Market Research Planning2018-09-15T07:12:26+00:00

Market Research Guide
Investigating The Market
For A New Product


  1. Market Research
  2. The Target Market Segment
  3. The Competition & Market Trends
  4. Sales Channels & Required Margins
  5. Determining Product Price
  6. Sales Volume & Market Share
  7. Hurdles & Barriers To Market Entry
  8. Financial Planning & Analysis

8.  Financial Planning
And Analysis.


At the end of the day product development is about making a profit. The simple reason for this is that it takes an investment of time and money to develop and sell a product, and unless it is being done intentionally on a non-profit charitable basis, most people will want a positive financial return on their investment.


To properly evaluate the prospects for making a profit on an investment in a new product it is necessary to get down to actual numbers, and show on paper exactly how an investment in the product will create a profit. This is done by preparing financial documents that show how money is expected to be raised, spent, and earned in bringing the product successfully to market for sale. The financial documents quantify in terms of money what your plan is for succeeding with the product. The numbers used in the financial documents come from, and should be clearly supported, by your research and planning concerning the product.


Projected ("Pro Forma") Cash Flow Statements

A projected cash flow statement is the same as a budget. It estimates how money will flow into and out of a business during a particular period of time. It identifies when and how cash is expected to be received and spent. A cash flow statement deals only with showing cash transactions, it does not deal with non-cash items (see income statements below). Cash flow statements allow you to plan so that not only will you have enough cash to do what needs to be done, but you will have it when it is needed.


Cash flow statements should be prepared for the next three to five year period (depending upon the business), and the immediately upcoming year should be prepared showing the cashflows on a monthly basis.


To prepare a cash flow statement you need to identify each category of cash inflow and outflow during a period of time for the product, and then prepare an estimated budget for each such category during the period of time being considered.


Projected Income Statements

An income statement differs from a cash flow statement in that the income statement deals only with business income (e.g. cash from the sale of the profit, as opposed to cash inflows from other sources like loans or equity investment), and expenses that can be deducted against the business income.


For example, the entire amount of a cash payment towards a loan will be recorded on the cashflow statement. However, only the deductible interest expense portion of the payment will appear on the income statement, since payment back of principal on the loan is not a deductible expense.


Income statements should be prepared for the next three to five year period (depending upon the business). They can be prepared by using the information in the cash flow statements you prepared, along with accounting information regarding the expected amortization of loans (how much of the loan payments are interest), the value of depreciation of assets in the business, and other information relevant to sales revenues and deductibe expenses.


Projected Capital Expenditure Budgets

A capital budget is a plan for expenditures for fixed assets such as equipment and facilities. It may include acquisition costs, building costs, and major repair costs, beyond routine maintenance. A capital budget is a part of a comprehensive annual operating or business plan.


A business, for example, may plan for a certain amount for the repair and maintenance of a fleet of vehicles in its operating budget, but the purchase of new or additional vehicles, or retrofitting with new engines, etc., would be part of the capital budget.


A start-up business would have a capital budget for the acquisition of buildings, equipment, computers and other assets.


A capital budget differs from an operating budget in that most capital purchases are depreciated, instead of being expensed in the current year, plus capital purchases are typically financed with medium to long-term debt, instead of out of operating cash flows.


Projected Balance Sheets

A balance sheet sheet is a "snapshot" of the financial position of a business at a given point in time. It sets forth the assets, liabilities, and net equity of a business. A projected sheet is a prediction of what the financial position of a business will be at a given point in time.


Financial Analysis

Once you have compiled your financial information into your financial statements, it is a good idea to analyze your projections.


BREAK EVEN ANALYSIS


One important analysis to perform is a "break-even" analysis, which will tell you the point at which the costs exactly match the sales revenues. In other words the transition point from losing money to making a profit. The break-even point can be calculated with the following formula:


Breakeven Point = Fixed Costs/(Unit Selling Price-Variable Costs)

Fixed costs are those that are the same regardless of how many items you sell. All start-up costs, such as rent, insurance and computers, are considered fixed costs since you have to make these outlays before you sell your first item.


Variable costs are costs that you incur with each unit you sell. For example, if you have to pay money to make your product, and pay a sales person a commision for each product they sell, then these costs are variable costs. This is because your total expenses will vary depending upon how much product you order and sell.


The Unit Selling Price is how much you sell each product for. If you are a manufacturer selling to a retail store, then it is the price you sell the product to the retail store for (not the price they charge their customers).


So, for example, if it costs you $25,000 a year in fixed costs to operate a business selling the product (e.g. rent, equipment, wages, etc. . . ) then this will be your fixed costs. If it costs you $1.50 to make and sell each product to your customer for $3.00, then the break-even point would be:


Breakeven Point = $25,000 / ($3.00 – $1.50)
= 16,667 units

This means that your business would have to sell 16,667 units of product (for total sales of $50,000) before it would start to make a profit.


The break-even analysis is important because it can help you to evaluate the likelihood of being able to sell enough products to make a profit. For example, if your research indicates that it is unlikely you will be able to sell 16,667 units of product in the period of time you would need to (maybe because you have to pay back a loan, etc. . . ), then you may need to reconsider.


Perhaps you can raise prices, lower costs (fixed or variable), to make it happen. However, if this doesn’t seem possible, then you may need to reconsider whether you should be pursuing the business at all.




OTHER FINANCIAL ANALYSIS TOOLS


In addition to break-even analysis, there are many other calculations you can perform on the financial data in your projected financial statements to help you make a decision about the desireability of moving forward. Some of these would include:


Liquidity Analysis – The ability of a business to meet its financial obligations (e.g. the "current ratio")

Profitability Analysis – The ability of a business to make a profit (e.g. gross profit margin, operating margin, net profit margin)

Debt Measures – The measure of how much other people’s money is being used to generate profits (e.g. debt to assets ratio)

Investment Measures – The measure of how much an investor in the business is getting back on the investment (e.g. "return on investment")



Many inventors with an idea for a new product are inexperienced and unfamiliar with the preparation and analysis of financial documents. That is perfectly fine, but it is not a justification for failing to do the financial planning and analysis that is generally considered necessary for success. Like anything else involved in the successful development of a product, if the inventor doesn’t have the necessary skills for doing the task, it is incumbent upon them to find someone who does to work with. Such a person can be an independent professional (e.g. an accountant) hired to help, a business partner, an employee, even a knowledgeable friend or family member. The important things is to be wise enough to know better than to simply skip the entire process and just proceed forward blindly.


Of course, the inventor should choose wisely when it comes to working with others, and ensure that they have a clear written agreement with those they work with. Among other things, all of the financial information and analysis should be treated as a highly confidential trade secret belonging to the inventor’s product development venture.


Previous Guide Section
Next Guide Section


Market Research Guide
Investigating The Market
For A New Product


  1. Market Research
  2. The Target Market Segment
  3. The Competition & Market Trends
  4. Sales Channels & Required Margins
  5. Determining Product Price
  6. Sales Volume & Market Share
  7. Hurdles & Barriers To Market Entry
  8. Financial Planning & Analysis

8.  Financial Planning
And Analysis.


At the end of the day product development is about making a profit. The simple reason for this is that it takes an investment of time and money to develop and sell a product, and unless it is being done intentionally on a non-profit charitable basis, most people will want a positive financial return on their investment.


To properly evaluate the prospects for making a profit on an investment in a new product it is necessary to get down to actual numbers, and show on paper exactly how an investment in the product will create a profit. This is done by preparing financial documents that show how money is expected to be raised, spent, and earned in bringing the product successfully to market for sale. The financial documents quantify in terms of money what your plan is for succeeding with the product. The numbers used in the financial documents come from, and should be clearly supported, by your research and planning concerning the product.


Projected ("Pro Forma") Cash Flow Statements

A projected cash flow statement is the same as a budget. It estimates how money will flow into and out of a business during a particular period of time. It identifies when and how cash is expected to be received and spent. A cash flow statement deals only with showing cash transactions, it does not deal with non-cash items (see income statements below). Cash flow statements allow you to plan so that not only will you have enough cash to do what needs to be done, but you will have it when it is needed.


Cash flow statements should be prepared for the next three to five year period (depending upon the business), and the immediately upcoming year should be prepared showing the cashflows on a monthly basis.


To prepare a cash flow statement you need to identify each category of cash inflow and outflow during a period of time for the product, and then prepare an estimated budget for each such category during the period of time being considered.


Projected Income Statements

An income statement differs from a cash flow statement in that the income statement deals only with business income (e.g. cash from the sale of the profit, as opposed to cash inflows from other sources like loans or equity investment), and expenses that can be deducted against the business income.


For example, the entire amount of a cash payment towards a loan will be recorded on the cashflow statement. However, only the deductible interest expense portion of the payment will appear on the income statement, since payment back of principal on the loan is not a deductible expense.


Income statements should be prepared for the next three to five year period (depending upon the business). They can be prepared by using the information in the cash flow statements you prepared, along with accounting information regarding the expected amortization of loans (how much of the loan payments are interest), the value of depreciation of assets in the business, and other information relevant to sales revenues and deductibe expenses.


Projected Capital Expenditure Budgets

A capital budget is a plan for expenditures for fixed assets such as equipment and facilities. It may include acquisition costs, building costs, and major repair costs, beyond routine maintenance. A capital budget is a part of a comprehensive annual operating or business plan.


A business, for example, may plan for a certain amount for the repair and maintenance of a fleet of vehicles in its operating budget, but the purchase of new or additional vehicles, or retrofitting with new engines, etc., would be part of the capital budget.


A start-up business would have a capital budget for the acquisition of buildings, equipment, computers and other assets.


A capital budget differs from an operating budget in that most capital purchases are depreciated, instead of being expensed in the current year, plus capital purchases are typically financed with medium to long-term debt, instead of out of operating cash flows.


Projected Balance Sheets

A balance sheet sheet is a "snapshot" of the financial position of a business at a given point in time. It sets forth the assets, liabilities, and net equity of a business. A projected sheet is a prediction of what the financial position of a business will be at a given point in time.


Financial Analysis

Once you have compiled your financial information into your financial statements, it is a good idea to analyze your projections.


BREAK EVEN ANALYSIS


One important analysis to perform is a "break-even" analysis, which will tell you the point at which the costs exactly match the sales revenues. In other words the transition point from losing money to making a profit. The break-even point can be calculated with the following formula:


Breakeven Point = Fixed Costs/(Unit Selling Price-Variable Costs)

Fixed costs are those that are the same regardless of how many items you sell. All start-up costs, such as rent, insurance and computers, are considered fixed costs since you have to make these outlays before you sell your first item.


Variable costs are costs that you incur with each unit you sell. For example, if you have to pay money to make your product, and pay a sales person a commision for each product they sell, then these costs are variable costs. This is because your total expenses will vary depending upon how much product you order and sell.


The Unit Selling Price is how much you sell each product for. If you are a manufacturer selling to a retail store, then it is the price you sell the product to the retail store for (not the price they charge their customers).


So, for example, if it costs you $25,000 a year in fixed costs to operate a business selling the product (e.g. rent, equipment, wages, etc. . . ) then this will be your fixed costs. If it costs you $1.50 to make and sell each product to your customer for $3.00, then the break-even point would be:


Breakeven Point = $25,000 / ($3.00 – $1.50)
= 16,667 units

This means that your business would have to sell 16,667 units of product (for total sales of $50,000) before it would start to make a profit.


The break-even analysis is important because it can help you to evaluate the likelihood of being able to sell enough products to make a profit. For example, if your research indicates that it is unlikely you will be able to sell 16,667 units of product in the period of time you would need to (maybe because you have to pay back a loan, etc. . . ), then you may need to reconsider.


Perhaps you can raise prices, lower costs (fixed or variable), to make it happen. However, if this doesn’t seem possible, then you may need to reconsider whether you should be pursuing the business at all.




OTHER FINANCIAL ANALYSIS TOOLS


In addition to break-even analysis, there are many other calculations you can perform on the financial data in your projected financial statements to help you make a decision about the desireability of moving forward. Some of these would include:


Liquidity Analysis – The ability of a business to meet its financial obligations (e.g. the "current ratio")

Profitability Analysis – The ability of a business to make a profit (e.g. gross profit margin, operating margin, net profit margin)

Debt Measures – The measure of how much other people’s money is being used to generate profits (e.g. debt to assets ratio)

Investment Measures – The measure of how much an investor in the business is getting back on the investment (e.g. "return on investment")



Many inventors with an idea for a new product are inexperienced and unfamiliar with the preparation and analysis of financial documents. That is perfectly fine, but it is not a justification for failing to do the financial planning and analysis that is generally considered necessary for success. Like anything else involved in the successful development of a product, if the inventor doesn’t have the necessary skills for doing the task, it is incumbent upon them to find someone who does to work with. Such a person can be an independent professional (e.g. an accountant) hired to help, a business partner, an employee, even a knowledgeable friend or family member. The important things is to be wise enough to know better than to simply skip the entire process and just proceed forward blindly.


Of course, the inventor should choose wisely when it comes to working with others, and ensure that they have a clear written agreement with those they work with. Among other things, all of the financial information and analysis should be treated as a highly confidential trade secret belonging to the inventor’s product development venture.


Previous Guide Section
Next Guide Section