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Maximizing Profits: The Art of Capital Budgeting & Investment Appraisal

Budgeting

Every business faces the challenge of allocating its limited resources effectively. Capital budgeting and investment appraisal are essential processes that help organizations identify, evaluate, and prioritize potential projects and investments. These methodologies enable businesses to make informed decisions that align with their long-term goals, ensuring sustainable growth and profitability. In this article, we’ll delve into the concepts of capital budgeting and investment appraisal, highlighting their significance and key techniques.

Understanding Capital Budgeting:

Capital budgeting refers to the process of planning and evaluating long-term investments and expenditures that will yield benefits over an extended period. It involves analyzing various investment options to determine their potential for generating returns and aligning them with the company’s financial goals. Capital budgeting serves as a crucial tool for management to ensure the optimal use of financial resources.

The Importance of Investment Appraisal:

Investment appraisal is an integral part of the capital budgeting process. It involves assessing the potential risks and returns associated with each investment opportunity. The main goal of investment appraisal is to filter out projects that do not align with the company’s strategic objectives or do not offer satisfactory returns. Proper investment appraisal minimizes the chances of financial loss and ensures that resources are allocated wisely.

Key Techniques in Capital Budgeting and Investment Appraisal:

a. Net Present Value (NPV):

NPV is one of the most widely used techniques in capital budgeting. It measures the profitability of an investment by comparing the present value of cash inflows and outflows over the investment’s lifetime. A positive NPV indicates a potentially viable project, while a negative NPV suggests the project may not be worthwhile. A higher NPV is generally preferred as it signifies greater profitability.

b. Internal Rate of Return (IRR):

The IRR is the discount rate at which the NPV of an investment becomes zero. In other words, it represents the rate of return a project is expected to generate. Managers compare the IRR to the company’s required rate of return to assess the project’s feasibility. If the IRR is higher than the required rate of return, the investment may be considered.

c. Payback Period:

The payback period is a simple technique that calculates the time required to recoup the initial investment. Although it does not consider the time value of money, it is useful for projects where quick returns are essential. A shorter payback period is generally favored, especially in industries with rapidly changing technologies or market conditions.

d. Profitability Index (PI):

The profitability index, also known as the benefit-cost ratio, measures the relationship between the present value of cash inflows and outflows. It helps rank projects by comparing their profitability relative to their initial investment. A PI greater than 1 indicates a potentially viable project, with higher values indicating more attractive opportunities.

Risk Assessment and Sensitivity Analysis:

Inherent risks are present in every investment. It is essential to conduct a thorough risk assessment to identify potential uncertainties and develop risk mitigation strategies. Sensitivity analysis involves evaluating how changes in key variables (e.g., sales volume, production costs, interest rates) impact the project’s financial viability. By understanding these sensitivities, decision-makers can make more informed choices and develop contingency plans.

Conclusion:

Capital budgeting and investment appraisal are vital processes that enable businesses to invest their resources wisely, pursue profitable opportunities, and achieve sustainable growth. By utilizing techniques like NPV, IRR, payback period, and profitability index, companies can objectively evaluate potential investments. Moreover, risk assessment and sensitivity analysis ensure that potential pitfalls are identified and addressed proactively. With a well-defined capital budgeting and investment appraisal framework in place, organizations can confidently make decisions that will pave the way for future success.

Who we are: Funded.com is a platform that is A+ BBB accredited over 10+ years. Access our network of Angel Investors, Venture Capital or Lenders. Let us professionally write your Business Plan.

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Business Plan Mistakes to Avoid

Plan

Writing your business plan is probably one of the most important business duties you will assume. If you follow a quality business plans template you will cover the basics of the plans, but there are still common mistakes made by entrepreneurs that hurt their cause. It is reminiscent of the teacher in school who gave you the parts of the essay for easy outlining and then marks points off because the essay is too long or too boring.

Following are some of the most common errors made in business plans. Some of them are simple errors, but that doesn’t minimize their importance. Other are mistakes usually made due to lack of experience. Either way, these mistakes can hurt the effectiveness of the overall business plan.

  • Including more than one business model in the false belief that more information and more strategies are always better (not true!)
  • Lacking cohesiveness throughout the business plans
  • Difficult to read due to illogical or poor layout (another reason to use a business plan template)
  • Including unsupported projections or estimates
  • Not fully analyzing the competition
  • Failing to prepare all required sections of a business plans (making your plan look amateurish or as if you are hiding something)
  • No value proposition separating your business from the competition
  • Not letting anyone else read your business plan and provide feedback before submission
  • Making the business plan difficult to read because it is written using mostly hard-to-understand industry or discipline terms (i.e. your funder may not know much about technology so using technical jargon will make the plan too difficult to understand)
  • Showing lack of understanding of the niche market to be served

These are certainly not the only mistakes, but they are some of the most common. You want to avoid writing a business plan that is too long and tedious, is not well written, and is boring. Though funders are often professionals looking for the next great business investment opportunity, they are also human. Grammatical errors and boring prose can quickly discourage anyone reading the business plan. It seems your essay teacher was right all along.

Who we are:  Funded.com is a platform that is A+ BBB rated over 10+ years. Access our network of Investors, get instantly matched with a Lender, or get a business plan by visiting us Funded.com

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How to Calculate Free Cash Flow for your Business Health

free

Free cash flow is one of the key indicators used to show the health of the business, particularly its profitability. Typically, it demonstrates the amount of money any business for other purposes after all the capital expenditures that may include equipment, buildings and various other necessary expenses that help businesses sustain their operations.

Although calculating cash flow is a complicated process, there are many ways you can do it. According to experts, it is always better to use all methods correctly. If they all generate the same result, it provides you a reliable way to cross-check your operations.

It is worth noting here that cash flow doesn’t relate to all businesses. It is precisely a measuring tool that non-financial firms use rather than professional associations and investment firms.  If you own a non-financial enterprise, you can calculate the cash flow for free with these three equations.

Equations to Calculate Free Cash Flow

1.       Free Cash flow:  Subtract operation taxes and costs from Sales revenues then subtract required investments for operation capital

The equation is one of the easiest ways to calculate free cash flow. Business owners take sales revenues, including taxes and operating costs from their income statement. The fixed assets show an increase when you invest in new operating capita. The balance sheet shows everything from investments and revenue details.

For example, if your business has earned revenues of $500,000, the amount is reduced to $300,000 because of taxes due and operating costs. If your business requires an investment of $150, 000, it will have the free cash flow of $30,000 to $50, 000.

2.      Free Cash flow:  Subtract net investments in operating capital from net operating profits NOPAT (after taxes)

 NOPAT refers to the same figure we used in the previous equation: subtract operating taxes and costs from sales revenues. Net investment of operating capital uses the same figure that is used in the third term of first calculations. For calculating free cash flow through this equation, it is better to use the increased fixed assets on your balance sheet.

That means, your NOPAT will remain at the same amount of $30,000. You just need to exchange the required investment of your business in operating capital for your net investments in operating capital.  If you assume the same figures, your free cash flow will remain the same.

3.      Free Cash flow:  Subtract capital expenditure from the net cash flow of operations

 You can also calculate free cash flow by subtracting the capital expenditure from the net cash flow that comes from operations.  Net cash flow in this equation comes from the cash flow statement, while capital expenditure is taken from the increase in the business’s fixed assets.  For instance, if your operation’s net cash flow is around $200,000, the figure might be reduced by your capital expenditures.

Interestingly, all these free cash flow calculation methods will give you the same answers when you work with these equations. You might feel like approaching the same information and data from three different angles.

How does Free Cash Flow Calculation Affect Your Business?

As mentioned earlier, free cash flow is useful for the health of your business. Firms with healthy free cash flow are financially stable to meet the bills and investments every month. Plus, they also have leftover funds that they usually distribute among dividends and shareholders. Man firms use this extra fund to seize opportunities to help them generate more revenues through acquisitions of innovative products.

That is to say, if your business is booming and has high free cash flow, it is an indication that it is doing well and you should consider expanding it. Conversely, if it fails to generate good free cash flow, you might need to consider restructuring it as there are remaining funds after the basic expenses.

However, it is important to understand that poor free cash flow doesn’t always indicate a failing business. It might be expected even when your business is pursuing growth. Development and acquisition of new products are temporarily subtracted from the main capital. That is the reason why most of the investors tend to work with the businesses that have high free cash flow. These businesses are generally considered healthy with bright prospects. If an investor finds a business that has rising free cash flow with an undervalued share cost, it may be a great investment bet.

How can you Benefit from the Free Cash Flow

Since you understand how positive free cash flow may benefit you by indicating the healthy financial status of your business, it is better to use this understanding to your advantage. It is always better to look beyond the figures. Know that established firms have relatively consistent and healthy free cash flow. New businesses, on the other hand, are in a state where they need to pour money into growth and stabilization.

Although it depends on the business owners how they use the free cash flow, using the funds to expand the operations, pay shareholders and dividends, invest in new products, research or to reduce debt is beneficial for the business.

Always remember that companies that have surging free cash flow due to debt elimination, dividend distributions, cost reductions, efficiency improvements, or revenue growth can reward their investors in the future.

In other scenarios, when free cash flow is shrinking, businesses fail to sustain their growth earnings. Not only this, insufficient free cash flow for growth forces a business to boost debt levels. In a worse scenario, a business without enough free cash flow may not even have the liquidity to sustain.

Final Thoughts

All in all, it is important to find an all-purpose tool that can help you test the fundamentals of your business that seem elusive. Free cash flow calculation is like a performance metric they provide entrepreneurs an opportunity to guard up if their business is not generating enough revenues.

Access our network of Investors, get instantly matched with a Lender, or get a business plan by visiting us Funded.com

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Is It Time To Apply For A Startup Accelerator?

Following the rise of startup accelerators, the number of new entrepreneurs who want to get a position within these incubators has also significantly increased. Wall Street Journal reports that the applications to more than 200 accelerators around the world have almost doubled in the past two years.

According to Marc Nager, Chief Executive Officer of Startup Weekend, an accelerator may be good for those who are new on the field of entrepreneurship. However, in isolated cases, some of the terms may not be as acceptable. Nager provided some information that might help those who have yet to apply for an accelerator.

Understand the Basics

For Nager, would-be entrepreneurs must start with understanding the basic terms of the deal. He said that before applying, they should look at the benefits that they will get once they participate in this venture.

In the world of startup accelerators, a lot of value will come from the network that will be established amongst the students, mentors, and program leaders. Nager added that the applicants should also use to their advantage the possibility of having one-on-one experience with experienced entrepreneurs. He stresses the need for applicants to identify at least three mentors who have had experience on the industry that they are working on. This will ensure that the sessions will be maximized and will result in a highly beneficial experience.

Choose Wisely

Nager advises that when applying for startup accelerators, would-be entrepreneurs should consider signing up in well-known programs. He said that these will ensure better results that will be advantageous for the participants.

Unfortunately, well-known start-up accelerators usually have very low acceptance rates. With this, applicants can also try signing up in local versions of the accelerators provided that they have high quality program, mentors, and leaders.

Nager also noted the rise in the number of accelerators that offer specialized programs. There are those that focus solely on providing programs that help healthcare startups, civic startups, and startups that use a specific technology, among others.

The specialization may be advantageous for some startups. However, it must be noted that there are also things that one may miss if he or she decides not to sign up in one of the traditional accelerators that offer a wider range of coverage. Because of this, would-be applicants should know how to weigh the benefits before deciding to participate in specialized programs.

 Work on that Application

As stated, the chances of getting admitted into a well-known accelerator are very slim. Because of this, would-be entrepreneurs should toughen up their applications if they want to get the nod of the evaluators. 

One thing that they can do, Nager says, is to understand how the applications were evaluated by the accelerators. He also said that having a good team that will shine above the rest will boost the chances of getting selected.

Finally, he said that the applicants must do all their best to impress those who will decide on the applications. He suggests the use of human element, among others, to get the approval of the decision makers.

More detailed information and useful advice can be found at www.funded.com Created by Mark Favre, it offers expertise and assistance with developing and funding your concept, including a private forum for queries and discussions. If you need access to investors and funding providers, please do check our website.

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Funding Your Own Business

Say you are planning to have a business and, furthermore, you know the know-how to bring it into development.  The only thing you are losing is the cold money to get started.  What are your options?

Suppose you do not have a ready line of credit, an extensive bank administrator, rich family members or a significant store of retirement savings you are willing to risk, you are going to have to do some serious preparation and hard work.  Luckily, there are a number of sources of finance for the Business startup owner, at least one of which may be right for you.

SBA LOANS

Available only to U.S.-based businesses (but if you are outside the US you can look for something that has a similar program), the SBA (the U.S. Small Business Administration) has served a large number of business owners begin their own Business.  The SBA does not issue resources (money you do not have to pay back) or create financial loans straight, rather, it assures financial loans made by personal loan organizations thereby decreasing or removing the danger natural in new organizations and making loan organizations more willing to offer.

The main concern for the SBA is reimbursement ability from the income of the company as well as “good personality, control ability, security and owner’s equity”.  You will be expected to individually assure your mortgage.  This implies your personal belongings are at risk.

As for the types of organizations qualified for SBA financial loans, the SBA enforces the following criteria: the company must be “for-profit” (it only indicates that your company has a revenue reason, not that it has actually produced a revenue yet), ), be engaged in business in the United States, there must be “reasonable” owner equity (what’s reasonable will depend on the circumstances) and you are expected to use alternative financial resources first, including your own personal belongings.

The SBA also enforces restrictions on the use of loan proceeds. For example, although the proceeds can be used for most company requirements (the cases given by the SBA include “the purchase of real estate to house the company operations; development, remodelling or leasehold improvements; getting furniture, furnishings, equipment; buy of inventory; and operating capital”), you cannot use the loan proceeds for financing floor-plan needs, to pay current financial debt, to create expenses to the business owners or to pay past due taxes etc.

As a common concept, loans for working capital must be repaid within seven years and loans for fixed assets must be paid for by the end of the economic life of the assets (but not to exceed 25years).

ANGEL INVESTORS

Angel Investors are good spirits with a healthy sense of self-interest. Determining they can get a higher come back if they are ready to take a bit of a risk, they are also often effective business owners themselves and want to give other a hand up. Think of financing from angel investors as a link or gap-filler between being a start-up and preparing for venture capital.  The kinds of money we’re referring to here are between about$150,000 and $1.5million.  Beyond this point you are in low venture-capital area. The SBA reports that there are around 250,000 angels in the U.S., financing about 30,000 organizations a year.  So, how do you connect with one?  Not a easy task, unfortunately.  It comes down to networking.  Begin by speaking with professional and business associates – they will often know someone who knows someone etc..  However, we at funded.com can help you in this.

VENTURE CAPITAL

You’re in the big teams now.  Usually you are in the ballpark of millions (of money that is) rather than a thousand.  Venture Capital organizations look for their return on investment from capital appreciation rather than interest (unlike banks, for example).  They’re generally looking for a return of 500-1,000% on exit. It will not shock you to learn that vc’s are particularly hesitant of internet-based organizations right about now and not surprising.  It also provides them right.  But if you have a powerful Business Plan and powerful development potential, this could be an option for you longer term.

One of the common issues about this form of financing, however, is that you have a limited control over your business. Venture Capital usually wants to have control on your business, in return for their risk. A venture capitalist will have to seat as a board member, for example. Always remember, that it’s in the vc’s best passions for your company to be successful, so providing up some control in return for outside skills may well be something worth thinking about.

For this, your best bet would be to begin out by analyzing the various loan program provided via the SBA (or your local equivalent).  But do not ignore, close to home sources first.  If you have household resources at your convenience (for example) and you are assured that your business will be effective (and unless you’re assured about that, don’t get into financial debt with *anyone*, let alone household members), better to begin out slowly and convenience into outside sources of financing as your company (and, furthermore, your company’s cashflow) can support it.  After all, Uncle Jack is much more likely to know about the temporary income meltdown than Uncle Sam.

More detailed information and useful advice can be found at www.funded.com Created by Mark Favre, it offers expertise and assistance with developing and funding your concept, including a private forum for queries and discussions. If you need access to investors and funding providers, please do check our website.

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Business Plans Need to Incorporate Best Practices

In a sense, ‘best practices’ is a euphemism for business plans. Developing business plans is critical to success because it is focused on what makes a business successful. The term best practices is tossed about quite a bit, but what does it specifically mean for a business plan?

The business plan best practices means building a convincing case that your company is an excellent proposition that efficiently and effectively serves the market by providing products and services that the market will embrace. The primary way the business case is built is by differentiating the business in some manner. The business plan must leave no doubt as to why the company is selling particular items and how those items will appeal to the target market.

Forward Thinking

To determine the best practices for marketing, the competition must be thoroughly analyzed. The analysis is not just a case of listing competitors selling similar products or services. The competition must be assessed as to what it is doing now to succeed and how it plans on succeeding in the future. In other words, best practices are forward thinking, and the plan preparer does not get mired down by focusing only on the past. In addition, businesses that can easily become competitors need to be considered also.

A best practice in business plan development is to develop a thorough understanding of competitor specifics. Exactly what sets your competitors apart? Each company has something unique about its products, marketing strategies, management, customer service practices, or product and service delivery. You need to understand these differences in detail to position your company correctly.

It can be fatal to underestimate the competition as many businesses have learned. Even seasoned companies like RIM and Blockbuster found themselves struggling to survive because they failed to understand what the competition was offering the niche market. Your goal in the business plan is prove the competition is not addressing a problem you are able to solve, and then develop a strategic marketing plan to implement your particular solution.

Honesty Counts

In addition, best practices in business plans dictates establishing realistic financial goals. A new business will need to make a profit with a couple of years in most cases in order to remain viable. Projecting unreasonable sales or underestimating expenses will be detected by experienced angel investors, banks, venture capitalists and equity funders. There must be evidence or documentation that the business plan marketing and financial goals make sense based on industry performance. You can project sales and expenses for brand new products and services, but they still need to be based on market research.

There are many other best practices that include developing a flexible business plan and analyzing best case/worst case scenarios. Ultimately, the business plan is about honesty – honest descriptions, honest research, honest analysis and honest assumptions.

Browse www.funded.com for more advice about getting your business funded.

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Business Plans and Benchmarking

Benchmarking can be an important concept in business plans. Benchmarking comparisons can be used to compare your business goals to the domestic or foreign competition. The comparisons can show how your business idea is viable in comparison to other successful businesses. The benchmarking can make your business plan more credible and prove that you have identified the best practices for marketing products and services.

The benchmarking process has one ultimate goal which is to evaluate your current competitive position. It is a method for taking your focus on the internal business to the external environment. How does your business fit in the industry? Are you competing locally, nationally or internationally? How have other businesses achieved success, and what will you do the same or differently to achieve excellent performance? If performance gaps are apparent between your business and the competition, what are the plans to close the gap? How will you measure success?

There are different ways to perform benchmarking analysis. You can review the marketing strategies other companies have used to succeed, compare products or services, complete a functional analysis to identify where you are innovative, and so on. In reality, you can benchmark in any way that makes sense for your particular business in terms of market performance.  Business success requires serving a niche market more efficiently and innovatively than the competition. If you don’t understand how successful competitors have performed, then you have no comparative information for competitive assessment.

Benchmarking is an important step in business plans. Before starting the analysis, the first step is to identify the most logical type of benchmarking. From that point on, it’s a matter of research and then identifying the best practices that suit your business.

More detailed information and useful advice can be found at www.funded.com Created by Mark Favre, it offers expertise and assistance with developing and funding your concept, including a private forum for queries and discussions. If you need access to investors and funding providers, please do check our website.

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Polishing Business Plans

Developing business plans takes time, effort and patience. It is a plan for success, no matter how you define success. The business plan can be used to find funding for a start-up or expansion, or to guide an existing business. Some people think the business plan is only needed when searching for financing, but that is faulty thinking. The business plan forces business owners and managers to define goals and then make plans to meet them within a set of circumstances that include competition.

Following are some tips for refining your business plan. The business plan template is the best guide available to ensure that all elements are completed. These tips will simply add a bit of polish to the plan.

 

  1. Do the Executive Summary last and not first. The summary needs to concisely state the nature of your business. The best way to ensure the important information is included despite the brevity of the summary is to develop the plan details first. In that way, the Executive Summary is much easier to develop.
  2. Market strategies are more than just numbers and some statements defining the market. It should also define what makes your selling proposition different from that of your competitors.  What does your business bring to the marketplace that is different in terms of products or services, customer services, selling approach and so on? A polished business plan emphasizes uniqueness.
  3. In the competitive analysis, don’t simply describe the competition. You need to explain the distinct advantage your business has over the competition. Once again, the polished business plan makes differences and not sameness clear.
  4. In the operations plan, don’t forget to discuss the benefits that your business will bring to the community. This has become especially important in light of the current economic condition. Will your business opportunity create new jobs or support economic growth?

 

In the final analysis, polishing business plans means adding the information that turns a paper business into a real business for the readers.

More detailed information and useful advice can be found at www.funded.com Created by Mark Favre, it offers expertise and assistance with developing and funding your concept, including a private forum for queries and discussions. If you need access to investors and funding providers, please do check our website.

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Planning for Change in Business Plans

Business plans are not etched in stone; yet that is exactly how some businesses treat them. The business plans are written and then put into a proverbial drawer where they never see the light of day. One day the plan is dusted off, updated for the Board of Directors, and then put back into the drawer. This does not make sense after so much time and effort has been put into developing a plan that is supposed to establish a clear path to success.

Viable businesses never stand still. They are movers and shakers as they interact with customers, develop new products and services, and adapt to good and poor economies. When major changes happen that affect your business, it is like a time warp because everything changes from that point forward. Change is always imminent today and largely because of technology. Businesses can enter the marketplace faster and roll out a marketing program quickly on the internet.

The business plan can quickly become an anachronism if it does not plan for change. This doesn’t mean doing multiple business plans addressing all the what-if scenarios. However, change should be built in to the business plan process. First you develop a business plan based on the most sensible goals using current knowledge and expectations for the future. You can include a decision tree analysis section, if desired. However, you plan to change by simply doing an honest and regular review of the developed business plan.

It is important to have the same groups involved in the original plan development also participate in review sessions. The business plan may need to be revised, but you have identified where and how which is good strategic management.

The real issue is whether management can develop the discipline needed to make sure the business plan is regularly reviewed. Developing business plans should not merely be an academic exercise. It needs to be an important management function.

Browse www.funded.com for more advice about getting your business funded.

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Adding Internet Marketing to Your Business Plans

Incorporating internet marketing in business plans has become an imperative as opposed to an option. That probably became true when even the large storefront businesses began to do internet marketing. Judging by the number of websites, online accounts and emails sent with discounts for online shopping, the internet is playing a larger and larger role in all business models.

The implication is that internet marketing should not be a separate strategy. It needs to be integrated in the total marketing plan. It should not be a standalone subsection in the marketing plan. It needs to be weaved into the various marketing efforts, in addition to be being a unique effort.

For example, the business plan can include the development of a website and a discount campaign. However, the offline marketing efforts need to incorporate the website and the discount campaign also. For example, direct mailing of advertisements can be integrated with online marketing by developing the tactics the big department stores have successfully developed. The offline direct mail advertisements encourage online shopping by offering discounts, and the online emails encourage offline shopping with special discounts.

Of course, you can have a description in the business plan for specific internet only strategies. For example, you can discuss strategies for obtaining client leads and set goals for the lead-to-customer conversion rate, the number of transactions and the targeted average dollar sale. Yet there is still integration needed with offline marketing needed. Offline marketing will play a supporting role in driving people to the website to find the online-only discounts.

There are a number of online marketing strategies that can be addressed in business plans. They include developing the business website, participating in social media and blogging, and so on. The important point to keep in mind is that the marketing plan needs to be a cohesive integrated plan and not a disjointed set of offline and offline activities.

More detailed information and useful advice can be found at www.funded.com.  Created by Mark Favre, it offers expertise and assistance with developing and funding your concept, including a private forum for queries and discussions.  If you need to access a vast network of business people, entrepreneurs, partners and service providers to help you start, finance and run your business, check out our website.