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

LOSSFixed

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 * 100Investment 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 = .0666 = 6.7%

450,000 450,000 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)