© Inge Hill, Start Up, Palgrave 2015

Show me the Money – Financial Planning and Pricing CHAPTER 10 Show me the Money – Financial Planning and Pricing © Inge Hill, Start Up, Palgrave 2015

© Inge Hill, Start Up, Palgrave 2015 Learning outcomes Identify essential start-up cost Examine financial forecasting tools Analyse pricing strategies and market positioning Draw conclusions on financial fit © Inge Hill, Start Up, Palgrave 2015

The Business model cube™ © Inge Hill, Start Up, Palgrave 2015

Areas of fit PERSONAL FIT FINANCIAL FIT IDEA OR OPPORTUNITY? LEGAL AND OPERATIONAL FIT INDUSTRY AND MARKET FIT IDEA OR OPPORTUNITY? Figure 11.3 Start Up and 3.3 © Inge Hill, Start Up, Palgrave 2015

Why financial planning and forecasting? To find out … How much money you need to get up and running How much money you need monthly to keep running the business = to be able to pay the bills and staff (and all other fixed cost) and suppliers (and all variable cost) How much you need to charge your customers / buyers in order to get your cost covered and generate the profit you want. © Inge Hill, Start Up, Palgrave 2015

Start-up budget (see table 10.1) Needed to identify how much money is needed to get up and running. This helps to identify how much money needs to be raised by third parties (as a loan, grant, investment) and How long it might take to be able to start trading. Example: Peter Jones Associates Ltd. © Inge Hill, Start Up, Palgrave 2015

Sales forecast – what is it? A prediction how much can be sold in a market / you can sell month by month. Types: Macro forecast Forecasting markets in total. Determine the existing level of market demand and Consider what will happen to market demand in the future. – from secondary research. Micro forecast Detailed unit sales forecasts for your business. © Inge Hill, Start Up, Palgrave 2015

Sales forecast – how do you do it? (1) Prepare a macroeconomic forecast – what will happen to overall economic activity in the relevant economies in which a product is to be sold. (2) Prepare an industry sales forecast – what will happen to overall sales in an industry based on the issues that influence the macroeconomic forecast; (3) Prepare a company sales forecast – based on what the founder(s) expect to happen to the company’s market share. © Inge Hill, Start Up, Palgrave 2015

Sales forecast methods and information Methods: statistical / observation / survey Sales forecasts need to be based on: (1) What customers say about their intentions to continue buying products in the industry; (2) What customers are actually doing in the market; (3) What customers have done in the past in the market. © Inge Hill, Start Up, Palgrave 2015

© Inge Hill, Start Up, Palgrave 2015 Sales forecast Often far too high – unrealistic! Why? Assumptions on sales figures too high No / insufficient market research No considerations of seasonal variations Misinterpretation of market research done (see table 10.3) © Inge Hill, Start Up, Palgrave 2015

© Inge Hill, Start Up, Palgrave 2015 Deductions needed from research on buying intentions (based on Dolan, 1990b) © Inge Hill, Start Up, Palgrave 2015

© Inge Hill, Start Up, Palgrave 2015 Cash flow – what is it? “Turnover is vanity Profit is sanity Cash flow is survival” Cash flow = amount of cash generated during a time period through sales, interest, other income, investment, grants, loans set against the amount of money spent on running the business. © Inge Hill, Start Up, Palgrave 2015

© Inge Hill, Start Up, Palgrave 2015 Cash flow – what is it? Positive = if cash flowing into the company are higher than cash flowing out of the company; It does not mean necessarily that the company is making a profit! Negative = if cash outflows are higher in a month or period than money coming in (It does not necessarily mean a loss is made). © Inge Hill, Start Up, Palgrave 2015

Cash flow – how to calculate it Step 1: Add up all money generated through sales, loans/grants, investment, interest and create TOTAL 1 Step 2: Add up all expenses, one-offs, and ongoing ones per month, including salaries, and drawings create TOTAL 2 Step 3: Deduct TOTAL 2 from TOTAL 1 = cash balance or flow for this month © Inge Hill, Start Up, Palgrave 2015

Cash flow – calculation cont. Step 4: As there is no opening balance in month 1, the cash flow is also the closing balance. Step 5: Each month: Closing balance of previous month becomes opening balance of next month Step 6: Add cash flow to opening balance to gain closing balance. Repeat steps 5 and 6 until the end of the financial year. © Inge Hill, Start Up, Palgrave 2015

© Inge Hill, Start Up, Palgrave 2015 Break-even point = Point in time when business activities generate sufficient cash to at least cover the costs (sales = production cost) Calculation (simple): 1) Unit sales price minus variable cost = contribution margin to fixed cost / unit of sales 2) Divide fixed cost by contribution margin = units needed to sell to cover all cost. © Inge Hill, Start Up, Palgrave 2015

Profit and loss forecast = expected revenue and expenses for given time period Shows amount of profit possible with planned level of trading (sales forecast based) Basis for a few indicators of profitability (important for potential investors / funders): Gross profit Revenue minus cost of goods sold Gross profit margin (Gross profit + revenue) x 100 Operating profit Gross profit minus operating expenses Net profit – operating profit minus (taxes and interest) © Inge Hill, Start Up, Palgrave 2015

© Inge Hill, Start Up, Palgrave 2015 Balance sheet = summarises company assets, liabilities and shareholder equity at a point in time Assets Current assets Cash in bank, goods in stock, possibility to turn into cash within a year Investments Long term investments for example Properties, plant and equipment (fixed assets) Land, furniture, trucks Intangible assets Intellectual property rights, mail and customer lists © Inge Hill, Start Up, Palgrave 2015

© Inge Hill, Start Up, Palgrave 2015 Balance sheet cont. Liabilities Short term = what needs to be paid back within 12 months from date of statement Overdraft, short-term loans Long term = need to be paid back over 12 months from statement date loans, mortgages Shareholders / Owner’s equity = assets minus liabilities © Inge Hill, Start Up, Palgrave 2015

© Inge Hill, Start Up, Palgrave 2015 Pricing strategies Application of “Strategy” Price = expression of perceived value of product / service Part of the marketing mix © Inge Hill, Start Up, Palgrave 2015

© Inge Hill, Start Up, Palgrave 2015 Pricing strategies Penetration pricing Price skimming Premium Pricing Loss leader Economy pricing Value pricing Competitive pricing Cost-plus pricing Going rate pricing Bundle pricing Psychological pricing © Inge Hill, Start Up, Palgrave 2015

© Inge Hill, Start Up, Palgrave 2015 Positioning Application of “Strategy” Price setting and positioning Create a Turquoise Lake with new target segment, so that a higher price can be charged. How much profit do you want to make? Are there sufficient customers willing to pay the price you want / need to achieve the profit you want? © Inge Hill, Start Up, Palgrave 2015

© Inge Hill, Start Up, Palgrave 2015 Fit conclusions Explore how much profit you can make, realistically! Assess if you can / want to wait for profits to be generated for over a year or two. If only small profits can be made – worth pursuing? If small profits are continuous, your decision! © Inge Hill, Start Up, Palgrave 2015

© Inge Hill, Start Up, Palgrave 2015 Questions? © Inge Hill, Start Up, Palgrave 2015