B3
Financial Aspects
B3
Financial Aspects
Financial Aspects
Financial Aspects
Any new business must consider their pricing strategy and policy
Market penetration: pricing to sell to an existing market to gain a higher market share
Market skimming: pricing as high as possible where customers will be prepared to pay then reducing the price once these customers are proved to be satisfied
Neutral pricing: pricing is set by the general market
Sales Forecasting
Sales forecasting is very important to let a business know how it will perform in the future.
It also informs the business of the resources and materials that are needed and gives the business a chance to identify potential problems and opportunities
Sales Forecasting
Sales forecasting includes:
A basis for sales forecasts: starting point for a sales forecast is last year’s business so you can see how many customers were gained and lost over the year and the average amount of sales per customer
Sales assumptions: a business makes assumptions about the marketplace and their targeted customers
Avoiding forecasting pitfalls: it is important not to be over-optimistic
Example 12 Month
Sales Forecast
Research
Step 1: Complete your sales assumptions
Step 2: Break down your sales into specific areas such as market, product and geographical area
Step 3: Predict likelihood of sales for each specific area
Projected Costs:
Set-up, Fixed, Variable
Your predicted sales need to be set against your predicted costs
Set-up costs: include all the one off purchases that a business needs to make to set up the business and includes other items that will become ongoing expenses such as stock and replacement or repairs of equipment used within the business
Projected Costs:
Set-up, Fixed, Variable
Fixed Costs: costs that will not change, but are necessary for the business to function such as rent, council tax, insurance and telephone rental
Variable Costs: costs that will vary according to the business activity so as the business increases, costs are likely to increase in line
Break-Even Forecast
A break-even point for a business is when total revenue equals its total costs. Once the break-even point is reached, the business can start making profit
Break-Even Forecast
LOSS: is shown by the space between costs and revenue BELOW the break even point
PROFIT: is shown by the space between costs and revenue ABOVE the break even point
The BREAK EVEN POINT is where the total cost and revenue lines cross
MARGIN OF SAFETY: is the amount by which the sales would have to fall before the break even
Cash Flow Forecast
A business needs to be aware of how much money is coming into the business and how much money is leaving the business or being spent
When forecasting cash flow a business must be realistic about the number of sales it will make
Opening balance: how much available at start of year
Closing balance: total cash available
January closing balance becomes February’s opening
Cash available = opening balance + total inflows
Negative amounts are shown as brackets
Cash Flow Forecast
Research
What projected costs will you incur in your business?
Identify the set up costs, fixed costs and variable costs for your business
Put together a break-even forecast and cash flow forecast for your business
Capital Structure to
Show Investment
Capital Structure: A business will have assets, or equity that has a value and it will have debts that go alongside
If the value of the assets is less than the debts of the company, it is not a viable business and investors will not want to invest their money
If the value of the assets is much greater than the debt then the business is viable and investors may be interested
Capital Structure to
Show Investment
The financial performance of a business is measured using a financial, or profit and loss statement that gives specific information on how a business has performed over a set period of time
This includes all money received, known as revenues and all money that has been spent