Financial Strategy and Financial

Objectives“Running by the Numbers”

Used to “capitalize” the venture

A = L + OE

How much Owners Equity?

How much Debt?

Financial Strategy

A sound financial strategy will answer these questions◦ 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

Sales forecasts Selling costs Gross profit Admin. Costs Pre-tax profit Balance sheet Working Capital Return on Investment Repayment proposal Collateral

Financial Strategy - Components

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

Joe’s Pizza ◦ To increase market share to 10%

Financial Objectives

Startup costs ◦ All costs associated with getting the venture up

and running ◦ Fixed and variable, capital and expense ◦ Often funded with equity or debt◦ Often included in the valuation of a business

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

Startup Costs vs. Operating Expenses

BREAKEVEN POINT The point at which total revenues equal the total

costs. Variable Costs

◦ Directly dependent on the quantity of goods produced Fixed Costs

◦ Constant, independent of sales or other variables Gross Profit

◦ The selling price minus the variable costs◦ This profit is used to pay the fixed costs, then to make

money for itself

BREAKEVEN POINT

Break-even Point = Fixed costs / gross profit Example

Company sells teddy bears for $18. Variable costs are $3 per bear and fixed costs are $150,000

Calculate Gross Profit Calculate BEP = FC / GP

Calculating the Break-even Point

The percentage of one company’s sales in relation to the total sales of the industry.

Example-If the ACME company had a $225,000 of sales in a $1,500,000 industry, what is Acme’s market share in a percentage?

SOLUTION = $225,000 / $1,500,000 x 100 = 15%

Market Share

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? SOLUTION 30 - 20 x 100 = 33% 30

Profit Margin

The amount of profit earned in return for the amount of capital invested.

 Return on = Net Income * 100 Investment 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 = 0.0666 = 6.7%

450,000 450,000 45

Return on Investment