Financial Strategy and Financial Objectives “Running by the Numbers”

Financial Strategy answers these ? 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 Strategy Provide specific details about when and how much money is needed Provide HI-MID-LO estimates of future performance For sales, profits and loan repayments

Financial Planning Process 1. Establish Financial Objectives 2. Prepare a Personal Budget 3. Estimate Revenue & Expenses 4. Prepare a cash flow projection 5. Calculate startup costs and operating expenses 6. Prepare a personal balance sheet 7. Prepare income forecasts and projected balance sheets

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

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 Gus’s Pizza To increase market share to 10%

$$ Units Sold PROFIT Total Revenue BREAKEVEN POINT The point at which total revenues equal the total costs. Fixed Cost Total Costs Break-Even Point LOSS Fixed Costs Variable Cost

 The Acme Corporation had a total production cost of $2000. Its selling price of its product is $10. How many units must it produce to breakeven? Breakeven Point Example SOLUTION: Breakeven point = TOTAL COSTS = $2,000 = 200 UNITS PRICE$10

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 15% market share of a $1,500,000 industry, what is Acme’s market share in dollars? SOLUTION = 15% x $1,500,000 = $225,000 of Sales

 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? Profit Margin SOLUTION = 30 – 20 = 10 = 33 % = 30 30

Return on Investment The amount of profit earned in return for the amount of capital invested. Return on = Net Income * 100 InvestmentAmount Invested Example-What is the return on investment for the Acme Corporation if it had $ in sales and $ in expenses on its business investment of $ ? SOLUTION = 150, ,000 = 30,000 = 3 =.0666 = 6.7% 450, ,000 45

Startup Costs vs. Operating Expenses Startup costs All costs associated with getting the venture up and running Fixed and variable, capital and expense Often funded with equity or debt 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 (NB)