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ENTREPRENEURSHIP
Second Semester
Fourth Quarter
Module 2:
Developing Business Model
and Forecasting Revenues
1
Republic of the Philippines
Department of Education
REGION VII-CENTRAL VISAYAS
SCHOOLS DIVISION OF SIQUIJOR
------------------------------------------------------------------------------------------------------------------------------------------------------
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Writer: Juliet Anne Christina O. Doble
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What I Need to know
After going through this module, you are expected to:
1. Develop the business model,
2. Forecast the revenues of the business
What is It
The Business Model
Business model is a design for the successful operation of a business,
identifying revenue sources, customer base, products, and details of financing. It
is a company’s plan for making a profit. It identifies the products or services the
business will sell, the target market it had identified, and the expenses it
anticipates.
A business model describes how a company creates, delivers, and captures
value. Everyone has their way of viewing the business model.
Most startups fail because entrepreneurs put all their faith in the idea of
the product the organization exists to create. In their loyalty to this product or
service, they fail to give in depth consideration to the business model their
organization will follow. Usually the business model is either a one-size-fits-all
model, common in the industry or it is a random amalgamation of systems and
processes, created at the spur of the moment to further the main goal; sell the
product or service.
Successful new ventures do not go to market with their first idea; instead,
the product/ service has usually gone through several iterations before arriving
at the final version. Similarly, organizations are more sustainable if they have
considered several business models before deciding on a particular one
Developing a Great Business Model
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The entrepreneur must adapt the dynamics of traffic lights in developing
the business model. These are the three “green lights” or the positive signals
that can help entrepreneurs develop ideal business models and eventually
succeed. On the other end, there are three “red lights” or negative signals that
entrepreneurs should be wary of.
The Green Lights
1. Target high-value customers.
A high-value customer is
▪ Someone who is easy to find
▪ Someone who is willing to pay a price that will reasonably profit the
entrepreneur
▪ Someone who is easy to persuade with the least promotional effort
▪ Someone who can join the bandwagon
Customers do not only mean end customers or retail customers; they can also
be retailers, distributors, or corporate customers. The entrepreneur's objective is
to find these customers.
2. Offer products or services with great value
The entrepreneur must position the unique attributes of his or her product
or service. He or she should offer products/services with great value coupled with
attractive and reasonable prices as a result of lean manufacturing. He or she
must also device an efficient distribution system where the flow of goods or service
delivery is convenient, fast, and available when needed.
3. Offer products/services with reasonable profits
There are two ways of achieving reasonable profits:
▪ 3.1 increasing markup
▪ 3.2 decreasing operational costs
Decreasing operational costs is the most practical way to achieve reasonable
profits hence it is a controllable strategy.
The Red Lights
1. Satisfying the customer becomes too costly and irrational
Example is a customer satisfaction cost like warranty and after sale cost.
Some products/services require extensive technical support, installation, and
customer service. These after sale costs might even surpass the actual sales price
of the product/service.
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2. Being a market leader is difficult to sustain if the following conditions
exist:
▪ there are major customers purchasing the entrepreneur’s product/services
▪ there are major players in the industry
▪ technology has changed the way the entrepreneur operates the business
▪ technology replaces the need for the entrepreneurs’ product/services
▪ competitors can easily tap the market of the entrepreneur
3. Return on Investment (ROI) takes too long and too small
If report says that ROI is less than approximately 25% in the first three
years of business operation, it is a sign that the entrepreneur is not operating an
ideal business model.
Another sign is that the production of additional products or services
requires an ample amount of additional capital.
Forecasting the Revenues
You’ve likely heard hundreds of times from mentors and business experts
that you need to set a budget to keep your small business expenses on track. But
how do you make decisions about your budget? Like how many employees you
can afford to hire or how much you can spend on advertising? If you don’t know
how much revenue, you’ll be bringing in the coming months and years?
If you’re starting a business from scratch, making revenue forecast will be
particularly challenging, where established businesses use historical data to
predict what will happen in the future. In order to prepare an accurate budget,
you first need to develop a revenue forecast for your business.
A forecast is an educated prediction for the upcoming year about how
much money your company will likely bring in, so that you can estimate what
you can afford to spend, and what your profit margin be like?
On the other hand, Revenue is the amount of money that a company
receives during a specific period, including discounts and deductions for a
returned merchandise. Don’t worry if your forecasts aren’t completely accurate,
you can always alter them after your first few months. Concentrate instead on
trying to make your figures as realistic as possible.
Why Revenue Forecasting Matters
Can you afford to hire a new employee or launch a new marketing
campaign? If you were to take on a business loan in the coming months, how
much of a monthly payment could you reasonably handle? These questions, and
thousands more that you likely ask yourself about your business every day,
cannot be answered with any degree of accuracy without revenue forecasting. And
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the more thoroughly researched and realistic your revenue forecasting is, the
easier it will be to stay on budget throughout the year.
Revenue forecasting helps you budget business expenses early because you
have a better idea of the total amount of money you have to budget each month.
And if you start to get off track, either on your revenue predictions or on fixed
expenses, you’re more likely to catch those deviations early if you have a forecast
to compare with.
Forecasting will also help you time important moves—like bringing in a new
hire, launching a new marketing campaign, or cutting costs during slow
seasons—to match your predicted revenue throughout the year. A detailed, well-
researched forecast can even help convince lenders or investors to contribute
funds to your business. While no revenue forecast will ever be 100% accurate
down to the penny, it will provide you with a very educated guess for your
upcoming financial needs. This information will be crucial to your ability to make
the best possible choices for your business.
How to Forecast Revenue?
1. Choose between Qualitative Forecasting or Quantitative Forecasting (or a
mixture).
A Qualitative method is a type of forecasting based on judgment, opinions,
intuition, emotions, or personal experiences and are subjective in nature while
Quantitative Forecasting is a type of forecasting method based on mathematical
models and are objective in nature. They rely heavily on mathematical
computations.
2. Start with last year’s revenue statements for a basis of prediction.
The thought of forecasting sales intimidates a lot of people, but in actually,
it’s simply an act of looking at some raw data and making some logical
assumptions from it. If you own an existing business, look at your past sales
figures, and then consider the following factors to make an educated guess about
future sales on a month by month basis:
▪ Your customers: Identify your customer base and determine which ones
you’ll include in the forecast. Remember, common wisdom says that you’ll
get 80 percent of your business from 20 percent of your customers.
▪ Your service area: Do you have plans for expansion? If so, include your
current geographical area as well as the area you plan to include in the
future.
▪ Market conditions: What is the state of the market? Will it remain steady or
increase?
▪ Business position: Consider the position of your business within your
industry, and factor in your growth expectations.
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▪ Seasonal adjustments: Many businesses have increased and decreased
sales in a cyclical seasonal cycle. If your business falls into that pattern,
take this into consideration.
3. Consider any recent changes in personnel, products, pricing,
competition, or other factors.
The forecaster should choose a technique that makes the best use of
available data. If there are changes in personnel like reassignment of an employee
to a higher job position, innovation of the product which may need additional
budget that will also affect pricing, changes in competitors and other factors to
consider in making your forecast.
4. Calculate anticipated revenue.
You have a great idea for a business. But now you need to know how to
calculate startup costs and expected revenue for business. The type of business
you open will determine the amount of money you will need to open. However, as
a rule you should count on having six months’ worth of money on hand to cover
your expenses. Startup cost are the expenses that are incurred prior to opening.
For example, startup costs may include legal work, logo design, brochures, site
selection and building improvements. Compare startup costs with your startup
assets. This include cash, starting inventory and equipment.
5. Separate individual income sources to get a clear picture of potential ups
and downs from each revenue stream.
Revenue streams are the various sources from which a business earns
money from the sale of goods or the provision of services. The types of revenue
that a business records on its account depend on the types of activities carried
out by the business. Generally speaking, the revenue accounts of retail
businesses are more diverse, as compared to business that provide services.
Separating your individual income sources will give you good and accurate
forecast of your business.
6. Constantly review and update the forecast to reflect changes in your
business.
Once your business is established and running well, you may be inclined
to let things continue to run as they are. However, it’s actually time to plan again.
After the crucial early stages, you should regularly review your progress, identify
how you can make the most of the market position you’ve established and decide
where to take your business next. You will need to revisit and update your
business plan with your new strategy in mind and make sure you introduce the
development you’ve noted.
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Computation of Gross Revenue
A business opportunity can only be considered a real one when the
entrepreneur recognizes that the opportunity may bring him or her revenue.
Revenue is the output of a sale wherein the sales price exceeds the cost to produce
the product or render the service. Revenue is considered earned when the product
is already sold or service has been rendered regardless if the business is paid in
cash or credit. Revenue is considered deferred when the product or service has
not yet been delivered or sold but the customer already paid in advance.
After establishing that the business opportunity will really bring revenue,
the next step is to estimate how big the revenue is on an annual basis.
Computation for the market size
The entrepreneur must derive the figure that represents the market
universe or the total market to understand how big the market is. This is
represented by the size of the potential customers and how often they will use or
consume the product or how often they will avail the service.
Example:
Mr. Sinati became interested in selling cellphone prepaid load, because
95% of the people in his barangay have cellphones and most of them are on
prepaid. Mr. Sinati wants to know the market size of the prepaid load business
in his barangay. He has the following data:
▪ Cellphone owners in Barangay Bacani – 5,000
▪ Number of times the customer buys load in a week – twice
▪ Average amount of load customers buy – P100
▪ Compute the market size using the formula:
Formula:
Market size = total number of customers x number of times the customers
buy/avail of the service per year x average amount per purchase/service
availment
Market size = ?
Market size = 5,000 x 2 x 4 x 12 x 100
= P48,000,000
Computation of Market Share of Competitors
There are 5 stores in Brgy. Bacani that dominate the prepaid load market.
Their total combined market share is 80%. They are the same in terms of store
size, and all of these are wholesalers. Aside from these 5, there are four retailer
stores in the community that haven’t ventured yet in the prepaid load business.
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Market share of competitors and Mr. Sinati=?
Market share of competitors and Mr. Sinat = 48,000,000 x 20%
= P 9, 600,000
Capturing the remaining market share
Mr. Sinati must device business strategies on how to tap the remaining
market and not let the new retailers overtake him. He employs to provide a
marketing promo to customers of every P100 load has a freebie. Assume that in
this example Mr. Sinati sets the target at 40% of the remaining market share.
How much is his annual revenue?
Annual Revenue of Mr. Sinati = 9,600,000 x 40%
= 3, 840,000
Projected Annual Revenue
Mr. Sinati must set a realistic and achievable five-year projection that
incorporates the contingencies and the external/internal factors. He must
monitor the growth or decline of both the market size and his market share.
Assuming that Mr. Sinati is optimistic that he will be able to differentiate
and grow the business, he is looking at a 5% growth in year 1, 15% growth in
year 2 and 3 and 20% growth in years 4-5.
Year 1 Year 2 Year 3 Year 4 Year 5
4,032,000 4,636,800 5,332,320 6,398,784 7,678,541
Solutions:
▪ Year 1 = growth 5% = Annual revenue 3,840,000 x105%
▪ Year 2 = growth 15% = Year 1 revenue 4,032,000 x 115%
▪ Year 3 = growth 15% = Year 2 revenue 4,636,800 x 115%
▪ Year 4 = growth 20% = Year 3 revenue 5,332,320 x 120%
▪ Year 5 = growth 20% = Year 4 revenue 6,398,784 x 120%
Computation of Net Income
The real income or net revenue is only realized when all the expenses have
been already deducted from the gross revenue. Therefore, the entrepreneur must
prepare an income statement, which is a financial statement that details the
computation of net revenue by deducting cost of sales, expenses, and taxes from
the gross revenue generated.
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There are different compositions of the income statement depending on the
type of business and the account titles used by the company; but the basic
income statement has the following formula:
A. For service type of business:
Source: https://www.wallstreetmojo.com/net-income-formula/
B. For merchandising and manufacturing type of business:
Sales/Revenue XXX
Less: Cost of Sales/CGS XXX
Gross Profit XXX
Less: Operating Expenses XXX
Operating Income XXX
Less: Interest Expense XXX
Net income before tax XXX
Less: Income tax XXX
Net Income XXX
Revenue is the total amount of income generated by the sale of goods or
services related to the company's primary operations. Cost of sales (also known
as "cost of goods sold") refers to the cost required to manufacture or purchase a
product that is then sold to a customer. Essentially, the cost of sales refers to
what the seller has to pay in order to create the product and get it into the hands
of a paying customer.
The cost of sales for a retailer is the cost of merchandise in its beginning
inventory plus the net cost of merchandise purchased during the accounting
period minus the cost of merchandise in its ending inventory.
From the given example the gross revenues have been already identified for
the next 5 years, it is time to account the cost and expenses associated with the
sale of prepaid load.
▪ Cost of prepaid load – 95% of the selling price
▪ Marketing cost – 1% of the selling price
▪ Income tax is assumed to be 20% of the net income before tax
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Activity 1:
Year 1 Year 2 Year 3 Year 4 Year 5
Sales P4,032,000 P4,636, 800 P5,332, 320 P6,398, 784 P7,678, 541
Less: Cost of 3,830,400 ? ? ? ?
Sales
Gross Profit 201,600 ? ? ? ?
Less: 40, 320 ? ? ? ?
Operating
expenses
Net income 161,280 ? ? ? ?
before tax
Less: Income 32,256 ? ? ? ?
tax
Net revenue P129,024 ? ? ? ?
after tax
Solutions:
• Cost of Sales = Sales x 95% (4,032,000 x .95)
• Gross Profit = Sales – Cost of Sales (4,032,000 - 3,830,400)
• Operating Expenses = Sales x 1% (4,032,000 x .01)
• Net Income before tax = Gross profit – Operating expenses (201,600-40,320)
• Income tax = net income before tax x 20% (161,280 x .2)
• Net revenue after tax = net income before tax – income tax (161,280-32,256)
What’s More
Directions: Answer the questions below in your notebooks. Refer to the attached
rubric for your guide in answering.
1. Why is it important for new businesses to create a business model?
2. Why do entrepreneurs conduct a revenue forecasting?
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Rubric for Essay Type of Questions
Points 10 8 6
Topic Sentences introduce Sentences don’t Topic is unclear
the key fully introduce
element/response response
Evidence 2 or more At least one No supporting
supporting details supporting detail is detail is given
are given given
Explanation Complete Minimal No explanation
explanation explanation
What I have learned
I learned that:
Business model is a design for the successful operation of a business,
identifying revenue sources, customer base, products, and details of
financing. It is a company’s plan for making a profit. It identifies the
products or services the business will sell, the target market it had
identified, and the expenses it anticipates.
The entrepreneur must adapt the dynamics of traffic lights in developing
the business model. These are the three “green lights” or the positive
signals that can help entrepreneurs develop ideal business models and
eventually succeed and there are three “red lights” or negative signals that
entrepreneurs should be wary of.
If you’re starting a business from scratch, making revenue forecast will be
particularly challenging, where established businesses use historical data
to predict what will happen in the future. In order to prepare an accurate
budget, you first need to develop a revenue forecast for your business.
Revenue forecasting helps you budget business expenses early because you
have a better idea of the total amount of money you have to budget each
month. And if you start to get off track, either on your revenue predictions
or on fixed expenses, you’re more likely to catch those deviations early if
you have a forecast to compare with.
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What I can do
A. Computation of Net Income
Directions: Complete the table below from the Activity 1 on pages 10-11. Write
your computations and answers in your notebook.
Activity 1:
Year 1 Year 2 Year 3 Year 4 Year 5
Sales P4,032,000 P4,636, 800 P5,332, 320 P6,398, 784 P7,678, 541
Less: Cost of 3,830,400 ? ? ? ?
Sales
Gross Profit 201,600 ? ? ? ?
Less: 40, 320 ? ? ? ?
Operating
expenses
Net income 161,280 ? ? ? ?
before tax
Less: Income 32,256 ? ? ? ?
tax
Net revenue P129,024 ? ? ? ?
after tax
B. Directions: Make a business model of your life. Illustrate in a diagram,
drawing, or cartooning your Green Lights or the things that will make you succeed
and your Red Lights or the things that you should be wary of. Use a short size
bond paper for this activity. Your work will be graded using the following criteria:
Content - 50%
Creativity - 20%
Originality - 20%
Overall Impact - 10%
Total 100%
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Assessment
A. TRUE or FALSE
Directions: Analyze the following sentences and determine if it is true or false.
Write TRUE if the statement is correct and FALSE if it is not correct. Do this in
your notebook.
1. _________ Most startup entrepreneurs fail because they put all their faith in the
idea of the product the organization exists to create.
2. _________Accurate forecasting can be done with inaccurate historical data. If
the forecasting model is a good one, it will improve the input used.
3. _________If quantitative data is available on which to base a forecast, it is
unnecessary to consider qualitative information.
4. _________ Successful new ventures do not go to market with their first idea.
5. _________In a good forecast, about half of the forecast misses should be
randomly scattered above the actual results and half below the actual results.
6. _________ If you’re starting a business from scratch, making revenue forecast
will be particularly challenging, where established businesses use historical data
to predict what will happen in the future.
7. ________ A Qualitative method is a type of forecasting based on judgment,
opinions, intuition, emotions, or personal experiences and are subjective in
nature.
8. ________Revenue is the amount of money that a company receives during a
specific period, including discounts and deductions for a purchased merchandise.
9. ________Revenue forecasting helps you budget business expenses early
because you have a better idea of the total amount of money you have to budget
each month.
10. _______ A detailed, well-researched forecast can help convince lenders or
investors to contribute funds to your business.
11. _______ Quantitative forecasting is a type of forecasting method based on
mathematical models and are subjective in nature.
12. ________ The forecaster should choose a technique that makes the best use of
available data.
13. ________ Startup cost are the expenses that are incurred during the business
operations.
14. ________ An entrepreneur should regularly review his progress; identify how
he can make the most of the market position established and decide where to
take his business to the next.
15.________ A business opportunity can only be considered a real one when the
entrepreneur recognizes that the opportunity may bring him or her revenue.
16. _______ Revenue is considered earned when the product or service has not yet
been delivered or sold but the customer already paid in advance.
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B. Revenue Computation
Directions: Analyze the situation below and answer the questions that follows.
write your solutions and answers in your notebook.
Situation:
Mr. Ronitico became interested in selling cellphone prepaid load, because 95%
of the people in his barangay have cellphones and most of them are on prepaid.
Mr. Ronitico wants to know the market size of the prepaid load business in his
barangay. He has the following data:
Cellphone owners in Barangay Leon – 6,000
Number of times the customer buys load in a week – three
Average amount of load customers buy – P50
1. What is the market size using 4 weeks in a month, 12 months in a year?
a. P 10,080,000
b. P 10,800,000
c. P3,600,000
d. P 43,200,000
There are 5 stores in Brgy. Leon that dominate the prepaid load market.
Their total combined market share is 80%. Aside from these 5, there are four
retailer stores in the community that haven’t ventured yet in the prepaid load
business.
2. How much is market share of Mr. Ronitico and his competitors?
a. P 2,160,000
b. P 8,640,000
c. P 720,000
d. P 5,600,000
3. Assume that in this example Mr. Ronitico sets the target at 35% of the
remaining market share. How much is his annual revenue?
a. P 3,024,000
b. P 3,456,000
c. P 252,000
d. P 288,000
Assuming that the cost and expenses associated with the sale of prepaid load
are the following:
Cost of prepaid load – 90% of the selling price
Marketing cost – 2% of the selling price
Income tax is assumed to be 20% of the net income before tax
4. How much is the annual cost of sale?
a. P 2,872,800
b. P 3,110,400
c. P 3, 283,200
d. P 2,721,600
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5. How much is the annual net income after tax?
a. P 193,536
b. P 96,768
c. P 241,920
d. P 195,365
C. Enumeration
Directions: Answer the following questions in your notebook.
1-3. What are the positive signals that can help entrepreneurs develop ideal
business models and eventually succeed?
4-6. What are the or negative signals that entrepreneurs should be wary of?
7-12. How do you forecast revenue?
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https://www.fundera.com/blog/revenue-forecasting-2
(2020). Retrieved 28 July 2020, from https://mech.at.ua/Forecasting.pdf
Kearns, S. (2020). How to Forecast Your Revenue | QuickBooks. Retrieved 30
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