Entrepreneurship 1. Entrepreneurship 2. Analyze Your Competition Gathering Competitive Intelligen ce Conducting a SWOT Analysis The Next Step 3. Analyzing Profitability Purpose of Profitability Analysis Profitability Ratios Analytical Procedures Com monly Used Analytical Procedures Comparative Statements Index-Number Trend Serie s Common-Size Statements Analysis of Financial Statement Components Vertical Analysis 4. Analyzing Your Financial Ratios Purposes and Considerations of Ratios and Ratio Analysis Types of Ratios Income Ratios Profitability Ratios Net Operating Profit Ratios Liquidity Ratios Working Capital Ratios Bankruptcy Ratios Long-Term Analysis Coverage Ratios Total Cover age Ratios Leverage Ratios Common-Size Statement 5. Building a Website Why Are You Here? Get Creative Make It Shine Where to Put It All The Tower Of Ba bble Getting it Right 6. Building Your Brand 1

The Importance of Branding When Should You Brand? Types of Brands What Goes Into a Brand? What's in a Name? Brand Positioning Building Brand Personality Strengt hening Your Core Brand Creating an Online Identity 7. Conduct a Market Analysis Marketing Analysis - Wh at Is It? Why Should You Do It? The Complete Process: A. B. C. D. E. F. Defining the Problem Analysis of the Situation Obtaining Data That Is Specific t o the Problem Data Analysis and Interpretation Fostering Ideas and Problem Solvi ng Marketing Plan 8. Creating a Competitive Advantage Gaining a Competitive Edge A. B. C. D. E. F. G. Define Yourself Define Your Competitors Identify Your Custo mers Personal Experience Differentiation Price Product Marketing Strategies H. Maintaining a Competitive Edge Keeping Up With Changes ve Advantage 9. Creating a Profit & Loss Statement Elements of Income Income Determination Changes in Estimates Statement (interactive tables are available for your use) erating Expenses Other Revenues and Gains Other Expenses 2 Evaluating Your Competiti Forms of the Income Cost of Goods Sold and Losses Op

Income Tax on Continuing Operations 10. Determining Your Company's Legal Structu re Introduction: Types of Entities Considerations in Selection of an Entity Pres erving Limited Liability 11. Identify Your Target Market Identify Potential Cust omers Conducting Market Research Choosing a Target Market Compiling a Customer P rofile 12. Maintaining an Agile Company Identify Opportunities for Change Case Studies in Change Know What Your Customer s Are Thinking Become Innovative Reinvent Yourself Through Branding Let Technolo gy Make A Difference Create An Environment for Change 13. Managing Your Cash Flow Background on a Statement of Cash Flow Major Classifications of Cash Flow Operat ing Activities Investing Activities Financing Activities General Format For a St atement of Cash Flow (interactive tables are available for your use) Indirect Me thod Sample Indirect Method Statement of Cash Flows Notes on Indirect Method Sta tement of Cash Flow Direct Method Sample Direct Method Worksheet Errors 14. Partners & Investors When Is Outside Financing Necessary? Equity or Debt? Worksheet: Are You Ready to Bring in Outside Investors? Types of Equity and Debt/Equity Hybrids 3

Types of Offerings and Investors How to Interest Professional Investors Investor Expectations An Alternative: The Strategic Alliance 15. Personalization Strateg ies Going One-to-One With Products Going One-to-One Through Marketing Plan Your Stra tegy Personalization and the Web Putting Online Personalization Into Action What Your Personalized Site Should Include When Personalization Works, and When It Doesn't 16. Preparing a Balance Sheet Wh o Wants to See Your Balance Sheet Common Classifications Preparing Your Balance Sheet Sample Trial Balance Sheet 17. Preparing a Business Plan Why Write a Busin ess Plan? Who Should Write the Business Plan? Business Plan Components A. B. C. D. E. F. G. H. Executive Summary The Product/Service The Market The Mar keting Plan The Competition Operations The Management Team Personnel Financial Data Supporting Documentation Summary 18. Preparing Your Cash Budget Purposes of Cash Budgeting Consistent Budgets Checking the Reasonableness of the Budget Sales and Other Potential Cash Sources Reserve 4

Sample Cash Budget 19. Pricing Products & Services The Importance of Accurate Pricing Conducting Market Research Pricing Models Pri cing for a Service or Consulting Company Raw Costs for Services and Consultants How to Determine If Prices Are Working for You When to Raise or Lower Prices

Prices and the Law 20. Promoting Your Business Analyzing Costs An Overview of Media Options Magazines Direct Mail Yell Radio Web Advertising Trade Shows Television Card Decks Newspapers Alternative Media Options 21. Protecting Your Intellectual Property with Patents, Trademarks and Copyrights

Patents Trademarks Copyrights Trade Secrets Developing an Intellectual Property Strategy 22. Valuing a Business 1. Entrepreneurship Entrepreneurship is the practice of starting new organizations or revitalizing m ature organizations, particularly new businesses generally in response to identi fied opportunities. Entrepreneurship is often a difficult undertaking, as a vast majority of new businesses fail. Entrepreneurial activities are substantially d ifferent depending on the type of organization that is being started. Entreprene urship ranges in scale from solo projects (even involving the 5

entrepreneur only part-time) to major undertakings creating many job opportuniti es. Many "high-profile" entrepreneurial ventures seek venture capital or angel f unding in order to raise capital to build the business. Angel investors generall y seek returns of 20-30% and more extensive involvement in the business.Many kin ds of organizations now exist to support would-be entrepreneurs, including speci alized government agencies, business incubators, science parks, and some NGOs. T he Entrepreneur Entrepreneurs have many of the same character traits as leaders. Similarly to the early great man theories of leadership; however trait-based th eories of entrepreneurship are increasingly being called into question. Entrepre neurs are often contrasted with managers and administrators who are said to be m ore methodical and less prone to risk-taking. Such person-centric models of entr epreneurship have shown to be of questionable validity, not least as many real-l ife entrepreneurs operate in teams rather than as single individuals. Still, a v ast but now clearly dated literature studying the entrepreneurial personality fo und that certain traits seem to be associated with entrepreneurs: Characteristic s of an Entrepreneur The entrepreneur has an enthusiastic vision, the driving force of an enterprise. The entrepreneur's vision is usually supported by an interlocked collection of specific ideas not available to the marketplace. The overall blueprint to realiz e the vision is clear, however details may be incomplete, flexible, and evolving . The entrepreneur promotes the vision with enthusiastic passion. With persisten ce and determination, the entrepreneur develops strategies to change the vision into reality. The entrepreneur takes the initial responsibility to cause a visio n to become a success. Entrepreneurs take prudent risks. They assess costs, mark et/customer needs and persuade others to join and help. An entrepreneur is usual ly a positive thinker and a decision maker. 2. Analyzing Your Competition Overview Almost everyone in business understands the principle of trying to offe r something better than what their competitors are offering. Gaining an advantag e is the key to success and even survival. But many of the so-called advantages that businesses rely on are not sustainable. They can be easily copied, stolen o r negated. Real competitive advantages things like brand name recognition, paten ted manufacturing processes or exclusive rights to a scarce resource cannot be e asily copied. Every company has a unique set of strengths, and it's critical tha t you determine yours, as well as your competitors'. Hold a brainstorming sessio n with your staff and advisors to perform a formal SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis. This analysis helps you to see how your str engths stack up 6

against your competitors' weaknesses and suggests ways to take advantage of mark etplace opportunities. After you have performed the analysis, there are four bas ic competitive strategies to consider. 1. Become the low-cost supplier. By under -pricing the competition, you can achieve greater volume, which can drive your c osts down even further by realizing economies of scale. Of course, it's importan t to still maintain a healthy profit margin so the key here is to lower costs, n ot just prices. 2. Achieve product or service quality differentiation. Think abo ut the hundreds of companies that have achieved such differentiation for themsel ves. Take L'Oreal, for example. Why have they used the slogan "I'm worth it" for so many years? And are there really any other crackers on grocery store shelves that have the image of Ritz? What's the real difference between Coke and Pepsi, or between Skippy and Jif peanut butter? Why do you keep returning to the same dealership to have your car serviced? Why do many of us follow our favorite hair stylist or radio personality if they move to another location or station? The a nswers lie in the perception of a difference in people's minds. 3. Achieve suppl y or distribution leverage. When Microsoft wrote the DOS operating system, it in stantly gained an advantage in the computer industry that has remained virtually impossible to copy. Airlines with landing rights at airport gates, or companies like Kellogg's with lots of shelf clout, have sustainable advantages that provi de serious barriers to competitors. A patent, copyright or exclusive contract pr ovides legal protection. 4. Pursue a market niche, especially one that has been neglected by the dominant firm in your industry. As companies grow, decisions of ten have to be made to discontinue servicing a particular segment. But that does n't mean that the segment no longer has needs; it just means that the larger com pany can no longer provide for them efficiently or profitably. That spells immed iate opportunity for a smaller, leaner organization. As you are customizing your strategy to meet your unique situation, keep in mind that your competitors are not just the obvious ones. McDonald's competes directly with Burger King and Wen dy's, but they also compete directly with the grocery stores, especially during the summer barbecue season when people enjoy do-it-yourself burger grilling. For more information, see Tailoring Your Company's Vision According to Trends and C hanging Customer Preferences and Creating a Competitive Edge. Outline: I. II. III. IV. Gathering Competitive Intelligence Conducting a SWOT Analysis The Next Step Reso urces I. Gathering Competitive Intelligence Have you ever made the wrong decision beca use you had inadequate information? Have you ever found yourself falling behind the competition and wondering how it happened? Have you ever wondered if there w ere new markets, sales channels and breakthrough communication programs that cou ld 7

take your product to the next step in sales and profits? If so, you need competi tive intelligence(CI). Many managers will argue they have plenty of information about their industry, competitors, customers and marketplace. So how is competit ive intelligence different? The difference is that CI manages information so it becomes the knowledge you need for foresight. CI can reduce the risk of making a wrong business decision so you won't be saying with regret, "If only I knew the n what I know now, I would have done things differently." It also increases your ability to do the right thing at the right time, so you're not blind sided by a new competitor, unexpected actions of current competitors, or by emerging techn ologies that render your current technology obsolete. The question all business owners should be asking themselves is not whether they need CI, but rather can t hey succeed without it? The purpose of CI is to make the best decisions based on the best available knowledge on a given subject. The rules have changed: The st akes are higher, the game is faster, and the risks associated with bad decisions greater. CI is the practice of gathering, analyzing and disseminating informati on on what the marketplace requires (demand), about how you and your competitors meet these requirements (supply), and how each strives to meet market needs bet ter than the other competition). The intelligence is then used to help make deci sions about the future direction and growth of the company. It's obvious that th e best results come from the best decisions. The quality of the decision is a di rect result of the quantity and quality of the information at hand, how it's ana lyzed, and how it's used. The right answers come from asking the right questions , and foreseeing events comes from looking ahead. This is why CI exists and is g rowing. Competitive intelligence can't predict the future, but it can help you m ake the right decisions about it. Knowing what is going on in the marketplace an d how it will impact you is the key to market leadership. This knowledge will he lp your firm become a strong competitor and seize the market first. The end resu lt is a better chance of lasting success. As writer Damon Runyon says, "The race isn't always to the swift, nor the battle to the strong, but that's the way to bet." To gain a marketing edge, you must first understand the nature of your com petition and the dynamics and trends of your marketplace. Then, promptly use tha t knowledge to take advantage of opportunities and avoid threats. The critical t ool to achieve that marketing edge is competitive intelligence and it's gaining ground every day. It should be clear now that whenever you have an important dec ision to make about the future, you could use the kind of knowledge that CI prov ides. Examples include developing new marketing plans, counteracting competitor initiatives, considering a new product or line extension, entering new markets, repositioning an existing product, investigating a strategic alliance or acquisi tion, identifying new distribution channels, counteracting imports the list goes on and on. Many managers rely on their years of industry experience to make key business decisions that are often based on instinct or "gut feelings." Certainl y, there is no 8

substitute for experience. On the other hand, change is happening faster and "yo u don't know what you don't know." CI can fill in the blanks of the most experie nced manager's knowledge and help assure the decision making process uses the be st intelligence to achieve the best results. An axiom in CI circles is that 80 p ercent to 90percent of the information you need for a given project is available through public and published channels and the rest is insignificant. You'll oft en find that" public" information, however, has not been published. Court record s, state filings and government hearings aren't published, but they are public a nd contain important information about a competitor's finances and future plans. A frequent example of useful public information is a Uniform Commercial Code (U CC) filing. These state-required filings of assets and loan collateral can often tell you how much of a capital investment a competitor is making, the kind of e quipment purchased and the manufacturer. A quick call to the manufacturer can te ll you what the equipment is used for, and, therefore, what kind of new activity a competitor is financing. Other sources of CI include internal and external so urces. Internal sources include those pieces of information you and your employe es need to do your jobs, such as technical papers, competitor sales literature, press clippings, annual reports, and the like. External information would includ e information found in proprietary databases like Biz@dvantage, Lexis-Nexis, Dia log and DowJones, to name a few well known resources. Information also comes fro m primary and secondary sources. Primary sources are the originators of the info rmation, and often you must interview the source to get the desired data. Second ary sources represent information that has been filtered through somebody other than the originator of the data, such as news stories and stock analyst reports. CI professionals also differentiate between hard and soft information. Hard inf ormation is quantitative, like facts, statistics, raw data, financial informatio n and hard news stories. Soft information is qualitative, and includes rumors, o pinions, anecdote and customer feedback. Which is more important, information ga thering or analysis? Data gathering fans say that you must know where the inform ation is and ask the right questions to get everything available. Analysis fans say that a "data dump" doesn't do anybody any good. It must be integrated and an alyzed into graphs and charts and other information interpreters so that it can be acted upon. Then, there is a third group that believes each is equally import ant because if either is flawed, the other will compensate. Analysis can be as s imple as developing charts and graphs to show information relationships, or it c an be as sophisticated as SWOTanalysis, scenario developing, and benchmarking. I I. Conducting a SWOT Analysis A SWOT Analysis takes is a method for examining th e Strengths, Weaknesses, Opportunities, and Threats facing a business. It can gi ve you insight into your company's position in the competitive arena. When carry ing out a SWOT analysis 9

to determine how you rate against a competitor, the following guides should be u sed: Strengths Consider your company's strong points. This should be both from y our own and your customers' points of view. Don't be modest; be realistic. What distinct advantages does your company offer? Why do customers say they enjo y doing business with you? Is there anything you currently offer that can not be copied by a competitor, now or in the future? Weaknesses Evaluate your company's weaknesses not only from your perspective, bu t also from the perspective of your competitors. It's sometimes difficult to thi nk about and discuss your weaknesses, but it is best to be realistic now and fac e any unpleasant truths as soon as possible. What does your company do that can be improved? What does your company do poorly ? What should be avoided? What do your competitors do better than you? Do compet itors have a particular market or segment locked up? Opportunities Next consider the areas in your market that offer you room to grow . Opportunities can come from changes in technology and markets on both a broad and narrow scale; changes in government policy related to your industry; changes in social patterns demographics and customer lifestyle changes; and local event s, such as the closing of a store near you. What and where are the interesting opportunities in your market? What are the im portant trends occurring in your local area as well as across the nation? What d o you anticipate happening in the future that may represent an opportunity? Threats Although we don't like to think about them, we all face threats in our b usinesses. Many times they're out of our control, such as a downturn in the econ omy, a shift in market demographics, or perhaps a new mega-corporation opening i n your local area. It is critical to think about and be prepared for such events . What are the obstacles that your company faces? What is your competition doing t hat could take business away from you or stunt your company's growth? Are the re quired specifications for your products or services changing? Is the changing te chnology threatening your position in the market? 10

Do you have cash flow problems that could keep your company from acquiring new t echnology, staff or equipment? The primary strength of SWOT analysis arises from matching specific internal and external factors and evaluating the multiple interrelationships involved. The m atching process can be greatly facilitated by the construction of a SWOT matrix. The SWOT matrix is constructed by creating a table showing the strengths, weakn esses, opportunities and threats that you've just identified. (See figure 1 belo w.) Figure Basic SWOT Matrix SWOT Matrix 1 Opportunities 1. 2. 3. Threats 1. 2. 3. T/S Matches T2 and S2 T2 and S1 Strengths 1. 2. 3. Weaknesses 1. 2. 3. O/S Matches O1 and S2 O3 and S3 O/W Matches O1 and W1 T/W Matches None Next, you can use the matrix to methodically compare each relevant pair of lists to generate logical matches. The four SWOT cells are comparisons of opportuniti es with your strengths (O/S), threats with your strengths (T/S),opportunities wi th your weaknesses (O/W) and threats with your weaknesses (T/W). Analyzing each of the four SWOT cells of the matrix should yield a variety of matches that will help generate strategic alternatives. For example, if an opportunity in the mar ketplace exists for a firm that can provide superior service but your firm lags behind competitors in this dimension (i.e., customer service is one of your weak nesses), then you will quickly see when you do the O/W match that steps must be taken to improve customer service in order to capitalize on the market opportuni ty. There are four basic categories of matches for which strategic alternatives can be considered: S/O matches show the company's strengths and opportunities. Essentially, the com pany should attempt to use its strengths to exploit opportunities. 11

S/T matches show the company's strengths in light of major threats from competit ors. The company should use its strengths to avoid or defuse threats. W/O matche s illustrate the company's weaknesses coupled with major opportunities. The comp any should try to overcome its weaknesses by taking advantage of opportunities. W/T matches show the company's weaknesses against existing market threats. Essen tially, the company must attempt to minimize its weaknesses and avoid threats. T hese strategy alternatives are generally defensive. III. The Next Step So what do you do once you've compiled your SWOTanalysis? Dev elop a strategic plan for dealing with your competition and other market forces. Your plan should be aimed at allowing all members of your organization to under stand your market position and how your company plans to compete. If your organi zation is large, it may require a separate plan for each business unit. Your pla n should include: An overview of the market An explanation of the products and services offered by your company and how they are different competitors A profile of the type of cl ientele you serve An explanation of the geographic marketing territory and natur e of the business and areas of specialization An outlook for the competitive lan dscape of your market 3. Running a Profitable Company Overview The bottom line. That's what many business people look at to gauge the profitability of a company. While important, the bottom line doesn't always prov ide the entire picture, and using it as the sole barometer of company performanc e could have serious fiscal repercussions. This discussion provides some simple profitability ratios and analytical procedures that can help determine your comp any's present and future financial standing. With your findings, you can identif y company trends and compare current figures to your business's historical perfo rmance. Once this essential data is in hand, you will be able to evaluate your b usiness in relation to your competition and industry norms. The following ratios and analytical procedures described here will provide you with a quick referenc e guide to how your business is performing: For more information on financial ra tios, see Financial Ratio Analysis. Ratios Gross Profit on Net Sales 12

Net Profit on Net Sales Management Rate of Return Net Profit to Tangible Net Wor th Rate of Return on Common Stock Equity Analytical Procedures Comparative Statements Index-Number Trend Series Common-Size Statements Analysis of Financial Statement Components This discussion also provides you with a detailed example of a common-size incom e statement and other procedures you can use to examine your company's profitabi lity. Outline: I. II. III. IV. V. VI. VII. VIII. IX. X. Purpose of Profitability Analysis Profitability Ratios Analytical Procedures Com monly Used Analytical Procedures Comparative Statements Index-Number Trend Serie s Common-Size Statements Analysis of Financial Statement Components Vertical Ana lysis Resources I. Purpose of Profitability Analysis A properly conducted profitability analysis provides invaluable evidence concerning the earnings potential of a company and the effectiveness of management. II. Profitability Ratios Profitability ratios are the most significant - and telling - of financial ratios. Similar to income ratios, profitability ratios provide a definitive evaluation of the overall effe ctiveness of management based on the returns generated on sales and investment. The adequacy of your company's earnings can be measured in terms of (1) the rate earned on sales; (2) the rate earned on average total assets; (3) the rate earn ed on average common stockholders' equity; and (4) the availability of earnings to common stockholders. The most widely used profitability measurements are prof it margin on sales, return-on-investment ratios, and earnings per share. Gross P rofit on Net Sales You can use the following ratio to determine the percentage o f gross profit on net sales: 13

Net Sales - Cost of Goods = Gross Sold Rate Net Sales Profit Your gross profit rate helps you determine whether your average markup on goods will consistently cover your expenses, therefore resulting in the desired profit . If your gross profit rate is continually lower than your average margin, somet hing is wrong! Be on the lookout for downward trends in your gross profit rate. This is a sign of future problems for your bottom line. Note: This percentage ra te can - and will - vary greatly from business to business, even those within th e same industry. Sales, location, size of operations, and intensity of competiti on are all factors that can affect the gross profit rate. Net Profit on Net Sale s Earnings Taxes Net Sales after = Net Rate Profit This ratio provides a primary appraisal of net profits related to investment. On ce your basic expenses are covered, profits will rise disproportionately greater than sales above the break-even point of operations. Note: Sales expenses may b e substituted out of profits for other costs to generate even more sales and pro fits. Management Rate of Return This profitability ratio compares operating inco me to operating assets, which are defined as the sum of tangible fixed assets an d net working capital. Operating Income = Rate Fixed Assets + Net Working Return Capital of This rate determines whether you have made efficient use of your assets. You can calculate for your entire company or for each of its divisions or operations, d etermines whether you have made efficient use of your assets. The percentage sho uld be compared with a target rate of return that you have set for the business. Net Sales to Tangible Net Worth Net Sales Tangible Worth* = Net Sales to Tangib le Net Worth Net Ratio This ratio indicates whether your investment in the business is adequately propo rtionate to your sales volume. It may also uncover potential credit or managemen t problems, usually called overtrading and undertrading. Overtrading, or excessi ve sales volume transacted on a thin margin of investment, presents a potential problem with creditors. Overtrading can come 14

from considerable management skill, but outside creditors must furnish more fund s to carry on daily operations. Undertrading is usually caused by management's p oor use of investment money and their general lack of ingenuity, skill or aggres siveness. *Tangible Net Worth = owners' equity - intangible assets Rate of Retur n on Common Stock Equity Instead of focusing on total assets, this ratio takes a reading on the rate of return on stockholders' equity. Earnings Taxes Tangible Worth after = Rate NetReturn of III. Analytical Procedures Procedures you can use to analyze your business's pro fitability are generally broken up into two categories: (1) those based upon fin ancial data from two or more fiscal periods, or (2) financial data from only the current fiscal period. To complete a thorough review of your company's financia l standing, we recommend you utilize both types of analytical procedures. IV. Co mmonly Used Analytical Procedures The most common types of analytical procedures are: (1) comparative statements; (2) index-number trend series; (3) common-size statements; (4) analysis of financial statement components; and (5) vertical an alysis. V. Comparative Statements A first look at your business's current financial figu res can be quite overwhelming and, more often than not, a little confusing. But, if you were to compare that data to your business's historical performance, it becomes significantly more meaningful. Compare your company's current financial numbers with monthly, quarterly, or annual data from previous fiscal years. You should notice some trends that will help you map out the future of your business . VI. Index-Number Trend Series If you are trying to analyze financial data that span a long period of time, simply trying to compare financial statements can t urn into quite a cumbersome task. If you find yourself in this boat, try to crea te an index-number trend series to alleviate some of your confusion. First, choo se a base year to which all other financial data will be compared. Usually, the base year is the earliest year in the group being analyzed, or it can be another year you consider particularly appropriate. 15

Next, express all base year amounts as 100 percent. Then state corresponding fig ures from following years as a percentage of the base year amounts. Keep in mind that index-numbers can be computed only when amounts are positive. Example 1998 Sales Index-Number Trend 1999 2000 100,00 150,00 175,00 0 0 0 100% 150% 175% The index-number trend series technique is a type of horizontal analysis that ca n provide you with a long range view of your firm's financial position, earnings , and cash flow. It is important to remember, however, that long-range trend ser ies are particularly sensitive to changing price levels. For instance, between 1 975 and 1985 the price level in the United States doubled. A horizontal analysis that ignored such a significant change might suggest that your sales or net inc ome increased dramatically during the period when, in fact, little or no real gr owth occurred. Data expressed in terms of a base year can be very useful when co mparing your company's figures to those from government agencies and sources wit hin your industry or the business world in general, because they will often use an indexnumber trend series as well. When making comparisons, be sure the sample s you use are in the same base period. If they aren't, simply change one so they match. VII. Common-Size Statements When performing a ratio analysis of financia l statements, it is often helpful to adjust the figures to common-size numbers. To do this, change each line item on a statement to a percentage of the total. F or example, on a balance sheet, each figure is shown as a percentage of total as sets, and on an income statement, each item is expressed as a percentage of sale s. This technique is quite useful when you are comparing your business to other businesses or to averages from an entire industry, because differences in size a re neutralized by reducing all figures to common-size ratios. Industry statistic s are frequently published in common-size form. When comparing your company with industry figures, make sure that the financial data for each company reflect co mparable price levels, and that it was developed using comparable accounting met hods, classification procedures, and valuation bases. Such comparisons should be limited to companies engaged in similar business activities. When the financial policies of two companies differ, these differences should be recognized in the evaluation of comparative reports. For example, one company leases its properti es while the other purchases such items; one company finances its operations usi ng long-term borrowing while the other relies 16

primarily on funds supplied by stockholders and by earnings. s for two companies under these circumstances are not wholly Common-Size Income Statement 2000 Sales Cost of Sales Gross es Profit 100% 65% 35% 27% 2% 6% 1999 100% 68% 32% 27% 1% 4% 6% 1% 3%

Financial statement comparable. Example Profit Expenses Tax 1998 100% 70% 30% 2

VIII. Analysis of Financial Statement Components The preceding analytical proced ures have been selected because they will prove to be the most beneficial for yo u, the small business owner and operator. There are other, more specific, techni ques that are used by people and agencies with special interests in certain comp onents of financial statements. Creditors, for example, are concerned with the a bility of a company to pay its current obligations and, therefore, seek informat ion about the relationship of current assets to current liabilities. Stockholder s are concerned with dividends. Management is concerned with the activity of the merchandise inventory. All parties, it seems, are vitally interested in profita bility. IX. Vertical Analysis Vertical analysis is the computation of percentages, ratio s, turnovers, and other measures of financial position and operating results for one fiscal period. When these figures are compared with those from other period s, it becomes horizontal analysis. Note: It should be emphasized that sound conc lusions on a company's profitability cannot be reached from an individual measur ement. However, many computations, together with adequate investigation and stud y, can lead to a satisfactory evaluation of financial data. 4. Analyzing Your Financial Ratios Overview 17

Any successful business owner is constantly evaluating the performance of his or her company, comparing it with the company's historical figures, with its indus try competitors, and even with successful businesses from other industries. To c omplete a thorough examination of your company's effectiveness, however, you nee d to look at more than just easily attainable numbers like sales, profits, and t otal assets. You must be able to read between the lines of your financial statem ents and make the seemingly inconsequential numbers accessible and comprehensibl e. This massive data overload could seem staggering. Luckily, there are many wel ltested ratios out there that make the task a bit less daunting. Comparative rat io analysis helps you identify and quantify your company's strengths and weaknes ses, evaluate its financial position, and understand the risks you may be taking . As with any other form of analysis, comparative ratio techniques aren't defini tive and their results shouldn't be viewed as gospel. Many off-the-balance-sheet factors can play a role in the success or failure of a company. But, when used in concert with various other business evaluation processes, comparative ratios are invaluable. This discussion contains descriptions and examples of the eight major types of ratios used in financial analysis: Income, Profitability, Liquidi ty, Working Capital, Bankruptcy, Long-Term Analysis, Coverage, and Leverage. Out line: I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. XIII. XIV. Purposes and Considerations of Ratios and Ratio Analysis Types of Ratios Income Ratios Profitability Ratios Net Operating Profit Ratios Liquidity Ratios Working Capital Ratios Bankruptcy Ratios Long-Term Analysis Coverage Ratios Total Cover age Ratios Leverage Ratios Common-Size Statement Resources I. Purposes and Considerations of Ratios and Ratio Analysis Ratios are highly im portant profit tools in financial analysis that help financial analysts implemen t plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performan ces, they can be predictive too, and provide lead indications of potential probl em areas. Ratio analysis is primarily used to compare a company's financial figu res over a period of time, a method sometimes called trend analysis. Through tre nd analysis, you can identify trends, good and bad, and adjust your business 18

practices accordingly. You can also see how your ratios stack up against other b usinesses, both in and out of your industry. There are several considerations yo u must be aware of when comparing ratios from one financial period to another or when comparing the financial ratios of two or more companies. If you are making a comparative analysis of a company's financial statements ove r a certain period of time, make an appropriate allowance for any changes in acc ounting policies that occurred during the same time span. When comparing your bu siness with others in your industry, allow for any material differences in accou nting policies between your company and industry norms. When comparing ratios fr om various fiscal periods or companies, inquire about the types of accounting po licies used. Different accounting methods can result in a wide variety of report ed figures. Determine whether ratios were calculated before or after adjustments were made to the balance sheet or income statement, such as nonrecurring items and inventory or pro forma adjustments. In many cases, these adjustments can sig nificantly affect the ratios. Carefully examine any departures from industry nor ms. Back to Outline II. Types of Ratios Income Profitability Liquidity Working Bankr uptcy Long-Term Coverage Leverage Back to Outline III. Income Ratios Turnover of Total Operating Assets Net Sales Total Assets* = Turnover of Total Operating As sets Operating Ratio Capital Analysis Obviously, an increase in sales will necessitate more operating assets at some p oint (sales may rise without additional investment within a given range, however ); conversely, an inadequate sales volume may call for reduced investment. Turno ver of Total Operating Assets or sales to investment in total operating assets t racks over-investment in operating assets. *Total operating assets = total asset s - (long-term investments + intangible assets) 19

Note: This ratio does not measure profitability. Remember, over-investment may r esult in a lack of adequate profits. Net Sales to Tangible Net Worth Net Sales T angible Worth* = Net Sales to Tangible Net Worth Net Ratio This ratio indicates whether your investment in the business is adequately propo rtionate to your sales volume. It may also uncover potential credit or managemen t problems, usually called "overtrading" and "undertrading." Overtrading, or exc essive sales volume transacted on a thin margin of investment, presents a potent ial problem with creditors. Overtrading can come from considerable management sk ill, but outside creditors must furnish more funds to carry on daily operations. Undertrading is usually caused by management's poor use of investment money and their general lack of ingenuity, skill or aggressiveness. *Tangible Net Worth = owner's equity - intangible assets Gross Margin on Net Sales Gross Margin* Net Sales = Gross Margin on Net Sales Ratio By analyzing changes in this figure over several years, you can identify whether it is necessary to examine company policies relating to credit extension, marku ps (or markdowns), purchasing, or general merchandising (where applicable). *Gro ss Margin = net sales - cost of goods sold Note: An increase in gross margin may result from higher sales, lower cost of goods sold, an increase in the proporti onate volume of higher margin products, or any combination of these variables. O perating Income to Net Sales Ratio Operating Income Net Sales = Operating Income to Net Sales Ratio This ratio reveals the profitability of sales resulting from regular business as well as buying, selling, and manufacturing operations. Note:Operating income de rives from ordinary business operations and excludes other revenue (losses), ext raordinary items, interest on long-term obligations, and income taxes. Acceptanc e Index 20

Applications Accepted Applications Submitted = Acceptance Index Obviously, a high sales volume that comes from just two or three major accounts is much riskier than the same volume coming from a large number of customers. Lo sing one out of three major accounts is disastrous, while losing one out of 150 is routine. A growing firm should try to spread this risk of dependency through active sales, promotion, and credit departments. Although the quality of custome rs stems from your general management policy, the quantity of newly opened accou nts is a direct reflection on your sales and credit efforts. Note: This index of effectiveness does not apply to every type of business. Back to Outline IV. Pro fitability Ratios Closely linked with income ratios are profitability ratios, wh ich shed light upon the overall effectiveness of management regarding the return s generated on sales and investment. Gross Profit on Net Sales Net Sales - Cost of Goods = Gross Profit on Net Sales Sold Ratio Net Sales Does your average mark up on goods normally cover your expenses, and therefore result in a profit? This ratio will tell you. If your gross profit rate is continually lower than your a verage margin, something is wrong! Be on the lookout for downward trends in your gross profit rate. This is a sign of future problems for your bottom line. Note : This percentage rate can and will vary greatly from business to business, even those within the same industry. Sales, location, size of operations, and intens ity of competition are all factors that can affect the gross profit rate. Back t o Outline V. Net Operating Profit Ratios Net Profit on Net Sales EAT* Net Sales = Net Profit on Net Sales Ratio This ratio provides a primary appraisal of net profits related to investment. On ce your basic expenses are covered, profits will rise disproportionately greater than sales above the break-even point of operations. *EAT= earnings after taxes 21

Note: Sales expenses may be substituted out of profits for other costs to genera te even more sales and profits. Net Profit to Tangible Net Worth EAT Tangible Wo rth = Net Profit to Tangible Net Worth Net Ratio This ratio acts as a complementary appraisal of net profits related to investmen t. This ratio sizes up the ability of management to earn a return. Net Operating Profit Rate Of Return EBIT Tangible Worth = Net Operating Profit Rate of Return Net Ratio Your Net Operating Profit Rate of Return ratio is influenced by the methods of f inancing you utilize. Notice that this ratio employs earnings before interest an d taxes, not earnings after taxes. Profits are taken after interest is paid to c reditors. A fallacy of omission occurs when creditors support total assets. Note : If financial charges are great, compute a net operating profit rate of return instead of return on assets ratio. This can provide an important means of compar ison. Management Rate Of Return Operating Income = Management Rate of Return Fix ed Assets + Net Working Ratio Capital This profitability ratio compares operatin g income to operating assets, which are defined as the sum of tangible fixed ass ets and net working capital. This rate, which you may calculate for your entire company or for each of its divisions or operations, determines whether you have made efficient use of your assets. The percentage should be compared with a targ et rate of return that you have set for the business. Earning Power Net Sales Ta ngible Worth EAT NetX Net Sales = Earning Ratio Power The Earning Power Ratio combines asset turnover with the net profit rate. That i s, Net Sales to Tangible Net Worth (see "Income Ratios") multiplied by Net Profi t on Net Sales (see ratio above). Earning power can be increased by heavier trad ing on assets, by decreasing costs, by lowering the break-even point, or by incr easing sales faster than the accompanying rise in costs. Note: Sales hold the ke y. 22

Back to Outline VI. Liquidity Ratios While liquidity ratios are most helpful for short-term creditors/suppliers and bankers, they are also important to financia l managers who must meet obligations to suppliers of credit and various governme nt agencies. A complete liquidity ratio analysis can help uncover weaknesses in the financial position of your business. Current Ratio Current Assets* = Current Current Ratio Liabilities* Popular since the turn of the century, this test of solvency balances your current assets against your current liabilities. The curr ent ratio will disclose balance sheet changes that net working capital will not. *Current Assets = net of contingent liabilities on notes receivable *Current Li abilities = all debt due within one year of statement data Note: The current rat io reveals your business's ability to meet its current obligations. It should be supplemented with the other ratios listed below, however. Quick Ratio Cash + Ma rketable Receivable (net) Current Liabilities Securities + Accounts = Quick Rati o Also known as the "acid test," this ratio specifies whether your current assets that could be quickly converted into cash are sufficient to cover current liabil ities. Until recently, a Current Ratio of 2:1 was considered standard. A firm th at had additional sufficient quick assets available to creditors was believed to be in sound financial condition. Note: The Quick Ratio assumes that all assets are of equal liquidity. Receivables are one step closer to liquidity than invent ory. However, sales are not complete until the money is in hand. Absolute Liquid ity Ratio Cash + Marketable = Absolute Securities Ratio Current Liabilities Liqu idity A subsequent innovation in ratio analysis, the Absolute Liquidity Ratio eliminat es any unknowns surrounding receivables. 23

Note: The Absolute Liquidity Ratio only tests short-term liquidity in terms of c ash and marketable securities. Basic Defense Interval (Cash + Receivables + Mark etable Securities) = Basic (Operating Expenses + Interest + Income Interval Taxe s) / 365 Defense If for some reason all of your revenues were to suddenly cease, the Basic Defens e Interval would help determine the number of days your company can cover its ca sh expenses without the aid of additional financing. Receivables Turnover Total Credit Sales = Receivables Turnover Average Receivables Ratio Owing Another indi cator of liquidity, Receivables Turnover Ratio can also indicate management's ef ficiency in employing those funds invested in receivables. Net credit sales, whi le preferable, may be replaced in the formula with net total sales for an indust ry-wide comparison. Note: Closely monitoring this ratio on a monthly or quarterl y basis can quickly underscore any change in collections. Average Collection Per iod (Accounts + Notes Receivable) = Average (Annual Net Credit Sales) /Period 36 5 Collection The Average Collection Period (ACP) is another litmus test for the quality of yo ur receivables business, giving you the average length of the collection period. As a rule, outstanding receivables should not exceed credit terms by 10-15 days . If you allow various types of credit transactions, such as a retail outlet sel ling both on open credit and installment, then the ACP must be calculated separa tely for each category. Note: Discounted notes which create contingent liabiliti es must be added back into receivables. Inventory Turnover Cost of Goods Sold = Inventory Ratio Average Inventory Turnover Rule of Thumb: Multiply your inventory turnover by your gross margin percentage. If the result is 100 percent or greater, your average inventory is not too high . 24

VII. Working Capital Ratios Many believe increased sales can solve any business problem. Often, they are correct. However,, sales must be built upon sound polic ies concerning other current assets and should be supported by sufficient workin g capital. There are two types of working capital: gross working capital, which is all current assets, and net working capital, which is current assets less cur rent liabilities. Moody's Investors Service has listed net working capital since 1922. If you find that you have inadequate working capital, you can correct it by lowering sales or by increasing current assets through either internal saving s (retained earnings) or external savings (sale of stock). Following are ratios you can use to evaluate your business's net working capital. Working Capital Rat io Use "Current Ratio" in the section on "Liquidity Ratios." This ratio is parti cularly valuable in determining your business's ability to meet current liabilit ies. Working Capital Turnover Net Sales = Working Capital Turnover Net Working R atio Capital This ratio helps you ascertain whether your business is top-heavy i n fixed or slow assets, and complements Net Sales to Tangible Net Worth (see "In come Ratios"). A high ratio could signal overtrading. Note: A high ratio may als o indicate that your business requires additional funds to support its financial structure, top-heavy with fixed investments. Current Debt to Net Worth Current Liabilities = Current Debt to Net Worth Tangible Net Ratio Worth Your business s hould not have debt that exceeds your invested capital. This ratio measures the proportion of funds that current creditors contribute to your operations. Note: For small businesses a ratio of 60 percent or above usually spells trouble. Larg er firms should start to worry at about 75 percent. Funded Debt to Net Working Capital Long-Term Debt = Funded Debt to Net Working C apital Net WorkingRatio 25

Capital Funded debt (long-term liabilities) = all obligations due more than one year from the balance sheet date Note: Long-term liabilities should not exceed n et working capital. VIII. Bankruptcy Ratios Many business owners who have filed for bankruptcy say they wish they had seen some warning signs earlier on in thei r company's downward spiral. Ratios can help predict bankruptcy before it's too late for a business to take corrective action and for creditors to reduce potent ial losses. With careful planning, predicted futures can be avoided before they become reality. The first five bankruptcy ratios in this section can detect pote ntial financial problems up to three years prior to bankruptcy. The sixth ratio, Cash Flow to Debt, is known as the best single predictor of failure. Working Ca pital to Total Assets Net Working = Working Capital to Total Assets Capital Rati o Total Assets This liquidity ratio, which records net liquid assets relative to total capitalization, is the most valuable indicator of a looming business disa ster. Consistent operating losses will cause current assets to shrink relative t o total assets. Note: A negative ratio, resulting from negative net working capi tal, presages serious problems. Retained Earnings to Total Assets Retained Earni ngs Total Assets = Retained Earnings to Total Assets Ratio New firms will likely have low figures for this ratio, which designates cumulati ve profitability. Indeed, businesses less than three years old fail most frequen tly. Note: A negative ratio portends cloudy skies. However, results can be disto rted by manipulated retained earnings (earned surplus) data. EBIT to Total Asset s EBIT Total Assets = EBIT to Total Assets Ratio How productive are your business's assets? Asset values come from earning power. Therefore, whether or not liabilities exceed the true value of assets (insolven cy) depends upon earnings generated. 26

Note: Maximizing rate of return on assets does not mean the same as maximizing r eturn on equity. Different degrees of leverage affect these separate conclusions . Sales to Total Assets Total Sales = Sales to Total Assets Total Ratio Assets S ee "Turnover Ratio" under "Profitability Ratios." This ratio, which uncovers man agement's ability to function in competitive situations while not excluding inta ngible assets, is inconclusive if studied by itself. But when viewed alongside W orking Capital to Total Assets, Retained Earnings to Total Assets, and EBIT to T otal Assets, it can confirm whether your business is in imminent danger. Note: A result of 200 percent is more reassuring than one of 100 percnt. Equity to Debt Market Value of Common + Preferred = Equity to Debt Stock Ratio Total Current + Long-Term Debt This ratio shows you by how much your business's assets can decl ine in value before it becomes insolvent. Note: Those businesses with ratios abo ve 200 percent are safest. Cash Flow to Debt Cash = Cash Flow to Debt Flow* Rati o Total Debt Also, refer to "Debt Cash Flow Coverage Ratio" in the section on "C overage Ratios." Since debt does not materialize as a liquidity problem until it s due date, the closer to maturity, the greater liquidity should be. Other ratio s useful in predicting insolvency include Total Debt to Total Assets (see "Lever age Ratios" below) and Current Ratio (see "Liquidity Ratios"). *Cash flow = Net Income + Depreciation Note: Because there are various accounting techniques of d etermining depreciation, use this ratio for evaluating your own company and not to compare it to other companies. IX. Long-Term Analysis 27

Current Assets to Total Debt Current Assets = Current Assets to Total Debt Curre nt + Long-Term Ratio Debt This ratio determines the degree of protection linked to short- and long-term debt. More net working capital protects short-term credi tors. Note: A high ratio (significantly above 100 percent) shows that if liquida tion losses on current assets are not excessive, long-range debtors can be paid in full out of working capital. Stockholders' Equity Ratio Stockholders' Equity Total Assets = Stockholders' Ratio Equity Relative financial strength and long-run liquidity are approximated with this ca lculation. A low ratio points to trouble, while a high ratio suggests you will h ave less difficulty meeting fixed interest charges and maturing debt obligations . Total Debt to Net Worth Current + Deferred = Total Debt to Net Worth Debt Rati o Tangible Net Worth Rarely should your business's total liabilities exceed its tangible net worth. If it does, creditors assume more risk than stockholders. A business handicapped with heavy interest charges will likely lose out to its bet ter financed competitors. X. Coverage Ratios Times Interest Earned EBIT = Times Interest Earned Ratio I EBIT = earnings before interest I = dollar amount of int erest payable on debt and taxes The Times Interest Earned Ratio shows how many times earnings will cover fixedin terest payments on long-term debt. XI. Total Coverage Ratios 28

EBIT s = Total +1Ratio I h Coverage I = interest payments s = payment on principal figured on income after taxes (1 - h) This ratio goes one step further than Times Interest Earned, because debt o bliges the borrower to not only pay interest but make payments on the principal as well. XII. Leverage Ratios This group of ratios calculates the proportionate contributions of owners and creditors to a business, sometimes a point of conten tion between the two parties. Creditors like owners to participate to secure the ir margin of safety, while management enjoys the greater opportunities for risk shifting and multiplying return on equity that debt offers. Note: Although lever age can magnify earnings, it exaggerates losses. Equity Ratio Common Shareholder s' = Equity Equity Ratio Total Capital Employed The ratio of common stockholders ' equity (including earned surplus) to total capital of the business shows how m uch of the total capitalization actually comes from the owners. Note: Residual o wners of the business supply slightly more than one half of the total capitaliza tion. Debt to Equity Ratio Debt + Preferred LongTerm = Debt to Equity Common Sto ckholders'Ratio Equity A high ratio here means less protection for creditors. A low ratio, on the other hand, indicates a wider safety cushion (i.e., creditors feel the owner's funds can help absorb possible losses of income and capital). T otal Debt to Tangible Net Worth If your business is growing, track this ratio fo r insight into the distributive source of funds used to finance expansion. Debt Ratio Current + Long-Term = Debt Debt Ratio Total Assets 29

What percentage of total funds are provided by creditors? Although creditors ten d to prefer a lower ratio, management may prefer to lever operations, producing a higher ratio. Times Interest Earned Refer to "Coverage Ratios" XIII. Common-Si ze Statement When performing a ratio analysis of financial statements, it is oft en helpful to adjust the figures to common-size numbers. To do this, change each line item on a statement to a percentage of the total. For example, on a balanc e sheet, each figure is shown as a percentage of total assets, and on an income statement, each item is expressed as a percentage of sales. This technique is qu ite useful when you are comparing your business to other businesses or to averag es from an entire industry, because differences in size are neutralized by reduc ing all figures to common-size ratios. Industry statistics are frequently publis hed in common-size form. When comparing your company with industry figures, make sure that the financial data for each company reflect comparable price levels, and that it was developed using comparable accounting methods, classification pr ocedures, and valuation bases. Such comparisons should be limited to companies e ngaged in similar business activities. When the financial policies of two compan ies differ, these differences should be recognized in the evaluation of comparat ive reports. For example, one company leases its properties while the other purc hases such items; one company finances its operations using long-term borrowing while the other relies primarily on funds supplied by stockholders and by earnin gs. Financial statements for two companies under these circumstances are not who lly comparable. 5. Build a Web Site Overview As the saying goes, information wants to befree. Unfortunately, many of the tools needed to publish that information are not.However, the rush to the W eb has recently given rise to an avalanche of low-cost onlinepublishing options. If you know what you are doing, you can post a professional qualitysite for les s than a $500 investment and you can get by for next to nothing ifyou're willing to live without some of the extras. However, what is most important is thatyou commit to investing the necessary dollars to produce a high-quality, well-design ed andwell-written Web site. Inexpensive Web site development is due in largepar t to shareware, a cash-poor developer's best friend. Shareware versions of every thingfrom HTML editors to animation builders are available for trial and usually cost less than$50 to register. You may need one or two commercial products as w ell, but they don't haveto clean out your wallet. Many manufacturers have less e xpensive versions of highendhardware and software aimed at amateur Web designers . Many software 30

manufacturers alsooffer free beta or demo versions of their programs, so you can try them before buying thecommercial package. Budget-minded Web site designers can also standon the shoulders of other Web developers. By modifying pre-made We b programming gadgets,buttons, backgrounds, and multimedia doodads, you can deli ver cutting-edge quality withouthaving to do it all yourself. You can create a d ynamite site simply by finding the bestplace from which to borrow. Just a few ye ars ago there were no Web sites,but today there are more than 60 million. If you don't have a Web site for your business,it's like not having your phone number in the yellow pages. But there's a sweet side to this crusade to geton the Web. A Web page helps small businesses create an image of a large company, whichmay h elp increase the perception among potential customers that your company is credi bleand able to perform. So what's holding you back? The main hurdle topublishing a small business Web site is the belief that doing so is difficult, technically demanding work. While that might have been true a few years ago when the Web fir st tookflight, Web page authoring is no longer the sole province of techno-wizar ds. Plenty ofeasy-to-use software is on the market, and a newcomer can usually p ost an initial site ina matter of hours. Better still, all of this can be accomp lished atvery low cost. Even the smallest business can afford to be on the Web. Don't believe it?Following are step-by-step tips for producing your first Web si te from choosing theright tools and putting them to use finding space to build y our site and telling the worldabout it. Just follow the steps, and in a few hour s, you'll be in business on the Web. Outline: I. II. III. IV. V. VI. Why Are You Here? Get Creative Make It Shine Where to Put It All The Tower Of Ba bble Getting it Right I. Why Are You Here? The starting point for putting up a Web site is knowing wha t you want it to do and what it probably won't do. The Web is not going to help most small companies strike it rich. A very few start-ups have prospered on the Web, most notably Amazon.com and Virtual Vineyards, but the online cash register rarely rings for most small businesses. In that case, why put up a Web page? Ev en if thesite is little more than an electronic billboard for your company, it's still a powerfultool for building a business. On the Web, for instance, time no longer matters, nor dotime zones or date lines. Your business can be open 24 ho urs a day, seven days and onholidays. 31

Better still, a well executed Web site is agreat way to build customer loyalty. Many Web-savvy businesses use the technology toprovide detailed customer assista nce tips at a very low cost. When a customer can get aquestion answered 24 hours a day, their loyalty will be much stronger. You should also use the Web to prov ideinformation on your products or services. Before, communicating with customer s andprospects cost money for printing, stamps and so on. The Web allows you toc ommunicate worldwide at a minimum of cost. Add it all up and small businesses ar e missingout on a lot if they do not utilize the Web. Back to Outline II. Get Cr eative Once, building a Web site meant hours of laborious wrestling with HTML (h ypertext markup language). But newer Web site authoring tools are solidly "WYSIW YG," meaning "what you see is what you get," and building a page now involves li ttle more than pointing and clicking with your mouse. Which software package sho uld you use? There aremany, ranging from high-end programs such as NetObjects Fu sion to more affordable programssuch as Microsoft's FrontPage, Claris' Home Page , DeltaPoint QuickSite, as well as manyothers. Most programs come bundled with a n assortment oftemplates that need only a little tweaking before you've got your own Web site. Stick withthe templates, and completing a Web page in 30 minutes is feasible. These templatesprovide thorough instructions, and you type in your own information over the template'sboilerplate. Some programs demand a more hand s-on approach tosite development. The templates are more like blueprints than re ady-to-use pages, but theresult is you'll get a highly customized Web site. But you do not need specific Web-authoringsoftware to create a Web page. Many progra ms designed to fill other needs also includebasic Web-authoring tools. Microsoft Word 97 and Lotus' Word Pro 97 include handsometemplates for setting up Web pag es. Netscape Communicator also comes with Web-authoringsoftware that is extremel y easy to use. Back to Outline III. Make It Shine The Web is a graphical medium words matter, but images are at least as important in attracting and holding vie wers. That's why some Web-development software packages come bundled with collec tions of free art buttons, page backgrounds, arrows and other visual elements to help readers navigate a site. Images are skimpier with word processing programs . It is important that your Web site is not simplyan online brochure. Rather, it must include regularly updated information that keepsvisitors coming back time and 32

again. A well balanced Web site consists of the followingelements: strong conten t (articles, interviews, tips, Q&A, testimonials, etc.), easynavigation, logical flow, appealing graphics that download quickly, directions on how toorder your products or services, customer service information such as a FAQ sheet isappropr iate, and contact information (including names, addresses, phone and fax numbers and email addresses). The following are examples of excellence in Website conten t and design. Although some of them have been designed with very large budgets,y ou can surely learn something from each site that you can adapt to your own. 1-8 00-FLOWERS There's more to this site than meets the eye.Not only can you buy bou quets for your sweetheart, but you can also learn the origins ofeach type of flo wer, find out how to extend the life of an arrangement, discover how todry flowe rs, and look up your state's flower. This site gets a thumbs-up for easynavigati on and thoroughness of information. Cooking Light Although this site allows view ers to subscribeto the print magazine, it also offers a hearty helping of recipe s and tips that areupdated often. The graphics are classy, and the site is a joy to search. eBay The purpose of this online auction house is togenerate sales of antiques and other odds and ends, yet it doesn't overlook its viewers'needs for other information. To that end, it offers a chat room, Q&A, updates onwhat's ne w on the site, and live 24-hour assistance. kidsdoctor With pleasing pastels and simple graphics,kidsdoctor offers anxious parents an array of information and t ips on children's healthfrom birth up through toddler age. The site sells nothin g at all, but surely gets plentyof traffic for its rich content. The Living Eden s This educational PBS site allows you to explorethe far corners of the world from Patagonia to Madagascar - without ever leaving yourdesk. The graphics are p henomenal and download quickly. The content is rich, from thenatural history of the land to interviews with experts to trivia games. Want to go a visual step be yond? There areplenty of software tools for creating your own graphics, but most impose a steep learningcurve. It's easier to search the Web for free art by gra phic artists who let others usetheir images. A must see site: WebPromotions whic h features several dozen superb animated images. Another source is TuDogs, a gat eway to dozens of graphicshouses, most of which provide free clip art. 33

You can spend days downloading images. The Web is swamped with terrific free art . But use it sparingly: A chief beef of Web surfers is the long wait for graphic heavy pages to come up on screen. Another caveat: Before uploading any images to your site, read the fine print on the artist's page. Some prohibit use on commer cialsites. If in doubt, ask permission, which will protect you against future co mplications. Back to Outline IV. Where to Put It All Once you've created your pa ge, you have to find a place to put it. Free space is available to members of on line services such as America Online and ISP's such as Earthlink. Earthlink offe rs up to 10MB of space available to members. If your ISP doesn't have some space available for your site, head over to Geocities or Tripod which provide 2MB of free server space to members; membership is free to anyone who registers at the sites. There are some drawbacks to free space, however.For instance, some sites require that advertisements for their service appear on yourpages. The hitch is that selling at sites erected on free space is generally prohibited.Find out by checking the provider's terms of service, which is usually prominently flaggedon the home page. But that doesn't necessarily rule out this space for business. Y ou canstill erect a cyber billboard that offers plenty of information about prod ucts andservices in these free spaces. For many businesses, that's the surest wa y to get initiatedto the Web. Have bigger ambitions? If you want more space speci ally if you want to retail on the Web you've got to open your walletand sign up with a Web-hosting service that will provide up to 30 MB or more of space.These services will also allow you to set up several POP3 email accounts per site forf ree and additional accounts for an extra charge. A POP3 account would be somethi ng likeyourname@yourcompany.com. A low-budget option is the SimpleNet service, w hich providesunlimited Web storage space starting at $10 per month. Hundreds of other Web-hostingoptions are available; search for candidates using a search eng ine. Ask any potentialWeb-hosting service for email addresses of current custome rs. Contact a dozen or so andask for feedback: How reliable and fast is the serv er? Do the tech support personnelpromptly answer cries for help? If their custom ers are unhappy with the service, yoursprobably will be to. V. The Tower Of Babb le Building a site is only the beginning. You can't build it and assume potentia l customers will automatically come. This isn't the Field of Dreams, this is Cyb erSpace. You must promote your site the way you promote your address and phone n umber. Otherwise, only accidental tourists will find you. The first step to draw ing visitors is to visitthe major search engines Infoseek,Excite, AltaVista, Yah oo, HotBot, and Lycos.All feature simple procedures for adding a URL, the "unive rsal resourcelocator," that is, your site's address. What about the estimated 30 0-plus other searchengines on the Web? Many Webmasters skip them; others pay a s ervice to do the submissionsto them. Shop 34

around for a service that will do the submissions for you and find the onethat b est suits your needs. Just adding a URL to a search engine is still noguarantee of visitors. Get more exposure for your site by enrolling in a free linkexchange programs that will display your banner on other sites if you make space for thi rdparty banners on yours. Generally, every two 'hits" on your site results in on e viewof your banner on another site. Just with search engines, there are many l ink exchangeprograms, but the two biggest and most reliable are LinkExchange and SmartClicks. Enrollment is a matter of filling out a simple form andpasting hyp ertext code supplied by the link exchange into pages at yoursite. The last step, neglected by a shocking number ofbusinesses, is to put your site's address on y our letterhead, business cards, fax coversheets and all other printed material y our business gives out. It's a low-cost way tobuild awareness of your site. VI. Getting it Right Survey the experts and they will agree: The quickest route to W eb site failure is not delivering on what you promised. If you solicit customer feedback by email, that email has to be answered promptly. Promise spec sheets, and they must be available online. If you are unwilling to take the time to comm unicate or follow up with people via the Web, then you shouldn't bother with it. You will only convey an image of being unresponsive. Won't you need to still pu t in more time on the Web? Absolutely, but the investment is warranted. The Inte rnet is a frontier with almost unlimited possibilities. Now is the time to exper iment before lack of competency puts you out of business. If you are not on the Web, you are missing out on resources, and potential customers. So now what's ho lding you back? 6. Building Your Brand Overview Branding is more than just a business buzzword. It has become the crux of selling in the new economy. If the old marketing mantra was," Nothing happens until somebody sells something," the new philosophy could be" Nothing happens u ntil somebody brands something." In its simplest form, a brand is a noun. It is the name attached to a product or service. However, upon close inspection, a bra nd represents many more intangible aspects of a product or service: a collection of feelings and perceptions about quality, image, lifestyle and status. It crea tes in the mind of customers and prospects the perception that there is no produ ct or service on the market that is quite like yours. In short, a brand offers t he customer a guarantee and then delivers on it. You might infer, then, that if you build a powerful brand, you will in turn be able to create a powerful market ing program. However, if you can't convince 35

customers that your product is worthy of purchasing, no amount of advertising do llars, fancy packaging or public relations will help you achieve your sales goal s. Therefore, successful branding programs begin with superior products and serv ices, backed by excellent customer service that permeates an entire organization . Outline: I. II. III. IV. V. VI. VII. VIII. IX. X. The Importance of Branding When Should You Brand? Types of Brands What Goes Into a Brand? What's in a Name? Brand Positioning Building Brand Personality Strengt hening Your Core Brand Creating an Online Identity Resources I. The Importance of Branding One of the truths of modern business is that there is almost nothing that your competitors can't duplicate in a matter of weeks or months. If you have a great idea, you can be certain that somebody will copy it before long. And not only will they follow your lead, but they may also be able to do a better job or sell the product or service at a lower price. The questio n then becomes, "What competitive edge do I have to offer that cannot be copied by anyone else?" The answer? Your brand. Creating a strong brand identity will b uild mind share one of the strongest competitive advantages imaginable. As a res ult, customers will think of your business first when they think of your product category. For example, when you think of tissues, more likely than not, you thi nk of the Kleenex brand. And when you're looking for tape to wrap a present, Sco tch is the brand that springs to mind. Likewise, when your child wants a hamburg er, he will often say he wants to go to McDonald's. The reason behind these stro ng brand-product associations is that these companies have built rock solid bran d identities. "A brand is the one thing that you can own that nobody can take aw ay from you," says Howard Kosgrove, vice principal of marketing at Lindsay, Ston e and Briggs Advertising in Madison, Wis. "Everything else, they can steal. They can steal your trade secrets. Eventually, your patents will expire. Your physic al plant will wear out. Technology will change. But your brand can go on and liv e. It creates a lasting value above and beyond all the other elements of your bu siness." That value is often called brand equity, or the worth of the brand. Bra nd equity, unlike other abstract marketing notions, can be quantified. For insta nce, if you owned the Marlboro Company and wanted to sell it, you would begin to value the firm by looking at the assets tied to the Marlboro brand. You would t hen identify the cost of the factories, patents, trucks, machines and staff." Th ey are worth a 36

small fraction of what you can sell that brand for," says Kosgrove. "The value o f that brand is huge compared to those actual physical assets." The importance a nd value of branding becomes apparent when an entrepreneur wants to sell his or her company or take it to Wall Street for a public offering or other infusion of capital. It is often the brand that a business owner has to sell in such cases. II. When Should You Brand? Because of the competitive nature of business today, nearly all industries can benefit from a branded product. All of the traditiona lly brand-conscious industries, including fashion, restaurants and consumer good s, are being forced to continue to brand heavily perhaps even more strategically than they ever have in the past. Financial services, which were one of the last frontiers, are even beginning to see the importance of branding by tagging bank ing packages and even mutual funds with catchy names. Even industrial markets, w here cost is usually more of a loyalty building factor, has seen brand names cre ep in. For example, Tyvek, a DuPont fiber, improbably one of the best known indu strial branded products. Other industries in which branding is a must include: Fast food High-tech Beverages Packaged Goods Petroleum Entertainment Retail Auto Pharmaceutical III. Types of Brands A brand cannot be all things to all people. By definition, no one brand is going to appeal to all customers. On the contrary, branding is b ased on the concept of singularity targeting individuals in a personal manner and therefore precludes the concept of universal appeal. This is why many brands br oaden and widen their appeal by creating tertiary brands or line extenders. Alth ough most industries and products or services can benefit from a brand, not ever y product needs its own stand-alone brand. Brands can be separated into three ca tegories: primary, secondary and tertiary. Primary Brands - This is a company's core brand or umbrella brand. Primary brand s typically garner a large percentage of a company's revenue potential and there fore need to be given priority and have a sufficient amount of advertising in or der to root them firmly. Secondary Brands - These are often line extenders, or " flankers," for a core brand. Secondary brands don't need to have their own name; usually a modifier to the brand name will suffice and strengthen the core brand . 37

Take, for instance, a toothbrush called the Crest Deep Sweep. Crest is the core brand, and Deep Sweep is the secondary brand. Line extenders are characterized b y having a descriptive term that allows the base brand to be the true selling pr oposition and the flanker to really designate to the audience what that particul ar product's key feature or benefits are. Tertiary brands - These brands typically have insignificant revenue potentials o r expectations, but they contribute to the company's overall image in some way. Therefore, they sometimes don't sport registered brand names, but just descripto rs. For example, a garbage bag manufacturer may make a generic-brand bag in addi tion to its flagship brand. The generic line may bring in minimal revenue for th e company, but it fills a need within a niche market so the company continues to manufacture it under the unregistered name Household Trash Bags. Therefore, the generic line is considered a tertiary brand for this company. IV. What Goes Into a Brand? If your product or service is new or unique, thetas of branding is made easier. Since there are no pre-existing biases toward the pr oduct or service, it will be easy to manipulate customer attitudes. More often, your product or service will have been in existence for a while and have direct competition. And if it doesn't, it probably soon will. Therefore, products that may be roughly equivalent in terms of their features need to have a brand identi ty that will impact consumer choice. Brand identity is comprised of: Pricing - a component of value; higher prices may signify to consumers higher qu ality, and lower prices may suggest decreased value. Distribution - availability ; limited distribution of a product or service may imply exclusivity to discerni ng consumers. Quality - which impacts satisfaction; obviously, higher quality wi ll translate to more satisfied customers who come back again and again to purcha se your offerings. Presence - prominence in the paid and unpaid media; products or services with a high-profile market presence will lead to brand recognition a nd increased sales. Awareness - top-of-mind awareness, residual awareness and re cognition, which are directly related to presence; the higher your offering's aw areness, the better your sales results will be. Reputation - enduring public opi nion of brand character, which is built over time and difficult to change once e stablished. Image - perceptions of brand traits or prototypical buyers; often re presented by qualities the consumer relates to. Like reputation, image is diffic ult to change once established. Benefits - consumers may equate certain positive and negative consequences with use of your product or service; these may be war ranted or unwarranted. Positioning salience - differentiation from the competiti on, which is established by a combination of all elements of the brand. Preferen ce - a predisposition to buy displayed by consumers who are establishing brand l oyalty. Share of market - increased market share is a direct result of a success ful branding campaign. 38

Customer commitment - loyalty is built through long-term branding and close cons umer contact. V. What's in a Name? The foundation of your brand is its name. After its uniquen ess wears off, it will be your brand name against the brand names of your compet itors in the marketplace. So, how can you create a name that will stand the test of time? "First, it should be able to communicate on its own without a lot of a dvertising," says James Dettore, president of the Brand Institute in Boston. "It has to be easy to pronounce and have neutral to positive associations around th e world, or at least in various languages. Because of the high ethnic influences here in America, you still have to have a name that crosses over many ethic and language barriers." Some extremely successful brand names include Yahoo!, Calvi n Klein, Evian, McDonald's and Nordstrom. Many companies have committed translat ion fauxpas when they failed to cross reference the brand's name in other langua ges or cultures. One of the most popular instances was the marketing mishap with the Chevy Nova. The car didn't go over well when the Latin consumers, as the ve hicle's name in Spanish means" It doesn't go." More recently, marketers at Reebo k obviously didn't do their homework when they named their women's running shoe "Incubus." Apparently, no one at Reebok was aware of the nightmarish nature of t he name: An evil mythological spirit believed to descend upon and have sexual in tercourse with women as they sleep. The company was mortified and looked into wa ys it could wipe out the offending name, which didn't appear on the $57.99 shoes , but on boxes. Besides making sure that people from all or most ethnic backgrou nds will accept your brand's name, it should also be memorable and easy to commu nicate in packaging and advertising. If possible, the name should also complemen t the overall core values of the company. For instance, Pampers was a perfect na me for the diaper line that Procter & Gamble launched in the late 1970s. The nam e is easy to say, has positive associations, and links to the performance of the product. Besides that, the brand came out at a time when cloth diapers were sti ll largely popular with mothers. By the name alone, mothers could make the switc h to disposable diapers that were more convenient without feeling that the produ ct would compromise the comfort, or pampering, of their child. In cases of large companies, a brand name can help propel a product or service through the market place. In other instances, particularly with younger brands, the descriptiveness of the name can have a strong influence on how well it's accepted (i.e., Aleve, America Online, Performa). For others, the name has no meaning at all until bro ader identity building programs are built around the name (such as ESPN, Foster' s Lager, Tide laundry detergent). VI. Brand Positioning 39

A. Characteristics of the Campaign Positioning is the art of creating a brand th at can persuade and realistically demonstrate its relevance to a customer's dail y life to become his or her regular choice. Positioning is not created by the ma rketer or the individual brand itself, but by how others perceive it. In fact, K osgrove says that the brand is not created by the marketer at all, but rather by the customer. Marketers don't create the positioning; rather, they create the s trategic and tactical suggestions to encourage the customer to accept a particul ar positioning in his or her mind. For instance, bread and milk are not branded items, and despite companies' push to try and brand the two products, no company has found much success building brand equity. When customers want either one of those staple items, they usually choose what is on sale or what is available on their local grocer's shelves. Beer and cola, on the other hand, are heavily bra nded product categories: Consumers have formed a relationship with and will sear ch out their preferred brands. To position your offering properly, you need to i dentify the key attributes or benefits that represent the value of your product or service. That will, in turn, create trust in your brand. As you begin to unde rstand the relationship that your customers have with your brand, you will be ab le to more efficiently meet their needs, wants and desires through your brand. " Positioning is everything," says Dettore. "Positioning studies identify the audi ence according to their needs, expectations and wants. Those drivers then come i nto developing products and services that best fit those audiences' needs and wa nts." While marketers do not literally position brands, they can have a signific ant influence on how they are positioned. Several characteristics can work in a positioning campaign, such as: 1. Relevance to a customer's lifestyle - The more apparent the connection is between the brand and the prospect's daily activities, the greater the chances are that the prospect will buy that product. Relevance, or the conn ection that the prospect has to the brand identity, is how customers ultimately decide which brands to buy and which they will discard. Ask yourself: Is the ide ntity of the brand too young for my target market? Is it too old? Is it too upsc ale? 2. Promises backed by support - Benefits need to be backed with some sort of persuasive reason to believe the product's hype. Many times, products or services have some formula or patent that is "unique" from all the other brands out there. Why do we trust Pantene shampoo, for instance? Because we believe in the brand's "revolutionary" Pro-V formula that leaves hairs strong and healthy. Why do we believe Secret antiperspirant will keep women smelling sweet? Because "it's pH balanced for a woman, and not a man." Ask yourself: What promises are you making about your brand? Can my products or services follow through on those promises? 3. Message of the brand Is clear and focused - No matter how brilliant a strategy you have, you need to be clear about the message. Some 40

examples of crystal clear campaigns include "Gillette - The Best a Man Can Get" or "Choosy Moms Choose Jif." Ask yourself: Are my messages in line with what I w ant to convey about my products and services? Are there messages that can be mis construed? If so, how can I change them to be more accurate? 4. Message of the brand is appropriate - Have you ever seen a commercial on TV that seems to come from left field? It grabbed your attention, but told you nothing about the product or service, and it seemed inappropriate f or what is being sold. For instance, financial institutions can't effectively wo rk humor into their ads because the preconceived notion is that banks are not su pposed to be fun or entertaining. The message that you send needs to be appropri ate to the product or service you are trying to brand. Ask yourself: Are my adve rtising messages in line with the image I'm trying to convey about my company, p roducts and services? If not, could they be hurting, rather than helping, the br and? customer trust by claiming to be the real McCoy. For instance, Pace Picante sauce tells you that they are not the brand from New York City. Coke tells you that "It's the Real Thing," "Coke Is It" and "Always CocaCola." The copy line he lps reinforce that this brand is the genuine article for that category of produc ts. Even service companies can make claims to being the real deal. AT&T's True V oice lets its customers know that they are receiving a level of clarity above wh at other telecommunication companies carry through their fiber optic lines. Ask yourself: In what ways are my products and services more "genuine" than my compe titors'? How can I emphasize those elements to give the brand a competitive adva ntage? 5. Product is the genuine article - Many successful companies build B. Types of Prompts in a Campaign Once you determine the way in which you can re ach your market, the next thing to look at is how you are going to lure your cus tomer to try your brand. That method is called the "positioning prompt" of the b rand. A brand can evoke several different types of prompts. Be aware, however, t hat positioning prompts are not verifiable scientific hypotheses, and there is a great deal of interpretation and high degree of risk that is involv