Finance
Workshop
02/23/2014
Agenda / Table of Contents
6:00
to
6:30
6:30
to
7:00
7:00
to
7:45
7:45
to
8:00
• Introductions
• Making a Case for Financial Sustainability
• Basic Financial Information
• Income Statement
• Cash Flows, Balance Sheet, Breakeven
• Sample Exercise
• Recap
• Q&A
• Appendix - Glossary
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2
Ask Questions
& Take Breaks
as needed
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
Name
Major
Academic Year
Faculty Leaders
•Carol Cirka - Business and Economics
•Rebecca Jaroff – English
•April Kontostathis – Mathematics and Computer Science
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3
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.
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!
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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.
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Financial Information – Income Statement
Revenue
Expenses
Income realized in a period
related to normal business
activities
Costs incurred in a period related to
the generation of revenue
Sources of Revenue
•Cost of materials
•Labor related to the production or
sale of goods/services
Cost of Sales - variable
•For Profit vs. Non-profit
Types of Revenue:
General and Admin Expenses
•One-time
•Fixed Costs – Administrative &
Overhead Expenses
oProduct sales
oSoftware license
•Salaries/staff expenses – employees not
related to production
•Rent
•Recurring
oSoftware maintenance
•Other Costs
•Recognition factors
•Recognition factors
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Other Financial Data
Balance Sheet
Assets =
Liabilities & Equity
$
Revenue
Cash Flow:
•Operations
•Source of cash to fund start-up
•Time to break-even
•Investing – buying, selling assets
•Financing – changes in debt, equity
Analytics
7
Total costs
Fixed costs
0
•Break-even analysis
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Breakeven
Units
Financial Statements – Pulling it Together
Income Statement
Revenue per Unit minus
Net Sales (Revenue)
COS per unit =
-Cost of Sales (COS)
Gross Profit Margin
= 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
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Exercise – Pop-a Bears Popcorn Company!
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
Sales Opportunity
•Healthy snack
•Easy to carry around
•Gaining in popularity
•Geographic advantage
•No direct competition
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Revenue & Expense
Exercise
9
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
•1st 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 collegeage groups, with high potential for repeat business
Assumptions
Year 1
Year 2
Year 3
Year 4
Year 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
120%
144%
173%
Annual Sales Growth = 20%
# of students, staff, visitors
20%
4,500
Penetration
Units per year
Units year 1
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50%
100%
Total Fixed Costsper year = $70,000
40%
Average Sale = $3.67
10.00
Total Variable Costs per unit = $1.17
18,000
Gross Profit Margin per unit = $2.50
10
Pop-a Bears Popco –Breakeven Analysis
PxQ
=
FC + VC x Q
Q
=
FC/(P-VC)
Pop-a Bears Popco Breakeven
Analysis
Weighted Average Price
Year 1
Total Revenue
Total Units
Average Price (P)
$
B/E Volume
70000/
(3.667-1.167)
28,000
Year 2
Year 3
Year 4
Year 5
33,000
66,000
79,200
95,040
114,048
9,000
18,000
21,600
25,920
31,104
3.667
$
3.667
$
3.667
$
3.667
$
3.667
Costs
Total Fixed Costs (FC)
70,000
70,000
70,000
70,000
70,000
Total Variable Costs
10,500
21,000
25,200
30,240
36,288
9,000
18,000
21,600
25,920
31,104
Total Units
Average Variable Cost (VC)
$
Net Income(Loss)
Net Income(Loss) - cumulative
1.167
$
1.167
$
1.167
$
1.167
$
1.167
$ (47,500)
$
(25,000)
$
(16,000)
$
(5,200)
$
7,760
$ (47,500)
$
(72,500)
$
(88,500)
$
(93,700)
$
(85,940)
Breakeven Example Exercise
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Pop-a Bears Popco – Financial Projections
Year 1
Revenue
Plain
Caramel
Beverages
Total Revenue
Expenses - Variable
Cost of materials - plain
Cost of materials - caramel
Cost of packaging
Beverages
Total Variable Expenses
$
$
$
Unit Cost
3.00
$ 18,000
3.50
$ 10,500
1.00
Equipment/Leaseholds
Total Fixed Expenses
EBITDA (cash flow)
Depreciation - 5 year basis
Net Income(Loss) Before Taxes
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4,500
33,000
Year 3
Year 4
Year 5
$
$
36,000
21,000
$
$
43,200
25,200
$
$
51,840
30,240
$
$
62,208
36,288
$
9,000
66,000
$
10,800
79,200
$
12,960
95,040
$
15,552
114,048
$
$
$
0.50
1.00
0.25
3,000
3,000
2,250
6,000
6,000
4,500
7,200
7,200
5,400
8,640
8,640
6,480
10,368
10,368
7,776
$
0.50
2,250
10,500
4,500
21,000
5,400
25,200
6,480
30,240
7,776
36,288
22,500
45,000
54,000
64,800
77,760
$40,000
$10,000
$15,000
$ 4,000
40,000
10,000
15,000
4,000
40,000
10,000
15,000
4,000
40,000
10,000
15,000
4,000
40,000
10,000
15,000
4,000
40,000
10,000
15,000
4,000
$ 5,000
5,000
74,000
69,000
69,000
69,000
69,000
(51,500)
(24,000)
(15,000)
(4,200)
8,760
(4,000)
1,000
1,000
1,000
1,000
Gross Profit
Fixed Expenses
Staff Expenses F/T - Fixed
Staff Expenses P/T - Fixed
Rent - 5 year lease
Other Expenses
$
Year 2
$ (47,500)
$
(25,000)
12
$
(16,000)
$
(5,200)
$
7,760
What are the
actions to
improve
profitability?
Breakeven
in year 5
Summary – Q&A
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Appendix - Glossary
•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 selfpreservation, expansion, or plans.
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