Presentation on theme: "Finance Workshop 02/23/2014. U-Innovate! Competition Introductions Making a Case for Financial Sustainability Basic Financial Information Income Statement."— Presentation transcript:
U-Innovate! Competition Introductions Making a Case for Financial Sustainability Basic Financial Information Income Statement Cash Flows, Balance Sheet, Breakeven Sample Exercise Recap Q&A Appendix - Glossary Agenda / Table of Contents 6:00 to 6:30 6:30 to 7:00 7:00 to 7:45 7:45 to 8:00 Ask Questions & Take Breaks as needed 2
U-Innovate! Competition Introductions Workshop Facilitator - Mike Gibson BS in Accounting, Master of Business Administration 30+ years experience in Corporate Accounting and Finance Colonial Penn Life, GE Financial Assurance, ING US 10+ years small business experiences as officer/treasurer of HOA U-Innovate! Teams Team members Team Project Description Faculty Leaders Carol Cirka - Business and Economics Rebecca Jaroff – English April Kontostathis – Mathematics and Computer Science Name Major Academic Year 3
U-Innovate! Competition Making a Case for Financial Sustainability Financial sustainability - achieved when a venture is able to deliver products and services to the market at a price that covers their expenses over the long term. 4 In the assessment of financial sustainability: Economic logic is present and estimates seem to be based on reasonable assumptions, i.e.: Price to the customer, costs, sales needed to breakeven, sales forecast, gross margin, etc. Estimates indicate that the venture has significant potential for financial sustainability. Financial Sustainability requires the team to apply finance concepts in understanding, tracking and managing its revenues and costs!
U-Innovate! Competition Elements of Information for Financial Sustainability Basic Financial Statements Income Statements - Revenue, Expenses Balance Sheet Statements of Cash Flow Assumptions Time Horizon – 3 to 5 years Source of Capital/ Financing Company organization – e.g. For-Profit vs. Non-profit Source and Estimates of Revenues Methods/source for developing cost assumptions Analytics Break Even Analysis, Other Metrics Relevant Benchmarks/Comparisons to Peer Companies Supporting Documents – leases, licenses, loans, etc. 5
U-Innovate! Competition Financial Information – Income Statement Revenue Income realized in a period related to normal business activities Sources of Revenue For Profit vs. Non-profit Types of Revenue: One-time o Product sales o Software license Recurring o Software maintenance Recognition factors Expenses Costs incurred in a period related to the generation of revenue Cost of Sales - variable Cost of materials Labor related to the production or sale of goods/services General and Admin Expenses Fixed Costs – Administrative & Overhead Expenses Salaries/staff expenses – employees not related to production Rent Other Costs Recognition factors 6
U-Innovate! Competition Other Financial Data Balance Sheet Assets = Liabilities & Equity Cash Flow: Operations Source of cash to fund start-up Time to break-even Investing – buying, selling assets Financing – changes in debt, equity Analytics Break-even analysis Fixed costs Total costs Revenue Breakeven $ Units 0 Loss Profit 7
U-Innovate! Competition Financial Statements – Pulling it Together Income Statement Net Sales (Revenue) -Cost of Sales (COS) = Gross Profit -Fixed operating costs (except depreciation) = Earnings Before Interest, Taxes, Depr & Amort (EBITDA) -Depreciation and amortization = Net Operating Income = EBIT -Interest = EBT -Taxes = Net Income Cash Flow: Net Income + Depreciation & Amortization (non-cash) = Net Cash Flow Revenue per Unit minus COS per unit = Gross Profit Margin 8
U-Innovate! Competition Exercise – Pop-a Bears Popcorn Company! Sales Opportunity Healthy snack Easy to carry around Gaining in popularity Geographic advantage No direct competition Assumptions Start-up One F/T employee Two P/T employees Campus retail location Selling Prices Plain = $3.00 Caramel = $3.50 Drinks = $1.00 Gross profit margin = $2.50 Revenue & Expense Exercise 9
U-Innovate! Competition Pop-a Bears Popco – Assumptions Operating Assumptions Campus location in Student Union, and presence at activities (football, etc.) One full-time employee – owner/manager Two part-time student employees 1 st year operations grade up; normalized volume of 18k units attained in year 2 Offering popcorn and cold beverages Research shows that popcorn consumption will grow 20% annually with college- age groups, with high potential for repeat business AssumptionsYear 1Year 2Year 3Year 4Year 5 # Units - Plain 6,000 12,000 14,400 17,280 20,736 # Units - Caramel 3,000 6,000 7,200 8,640 10,368 Total Units 9,000 18,000 21,600 25,920 31,104 # Beverages - 50% of sales 4,500 9,000 10,800 12,960 15,552 Annual Sales Growth = 20%20%50%100%120%144%173% # of students, staff, visitors 4,500Total Fixed Costsper year = $70,000 Penetration40%Average Sale = $3.67 Units per year 10.00Total Variable Costs per unit = $1.17 Units year 1 18,000Gross Profit Margin per unit = $2.50 10
U-Innovate! Competition Pop-a Bears Popco –Breakeven Analysis Breakeven Example Exercise 11 P x Q=FC + VC x QB/E Volume Pop-a Bears Popco Breakeven Analysis Q=FC/(P-VC) 70000/ (3.667-1.167) 28,000 Weighted Average PriceYear 1Year 2Year 3Year 4Year 5 Total Revenue 33,000 66,000 79,200 95,040 114,048 Total Units 9,000 18,000 21,600 25,920 31,104 Average Price (P) $ 3.667 Costs Total Fixed Costs (FC) 70,000 Total Variable Costs 10,500 21,000 25,200 30,240 36,288 Total Units 9,000 18,000 21,600 25,920 31,104 Average Variable Cost (VC) $ 1.167 Net Income(Loss) $ (47,500) $ (25,000) $ (16,000) $ (5,200) $ 7,760 Net Income(Loss) - cumulative $ (47,500) $ (72,500) $ (88,500) $ (93,700) $ (85,940)
U-Innovate! Competition Appendix - Glossary 14 Income Statement -shows sources of revenues and expenses for certain periods Revenue - income that a company receives from its normal business activities, usually from the sale of goods and services to customers. Expense - an outflow of cash or other valuable assets from a person or company to another person or company. Variable Cost - A periodic cost that varies in step with the output or the sales revenue of a company. Fixed Cost - A cost that does not change with an increase or decrease in the amount of goods or services produced. Gross Profit - Revenue less Cost of Sales (COS) Gross Profit Margin - Revenue per unit less COS per unit. Breakeven – Revenue = Expenses. Price x Quantity = Fixed Cost + (Variable Costs x Quantity) Nonprofit - an organization that uses surplus revenues to achieve its goals rather than distributing them as profit or dividends. While not-for-profit organizations are permitted to generate surplus revenues, they must be retained by the organization for its self- preservation, expansion, or plans.