Cash Flow and Breakeven analysis Week 12 Tutorial class ( 17/4/2017 ) MANGT 100 Abdullah Al Shukaili

Outline Capital sources Cash flow statement Breakeven analysis

Capital sources Equity Debt Personnel saving Family or friends loans Shareholders Debt Government loans and support Bank and financial institutions

Government Institutions Institutions supporting entrepreneurship in Oman 9/4/2014

9/4/2014

9/4/2014

Government financial support in Oman AL RAFAD FUND Program "Mawrid” loans The "Tasees” program The “Riada “ Program The Tazeez Program Loans range from 10,000 OMR to 100,000 OMR

OMAN DEVELOPMENT BANK (ODB) There are Loans up to 50,000 R.O managed by ODB branches for SMEs For more details visit: www.odb.com.om

THE RESEARCH COUNCIL FUNDING PROGRAM This program is a trial program for two years funded by the Scientific Research Council in collaboration with the Ministry of Trade and Industry in order to build research capacity and innovation in the academic, and industrial field of to address industrial problems and challenges of small and medium enterprises on the basis of a competitive mechanism in the request for support.

SHARAKAH Sharakah is a closed joint stock company, which was created to encourage and support the development of entrepreneurs and SMEs in the sultanate. It was established by Royal Decree (76/98) in 1998. Equity participation in projects that are in high growth sectors. This financial solution gives an Investment amount between RO 10,000 to 200,000.

Institutions supporting entrepreneurship in Oman Private Institutions Institutions supporting entrepreneurship in Oman 9/4/2014

9/4/2014

Estimate cost of start-ups If you are planning to start a business, it is critical to determine your budgetary needs Since every business is different, and has its own specific cash needs at different stages of development, there is no universal method for estimating your startup costs Two types of costs:- one-time costs such as the fee for incorporating your business or the price of a sign for your building. Some will be ongoing costs, such as the cost of utilities, inventory, insurance, etc

Cost categories Start up – An initial purchase for your business – usually equipment, or marketing materials Continual – payments you are usually committed to making every month (“fixed costs”) Fixed expenses include rent, utilities, administrative costs and insurance costs Cost of goods sold – costs that only occur if you sell a product - food for your restaurant, clothing for your store (“variable cost’) Variable expenses include inventory, shipping and packaging costs, sales commissions, and other costs associated with the direct sale of a product or service

Different FC & VC Fixed costs (FC) are expenses that do not vary with sales volume, such as rent and administrative salaries. These expenses must be paid regardless of sales, and are often referred to as overhead costs. Variable costs (VC) fluctuate directly with sales volume, such as purchasing inventory, shipping, and manufacturing a product.

For your business plan The most effective way to calculate your startup costs is to use a worksheet that lists both one-time and ongoing costs. Visit this website www.sba.gov

Cash Flow ( 2017) – dress shop Month 1 2 – store opens 3 4 5 6 Labor costs 500 Store rent 315 Equipment purchase 400   Inventory purchase 1000 C.O.G.S.  1000 1500 Total costs 1715 1815 2315 Revenue  2000 2000 3000 Profit/(loss) (1715) 185 685 Yearly profit/(loss) (1530) (1345) (1160) (475) 210

Flower shop cash flow goes positive after 8 months 1 2 3 – store opens 4 5 6 7 8 Labor costs 200 Store costs 300 Equipment purchase 600   Decorating 100 C.O.G.S. 400 Total costs 1000 500 700 800 900 Revenue 1200 1600 Profit/(loss) (1000) (500) Yearly profit/(loss) (1500) (1400) (1300) (1200) (800) (400)

Breakeven analysis (BEV)  Is used to determine when your business will be able to cover all its expenses and begin to make a profit. It is important to identify your startup costs, which will help you determine your sales revenue needed to pay ongoing business expenses. The concept of break-even analysis deals with the contribution margin of a product

Breakeven analysis (BEV) Breakeven point = fixed costs/ (unit selling price – variable costs) To solve this equation, you need to get the following:- Total fixed costs: How many units you expect to produce within a year? Variable costs per unit ( total VC / Total units) Sales price per unit

Preparing the cash flow and BEV See the Excel sheet for an example of estimating CF & BEV