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2. Show me the Money – Financial Planning and Pricing
CHAPTER 10
Show me the Money – Financial Planning and Pricing
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3. © Inge Hill, Start Up, Palgrave 2015
Learning outcomes
Identify essential start-up cost
Examine financial forecasting tools
Analyse pricing strategies and market positioning
Draw conclusions on financial fit
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4. The Business model cube™
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5. Areas of fit PERSONAL FIT FINANCIAL FIT IDEA OR OPPORTUNITY?
LEGAL AND OPERATIONAL FIT
INDUSTRY AND MARKET FIT
IDEA OR OPPORTUNITY?
Figure 11.3 Start Up and 3.3
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6. Why financial planning and forecasting?
To find out …
How much money you need to get up and running
How much money you need monthly to keep running the business = to be able to pay the bills and staff (and all other fixed cost) and suppliers (and all variable cost)
How much you need to charge your customers / buyers in order to get your cost covered and generate the profit you want.
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7. Start-up budget (see table 10.1)
Needed to identify how much money is needed to get up and running.
This helps to identify how much money needs to be raised by third parties (as a loan, grant, investment) and
How long it might take to be able to start trading.
Example: Peter Jones Associates Ltd.
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8. Sales forecast – what is it?
A prediction how much can be sold in a market / you can sell month by month.
Types:
Macro forecast
Forecasting markets in total.
Determine the existing level of market demand and
Consider what will happen to market demand in the future. – from secondary research.
Micro forecast
Detailed unit sales forecasts for your business.
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9. Sales forecast – how do you do it?
(1) Prepare a macroeconomic forecast – what will happen to overall economic activity in the relevant economies in which a product is to be sold.
(2) Prepare an industry sales forecast – what will happen to overall sales in an industry based on the issues that influence the macroeconomic forecast;
(3) Prepare a company sales forecast – based on what the founder(s) expect to happen to the company’s market share.
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10. Sales forecast methods and information
Methods: statistical / observation / survey
Sales forecasts need to be based on:
(1) What customers say about their intentions to continue buying products in the industry;
(2) What customers are actually doing in the market;
(3) What customers have done in the past in the market.
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Sales forecast
Often far too high – unrealistic!
Why?
Assumptions on sales figures too high
No / insufficient market research
No considerations of seasonal variations
Misinterpretation of market research done
(see table 10.3)
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Deductions needed from research on buying intentions (based on Dolan, 1990b)
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Cash flow – what is it?
“Turnover is vanity
Profit is sanity
Cash flow is survival”
Cash flow
= amount of cash generated during a time period through sales, interest, other income, investment, grants, loans set against the amount of money spent on running the business.
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Cash flow – what is it?
Positive = if cash flowing into the company are higher than cash flowing out of the company;
It does not mean necessarily that the company is making a profit!
Negative = if cash outflows are higher in a month or period than money coming in
(It does not necessarily mean a loss is made).
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15. Cash flow – how to calculate it
Step 1: Add up all money generated through sales, loans/grants, investment, interest and create TOTAL 1
Step 2: Add up all expenses, one-offs, and ongoing ones per month, including salaries, and drawings create TOTAL 2
Step 3: Deduct TOTAL 2 from TOTAL 1 = cash balance or flow for this month
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16. Cash flow – calculation cont.
Step 4: As there is no opening balance in month 1, the cash flow is also the closing balance.
Step 5: Each month: Closing balance of previous month becomes opening balance of next month
Step 6: Add cash flow to opening balance to gain closing balance.
Repeat steps 5 and 6 until the end of the financial year.
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Break-even point
= Point in time when business activities generate sufficient cash to at least cover the costs
(sales = production cost)
Calculation (simple):
1) Unit sales price minus variable cost = contribution margin to fixed cost / unit of sales
2) Divide fixed cost by contribution margin
= units needed to sell to cover all cost.
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18. Profit and loss forecast
= expected revenue and expenses for given time period
Shows amount of profit possible with planned level of trading (sales forecast based)
Basis for a few indicators of profitability (important for potential investors / funders):
Gross profit
Revenue minus cost of goods sold
Gross profit margin
(Gross profit + revenue) x 100
Operating profit
Gross profit minus operating expenses
Net profit – operating profit minus (taxes and interest)
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Balance sheet
= summarises company assets, liabilities and shareholder equity at a point in time
Assets
Current assets
Cash in bank, goods in stock, possibility to turn into cash within a year
Investments
Long term investments for example
Properties, plant and equipment (fixed assets)
Land, furniture, trucks
Intangible assets
Intellectual property rights, mail and customer lists
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Balance sheet cont.
Liabilities
Short term = what needs to be paid back within 12 months from date of statement
Overdraft, short-term loans
Long term = need to be paid back over 12 months from statement date
loans, mortgages
Shareholders / Owner’s equity
= assets minus liabilities
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Pricing strategies
Application of “Strategy”
Price = expression of perceived value of product / service
Part of the marketing mix
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Pricing strategies
Penetration pricing
Price skimming
Premium Pricing
Loss leader
Economy pricing
Value pricing
Competitive pricing
Cost-plus pricing
Going rate pricing
Bundle pricing
Psychological pricing
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Positioning
Application of “Strategy”
Price setting and positioning
Create a Turquoise Lake with new target segment, so that a higher price can be charged.
How much profit do you want to make?
Are there sufficient customers willing to pay the price you want / need to achieve the profit you want?
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Fit conclusions
Explore how much profit you can make, realistically!
Assess if you can / want to wait for profits to be generated for over a year or two.
If only small profits can be made – worth pursuing?
If small profits are continuous, your decision!
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Questions?
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