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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)
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