today. Our goals and our visions at Urban Trends will situate us on a path that will
consistently place us at the forefront of reinventing the wheel in regards to successfully integrating the world
of pop culture and clothing apparel, and we will do so while fulfilling our service promise; friendly customer
service to help you find the best version of yourself. We will serve you style with a smile.
While our store is for anyone that shares an interest in our style of clothing, our target audience will sway
towards younger millennials and older teens, specifically in the age group of 17-32, as we feel that this is the
age group that is more in tune with current pop culture and its trends. Not only this, but with the ever growing
rise in social media usage and popularity and with the rise of social media influencers setting trends, this will
help give our clothing style the backing it needs from this targeted age group to succeed.
The way the business will run is quite simple in nature. From the employee side, there will be two full time
staff and a revolving staff of 3-5 part timers that work 15 hours per week, rotating every other day. The
business itself will be open for 9 hours daily Monday-Sunday. A code of ethics and guidelines, a model for
approach in regards to helping customers, and store etiquette will be understood at each level on the chain of
command, from the manager of the store to any part time worker. The message will be understood clearly
and concisely, and managers will ensure that all team members and employees of the store are on the same
page so that the store may operate smoothly, efficiently, and effectively while being able to provide expected
friendly customer service and advice. On the operations side in regards to merchandise and inventory, there
will be 1000 pants and 1000 tops in inventory alone per each quarter. Tops will be sold at $21-$22 each while
pants will be sold at $30-$31 each. We aim to keep our prices competitive and customer friendly while still
maintaining quality and brand recognition. The amount of tops and pants that will be ordered will be based on
circumstances and the results of Q1 moving forward. We will adjust accordingly based off the review of Q1.
Marketing the business will be a twofold attack with the online website and social media. An ultra-trendy
store is something that screams “new and being as it may, social media and online recognition coincides
perfectly with that. In an age of technological advances where more business are becoming intertwined with
technological models, we cannot afford to stay behind the curve and only be “old school” in our ways. Word of
mouth is often said to build the most loyal customer bases, and our goal is to get our image, brand, and
product out onto the market via social media. That includes sending samples to popular social media
influencers with a huge following, having our own Instagram, Snapchat, Twitter, and Facebook page. It would
be beneficial to not only advertise online, but have an online website as well, which we will have that will
contain up to date pricing, special deals, deals of the month, and clearance sales or holiday sales. This is not to
single out other methods of advertisement and promotion. All options are on the table once profit is
achieved.
Lastly, the vision going forward into the future. As the owner of this store, having decided to move the store to
Main Street as opposed to keeping it on a college campus means we are looking to rebrand our image. Two
years from now, we fully expect the company to be operational, netting $150k in sales per quarter, and
producing profit. We plan to be a mainstay and popular option in the local economy for many years to come.
- Sample Assignment: Simulation Business Plan
Entrepreneur
The Retail Entrepreneurship Simulation
Jerald R. Smith, Florida Atlantic University
Peggy A. Golden, Florida Atlantic University
Michael Deighan, Interpretive Simulations
Charlottesville, Virginia, USA
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This manual and the simulation described in it are copyrighted with all rights reserved by
Interpretive Software, Inc. Under the copyright laws, neither this manual nor the software may
be copied, in whole or in part, without written consent of the authors, except in the normal use
of the simulation for educational purposes, and then only by those with a valid license for use.
The same proprietary and copyright notices must be affixed to any permitted copies as were
affixed to the original. This exception does not allow copies to be made for others, whether or
not sold. Under the law, copying includes translating into another language or format.
Purchasing the simulation experience gives the owner the right to participate in a unique learning
event. Each student or participant must purchase the simulation to take part in the event or the
institution sponsoring the event must purchase for the entire group participating in the event.
Limited Warranty on Media and Manuals
In no event, will Interpretive Software, Inc. be liable for direct, indirect, special, incidental, or
consequential damages resulting from any defect in the software or its documentation, even if
advised of the possibility of such damages. In particular, the authors shall have no liability for any
programs or data stored in or used with the computer products, including the cost of recovering
such programs or data.
This simulation experience is sold, “as is,” and you, the purchaser, are assuming the entire risk as
to its quality and performance. The warranty and remedies set forth above are exclusive and in
lieu of all other, oral or written, express or implied.
For more information about other products from Interpretive Software, please contact:
Interpretive Simulations
1421 Sachem Place, Suite
2
Charlottesville, VA 2290
1
Phone: (434) 979-0245
Fax: (434) 979-245
4
Website: http://www.interpretive.com
Discover a Better Way to Learn. Active Learning through Business Simulations.
Copyright © 1987–2007 Peggy A. Golden and Jerald R. Smith
Copyright © 2008–2018 Interpretive Software, Inc.
All rights reserved. Printed in the United States of America. No part of this book may be used or reproduced in any manner
whatsoever without written permission of Interpretive Software, Inc. Cover image © BigStock. Incident images, audio, and video
© iStockPhoto, GettyImages, and BigStock. Graphic images used in manuals © BigStock and iStockPhoto.
iii
1
Entrepreneur Quick Start Guide 3
Entrepreneur Manual 4
5
Entrepreneur Case
6
Location 6
Product Line 7
Business Name
8
Finance 9
Inventory Management
10
Hours 11
Return Policy 11
Pricing 11
Marketing
12
Staffing 13
Overhead and Other Expenses 13
Incidents
14
Reports 14
Performance Measures
16
Next Step 17
19
Planning, Organizing, and Controlling 21
Financial Statements 23
Team Dynamics 25
Simulation Objectives
26
27
Worksheets
28
Marketing Data Analysis 29
Quarterly Budget Variance
30
Log of Quarterly Decisions 31
Glossary
32
Index
38
Printed March 26, 20
18
iv
Dr. Peggy Golden is currently Professor of Management and International Business at Florida
Atlantic University teaching graduate and doctoral courses in Strategy and the Environment of
Business. She has also taught courses on global competition in Spain and to computer industry
executives in Asia. Prior to her arrival at FAU, Golden taught at the University of Louisville for five
years in a variety of areas including the management of information systems. All courses are
taught through extensive use of cases, experiential exercises, and simulation experiences to
reinforce the learning process.
In addition to teaching college courses, Dr. Golden has also conducted numerous workshops in
the development of competitive strategy, general management principles, special topics for
women managers, time management, decision-making, and team-building. Consulting activities
include strategic planning, systems analysis and design, and management of change.
Dr. Golden is an active researcher and writer. She is currently studying corporate reputation and
the interaction of corporate governance on top management team pay disparity. She has
published seven management simulation games and numerous articles and papers in the area of
strategy formulation and implementation, and simulation development and use. Visit Dr.
Golden’s homepage at http://professorgolden.net
Dr. Jerald Smith is Professor Emeritus of Business Strategy and Policy at Florida Atlantic
University. He is the author of eight simulation games spanning many interest areas in
Management and Marketing. He has taught a broad range of courses at the undergraduate,
masters, and doctoral level. He was one of the first to teach a course on the Internet as a host
for professional MBA’s who are on the go. Dr. Smith has consulted for Fortune 100 companies in
diverse areas such as ethics training, supervision, and has helped formulate strategic initiatives
for these companies. He is the author of numerous articles.
Michael Deighan is a coauthor on the web-based editions of Airline, Entrepreneur, and
HRManagement. His expertise, insight, and creativity proved invaluable and made it possible to
convert these models to their current web-based versions. Michael joined Interpretive
Simulations in 1989 as lead software developer and is now Manager of Content Development.
He is coauthor on a number of Interpretive simulations: PharmaSim, AutoSim, BizCafe,
StratSimMarketing, StratSimManagement, StratSimChina, ServiceSim, CountryManager, and
MarketShare. In addition to developing software, he has been teaching computer programming
classes at Piedmont Virginia Community College in Charlottesville, Virginia, since 1990. Michael
received his B.A. in German and Economics from Washington and Lee University, and an M.A. in
German from the University of Virginia.
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A project of this magnitude cannot occur without the input and support of many people and
organizations. Special thanks go to the following people:
The Dean, Bruce Mallen, faculty in the Department of Management, International Business, and
Entrepreneurship and its chair, Darab Unwalla, and the Graduate School of Business at Florida
Atlantic University for support of our interest in management simulation and software. Our
supportive families are always in the background: Adele, Barbara, Michael, Charles, David,
Flossie, Susan, Jennifer, Matthew, and Willie.
The genesis for this endeavor is in the strong entrepreneurship program at Florida Atlantic
University. SUCCESS magazine studied over 250 entrepreneurship programs in the country and
published their list of the “Top 50 Business Schools to Study Entrepreneurship.” Florida Atlantic
University was among the colleges listed. The Entrepreneurship team at FAU includes the
director, Larry Klatt, and includes Paul Gugliemino, Kunal Banerji, Dennis Boyer and Bob Keltie.
This team believes that simulations are valuable teaching tools for entrepreneurship. This is a
real “Learn by Doing” pedagogical philosophy.
Professor Richard Hoogerwerf at Miriam College for beta testing the simulation in his classes.
Richard gave us 110% in testing and many valuable suggestions. Professor Marc Dollinger at
Indiana University for a foundation in entrepreneurship, and Professor James Gray at Florida
Atlantic University for making several suggestions in the field of retailing.
Early adopters and champions of the cause include: Mary Beth Pinto, Jeff Jones, Richard
Hoogerwerf, Judy Harris, Aston Moss, Salim Jiwa, Don Gudmenson, Ken Klatz, and John Pal.
Thanks to the team at Houghton Mifflin, Kathy Hunter, Susan Kahn, Florence Cadran, and Melissa
Russell. A special thanks to Pat Menard who is undoubtedly the most precise copy editor in the
business. Not only does she edit for typos but makes helpful grammatical suggestions and makes
sure all the numbers are correct.
Those brave souls who tested the beta version were of great help: Steven Maranville, Mary Beth
Pinto, Brian Hoekstra, Chris Scalzo, Connie Nott, Philip Little, Walt Bogumil, Rod Borer. Thanks to
all!
In this revision, we attempted to use all the comments and suggestions made by the many users
of the first edition of this simulation. If we tried to name all the contributors we would surely
omit one or more so we will simply thank all of you. We had some users who wanted a much
more complex simulation with a heavy international emphasis. Others said keep the simplicity of
the second edition in order that students who had never played a simulation could do so without
getting deep in the many “rules” of a complex simulation. Unfortunately, we could not do both
so we have opted for a less complex simulation in this edition.
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1
Introduction
ENTREPRENEUR
2
Welcome to the exciting world of simulations! The Entrepreneur
simulation provides an opportunity for you to manage a small retail
clothing store in a college town. You have the unique opportunity
to make business decisions, see how the decisions work out, and
then try again! In the process, you will get “hands-on” experience
operating a retail store.
In Entrepreneur, you will typically be making decisions as part of a
student management team. Teamwork is increasingly important in
business today, and a valuable part of the simulation experience is
learning how to make the best decisions when confronted with
several different opinions. Your group will have to decide how to
sort out your priorities and objectives in the context of limited
resources and a changing environment.
At startup, your team will need to name the shop, decide its
location, how to finance it, and pick a product line to best meet
your business objectives. You will then make weekly decisions to
purchase product, price and promote your line of clothing, set shop
hours and hire staff. In addition, you may have to respond to issues
raised by “incidents” (mini-cases), and complete supplemental
assignments chosen by your instructor.
You will need to understand the business in order to make good
decisions. Therefore, take some time to familiarize yourself with
the case before beginning the simulation. While working through
your decisions, you will find it helpful to refer to the manual for
information and management tips.
To get the most out of the Entrepreneur experience, we
recommend the approach outlined on the following page.
Entrepreneur is a
dynamic business
simulation covering
entrepreneurship,
ownership, retailing, and
the ethical dimensions of
management.
You compete against
your peers in an
Entrepreneur industry.
All teams start from the
same position and
compete in the same
environment.
You will gain experience
with management,
marketing, operations,
and finance.
3
Entrepreneur Quick Start Guide
PERIOD DECISIONS
• Operations
• Pricing
• Marketing
• Staffing
• Finance
SIM ADVANCES
• Check Schedule for times
• Complete Decisions BEFORE Deadline
SIMULATION ENDS
• Evaluate team performance
• Review what you have learned
STARTUP DECISION
• Access simulation from course website
• Input a company name
• Choose location, financing and product
• Team leader MUST finalize startup to allow access to period decisions
READ THE CASE
• Industry background
• Company starting situation
Your instructor may require additional assignments during the simulation.
Check the schedule and messages on your course website for details.
DECISION ANALYSIS
• Break-even
• Forecast
EVALUATE RESULTS
• Company reports
• Environment
4
Entrepreneur Manual
The remainder of this manual is divided into the sections described below. Your understanding
and success in Entrepreneur will be greatly enhanced by reading this manual before you begin
the simulation. The sections listed below will answer most of the questions students typically
have during the simulation experience, and reading them has the added benefit of improving
your competitiveness. Finally, the case and help notes are available on-line in the simulation
software.
Section 1: The Entrepreneur Case presents information on your retail clothing store in a form
similar to a business school case. A thorough understanding of your business, its current
situation, and opportunities will help your group decision- making process.
Section 2: Entrepreneurship Essentials provides a brief introduction to entrepreneurial
management: what it is, why it is important, and what concepts will be used in the simulation. In
addition, each of the basic functional areas covered in Entrepreneur are discussed.
Appendix: This section includes worksheets to help with decision making, a glossary containing
business terms that are used in the simulation, and an index.
5
Entrepreneur Case
ENTREPRENEUR
6
Entrepreneur Case
You are purchasing a store that sells casual clothes, a specialty business in the retail apparel
industry with a long history in the local community. It has been a family-owned business for many
years, selling tops and pants for work and recreation at moderate prices. The youngest members
of the family pursued careers in other fields and the retiring owners are interested in selling the
business to ambitious entrepreneurs who can update the image and carry the business forward.
Location
The store has been in the same location for many years, across from the college campus. The
college location appeals to the student population and there is a fair amount of trade from
surrounding neighborhoods. Rent is $5,000 per quarter, and the store is about 1,500 square feet,
including both display area and storage space. While parking is limited, foot traffic in the area is
constant, and the previous owners have been moderately successful in this location. Their sales
last year were $400,000 and their after-tax profit was just over $11,000. The lease expires now,
so you have the opportunity to renew the lease at the current rent or relocate.
If you plan to continue selling a medium-priced casual line of clothing, then staying at the college
location should be a good choice. On the other hand, if you are targeting a different customer
base, another location might make more sense. Small retail apparel stores can be found in a
variety of locations. Although they are most prevalent in retail malls, successful operations can
be found in shopping plazas, downtown stores, and other types of retail space (e.g., adjacent to
drive-in grocery convenience stores, former gas stations, and hotel arcades). Each type of
location attracts a unique clientele and it is important to be able to identify which population
your store is serving and whether there is a large enough segment available to generate profits.
Consider the customer base and segment population in your location and be aware of their needs
and expectations.
The average floor space required for this type of retail outlet is 1,000 to 2,000 square feet with
additional stockroom space of 500 to 1,500 square feet. In addition to the college location, you
have three other choices, as described next.
• You may lease space in a shopping mall located in a newly developed subdivision, about a mile
from the college. The rent is $6,000 per quarter for 2,000 square feet. The Merchants Association
at the mall provides a moderate amount of free advertising through flyers. Parking is close and
plentiful.
• A store along the main street of the town is available for lease at $6,000 per quarter. The street
is steadily becoming a shopping area; many stores are moving there and making improvements.
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There is parking along the street and in back of the stores. Other merchants report there is usually
enough parking available. The store is 1,800 square feet.
• A corner property between the college and downtown is available. It currently has a closed service
station on it, but the owner will convert it to a retail store of 1,500 square feet with new interior
and exterior. There is parking for several cars, and it is located on a busy intersection with good
visibility. The landlord will rent it at $4,000/quarter for the first year, with a clause to raise the
rent in the second year to no more than $4,500.
None of the locations is “bad”. The location decision should be based on your product line, price
range, and customer base. However, your team needs to choose the location carefully, since the
opportunity to relocate will not be available later in the simulation
Product Line
The tops and pants store that you will be operating is a specialty business in the retail apparel
industry. Retailers report that they carry several types of pants and an equivalent array of tops,
depending on the clientele they wish to attract. The type of population or market segment will
affect the type of inventory carried in an individual store. Although the early entrants in this
market limited their inventory to jeans, most of the successful operations have broadened their
offerings to include a variety of styles of pants and tops (jeans, slacks, fatigues, T-shirts, blouses,
casual shirts, etc.). This provides a more complete product mix for customers. Depending on your
local market, your team may wish to offer a specialty line of garments, such as ethnic, designer,
or uniforms for healthcare, food, and other service professionals. Your store’s relationship with
its suppliers is excellent. Your primary vendor has offered to replace the existing stock if you
change your product line when you take over the business, as long as the product is in the same
price range. You can choose one of the following lines of clothing.
• Ethnic: You can choose to sell specialty clothing specific to a region or ethnicity. This includes
African, Asian, and Hispanic styles, as well as Western Cowboy.
• Casual: Your current inventory is casual clothing for the contemporary shopper. It includes jeans,
t-shirts, sweaters, and sports apparel.
• Designer: Designer clothes display the label or logo of a fashion designer. Designer brands use
name recognition to help sell the pants and tops.
• Ultra-Trendy: Ultra-trendy apparel appeals to the more fashion-conscious buyer. It includes pants
and tops that are the latest fad, as well as higher fashion clothing.
• Uniforms: The uniforms line provides apparel for healthcare, food, and other service
professionals. This choice includes a casual line of surgical scrubs.
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You can be successful with any of the product lines, though you need to coordinate your choice
with your location and target customers. While you may change to any of the product lines at
any time, you will be charged a 10% restocking fee for your inventory of old product. Also, keep
in mind that when you switch clothing lines, it will take some time to reach normal sales volume.
Frequently changing your product line will confuse customers.
Business Name
One of the most important decisions an entrepreneur makes is naming the business. This is also
a legal issue since names are usually registered in a governmental office for the locale in which
the business operates.
Once your business has a new name, the image and reputation for the store immediately begins
to take form. Although it is possible to rename your business if the first name selected turns out
to be unsatisfactory, it is important to select a name that will stand the test of time. It should also
be adaptable to a new product line if you desire to change the line sometime during simulation
play. Factors you may want to take into consideration in naming your business and some
good/bad examples follow.
• Is the name descriptive of what you sell?
Campus Clothing Corner vs. The Corner Store
• Does it avoid meaningless words or initials?
The Jeans Shop vs. The JGD Shop
• Is the name distinctive and easy to remember?
Jerry’s Jeans vs. Emily Lanahan’s Clothing Store
• Does the name adapt to changes in products?
Casual Clothes, Etc. vs. Just Tops
Of course, some of these factors have conflicting requirements. It can be difficult to come up
with a name that is both descriptive and flexible. You will need to determine which factors are
most important for your store’s image. In any event, be sure to choose a business name that is
descriptive, yet flexible.
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Finance
Sales for the past four quarters have ranged from $80,000 in the first quarter (January–March)
to $110,000 in the fourth (October–December), with average quarterly revenue of $100,000.
After-tax profit for the year was about $11,200. Your accountant has audited the books and
believes that the business is a healthy going concern, especially since it could be operated more
efficiently than it had been by the previous owners. In her opinion, the purchase price of $55,000
is fair since it includes $21,000 in inventory, some residual advertising, and the good reputation
of the firm.
Below is a summary of the income statement for last year, along with the balance sheet at of the
end of the year.
Figure 1: Income Statement (last year)
Gross Revenue $400,000 100.0%
Cost of Goods Sold $200,000 50.0%
Gross Margin $200,000 50.0%
Marketing $45,000 11.3%
Staffing $96,000 24.0%
Overhead & Other $43,000 10.8%
Total Expenses $ 184,000 46.0%
Profit Before Taxes $16,000 4.0%
Less Tax (30%) $4,800 1.2%
Profit after Taxes $11,200 2.8%
Figure 2: Balance Sheet (end of year)
Cash $15,000 Loans Payable $8,000
Rent Deposit $5,000 Total Liabilities $8,000
Inventory $21,000
Retained Earnings $33,000
Total Equity $33,000
Total Assets $41,000 Total Liab. and Equity $41,000
Your team must put together $75,000 to get the business started: $55,000 to purchase the
business, $10,000 for rent deposit, and $10,000 in working capital. There are several ways to
raise the capital needed, including selling stock (to the team members, friends or an angel
investor) and borrowing the balance of funds needed. Your team has formed a corporation and
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has “pooled resources” of $50,000 that will become the equity in the business, That is, 5,000
shares of common stock will be issued at $10 a share, for $50,000 in equity. For the remaining
$25,000, you have three options.
• You have been pre-approved for a $25,000 loan at 8% interest from a local bank through a
program with the Small Business Administration. In addition to the interest due, the bank will
automatically deduct $2,500 each quarter for principal reduction. This loan is a good choice for
those who want to have scheduled payments to pay back their debt.
• The father of one of the stockholders will grant a $25,000 loan to the company at 10% interest.
The terms require you to pay quarterly interest, but you can repay the loan principal at any time.
This is an interest-only loan; it is up to you to make principal repayments to reduce the debt. While
the interest rate is higher than the bank loan, you will have more flexibility in managing your cash
flow.
• An angel investor has offered to buy 50% of the stock shares for $25,000; the team would then
control the remaining 50% of the stock. The total number of shares would remain at 5,000.
Advantage: no loan interest or loan principal to pay each quarter. If additional funds are needed,
a bank will loan funds at 12% interest, and an automatic $2,500 loan payment on principal will
then be imposed.
In addition to cash to purchase the business, you will need working capital to operate it. Liquid
assets are required for everyday business functions: adding employees, purchasing inventory,
paying utilities and rent, etc. While you start with $10,000 in working capital, there may be times
when cash gets tight and you need additional funds. In that case, your lender will advance you
additional funds from a line of credit, charging you a one-time fee of 3% of the advance, plus
interest at the regular annual rate (8%, 10%, or 12%, depending on your financing choice).
Inventory Management
Good inventory management is critical to running your business. Before you can sell to customers
each quarter, you will need to purchase tops and pants. You must pay for your purchases in the
quarter you order them, and the value of the unsold product will be shown as an asset on the
inventory line of the balance sheet. Buying too much product can cause problems with cash flow,
so you will need to coordinate your sales projections with your product purchases to avoid
running short of cash. Also, keep in mind that the appearance of your store can affect sales. Both
overstocked, crowded shelves and under-stocked shelves with poor selection can hurt sales.
Sales forecasting is difficult, especially when you do not have a sales history to review. The
previous owners averaged about $100,000 in sales per quarter, or about 2,000 tops and 2,000
pants in the medium-price range per quarter. Keep in mind that this is an average, and demand
will be lower in the first quarter of the year (January–March) than around the holiday season
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(October–December). Demand for your products will also vary with your choice of pricing (low,
medium, high) and you should also not expect to sell exactly the same number of tops as pants,
so be sure to adjust your forecast, keeping all these factors in mind. While your initial forecast
may be off a bit, your projections will improve as you gain experience.
Whenever merchandise is displayed on open shelves and available for customer handling, there
is the possibility of it becoming soiled, stolen, lost in some way (getting swept off into the waste
can) or returned for credit. Goods are often pushed back on shelves, in drawers, or in the
stockroom until they are out of season and it is too late to have an end-of-season sale. No money
is received for these items, and they are written off the inventory at cost, with the expense
assigned to shrinkage. The more inventory you carry, the higher your shrinkage.
Hours
Your store should be open at times that are convenient to customers. While longer hours will
provide more convenience for your customers, they will also require more staff. The former
owners kept their shop open 10 hours per day, but you have the option to be open as few as 8
hours each day or as many as 12 hours. You will have to decide if it is better to be open more or
fewer hours, based on customer traffic at your store and the cost of staffing.
Return Policy
Your team will need to decide on the type of return policy your store will have. As you have likely
experienced yourself, there can be a vast difference in return policies from one store to another.
A stringent policy could result in somewhat fewer sales, but will reduce shrinkage. A liberal policy
will please customers but increase shrinkage. You may change your policy in the future, but for
customer satisfaction, you should not change frequently without thoughtful reasons.
Pricing
Prices must be established for pants/jeans as well as tops/blouses/shirts. Markup is the amount
added to the cost of goods to establish the selling price of a product. This is usually 100% of cost,
meaning if the wholesale cost of the item is $10, the retail price will be $20 ($10 + 100% x $10 =
$20). However, retailers often express markup as a percentage of retail price, in which case a
product that cost $10 and retails for $20 has a markup of 50% of retail ($10 ÷ [100% – 50%] =
$20). End-of-season reductions run approximately 25–35% off the retail selling price, producing
narrow profit margins on sale merchandise. Retail outlets occasionally take advantage of buyouts
of job lots and pass the savings on to their customers at the same profit margins as the regular
stock. These are commonly advertised as “special buys.”
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The previous owners of the store offered medium-priced clothing for sale (around $20 for tops,
$30 for pants). You will have the option of offering low ($10–14 tops, $20–24 pants), medium
($18–22 tops, $28–32 pants), or high priced ($26–30 tops, $36–40 pants) apparel in your store.
Your choice will affect the quality of the products you purchase, and should target the population
to whom you are trying to sell.
In the simulation, any time you change the price range (e.g., from medium to low), you will need
to return your existing inventory and pay a 10% restocking fee, which will be charged to “other
expense”. You must then order more product of the appropriate quality to replenish your stock.
You may price your tops in a different range from your pants, but if the difference is too great, it
could affect customer perception of your products, and sales may suffer.
Marketing
It is important that your store communicates value to its customers. The right mix of products,
competitive prices, a courteous and efficient staff, and effective marketing can maximize sales.
Build a marketing strategy that promotes customer awareness in your community with the
appropriate advertising media for the population segment you are targeting. Remember that
your store can create a positive image or marketing presence through effective advertising.
Retail apparel outlets advertise their merchandise in a number of ways. The most common is
newspaper advertising that is prepared by an agency and paid for as an expense of the business.
In addition, a manufacturer may provide co-op advertising if the retail outlet is carrying an item
that the manufacturer selects for promotion. Advertising of this type (that promotes the item
rather than the store) can save the retailer about 50% in advertising costs, and provide a residual
image to consumers. An example is a Levi-Strauss promotion of a new line of jeans with an
announcement that they can be purchased at a specified outlet.
Some shopping centers include “flyer” advertising as a benefit of tenancy; alternatively, some
shopping centers require that tenants participate in mall promotions and charge for the
advertising. Clothing retailers are able to reach their target segments effectively through this flyer
type of publication, if they have chosen their location wisely.
Other forms of advertising are effective only if the media are chosen carefully for their reach/cost
relationship. For example, the campus newspaper may reach students, but have trouble reaching
the typical downtown customer. When trying new media, it is recommended that you do not use
a random, unthinking method of making decisions, but rather plan to hold certain variables
constant while manipulating others. This allows you to begin to determine which marketing
elements are more effective in generating sales. Expect to spend from 5% to 10% of gross sales
on advertising.
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While advertising can help get customers into the store, promotional activity will help get product
into their hands. Your promotion budget will be used for special discounts and creating attractive
displays. As a guide, you should spend from $500 to $5,000 on promotion.
Staffing
Smaller retail pants and tops outlets of this size typically have a sales force of two people at all
times except for weekend afternoons and peak seasons such as “back-to-school” and Christmas
rush when more salespeople are necessary. Staffing includes a full-time manager or assistant
manager at all times, but you will need to hire additional part-time help to sufficiently staff the
store. Part-timers work 15 hours per week, and the number of workers you need will vary,
depending on the number of hours you are open, as well as the time of year. For the average
quarter, if you are open 10 hours per day (60–70 hours a week), you will need 4–5 part-timers to
bring the store to full staff.
Insufficient staff will result in lost sales when customers cannot find assistance, while having too
many staff may overwhelm customers and be unproductive. If there is not enough sales help on
the floor, there is a greater chance of shoplifting. Inexperienced, overworked, or lower-paid sales
clerks will also be less inclined to notice shoplifting or incorrectly stored goods.
Full-time staff cost is fixed at $15,000 per quarter, which covers salary, vacation and sick pay
benefits. Part-time staff receive no benefits, but you need to decide on their hourly wage. Higher
wages will attract better employees, which may be especially important when selling higher-end
products. In addition to wages and salaries, your payroll costs include a 10% tax to cover social
security and accident insurance.
New hires will need training to get up to speed working in the store. Even experienced employees
benefit from extra training which can show them better ways to handle their job. Each quarter,
you should expect to spend $100–$200 on training for each new hire, and $50–$100 for existing
staff.
Overhead and Other
Expenses
Overhead refers to the ongoing expense of operating your business, regardless of the level of
sales. Each quarter you will need to pay a fixed amount for rent (which includes electric and
water), telephone, and insurance. Telephone expense is estimated at $600 per quarter. The basic
insurance cost of $700 includes group life and disability for full-time employees, and store
liability, but not property insurance to cover loss in case of fire or storms. You may have the
opportunity to buy a separate insurance policy to cover property loss as an “incident” decision.
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The simulation assumes that 70% of your sales will be by credit card. The credit card company
will charge a 4% service fee on all credit card sales. Therefore, if you have sales of $100,000, the
bank will charge 4% of $70,000, or $2,800 for the quarter.
From time to time you may incur expenses that do not fit one of the regular categories. For
example, your response to certain incidents may involve a cost, and returning inventory when
you change the quality of your stock (due to a price level change) will result in a one-time
restocking fee. These kinds of costs will be shown as “other expenses” on your income statement.
Incidents
If your instructor selects this option, each week you will have an “incident” which you will need
to address. An incident is like a mini-case. Your team will need to discuss the issue presented and
enter an appropriate response. Any costs associated with an incident will automatically appear
on the income statement under “other expenses”.
Reports
An entrepreneur must think about the integration of business decisions. When reviewing your
pricing decisions, can you determine the impact a change in price has on other functional areas
of your business? What impact does it have on product demand? …on staffing needs? …on your
product purchases? …on your net income? As the owner of a small retail clothing store, you must
make sure that all functional areas of your business are in line with your firm’s overall objectives
and that all of your decisions are integrated—working toward producing the desired results.
There are a number of reports you can use to track performance as you operate your business.
These include the Balance Sheet, Income Statement, Cash Analysis, and Inventory reports. You
can access these reports from your Company Dashboard. Be sure to check the messages tab as
well for tips on running your business, alerts about upcoming decisions, and feedback on issues
in the store.
The Inventory report gives an accounting of your stock of tops and pants, showing purchases,
sales, and shrinkage. By keeping a close watch on the report you can monitor your inventory and
become more effective with your purchasing practices. You will want to manage inventory
efficiently to minimize your cost while providing an attractive array of goods to the consumer.
The inventory/sales ratio is especially helpful in determining if you have the “right” amount of
product on hand. In the simulation, a ratio of 0.5 is a good target.
The Cash Analysis shows the sources and uses of cash in running your store. When you purchase
product, pay employees, advertise, and pay rent and utilities, cash goes out. When you sell tops
and pants, cash comes in. Monitoring your cash balance will give you a good idea of how good a
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job you are doing at keeping a positive cash flow. Note that cash going out is not always the same
as an expense. For example, when you purchase more product, you are exchanging one asset
(cash) for another (inventory). Only when you sell your inventory will the cost of goods be booked
as an expense.
You must keep at least $2,000 in cash on hand for operating expenses. If you fall below the
minimum, cash will be brought up to $2,000 using a draft on the line of credit and the borrowed
amount added to your loan balance. Any cash over $2,000 will be invested in a money market
fund and the interest will appear on the income statement the following period.
In addition to your cash flow, you will want to keep track of the bottom line—your after-tax profit.
The Income Statement provides a summary of the revenues and expenses each quarter, and how
profitable your business was for the quarter. Use the sales line items for tops and pants to identify
sales trends. Tracking marketing and staffing expenses as a percent of revenue over time is a
good way to monitor the effectiveness of your decisions in those areas.
The Balance Sheet provides a summary of your assets and liabilities, as well as your equity in the
company. The simulation balance sheet is an abbreviated one. It includes only current assets:
cash, money market funds, rent deposit, and the value of inventory (at cost). Since all of your
property and fixtures are leased, there are no fixed assets shown. Your liabilities include any
unpaid loan balance. Owner’s equity includes the stock that you sold and retained earnings.
Retained earnings are the total profits of the firm, to date, less any dividends that were paid.
If you are playing in competitive mode, a market research firm will conduct studies of the local
clothing stores and sell information to you as needed, after the 1st quarter. The cost varies from
$100 to $400 per report each period. Your firm may purchase these reports to learn how your
competitors are positioned. Selecting the appropriate market research report can aid in
compiling decision data. Such data will keep your firm informed about unit sales and pricing,
product line, and marketing expenditures for each competitor in your industry.
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ROI = cumulative profit / investment
Performance Measures
There are several measures you can use to track performance as you operate your business. The
first is to look at your sales revenue. Since seasonality can affect performance independent of
your decisions, it is best to compare current sales with the previous year’s sales during the same
quarter. Unfortunately, that is not possible in your first year of operation, so an alternative would
be to track sales per employee. To do this, you will need to convert the hours worked by part-
time employees to the equivalent of full-time employees, then divide sales by the calculated
number of full time employees. Since you have two full time employees, the full calculation is
shown below:
Tracking profit after taxes each quarter will give you a good idea of overall performance, but you
may also want to calculate return on sales (ROS) to measure the efficiency of your business. This
ratio shows how much profit you are making per dollar of sales, and is calculated by dividing
profit by revenue. Both numbers can be found on the Income Statement, though you will need
to add sales of tops and pants to get total revenue. Return on sales will vary by industry, but in
Entrepreneur an ROS of 7% indicates an efficient operation.
Return on investment (ROI) is another useful profitability measure. It allows you to compare the
profitability of your company with other investment opportunities. This measure divides the
cumulative profit of the store by the investment made to acquire the business. Both numbers are
found on the Balance Sheet, with the stock line item showing the investment, and the retained
earnings the cumulative profit, though you will need to add back any dividends distributed. The
calculation is:
In order to purchase the store, your team contributed $50,000 in exchange for 5,000 shares of
stock at $10 per share. If you choose the angel investor option to finance the rest of the purchase,
then 2,500 of those shares will be sold to the investor for $25,000. In any case, $10 will be the
starting stock price. You can check how you are doing by comparing your stock price in a given
quarter with its starting price. Although the company is actually “private” (i.e., the stock does not
sell actively on the open market), it will be assumed the stock does have value in the over-the-
counter market.
Investor whims concerning poor performance one quarter could make the stock price decline,
perhaps more than it should. Investors may not know of the firm’s overall plans and what it is
Sales per Employee = total sales / ( PT employees × 15/40 + 2 FT )
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Your team will first have
to make startup
decisions. The team
leader must finalize
startup decisions to get
access to the quarterly
decisions.
trying to accomplish, thus undervaluing the stock. The point is that you need to continue to
operate your company as best you can, regardless of the stock price.
Some of the factors that affect stock price are:
• Total sales
• Return on sales (profit divided by total sales)
• Customer satisfaction (optimum inventory and good service)
• Company image (advertising, promotion, good business ethics)
• Dividends paid
Next Step
The small retail-clothing store is in a stable segment of the retail
clothing business and can be operated profitably, if organized and
managed efficiently. What you learn, and the challenges you face in
the Entrepreneur simulation, are adaptable to many types of
businesses and situations. Any entrepreneur who attempts to operate
a profitable business will face similar circumstances. The simulation
provides you with an opportunity to manage a retail specialty-clothing
store, make decisions, test marketing options, and make mistakes—
all without any actual money being spent. Now that you have some
background on the general context of Entrepreneur, we wish you
success in running your retail-clothing store!
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Decision Description Value Ranges
Company
Name
Enter a name for your business before making the
first period decision. Up to 30 characters.
Location
The existing location is near the college. You can
move to a different location when you acquire the
business.
Choose: College, Mall,
Main St., or Corner
Financing You need to raise $25,000 in addition to a $50,000 investment.
Choose: Bank Loan,
Personal Loan, or
Angel Investor
Product Line
The store you are acquiring sold casual clothing. You
can choose another product line at startup, or
change the line at a later time.
Chose: Ethnic, Casual,
Designer, Trendy, or
Uniforms
Hours Open Select the number of hours to be open each day. 8-12
Product
Purchase
Tops and pants must be purchased each quarter to
provide stock for the store. 0-10,000
Return Policy
Customers are more likely to shop the store if it has
a generous return policy, while a more restrictive
policy can reduce shrinkage.
Choose: no receipt, 30
days, 10 days, 10 days
if defective, or 7 days
if defective
Tops Price
Choose a price range (low, medium, high) and price
for your tops. This represents an average for tops
sold.
Low: 10-14
Med: 18-
22
High: 26-30
Pants Price
Choose a price range (low, medium, high) and price
for your pants. This represents an average for pants
sold.
Low: 20-
24
Med: 28-32
High: 36-40
Advertising
Advertising makes potential customers aware of
your store. Select media options appropriate for
your location and target market.
Choose 0 or more:
Web Site, Radio,
Television, Social
Media, Community
News, Campus News,
Direct Mail, Flyers
Promotion Promotion spending is used for special discounts and displays. 0-25,000
Hiring
The store has two full-time employees, but requires
part-time staff to help serve customers. Use a
negative number to fire staff.
0-
20
Hourly Wage
Part-time staff are paid an hourly wage. Higher
wages may attract more qualified employees and
reduce turnover.
7-25
Training Training employees helps with customer experience, shrinkage, and retention. 0-10,000
Dividend Profits distributed to stockholders. 0-quarterly profit
Extra Loan
Payment
If there is a loan outstanding, extra payments can be
made to reduce the balance. 0-loan balance
Incident Each period you may have to respond to issues raised by an “incident” (mini-case).
Choices vary by
incident.
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Entrepreneurship
Essentials
ENTREPRENEUR
20
Entrepreneurship is usually associated with the start-up of an innovative business. This
simulation is more about the day-to-day operation of the small firm. However, the authors hope
that students will carry into their play of the game the spirit of entrepreneurship, which includes
risk and profits, operating under uncertainty, creation of new products and services, and
innovative approaches to thinking. As Marc Dollinger suggests, an excellent role model for the
entrepreneur is Sam Walton, founder of Wal-Mart. Sam Walton’s 10 rules of leadership and
entrepreneurship are jewels for the student of any entrepreneurial endeavor. They are:
• Commit to your business and believe in it.
• Share your profits with your employees.
• Motivate your employees, challenge them, and keep score.
• Communicate everything.
• Appreciate your associates with well-chosen words.
• Celebrate your successes.
• Listen to everyone and get them talking.
• Exceed your customers’ expectations.
• Control your expenses.
• Break all the rules. Swim upstream. Go the other way.
A key to success as an entrepreneur is planning. After strategy for a business is formulated, the
next step is to prepare the business plan. If a business is seeking outside financing for its
operations, the bank, venture capitalist, or other lending entity often requires a business plan.
The business plan has some of the same information as contained in the strategic plan but in
addition, usually contains a great deal more marketing and financial information, e.g., market
analysis, demand forecasts, production and operations management details, financial forecasts
and plans, and human resource plans.
Many texts describe the functions of a manager as planning what tasks are to be accomplished,
organizing resources to accomplish the tasks, directing the accomplishment of the tasks, and
controlling the tasks from inception to completion.
NOTE: The spirit of entrepreneurship includes willingness to take risks, operating under
uncertainty, creation of new products and services, and innovative approaches to thinking.
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Planning, Organizing, and Controlling
Mission
The establishment of a mission for your store is the first step in the strategic planning process.
This short statement denotes exactly what the organization should be doing and why it exists. It
specifies the nature of the business and the markets served. An example might be: “To provide
moderately priced clothes and accessories to support the lifestyle of young working
professionals.” Such a statement is broad enough to permit diversification but provides an image
of the store’s position in the marketplace.
Objectives
Objectives specify the action commitments that are being made to achieve the organization’s
purpose. They describe the results that the organization wishes to achieve. Objectives provide
management with the direction needed for effective coordination of human, financial, physical,
and information resources. They can also serve to motivate those in the organization and provide
a basis for control processes. Objectives should be established in the following areas:
• Innovation and creativity in the business
• Market standing
• Financial resources
• Physical resources
• Management development
• Human resources
• Productivity
• Profitability
Merely establishing objectives falls far short of completing the planning tasks. The management
team must have a plan of action to accomplish the desired objectives. These plans have different
names in different organizations including “action plans,” “strategies,” “tactical plans,” etc. For
the purpose of this simulation, the term action plan will be used.
Policies
After the team has established the general direction that the store should take, specific day-to-
day guidelines must be prepared. These statements are called policies and they give guidance to
daily activities while providing some latitude to the manager in his or her decision-making.
Policies should be established in all of the areas for which there are objectives. An example of a
marketing policy in this simulation is: “The advertising and promotion budget will be 5% of the
previous quarter’s gross revenues.” A human resource policy might state, “All part-time
employees will receive the equivalent of one working week vacation after one year.” These policy
statements facilitate routine decisions and continuity of business practices.
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Controlling―The Management Audit
The management processes are not complete until there is some way of analyzing the outcomes
of operations. This is called the control function of management. One method of accomplishing
this is through an internal management audit. The purpose of this audit is to review your store’s
results over a certain period of time (generally four quarters or one year), compare them with
your plans for the simulation when you started, and make any changes that you deem desirable
in order to improve your performance and your own learning experience. If this audit occurs at
the midpoint of the simulation, you will have the opportunity to take corrective action. If it occurs
at the end, your conclusions will be a “report card” of your success. This differs from an
accounting audit in that you will be concerned with management issues as well as variances from
planned revenues and expenses.
The audit process begins by reviewing the stated mission, objectives, and action plans for your
store. Even if you did not write them down at the beginning of the simulation, you may ask
yourself “What was our original strategy? Are we still on course?” The next step is to measure
progress toward achievement of this plan. Teams usually find it helpful to graph their revenues
and expenses so they can monitor fluctuations more easily. Review your decisions log. Do your
decisions seem to implement your plans? How might you have done things differently?
Company Log
In order to provide continuity of decisions, each team may want to keep a logbook containing
some or all of the following items. An assortment of forms, worksheets, and charts (See Appendix
A) will help management teams maintain the records needed for good decision-making. A
suggested list of additional items is given next.
• Written rationale for selection of business name
• Written rationale of each quarter’s decisions
• Organization chart
• Objectives for your company
• A printout of each quarter’s decision summary
• Printouts of the quarterly Income Statements, Inventory, and Balance Sheets
• Any other information that would be of help in operating the firm
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Assets = Liabilities + Equity
Financial Statements
Tracking results is essential to the control function of management, and the financial statements
provide necessary data to decide if you are meeting your goals. The balance sheet tells where
the business stands at a particular point in time, while the income statement tells how well the
business did over a period of time. Financial transactions are recorded using a double-entry
system of debits and credits and the results are reported on the income statement and balance
sheet at the end of each quarter.
The
Balance Sheet
The balance sheet shows the financial condition of a business at a point in time. The business
owns certain assets which it uses to produce something of value. The product is then sold in
exchange for other assets, typically cash. In order to acquire the assets needed for operating the
business, the company can raise capital either by borrowing or issuing stock. Loans must be paid
back, and are considered liabilities on the balance sheet. Stock represents an investment in the
company, and gives the owner a share in the equity, but there is no guarantee that the
investment will be returned. If the company is managed well, then income from the business will
be added to the equity in the form of retained earnings. The balance sheet is a list of assets,
liabilities, and equity, and is “balanced” by the following equation:
Assets can be current or fixed, tangible or intangible. Current, or liquid, assets can be exchanged
for goods, services, or other assets quickly. Examples of current assets are cash, short-term
investments, inventory, and accounts receivable. Fixed, or long-term, assets cannot be easily
converted into cash, but are used in the operation of the company. They can be tangible or
intangible. Examples of tangible fixed assets are buildings and equipment. Goodwill and
trademarks are examples of intangible assets.
Like assets, liabilities can be current or long term. Current liabilities must be paid within the next
accounting period. Examples are accounts payable (bills that are due) and bank overdrafts.
Installment loans and mortgages are examples of long-term liabilities.
Equity can be thought of as whatever is left over when the liabilities are subtracted from the
assets. It consists of the investment of the owners through the original purchase of stock plus all
the retained earnings from the operation of the company. Note that there is a difference
between the book value of a company and the market value. The book value is the owner’s equity
from the balance sheet, while the market value is the stock price times the number of shares
outstanding. Book value is calculated from the balance sheet, and shows the state of the
company at the end of the reporting period. Market value indicates what investors think the
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Net Income = Revenues – Expenses
company is worth, and includes sentiment about what might happen in the future. Comparing
the book value with the market value of a business can provide information about whether a
stock is overvalued or undervalued.
Looking at the owner’s equity on a balance sheet provides a quick check of the health of a
company. A more detailed analysis involves matching up current assets with current liabilities to
see if there may be a problem with cash flow in the company’s future.
The Income Statement
The purpose of the Income Statement, also called a statement of Profit & Loss, is to show how
well a company performed over a period of time, such as a year or a quarter. It shows the revenue
received for products or services, and the expenses required for producing the products or
services. The difference between the two is net income, or profit.
Revenue can come from the direct sale of product, or it can come from other sources such as
interest earned on investments owned by the company. Sales may be shown in the aggregate, or
broken down by product category. When an expense is directly connected with the sale of a
product, it is often useful to show it as the cost of goods sold, and report the difference as gross
profit. In a retail store, for example, the total revenue from the sale of a product would be
reduced by the cost of acquiring the product to calculate the gross margin.
Expenses can be a direct, or variable, cost of a sale or service, or a cost that is incurred during the
period regardless of how much product is sold. Marketing expense, payroll, rent and utilities, and
interest on loans are examples of expenses that do not vary with revenue. Expenses that are fixed
and cannot be changed from period to period are considered overhead. Examples would be rent,
utilities, insurance, and interest expense. Salaries of full-time employees could be considered
overhead, while the wages of part-time employees might not if they are seasonal.
It is important to distinguish here between an expense and the purchase of an asset. When
product is purchased to stock a store, we are converting one asset (cash), into another
(inventory). It is only when the product is sold that the cost of acquiring it is booked as an
expense. In short, purchasing inventory affects the balance sheet, while selling the product
affects both the balance sheet and the income statement. Other fixed assets, such as buildings
or equipment, are depreciated, or expensed over time, as they are used.
Subtracting expenses from revenue yields the taxable income for the business. The tax paid on
this amount is then subtracted to produce the net income or profit for the period. The profit can
then be distributed to the owners in the form of dividends, or it can be kept by the company and
added to retained earnings. At the end of each financial period, all revenue and expense accounts
25
are zeroed out after the net income has been transferred to retained earnings and reports have
been generated.
The Accounting Cycle
Following the accounting steps involved in purchasing inventory, then selling it to a customer
may help in understanding the purpose of the balance sheet and income statement. The
sequence starts with the purchase of inventory. This transaction involves an increase in one asset
(inventory) and a decrease in another (cash). Both sides of the transaction must be recorded;
these are the debits and credits of accounting. As long as the inventory sits in the store, there is
no change in the financial statements. But when a customer comes and buys the goods, the
transaction needs to be accounted for. Cash is exchanged for the product, so cash increases while
inventory decreases. But inventory decreases only by what the company paid for the product,
not the full sale price, so the credit will not match the debit. The mismatch is handled by offsetting
the increase in cash by an increase in revenue, and the decrease in inventory by a corresponding
increase in cost of goods sold. Now the assets are accounted for correctly on the balance sheet,
and the difference in revenue and expense will be captured as profit on the income statement.
Note that during a financial period, assets will not equal liabilities plus equity, as transactions are
posted as revenues and expenses. At the end of the financial period, the net income is added to
retained earnings on the balance sheet, bringing it back into balance. With the income statement
and balance sheet produced, the period can be closed and the cycle starts again.
Team Dynamics
You will likely be making decisions as a team. It may be the first time you have done this. Since
more firms are becoming increasingly participative in management style, this is a good time for
you to practice your interpersonal skills in a team setting. In short, it takes a lot of give and take.
It also requires participation by all team members. It is unfair for any team member to not do
his or her fair share and equally unfair for any team member to monopolize the decision-making.
You may find a Peer Evaluation form online which your instructor will ask you to use for rating
each team member’s contribution/performance. Performance evaluation is one of the toughest
jobs of a manager. You need to force yourself to be objective about the evaluation. If someone
has not pulled his or her fair share, it is your responsibility to indicate that in the evaluation form
online.
In addition, if your team is having interpersonal problems, you should first try to work it out, as
you would do in an actual work situation and then discuss it with your instructor. Making
decisions and playing a simulation game should be an enjoyable experience, and you need to
approach it with that always in mind.
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A Team’s Risk Quotient
What is your risk quotient? What will be the risk quotient of your team? You may have some
team members who want to stay very safe and others who want to go for it. The purpose of
having teams to make and enter decisions in a simulation is to allow you to experience group
dynamics in a team decision-making environment. At times, you may have to give in and at other
times, you will have your way. You need to understand your own level of risk-taking as well as
that of your teammates.
Transforming Your Group into a Team
There is a big difference between a group and a team. A group is a cluster of people whereas a
team is a group that has been organized to get a job done. For a group to become a team, the
members must have a high degree of trust, mutual respect for ideas, open communication, equal
participation, and constructive confrontational skills. This process is not easy. The dynamics of a
group becoming a team include four phases:
1. Forming: awareness and acceptance of others
2. Storming: conflict over leadership and style of decision-making
3. Norming: cooperation results from involvement and support
4. Performing: achievement of the desired productivity
Simulation Objectives
A key objective of the simulation is to optimize profits. Although profits in the short term should
not be under emphasized, your team might choose to forgo some short-term profits while
building the store for future higher payoffs. At the end of the simulation, the stockholders
(represented by your instructor) will be expecting to evaluate a “healthy, going concern.” Other
objectives that the instructor or you may want to establish may include:
• Use of marketing strategies that capture optimum market share.
• Management of operations in a cost-effective manner.
• Observation of good business ethics that will increase the value of the firm’s goodwill.
• Maintenance of reasonable inventories.
• Accumulation of knowledge about marketing mix relationships through experimentation
and good market research practices.
27
Appendix
ENTREPRENEUR
28
Worksheets
This section contains various worksheets and forms for analyzing the simulation. Your instructor
will indicate if any are required work. You may want to replicate some of the forms as
spreadsheets and keep the results of your team’s progress electronically.
The Marketing Data Analysis form will allow you to gain insight to how marketing variables relate
to sales demand.
A list of forms is given below:
• Marketing Data Analysis
• Quarterly Budget Variance
• Log of Quarterly Decisions
29
Marketing Data Analysis
Quarter _______ Industry _____________ Company ___________________________
This form should aid in analyzing relationships between price and sales, and marketing budget
(advertising + promotion) and sales.
Qtr # Advertising
Budget
Promotion
Budget
Price
Tops
Price
Pants
Sales
Tops
Sales
Pants
% Increase or %
Decrease
Marketing
to Sales
Ratio
0
1
2
3
4
5
6
7
8
9
10
11
12
Marketing to Sales ration = (Advertising $ + Promotion $) / Sales $
30
Quarterly Budget Variance
Quarter _______ Industry _____________ Company ___________________________
Sales Revenues Planned Actual
1. Units pants sold ______ @ $ ________ = $_________ $_________
2. Units tops sold ______ @ $ ________ = $_________ $_________
3. Interest and Other Income $_________ $_________
4. Total revenues and Interest (1,2,& 3) $_________ $_________
Expenses
5. Total pants ordered ______ @ $ ________ = $_________ $_________
6. Total tops ordered ______ @ $ ________ = $_________ $_________
7. Regular labor $_________ $_________
8. Part-time labor $_________ $_________
9. Advertising $_________ $_________
10. Promotion $_________ $_________
11. Rent and Utilities $_________ $_________
12. Insurance and telephone $_________ $_________
13. Credit card expenses $_________ $_________
14. Market research $_________ $_________
15. Loan payments $_________ $_________
16. Interest expense $_________ $_________
17. Payroll taxes $_________ $_________
18. Shrinkage $_________ $_________
19. Total expenses & loan payments (Add 5 through 18 ) $_________ $_________
2.0 Net Receipts ( Item 4 minus item 19 ) $_________ $_________
31
Log of Quarterly Decisions
Quarter _______ Industry _____________ Company ___________________________
(Record key decisions and major changes in strategy. You may need to submit this log.)
DECISION:
RATIONALE:
DECISION:
RATIONALE:
DECISION:
RATIONALE:
DECISION:
RATIONALE:
DECISION:
RATIONALE:
DECISION:
RATIONALE:
DECISION:
RATIONALE:
32
Glossary
Advertising
Presence
Each advertising medium reaches different customers but all are intended to
establish your store as a “presence” and give you a better community image.
Your customers will be unaware of your presence if you do not broadcast your
presence sufficiently.
Angel Investor
An individual who provides capital to either start-up ventures or small
companies who wish to expand but do not have access to public funding.
Typically, the angel is willing to invest in a medium- to high-risk business in
exchange for a high rate of return.
Annualized
Return
Annualized return, or “average annual return,” describes the return gained, on
average, each year of a multi-year period rather than a cumulative return. The
calculation is:
Annualized Return = [(investment + gain) / investment](1 / years) – 1
See also: “Return on Investment”
Assets Things a company owns, such as inventory or cash deposits.
“Bait and Switch”
When off-quality merchandise is offered at extremely low prices yet is
advertised as “designer” or “brand name” merchandise. Usually, the sale
offering is a mix of low quality merchandise with a few (very small size) designer
label goods added in, yet the advertiser claims there is actual designer and
brand name merchandise on sale. The ads state the price is “below normal cost”
or “a buy-out price” and the price appears in the ads to be well below the usual
cost of high-quality, brand name goods. However, when customers get to this
store’s sale and compare the sale merchandise to the regular merchandise, they
realize the quality is not the same and usually end up buying the regular line,
which has the normal markup.
Balance Sheet
The balance sheet shows the assets of the business and the claims of ownership
against those assets at the end of each period. Your balance sheet includes only
current Assets: cash, money market funds, rent deposit, and the value of
inventory on hand (at cost). Since all of your property and fixtures are leased,
there are no fixed assets shown. Your Liabilities will include your unpaid loan.
Owner’s Equity includes the stock that you sold and retained earnings. Retained
earnings are the total profits of the firm, to date, less any dividends that were
paid.
Breakeven
The point at which the cost of operations equals the revenues from sales is
called the breakeven point. It is calculated using the formula:
Breakeven Volume = fixed costs / (unit selling price – unit cost)
In the simulation, fixed costs include both overhead (rent, utilities, insurance)
and decision expenses that do not vary with sales (marketing, staffing
expenses). Since tops and pants have different unit costs, fixed costs are
allocated to each and the breakeven for each is calculated separately.
33
Bureau of Illegal
Practices
Usually referred to as the Better Business Bureau. Better Business Bureaus are
nonprofit organizations that work to maintain standards in business and
advertising. Supported by local businesses, they aim to serve businesses and
consumers by encouraging voluntary ethical business practices and providing
services to the public.
Business
Objectives
Objectives specify the action commitments that are being made to achieve the
organization’s purpose. They describe the results that the organization wishes
to achieve. Objectives provide management with the direction needed for
effective coordination of human, financial, physical, and information resources.
They can also serve to motivate those in the organization and provide a basis
for control processes.
Business Plan
The business plan has some of the same information as contained in the
strategic plan but in addition, usually contains a great deal more marketing and
financial information, e.g., market analysis, demand forecasts, production and
operations management details, financial forecasts and plans, and human
resource plans. If a business is seeking outside financing for its operations, the
bank, venture capitalist, or other lending entity often requires a business plan.
Business Policies
After the team has established the general direction that the store should take,
specific day-to-day guidelines must be prepared. These statements are called
policies and they give guidance to daily activities while providing some latitude
to the manager in his or her decision-making. Policies should be established in
all of the areas for which there are objectives. These policy statements facilitate
routine decisions and continuity of business practices.
Cash Flow
Analysis
Analyzing a firm’s cash position is essential to understanding its financial health.
Investors need to know how the company is generating or obtaining its cash (the
cash sources) and where that cash is being expended (cash uses).
Control Function
of Management
An analysis of the outcomes of operations. One method of analysis is through
an internal management audit. This differs from an accounting audit in that you
will be concerned with management issues as well as variances from planned
revenues and expenses.
Co-op Advertising
Advertising of this type promotes the item rather than the store, can save the
retailer about 50% in advertising costs, and provides a residual image to
consumers. An example is a Levi-Strauss promotion of a new line of jeans with
an announcement that they can be purchased at a specified outlet. Some
shopping centers include “flyer” advertising as a benefit of tenancy;
alternatively, some shopping centers require that tenants participate in mall
promotions and charge for the advertising. Clothing retailers are able to reach
their target segments effectively through this flyer type of publication if they
have chosen their location wisely.
Cottage Industry
A small garment cooperative that represents many small shops in homes around
the area. Often a “cottage industry” will produce a look-alike product of very
high quality.
34
Credit Card
Expense
Sales made to customers who use a credit card are subject to a bank fee to cover
the cost of processing the charge and collecting the money. In Entrepreneur, it
is assumed that 70% of your sales are credit card purchases, and that the fee is
4% of the sale.
Demand Note A loan that has no fixed date for repayment, but the lender can demand repayment in full at any time (subject to the terms of the note).
Dividends Dividends are a payment to stockholders for the investment they have made in the firm.
Economic
Development
Commission
A commission appointed by the county commission to recruit, assist, and retain
businesses.
Equity The amount invested in a business by shareholders; equity on the balance sheet is the difference between assets and liabilities.
Financial Report
An accounting statement detailing financial data, including income from all
sources, expenses, assets, and liabilities. A financial report may also be an
itemized accounting that shows how grant funds were used by an organization.
Goodwill An intangible asset accounting for the difference between the purchase price of a business and its tangible assets.
Gross Profit
Margin
Gross profit margin equals gross profit divided by revenue; expressed as a
percentage. The percentage represents the amount of each dollar of revenue
that results in gross profit. Gross profit equals revenue minus cost of goods sold
(COGS). It identifies the amount available to cover other operating expenses.
Income
Statement
A quarterly or annual financial statement that shows a corporation’s business
results. It shows all revenues, expenses, and taxes. Subtracting the expenses
from the revenue gives the net profit.
Intangible Asset Something owned by a business which is not physical, such as a patent or goodwill.
Interest Income
If your firm has any income other than sales and interest, it will be shown with
interest income on the income statement. Typically, interest income is the type
of income generated by bank deposits, bonds, GICs, treasury bills, and fixed
income investments.
Inventory / Sales
Ratio
A ratio showing the inventory available relative to sales. On the inventory
report, it is calculated separately for tops and pants by dividing ending inventory
by unit sales for the quarter. A high ratio indicates that you may be ordering too
much product relative to sales, which could lead to cash flow problems. A low
ratio means that you are probably losing sales due to a lack of selection. A ratio
of about 0.5 is a good target in the Entrepreneur simulation.
Inventory
Turnover
A ratio for evaluating sales effectiveness that is often calculated by dividing sales
by ending inventory i.e., how fast new inventory is purchased and then resold
to customers. Low turnover is an unhealthy sign, indicating excess stocks and/or
poor sales.
Kickbacks
A payment made to someone for referral of a customer or business. Generally
speaking, kickbacks are illegal. The reason is that, unlike a commission, a
kickback is made without the customer’s knowledge; thus, the referral could
have been made without the customer’s best interest at heart.
Liabilities Things a company owes, such as the balance on a loan.
35
Line of Credit
Loan
A line of credit is a type of open-ended automatic loan that the entrepreneur
may add to or pay back at any time without going through the formal motions
of applying for a new loan every time the firm needs additional working capital.
Management
Audit
Reviews your store’s results over a certain period of time (generally four
quarters or one year). In the simulation, the purpose of the management audit
will be to make a comparison to these results with your plans for the simulation
when you started, and then to make any changes that you deem desirable in
order to improve your performance and your own learning experience. If this
audit occurs at the midpoint of the simulation, you will have the opportunity to
take corrective action. If it occurs at the end, your conclusions will be a “report
card” of your success. This differs from an accounting audit in that you will be
concerned with management issues as well as variances from planned revenues
and expenses.
Market Research
Reports
Market research reports provide information about your competitors or
customers in a market. In competitive industries of the simulation, the sales,
pricing, and promotion reports contain data about the local retail clothing
market, which consists of the teams competing in your industry.
Markup
The amount added to the unit cost of a product to get the retail selling price.
The markup can be expressed as a percent of cost or a percent of retail price. If
the wholesale cost of the item is $10, the retail price will be $20 using a
markup of 100% of cost ($10 + 100% x $10) or 50% of retail ($10 ÷ [100% –
50%]). See also “Gross Profit Margin”.
Negative Cash
Balance
When a firm makes cash payments that exceed its available cash, it creates a
negative cash balance. This is generally a sign of poor cash management. If it
occurs in the simulation, an automatic loan feature will advance enough funds
to bring your cash balance up to $2,000, but you will be charged a fee equal to
3% of the loan, and your stock price will suffer.
Organizational
Chart
An organizational chart is a chart which represents the structure of an
organization in terms of rank. The chart usually shows the managers and sub-
workers who make up an organization. The chart also shows relationships
between staff in the organization.
Overhead
Refers to an ongoing expense of operating a business. The term overhead is
usually used to group expenses that are necessary to the continued functioning
of the business, but that do not directly generate profits. Typical examples of
overhead expenses include rent, utilities, business permits, and commercial
liability insurance. See also “Breakeven”
Payroll Taxes
Taxes based on payroll (wages) that is used to finance the Social Security and
Medicare programs. In the simulation, you will be charged (in a separate budget
item) 10% of the total payroll for the employer’s share of social security taxes
and mandatory on-the-job accident insurance (termed workers’ compensation
in many states). This includes the manager’s salary as well as the part-time
wages.
Point of
Diminishing
Returns
This is the point of dollar expenditure that does not add as much effect as the
previous dollar; the cost will not be offset by the gains.
http://en.wikipedia.org/wiki/Structure
http://en.wikipedia.org/wiki/Organization
36
“Pull” Marketing
Strategy
Advertising is a part of marketing that lures customers into the specific store.
These subtle influences that affect consumer behavior are called “pull”
marketing strategies. Most retailers use a combination of advertising and sales
promotions (“pull” and “push” strategies).
“Push” Marketing
Strategy
Sales promotion is known as a “push” marketing strategy. Typical promotional
activities include coupons and attractive point-of-sale displays that push
merchandise into a customer’s hands. Most retailers use a combination of
advertising and sales promotions (“pull” and “push” strategies).
Retail Clothing
Merchants
Association
Local and regional level retail associations, whose membership is typically
comprised of small-to-mid-size independent retailers.
Retained Earnings Accumulated net earnings not paid out as dividends.
Return on Assets ROA measures management’s efficiency in using a company’s assets to generate a profit. It is calculated by dividing profit by total assets.
Return on
Investment
The return on investment (ROI), or rate of return (ROR), or sometimes just
“return”, is the gain or loss on an investment, divided by the amount invested.
Return can also refer to the monetary amount of gain or loss. ROI is usually given
as a percent. See also “Annualized Return”
Return on Sales
A ratio used to evaluate a company’s operational efficiency. ROS is also known
as a firm’s “operating profit margin”. This measure provides insight into how
much profit is being produced per dollar of sales. As with many ratios, it is best
to compare a company’s ROS over time to look for trends, and compare it to
other companies in the industry. An increasing ROS indicates the company is
growing more efficient, while a decreasing ROS could signal looming financial
troubles.
Risk Averse
Risk aversion is the reluctance of a person to accept a bargain with an uncertain
payoff rather than accepting another bargain that has a more certain payoff, but
with a possibly lower return. (Also referred to as risk tolerance.)
Sales per
Employee
Average sales for each full-time equivalent employee. Part-time employees are
converted to full-time equivalents using a weight of 15/40 (part-time hours to
full-time hours). Sales per employee can help identify productivity problems, as
well as measure the effectiveness of other decisions, such as marketing.
Sales per Employee = sales / (2 + part-timers x 15/40)
Sales Revenue per
Dollar of
Employee Cost
A formula that provides a benchmark for understanding the relationship
between employee efficiency and sales; expressed as an equation.
Sales per Dollar of Employee Cost = sales / wages & salaries
Shrinkage
Any merchandise that has been soiled, stolen, lost in some way (getting swept
off into the waste can), or perhaps returned for credit. It is assumed that no
monies are received for these units. They are simply written off the inventory at
their cost.
37
Small Business
Administration
The U.S. Small Business Administration (SBA) was created in 1953 as an
independent agency of the federal government to aid, counsel, assist, and
protect the interests of small business concerns, to preserve free competitive
enterprise and to maintain and strengthen the overall economy of our nation.
The SBA helps Americans start, build, and grow businesses. The SBA provides a
number of financial assistance programs for small businesses. Though the SBA
does not provide grants to help you start a business, it does provide information
on organizations and sites that can assist you in locating special purpose grants.
Social Media
Social media are technologies that facilitate two-way communication between
the business and its customers. Examples include mobile applications, blogs,
Twitter, and Facebook.
Stock Out Selling completely out of inventory is termed as a “stock out.”
Tangible Asset Something owned by a business which is physical, such as cash or inventory.
Venture Capitalist
An investor or organization who provides capital to either start-up ventures or
support small companies who wish to expand but do not have access to public
funding.
38
Index
A
accounting cycle ……………………………………………………… 25
action plan ………………………………………………………… 21, 22
advertising ………………………………………………………… 12, 36
co-op …………………………………………………………………. 12
flyer ………………………………………………………………….. 12
media ………………………………………………………………… 12
after-tax profit ………………………………………………………… 15
angel investor …………………………………………………………. 10
assets …………………………………………………………………….. 23
audit of your firm ……………………………………………….. 22, 33
B
balance sheet …………………………………………………….. 23, 32
business
plan …………………………………………………………………… 20
business name ………………………………………………………….. 8
C
cash flow …………………………………………………………… 10, 14
cash minimum ………………………………………………………… 15
company
objectives …………………………………………………….. 21, 33
policies …………………………………………………………. 21, 33
control function of management ………………………….. 22, 33
cost of goods …………………………………………………………… 15
costs
payroll taxes ………………………………………………………. 35
credit card fee …………………………………………………………. 14
customer perception ……………………………………………….. 12
D
depreciation ……………………………………………………………. 24
dividends………………………………………………………………… 34
E
entrepreneurship essentials ……………………………………… 20
equity …………………………………………………………………….. 23
expenses ………………………………………………………………… 24
F
financing options ………………………………………………………. 9
G
gross margin …………………………………………………………… 24
gross profit …………………………………………………………….. 24
group dynamics ………………………………………………………. 26
I
income statement …………………………………………………… 24
income, other …………………………………………………………. 34
insurance policy………………………………………………………. 13
inventory ……………………………………………………………….. 24
L
liabilities ………………………………………………………………… 23
line of credit …………………………………………………………… 15
logbook………………………………………………………………….. 22
M
management audit ……………………………………….. 22, 33, 35
marketing presence …………………………………………………. 12
marketing strategy ………………………………………………….. 12
mission of your firm ………………………………………………… 21
N
naming your business ………………………………………………… 8
net income …………………………………………………………….. 24
net profit ……………………………………………………………….. 24
O
other expenses ……………………………………………………….. 14
overhead ……………………………………………………………….. 13
P
peer evaluation ………………………………………………………. 25
performance
tracking your ……………………………………………………… 16
planning tasks …………………………………………………………. 21
price
margin ………………………………………………………………. 11
range ………………………………………………………………… 12
product
line …………………………………………………………………….. 8
mix …………………………………………………………………….. 7
perception of …………………………………………………….. 12
promotion budget …………………………………………………… 36
39
promotional activities ………………………………………………. 13
property loss …………………………………………………………… 13
R
restocking fee ……………………………………………………. 12, 14
retained earnings …………………………………………………….. 24
return policy …………………………………………………………… 11
revenue ………………………………………………………………….. 24
risk quotient ……………………………………………………………. 26
S
sales forecast ………………………………………………………….. 10
shrinkage ……………………………………………………………….. 11
special buys …………………………………………………………….. 11
staff
hours…………………………………………………………………. 13
motivation …………………………………………………………. 13
new hires …………………………………………………………… 13
training ……………………………………………………………… 13
stock
factors that affect price……………………………………….. 17
investors ……………………………………………………………. 16
undervaluation …………………………………………………… 17
valuation …………………………………………………………… 16
store
hours ………………………………………………………………… 11
location …………………………………………………………… 6, 7
return policy ………………………………………………………. 11
T
taxable income ……………………………………………………….. 24
team dynamics ……………………………………………………….. 25
training staff …………………………………………………………… 13
V
value
communicate …………………………………………………….. 12
- Copyright Notice
Contents
About the Authors
Acknowledgements
Introduction
Entrepreneur Quick Start Guide
Entrepreneur Manual
Entrepreneur Case
Entrepreneur Case
Location
Product Line
Business Name
Finance
Inventory Management
Hours
Return Policy
Pricing
Marketing
Staffing
Overhead and Other Expenses
Incidents
Reports
Performance Measures
Next Step
Entrepreneurship Essentials
Planning, Organizing, and Controlling
Mission
Objectives
Policies
Controlling―The Management Audit
Company Log
Financial Statements
The Balance Sheet
The Income Statement
The Accounting Cycle
Team Dynamics
A Team’s Risk Quotient
Transforming Your Group into a Team
Simulation Objectives
Appendix
Worksheets
Marketing Data Analysis
Quarterly Budget Variance
Log of Quarterly Decisions
Glossary
Index
SampleAssignment: Simulation Marketing Plan
Simple U target market is young adults with an on the go lifestyle, whose hobbies include travel, sports,
movies and outdoor activities. Specifically, college students from the ages of 20 to 30 years of age living within
the two zip codes within a 10-mile radius of my store’s location. There is a large advantage in targeting young
adults because of the constant need to look and feel great.
Simple U product offered focuses on making simplicity as the new you. Young adults struggle to find clothing
that fits their everyday environment, which include college, work, and hangout clothing. Our brand provides
customers with clothing to simply mix and match accommodating to each environment. Simply, we provide
customers with a fast and easy way to style for the on the go lifestyle.
Target costing would be best way to setting a price for our target market because it would satisfy our
customers. Simple U is focused on provided customers with the best price that would be both reasonable and
affordable to accommodate their needs. This will allow us to assure the store with sales. Another method I
would use is cost-based pricing to determine if our clothing is making profit. Two tools to measure the impact
on my price decision would be first, the profit and loss report. Here, I could essentially look for a measure that
indicated any profit or loss money. Secondly, I would use the break-even analysis to determine my forecast
by pricing a clothing peace a certain amount.
The role in Simple U advertisement is to generate awareness to eventually generate leads. We want to let our
customers know that they have an option to be both stylish while keeping busy in their on the go lifestyle. We
want for both online and in store shoppers to spread our brand and self-promote on social media blogs.
Resulting in word of mouth advertising. I would measure my effectiveness of my advertising with analytical
reports that will help me determine what platform is generating leads.
- Sample Assignment: Simulation Marketing Plan