The Price is RightâOr is it???
Pricing, Costs and Financial Planning
SESSION 4: Financial Matters
The Price is Right—Or is it??? The Importance of Financial Planning
1
Agenda
SESSION 4: Financial Matters
• 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
Benefits of Financial Planning & Goal Setting
SESSION 4: Financial Matters
• 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
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
SESSION 4: Financial Matters
Financial Projection Model
SESSION 4: Financial Matters
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
Ann’s Nursery Example
SESSION 4: Financial Matters
• Produces specimen trees, shrubs and vines
• Projected third year sales: $710,000 • Sells to retail nurseries and end consumers • S-corporation
6
Financial Projection Model
SESSION 4: Financial Matters
The five worksheets are: 1. 2. 3. 4. 5.
7
Required Start-Up Funds Salaries and Wages Fixed Operating Expenses Projected Sales Forecast Breakeven Analysis
Financial Projection Model Required Start-Up Funds
8
SESSION 4: Financial Matters
•
How much do you need?
•
What will it be used for?
•
Also consider starting costs for employees: salaries, taxes, benefits.
•
This develops Assets part of opening Balance Sheet.
Sources of Funding
9
SESSION 4: Financial Matters
Salaries and Wages
10
SESSION 4: Financial Matters
Fixed Operating Expenses
11
SESSION 4: Financial Matters
Forecasting Sales Units
SESSION 4: Financial Matters
What unit categories make sense for your business? • You need to figure out if you’re selling: – Products – Services (hours or fixed price) – Combination (packages) • Determine what makes up your “unit of sale” • Determine your direct cost per unit • Determine your price per unit
12
Sales Unit Data Sources
SESSION 4: Financial Matters
Sales unit category or grouping • Product, service, package, volume, customer type Unit cost and price • Build up from sources • Subcontract • Competition Sales volume in units • Estimate from market • Competition • Back in number to make business profitable 13
Product Producing Firm
SESSION 4: Financial Matters
Ann’s Nursery has three categories of sale: 1. Direct to local retailers 2. Through representatives to distant retailers 3. Through internetbased sales to end consumers
14
Gross Profit /Margin
SESSION 4: Financial Matters
What is gross profit? – Sales ($) 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
Projected Sales Forecast
Sales Units
January
February
March
SESSION 4: Financial Matters
Q2
Q3
1,500
1,000
Q4
Year 1 Total
Direct Sales Plants Sold
50
50
400
470
3,470
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 (%)
16
40%
40%
40%
45%
45%
40%
43.6%
Breakeven Analysis
SESSION 4: Financial Matters
Breakeven is where: Gross Profit $ = Fixed Expenses OR Sales Volume where there is no Profit Breakeven Sales $ = Fixed Cost / GM%
17
Projected Income Statement SESSION 4: Financial Matters
Ann's Nursery
18
January
February
5,000 $ 3,000 $ 2,000 $
March
Q2
Q3
Q4
Year 1 Total
Total Sales COGS Gross Profit
$ $ $
5,000 $ 40,000 $ 150,000 $ 100,000 $ 47,000 $ 3,000 $ 23,920 $ 82,575 $ 55,000 $ 28,200 $ 2,000 $ 16,080 $ 67,425 $ 45,000 $ 18,800 $
347,000 195,695 151,305
Expenses: Payroll and Benefits Fixed Expenses Total Expenses
$ 7,834 $ 7,834 $ 7,834 $ 23,502 $ 23,502 $ 23,502 $ $ 5,422 $ 5,422 $ 5,422 $ 16,266 $ 16,266 $ 16,266 $ $ 13,256 $ 13,256 $ 13,256 $ 39,768 $ 39,768 $ 39,768 $
94,008 65,064 159,072
Operating Income
$ (11,256) $ (11,256) $
( 7,767)
Interest Expense
$
Net Profit (Loss)
$ (11,756) $ (11,756) $
500 $
500 $
2,824 $ 27,657 $ 500 $
1,500 $
2,324 $ 26,157 $
5,232 $ (20,968) $ 1,500 $
1,500 $
6,000
3,732 $ (22,468) $
(13,767)
Making a Profit
• • • •
•
SESSION 4: Financial Matters
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
Did Ann Make a Profit? SESSION 4: Financial Matters
Ann's Nursery
20
Year One
Year Two
Year Three
Total Sales COGS Gross Profit
$ 347,000 $ 195,695 $ 151,305
$ 500,000 $ 275,000 $ 225,000
$ $ $
710,000 355,000 355,000
Expenses: Payroll and Benefits Fixed Expenses Total Expenses
$ 94,008 $ 65,064 $ 159,072
$ 125,000 $ 75,000 $ 200,000
$ $ $
175,000 85,000 260,000
Operating Income
$
(7,767)
$
25,000
$
95,000
Interest Expense
$
6,000
$
6,000
$
0
Net Profit (Loss)
$ (13,767)
$
19,000
$
95,000
Need Help?
SESSION 4: Financial Matters
• Ask SCORE for advice online: www.score.org/ask_score.html • Find a SCORE office near you: www.score.org/findscore • Email SCORE: [email protected] Contact SCORE
21
• Website: www.score.org
SESSION 4: Financial Matters
The Price is Right—Or is it??? The Importance of Financial Planning
1
Agenda
SESSION 4: Financial Matters
• 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
Benefits of Financial Planning & Goal Setting
SESSION 4: Financial Matters
• 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
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
SESSION 4: Financial Matters
Financial Projection Model
SESSION 4: Financial Matters
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
Ann’s Nursery Example
SESSION 4: Financial Matters
• Produces specimen trees, shrubs and vines
• Projected third year sales: $710,000 • Sells to retail nurseries and end consumers • S-corporation
6
Financial Projection Model
SESSION 4: Financial Matters
The five worksheets are: 1. 2. 3. 4. 5.
7
Required Start-Up Funds Salaries and Wages Fixed Operating Expenses Projected Sales Forecast Breakeven Analysis
Financial Projection Model Required Start-Up Funds
8
SESSION 4: Financial Matters
•
How much do you need?
•
What will it be used for?
•
Also consider starting costs for employees: salaries, taxes, benefits.
•
This develops Assets part of opening Balance Sheet.
Sources of Funding
9
SESSION 4: Financial Matters
Salaries and Wages
10
SESSION 4: Financial Matters
Fixed Operating Expenses
11
SESSION 4: Financial Matters
Forecasting Sales Units
SESSION 4: Financial Matters
What unit categories make sense for your business? • You need to figure out if you’re selling: – Products – Services (hours or fixed price) – Combination (packages) • Determine what makes up your “unit of sale” • Determine your direct cost per unit • Determine your price per unit
12
Sales Unit Data Sources
SESSION 4: Financial Matters
Sales unit category or grouping • Product, service, package, volume, customer type Unit cost and price • Build up from sources • Subcontract • Competition Sales volume in units • Estimate from market • Competition • Back in number to make business profitable 13
Product Producing Firm
SESSION 4: Financial Matters
Ann’s Nursery has three categories of sale: 1. Direct to local retailers 2. Through representatives to distant retailers 3. Through internetbased sales to end consumers
14
Gross Profit /Margin
SESSION 4: Financial Matters
What is gross profit? – Sales ($) 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
Projected Sales Forecast
Sales Units
January
February
March
SESSION 4: Financial Matters
Q2
Q3
1,500
1,000
Q4
Year 1 Total
Direct Sales Plants Sold
50
50
400
470
3,470
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 (%)
16
40%
40%
40%
45%
45%
40%
43.6%
Breakeven Analysis
SESSION 4: Financial Matters
Breakeven is where: Gross Profit $ = Fixed Expenses OR Sales Volume where there is no Profit Breakeven Sales $ = Fixed Cost / GM%
17
Projected Income Statement SESSION 4: Financial Matters
Ann's Nursery
18
January
February
5,000 $ 3,000 $ 2,000 $
March
Q2
Q3
Q4
Year 1 Total
Total Sales COGS Gross Profit
$ $ $
5,000 $ 40,000 $ 150,000 $ 100,000 $ 47,000 $ 3,000 $ 23,920 $ 82,575 $ 55,000 $ 28,200 $ 2,000 $ 16,080 $ 67,425 $ 45,000 $ 18,800 $
347,000 195,695 151,305
Expenses: Payroll and Benefits Fixed Expenses Total Expenses
$ 7,834 $ 7,834 $ 7,834 $ 23,502 $ 23,502 $ 23,502 $ $ 5,422 $ 5,422 $ 5,422 $ 16,266 $ 16,266 $ 16,266 $ $ 13,256 $ 13,256 $ 13,256 $ 39,768 $ 39,768 $ 39,768 $
94,008 65,064 159,072
Operating Income
$ (11,256) $ (11,256) $
( 7,767)
Interest Expense
$
Net Profit (Loss)
$ (11,756) $ (11,756) $
500 $
500 $
2,824 $ 27,657 $ 500 $
1,500 $
2,324 $ 26,157 $
5,232 $ (20,968) $ 1,500 $
1,500 $
6,000
3,732 $ (22,468) $
(13,767)
Making a Profit
• • • •
•
SESSION 4: Financial Matters
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
Did Ann Make a Profit? SESSION 4: Financial Matters
Ann's Nursery
20
Year One
Year Two
Year Three
Total Sales COGS Gross Profit
$ 347,000 $ 195,695 $ 151,305
$ 500,000 $ 275,000 $ 225,000
$ $ $
710,000 355,000 355,000
Expenses: Payroll and Benefits Fixed Expenses Total Expenses
$ 94,008 $ 65,064 $ 159,072
$ 125,000 $ 75,000 $ 200,000
$ $ $
175,000 85,000 260,000
Operating Income
$
(7,767)
$
25,000
$
95,000
Interest Expense
$
6,000
$
6,000
$
0
Net Profit (Loss)
$ (13,767)
$
19,000
$
95,000
Need Help?
SESSION 4: Financial Matters
• Ask SCORE for advice online: www.score.org/ask_score.html • Find a SCORE office near you: www.score.org/findscore • Email SCORE: [email protected] Contact SCORE
21
• Website: www.score.org
