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Financial strategy
- 1. Financial Strategy and Financial Objectives โRunning by the Numbersโ
- 2. Financial Strategy answers these ? How much will it cost to startup? How much will it cost to run the venture? ๏ฌ 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 ๏ฌ Investors โ equity ๏ฌ Loans - debt
- 3. Financial Strategy Components Sales forecasts Selling costs Gross profit Admin. Costs Pre-tax profit Balance sheet Working Capital Return on Investment Repayment proposal Collateral
- 4. Financial Strategy Provide specific details about when and how much money is needed Provide HI-MID-LO estimates of future performance ๏ฌ For sales, profits and loan repayments
- 5. Financial Planning Process 1. 2. 3. 4. Establish Financial Objectives Prepare a Personal Budget Estimate Revenue & Expenses Prepare a cash flow projection 5. 6. 7. Calculate startup costs and operating expenses Prepare a personal balance sheet Prepare income forecasts and projected balance sheets
- 6. Financial Strategy Used to โcapitalizeโ the venture Finance ๏ฌ A โL = OE ๏ฌ How much Owners Equity? ๏ฌ How much Debt? ๏ฌ
- 7. Financial Objectives ย All companies need money, therefore, financial objectives must be established and reached. ย ย Examples of financial objectives: ย ย Canadian Cancer Society ย ย ย ย Raise $5 for every Canadian Breakeven ย Gusโs Pizza ย To increase market share to 10%
- 8. BREAKEVEN POINT โขThe point at which total revenues equal the total costs. $$ Total Revenue PROFIT Variable Cost LOSS Total Costs Fixed Costs Fixed Cost Break-Even Point Units Sold
- 9. Breakeven Point Example โข 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? SOLUTION: Breakeven point = TOTAL COSTS = $2,000 = 200 UNITS PRICE $10
- 10. Market Share The percentage of one companyโs 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 Acmeโs market share in dollars? SOLUTION = 15% x $1,500,000 = $225,000 of Sales
- 11. Profit Margin โข The percent of the final selling price that represents the profit ย โข Profit margin =Selling price-Cost price * 100 Selling price ย โข Example-The Acme Corporation has a selling price of $30 and a cost of $20. โขWhat is the profit margin? SOLUTION = 30 โ 20 = 10 = 30 30 = 33 %
- 12. Return on Investment โขThe amount of profit earned in return for the amount of capital invested. ย Return on = Net Income * 100 Investment Amount Invested ย โขExample-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
- 13. Startup Costs vs. Operating Expenses โขStartup costs โขAll costs associated with getting the venture up and running โขFixed and variable, capital and expense โขOften funded with equity or debt โขOperating costs โขAll costs needed to keep the business going after startup (i.e. support of revenue generation) โขFixed or variable , expenses. โขShould be โfundedโ from revenues (NB)