Financial Strategy and Financial Objectives “Running by the Numbers”

Financial Strategy Used to “capitalize” the venture A = L + OE How much Owners Equity? How much Debt?

Financial Strategy A sound financial strategy will answer these questions How much will it cost to startup? How much will it cost to run the venture? Short term cash needs when revenue low Revenue and Expenses- operations Capital (for fixed assets and business expansion), how much and when. Sources of capital Investors – equity Loans - debt

Financial Strategy - Components Sales forecasts Selling costs Gross profit Admin. Costs Pre-tax profit Balance sheet Working Capital Return on Investment Repayment proposal Collateral

Financial Objectives All companies need money, therefore, financial objectives must be established and reached. Examples of financial objectives: Canadian Cancer Society Raise $5 for every Canadian Breakeven Joe’s Pizza To increase market share to 10%

Startup Costs vs. Operating Expenses All costs associated with getting the venture up and running Fixed and variable, capital and expense Often funded with equity or debt Often included in the valuation of a business Operating costs All costs needed to keep the business going after startup (i.e. support of revenue generation) Fixed or variable , expenses. Should be “funded” from revenues

BREAKEVEN POINT BREAKEVEN POINT The point at which total revenues equal the total costs. Variable Costs Directly dependent on the quantity of goods produced Fixed Costs Constant, independent of sales or other variables Gross Profit The selling price minus the variable costs This profit is used to pay the fixed costs, then to make money for itself

Calculating the Break-even Point Break-even Point = Fixed costs / gross profit Example Company sells teddy bears for $18. Variable costs are $3 per bear and fixed costs are $150,000 Calculate Gross Profit Calculate BEP = FC / GP

Market Share The percentage of one company’s sales in relation to the total sales of the industry. Example-If the ACME company had a $225,000 of sales in a $1,500,000 industry, what is Acme’s market share in a percentage? SOLUTION = $225,000 / $1,500,000 x 100 = 15%

Profit Margin The percent of the final selling price that represents the profit Profit margin =Selling price-Cost price * 100 Selling price   Example-The Acme Corporation has a selling price of $30 and a cost of $20. What is the profit margin? SOLUTION 30 - 20 x 100 = 33% 30

Return on Investment The amount of profit earned in return for the amount of capital invested.  Return on = Net Income * 100 Investment Amount Invested   Example- What is the return on investment for the Acme Corporation if it had $150 000 in sales and $120 000 in expenses on its business investment of $450 000? SOLUTION = 150,000 -120,000 = 30,000 = 3 = 0.0666 = 6.7% 450,000 450,000 45