The Price is Right Or is it???

Transcription

1 Pricing, Costs and Financial Planning The Price is Right Or is it??? The Importance of Financial Planning 1

2 Agenda Importance of financial planning Building your financial model Start-up funds Fixed operating expenses Forecasting sales units and prices Break-even price The Price is Right-or is it? 2

3 Benefits of Financial Planning & Goal Setting Match business concept with personal income goals Gain a better understanding of financial risks and rewards Identify early development and start-up costs, ongoing operations expenses and funds needed to finance the business Have a plan to help guide business decisions and monitor results A tool for seeing if The Price is Right! 3

4 Why is a Financial Plan Important? Helps you examine the feasibility of your numbers Organizes your business finances A modeling tool that helps you evaluate variable factors-like price and costs A benchmark for tracking progress A blueprint you can adjust to achieve your financial goals 4

5 Financial Projection Model Common Concerns: The spreadsheets look complicated. I don t think I can do this on my own. I don t understand all the figures and math. This is overwhelming. Can I start my business without a financial projection model? Businesses don t plan to fail they often fail to plan! 5

6 Ann s Nursery Example Produces specimen trees, shrubs and vines Projected third year sales: $710,000 Sells to retail nurseries and end consumers S-corporation 6

7 Financial Projection Model The five worksheets are: 1. Required Start-Up Funds 2. Salaries and Wages 3. Fixed Operating Expenses 4. Projected Sales Forecast 5. Breakeven Analysis 7

8 Financial Projection Model Required Start-Up Funds How much do you need? What will it be used for? Also consider starting costs for employees: salaries, taxes, benefits. 8 This develops Assets part of opening Balance Sheet.

9 Sources of Funding 9

10 Salaries and Wages 10

11 Fixed Operating Expenses 11

12 Forecasting Sales Units What unit categories make sense for your business? You need to figure out if you re selling: Products Services (hours or fixed price) Combination (packages) Determine what makes up your unit of sale Determine your direct cost per unit Determine your price per unit 12

13 Sales Unit Data Sources Sales unit category or grouping Product, service, package, volume, customer type Unit cost and price Build up from sources Subcontract Competition Sales volume in units Estimate from market Competition Back in number to make business profitable 13

14 Product Producing Firm Ann s Nursery has three categories of sale: 1. Direct to local retailers 2. Through representatives to distant retailers 3. Through internetbased sales to end consumers 14

15 Gross Profit /Margin What is gross profit? Sales ($) minus direct cost of sales ($) What is gross margin (%)? Gross Profit divided by Sales Why are they important? Requires you to cost out what you re selling Helps you determine if The Price is Right! 15

16 Projected Sales Forecast Sales Units January February March Q2 Q3 Q4 Year 1 Total Direct Sales Plants Sold ,500 1, ,470 Total Sales $ 5,000 $ 5,000 $ 40,000 $ 150,000 $ 100,000 $ 47,000 $ 347,000 COGS $ 3,000 $ 3,000 $ 23,920 $ 82,575 $ 55,000 $ 28,200 $ 195,695 Gross Profit $ 2,000 $ 2,000 $ 16,080 $ 67,425 $ 45,000 $ 18,800 $ 151,305 Gross Margin (%) 40% 40% 40% 45% 45% 40% 43.6% 16

17 Breakeven Analysis Breakeven is where: Gross Profit $ = Fixed Expenses OR Sales Volume where there is no Profit Breakeven Sales $ = Fixed Cost / GM% 17

18 Projected Income Statement Ann's Nursery January February March Q2 Q3 Q4 Year 1 Total Total Sales $ 5,000 $ 5,000 $ 40,000 $ 150,000 $ 100,000 $ 47,000 $ 347,000 COGS $ 3,000 $ 3,000 $ 23,920 $ 82,575 $ 55,000 $ 28,200 $ 195,695 Gross Profit $ 2,000 $ 2,000 $ 16,080 $ 67,425 $ 45,000 $ 18,800 $ 151,305 Expenses: Payroll and Benefits $ 7,834 $ 7,834 $ 7,834 $ 23,502 $ 23,502 $ 23,502 $ 94,008 Fixed Expenses $ 5,422 $ 5,422 $ 5,422 $ 16,266 $ 16,266 $ 16,266 $ 65,064 Total Expenses $ 13,256 $ 13,256 $ 13,256 $ 39,768 $ 39,768 $ 39,768 $ 159,072 Operating Income $ (11,256) $ (11,256) $ 2,824 $ 27,657 $ 5,232 $ (20,968) $ ( 7,767) Interest Expense $ 500 $ 500 $ 500 $ 1,500 $ 1,500 $ 1,500 $ 6,000 Net Profit (Loss) $ (11,756) $ (11,756) $ 2,324 $ 26,157 $ 3,732 $ (22,468) $ (13,767) 18

19 Making a Profit Is the Price Right? Demand Curve (volume/price) Reexamine fixed cost structure Revisit variable (supplier) costs (gross margin %) Change business model/unit of sale? New marketing plan? Challenge your assumptions! 19

20 Did Ann Make a Profit? Ann's Nursery Year One Year Two Year Three Total Sales $ 347,000 $ 500,000 $ 710,000 COGS $ 195,695 $ 275,000 $ 355,000 Gross Profit $ 151,305 $ 225,000 $ 355,000 Expenses: Payroll and Benefits $ 94,008 $ 125,000 $ 175,000 Fixed Expenses $ 65,064 $ 75,000 $ 85,000 Total Expenses $ 159,072 $ 200,000 $ 260,000 Operating Income $ (7,767) $ 25,000 $ 95,000 Interest Expense $ 6,000 $ 6,000 $ 0 Net Profit (Loss) $ (13,767) $ 19,000 $ 95,000 20

21 Need Help? Ask SCORE for advice online: Find a SCORE office near you: SCORE: contact@score.org Contact SCORE Website: 21