Chapter 8—Calculating Startup Capital Requirements
TRUE/FALSE
1. A new venture’s health is measured by its balance sheet.
2. Determining what resources are needed, when they are needed, and how to acquire them is a critical
piece of the feasibility puzzle.
3. Bootstrapping refers to minimizing of resources at startup in order to keep fixed costs as low as
possible.
4. A process map details how information flows through the business.
5. Where the new venture lies in the value chain will determine what its margins are, who its customer is,
and how much it can charge for its products and services.
6. How a product or service is priced is a function of a company’s goals.
7. Price skimming is finding out what customers are willing to pay for the product and pricing it
accordingly.
8. Pricing is not designed to cover total costs but to maximize total contribution⎯that is, unit price minus
unit variable costs.
9. The least important part of any financial plan is the assumptions on which it is based.
10. When an entrepreneur is attempting to gauge levels of demand, the customer is the prime source of
information.
MULTIPLE CHOICE
1. Pro forma financials are a key part of the ____.
a.
feasibility analysis
b.
business launch
c.
cash flow
d.
startup capital
e.
business plan
2. The bottom line for any new venture is to have ____.
a.
positive inventory
b.
good income statements
c.
great employees
d.
a strong founding team
e.
positive cash flow
3. Determining what resources are needed, when they are needed, and how to acquire them is a critical
piece of the ____.
a.
business plan
b.
feasibility analysis
c.
founding team experience
d.
marketing plan
e.
profit and loss statements
4. Which of the following would not be considered a startup resource?
a.
Feasibility analysis
b.
Founding team
c.
Independent contractors.
d.
Equipment
e.
Equity
5. Which of the following is not one of the categories into which the resources of a company are often
divided?
a.
Human
b.
Social
c.
Financial
d.
Physical
e.
Value chain
6. Creating a ____ is the first step in calculating startup capital requirements.
a.
process map
b.
feasibility analysis
c.
business plan
d.
balance sheet
e.
timeline
7. Once the entrepreneur determines where the new venture lies in the value chain, he or she must create
a ____.
a.
process map
b.
feasibility analysis
c.
business plan
d.
timeline
e.
None of these choices
8. Whenever there is competitive rivalry, prices tend to be ____.
a.
the same
b.
slightly higher
c.
lower
d.
50 percent higher
e.
None of these choices
9. How a product or service is priced is a function of the company’s ____.
a.
business plan
b.
feasibility analysis
c.
process map
d.
goals
e.
product demand
10. Which of these pricing strategies will help a new firm maximize cash flow?
a.
Lower price to raise volume
b.
Raise price and reduce direct costs
c.
Set a higher price to raise perceived value
d.
Sell online
e.
None of these choices
11. ____ starts with a high price to establish uniqueness; then drops the price as competitors enter the
market.
a.
Price skimming
b.
Premium pricing
c.
Product bundle pricing
d.
Captive product pricing
e.
Demand-based pricing
12. It is important to ensure that the final price to the customer or end user is tolerable, given all the
mark-ups along the value chain. This is called ____.
a.
premium pricing
b.
price skimming
c.
product bundle pricing
d.
captive pricing
e.
demand-based pricing
13. One mistake that entrepreneurs make is to set their prices so that they cover ____ costs plus a margin
the entrepreneur is expecting to achieve.
a.
inventory
b.
total
c.
marginal
d.
variable
e.
All of these choices
14. Entrepreneurs can reach a price that can be tested in the market by considering costs, competitor
pricing, and ____.
a.
feedback from customers
b.
feedback from value chain partners
c.
customer behavior
d.
Both “feedback from customers” and “feedback from value chain partners”
e.
Both “feedback from customers” and “customer behavior”
15. In figuring ____, entrepreneurs must convert time to dollars and consider an opportunity cost.
a.
customer acquisition cost
b.
revenue for direct sales
c.
revenue per sales person
d.
lifetime value per customer
e.
customer retention cost
16. Internet ventures have unique metrics because they typically start with three types of “customers”:
visitors, contributors, and ____.
a.
investors
b.
end users
c.
distributors
d.
partners
e.
traffickers
17. ____ is found by subtracting variable costs from revenues and dividing the difference by revenues to
yield a percentage.
a.
Return on investment
b.
Contribution margin
c.
Profit margin
d.
Cash flow
e.
None of these choices
18. Which of the following is not a technique that can help entrepreneurs arrive at a realistic forecast of
demand for their product or service?
a.
Talk to customers
b.
Interview prospective end-users and intermediaries
c.
Prepare revenue forecasts
d.
Apply the entrepreneur’s knowledge and experience
e.
Go into limited production
19. In a manufacturing business, which of the following is not part of the calculations used to forecast the
costs of goods sold (COGS)?
a.
Direct labor
b.
Cost of materials
c.
Direct factory overhead
d.
Product delivery
e.
Work-in-process flow
20. In service businesses, the cost of goods sold (COGS) is equivalent to the time expended to ____ and
____ the service.
a.
sell / deliver
b.
produce / deliver
c.
produce / market
d.
test / produce
e.
None of these choices
21. Which of the following is not part of direct selling expenses?
a.
Telephone expenses
b.
Advertising costs
c.
Travel costs
d.
Sales salaries
e.
Commissions
22. Indirect selling expenses are not linked to the sale of a specific product and include interest, telephone
expenses, and ____.
a.
cost of promotional supplies
b.
salaries of non-sales personnel
c.
postal charges
d.
rent
e.
utilities
23. In manufacturing businesses, forecasting expenditures is a bit more complex because ____ must be
derived first.
a.
salaries
b.
inventory expenses
c.
factory overhead
d.
cost of goods sold
e.
in-process flow
24. Entrepreneurs need to remember that ____ costs are the biggest costs the business will bear.
a.
production
b.
startup
c.
overhead
d.
inventory
e.
employee
25. A/an ____ statement is, essentially, a cash budget or sources and uses statement.
a.
direct cash flow
b.
in-process flow
c.
return on investment
d.
cost of goods sold
e.
pro forma
26. The ____ is an amount of cash that is often based on the sales and collection cycle of the business.
a.
cash flow
b.
in-process flow
c.
risk factor
d.
safety margin
e.
None of these choices
27. For ____ companies, the actual delivery costs must be based initially on information gathered from
other companies in the industry.
a.
product
b.
service
c.
technology
d.
All of these choices
e.
None of these choices
28. The best way, and sometimes the only way, to accurately gauge customer demand is to ____.
a.
test a prototype
b.
go into limited production
c.
do market research
d.
do a feasibility study
e.
None of these choices
29. \____ represent(s) how the startup uses its cash to cover its overhead before it generates a positive cash
flow from operations.
a.
Monthly burn rate
b.
Contribution margin
c.
Financial metrics
d.
Bootstrapping
e.
Process map
30. A month-by-month timeline shows a year in the life of a business with key milestones and anticipated
____.
a.
pricing
b.
growth
c.
financial metrics
d.
losses
e.
triggers
SHORT ANSWER
1. Briefly discuss what startup resources include.
2. Briefly discuss the term bootstrapping.
3. Briefly discuss the elements of a process map.
4. Briefly discuss the positioning of the venture in the value chain.
5. Discuss the importance of pricing strategies.
6. Briefly discuss product bundle pricing.
7. Briefly discuss the various items needed to develop estimates of demand.
8. Briefly discuss the financial metrics employed by startups.
9. Discuss the sections of the cash flow statement.
10. What pricing strategies are most common for startups?