[MUSIC] Hello again, learners. In this lesson of our fifth course, in our specialization, How to Start a Business, we begin to address the last of our risk management questions that we have used to frame your perspective, your focus on addressing the second fundamental strategic question associated with launching your business. As we approach a close to our discussion of this risk management framework, let's recap what you have addressed to date. As you recall, the first two steps in our countdown to your capstone experience and the launching of your business, generally, were to gear up. That is to focus your mindset, and to gear up and focus your business. Your prepared or focused mindset in business is reflected in your strategy statement. The components of which were vision, mission, goals, and objectives. And those particular components answered the first fundamental strategic question, what does your business need or want to do? The strategy component of your strategy statement, and in particular, its sub-component of your business model and type of business answer the fundamental strategic questions, what can your business do? And then, how does your business going about narrowing the gap between what it wants to do and what it can do? In order to get a clear picture, an understanding about what your business can do, you have learned how to conduct a resource inventory, a resource acquisition plan and a resource assessment. At the end of this and subsequent lessons, you will be equally competent in resource budgeting. You'll be taught to administer an analysis framework that helps you count the costs of implementing your business. This resource budget will give you a clear picture of what's needed in order for you to get into the game that you've chosen to play. Again, that is, what resources are required to implement and operate your selected business model? Businessdefinitition.com, along with the entire small business literature, describes a budget as one of the most important administrative tools of any business. Businessdefinition.com specifically defined a budget as an estimate of cost, revenues, and resources over some specified time period, that reflect a reading of future financial conditions and goals. Their discussion points out that a budget serves as a plan of action for achieving quantified objectives. In essence, it is a numerical representation of a business model. Second, it is a standard for measuring performance. And third, a device for coping with foreseeable adverse situations. Again, in essence, it is the basic ruler, our control device for managerial oversight in decision making. As stated, a budget is essentially a numerical representation of your business model. The definition given here shows that it is essentially identical to a collaboration of the pro-form or financial statements you learned about in class four. Structure, building the frame for business growth. In that class, you started with the structure of each one of the various financial statements and generated estimates for expenditures. That is, you started with the format of an income statement, for example, and then generated estimates for revenues, cost of goods sold, etc. The budget you will produce here will be directly derived from your business model. We strongly recommend this process for deriving your budget. This approach inherently addresses the five budget requirements or considerations Ken shared with you in course four. Specifically, your cost and revenues will flow directly from the actions and tactics of your business. For example, you can get an estimate of the average utility bill for a home your size in your community in order to project your utility bills for a new home you might be moving into. That projection, though, doesn't reflect your lifestyle, habits, and the new home's infrastructure. You could take a different approach, though. You could project that your work schedule and lifestyle keeps you out of the home 12 hours per day, five days a week, and set your thermostat accordingly. Then when you are home, you're comfortable with a sweater in the fall or winter, or t-shirts and shorts in the summer and spring. And again, can set your thermostat accordingly. And then, before moving in, you plan to install one of the most efficient air conditioning units and furnace units currently on the market, along with motion detecting lighting. Thus now, you can fairly accurately project the kilowatt and BTU usage of your home each month. And given the cost per kilowatt for electricity and cost per BTU for gas, you can now estimate your utility based on your lifestyle, your home's infrastructure, as opposed to some average. This latter projection of your utility cost is much more reflective, again, of the actions and strategies that you can control, than a projection based on area averages from some secondary data source. This is why we emphasize this approach based on your business model. It builds your budget projections and financial projections from the bottom up. With reasoned actions based on your business model's design enabling you to better estimate costs, time to sale, and seasonality. Those considerations Ken emphasized in his discussion in course four. So, in summary, resource budgeting over the life of your business might be the most important aspect of our risk management analysis procedures. Not only does it give you a clear picture of what you need to get into the game that you've chosen to play. That is, again, what resources are required to implement and operate your business model. But it is also a tool to guide your management decisions over the life of that business. You now have a rationale for why the business model should be used as the basis of your research budget analysis. Quite simply, actions speak. Or in this case, projects louder or better than words our secondary data on industry averages. Thus, in the subsequent parts of this lesson, we will guide you through a resource budget spreadsheet using the Stederal case with the goal of preparing you to produce your own budget based on your own business model. [MUSIC]
