Financial Strategy and Financial Objectives

1. Financial Strategy and Financial Objectives “Running by the Numbers”

2. Financial Strategy • Used to “capitalize” the venture • A = L + OE • How much Owners Equity? • How much Debt?

3. 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

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

5. 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 • Joe’s Pizza • To increase market share to 10%

6. 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 • 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

7. BREAKEVEN POINT • 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

8. Calculating the Break-even 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

9. 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 $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%

10. Profit Margin • 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

11. Return on Investment • 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