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Financial Objectives. Financial Objectives. There are 4 main ways to express financial objectives: Break-even Market Share Profit Margin Return on Investment. Financial Objectives. Reasons why setting financial objectives is important for entrepreneurs: Goal to reach
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Financial Objectives There are 4 main ways to express financial objectives: • Break-even • Market Share • Profit Margin • Return on Investment
Financial Objectives Reasons why setting financial objectives is important for entrepreneurs: • Goal to reach • Ensures profitability • Allows comparisons to competition
1. Break-even Point • The point at which total revenues equal the total costs. • Example: The Acme Corporation had a total production cost of $2,000. It’s selling price of its product is $10. How many units must it produce to break-even?
1. Break-even Point • Break-even = Total Cost . Selling Price = $2000 $10 = 200 • Therefore the break-even point is 200 units.
2. 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?
2. Market Share • Market Share = 15% x $1,500,000 = 0.15 x $1,500,000 = $225,000 • Therefore, ACME’s market share in dollars is $225,000.
3. Profit Margin • The percent of the final selling price that represents the profit. • Example: The ACME Corporation has a selling price of $30 and a cost of $20. What is the profit margin.
3. Profit Margin • Profit Margin = Selling Price – Cost Price x 100 Selling Price = $30 - $20 x 100 $30 = 33.3% • Therefore, the Profit Margin is 33.3%.
4. Return on Investment • The amount of profit earned in return for the amount of capital invested. • Example: What is the return on investment for the ACME Corporation if it made $15,000 profit on a $120,000 investment?
4. Return on Investment • Return on = $ Return x 100 Investment $ Invested = $15,000 x 100 $120,000 = 12.5% • Therefore, the Return on Investment is 12.5%
Calculate the following: • Tony’s Chicken Hut has costs of $800 a day and each chicken dinner sells for $12. How many units will Tony have to sell to Break-even? • Greta owns a house cleaning business. She estimates that she has the labour to clean 10 houses in one day. Her costs will be $800 for the day. At what price per house does Greta Break-even? • If the total value of all sales in an industry were $1,000,000 and your company had 35%, what is your market share?
Calculate the following: • If the total value of all sales in an industry were $2,500,000 any your company sold $1,200,000 what is your market share? • If you had 42% market share of a product and sold 1300 units, what is the size of the total market? • If a hockey stick cost $10 to produce and sells for $20 what is the profit margin? • If the profit margin on a baseball hat is 25% and the selling price is $20 what is the cost of production?
Calculate the following: • If the profit margin for a product is 25% and the cost of the product is $15 what is the selling price? • Thames Golf Couse had sales of $200,000 and expenses of $150,000. What would its return on investment be if its initial investment were $1,000,000? • If the Riverview Spa wanted a return on investment of 20% what would its net income (profit) have to be with a $1,000,000 initial investment?
Answers: • 50% • $15 • $20 • 5% • $200,000 • 67 units • $80 • $350,000 • 48% • 3095 units
