Financial prioritization

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Financial prioritization

  1. 1. 1
  2. 2.  Types of Revenue Estimating Feature / Product Revenue What is the value of Money ? Financial Measures2
  3. 3.  New Revenue› New client Incremental Revenue› Extra Fees From Current Clients Retained Revenue› Cut Losses Operational Efficiencies› Save Time and efforts3
  4. 4. 4Quarter DevelopmentCostNewRevenueIncrementalRevenueRetainedRevenueOperationalEfficiencyNet CashFlow1 -8000 0 0 0 0 -80002 -4000 500 500 500 500 -20003 1000 1000 1000 500 350045678We Want to reach That
  5. 5. * Required 5Quarter New Customers Revenue Per Customer(Average)New Revenue12 50 75 37503 50 75 37504 50 75 37505 100 75 75006 100 75 75007 100 75 75008 100 75 7500
  6. 6. * Required 6Quarter Current Customers Revenue Per Customer(Average)IncrementalRevenue12 100 25 25003 200 25 50004 300 25 75005 400 25 100006 400 25 100007 400 25 100008 400 25 10000
  7. 7. * Required 7Quarter Retained Customers Revenue Per Customer(Average)Retained Revenue1 20 100 20002 20 100 20003 20 100 20004 20 100 20005 40 100 40006 40 100 40007 40 100 40008 40 100 4000
  8. 8. * Required 8Quarter Employees Need to domanual workSalary perEmployeeOperationalEfficiency1 0 0 02 0 0 03 1 1000 10004 1 1000 10005 1 1000 10006 2 1000 20007 2 1000 20008 2 1000 2000
  9. 9.  If i pay 50 today and earn 100 after onemonth, did I make profit ? If i pay 50 today and earn 100 after oneyear, did I make profit ? If i pay 50 today and earn 100 after tenyear, did I make profit ?9
  10. 10. Should always take into considerationOpportunity CostThis can be Interest rate Apartment Rental Even your Time has a cost10
  11. 11.  Net Present Value Internal Rate of Return Payback Period Discounted Payback Period11
  12. 12. * Required 12End Of Period Net Cash Flow Present Value Factor (12%) Present Value1 -85750 0.97 = 1/1.03 -857502 -14150 0.94 = 1/1.03^2 -133383 18250 0.91 = 1/1.03^3 1670145678Net46341
  13. 13.  Pros› Easy to calculate Cons› Can be misleading (Value and not percentage)› Two projects with the same NPV 100,000. Onerequire big initial investment while the otherrequire less initial investment at the beginning13
  14. 14. I Want to know what is the interest rate of investing inthis project as if i am investing my money in a bankSo what it i* ? , the interest rate that will make thepresent value of the money spent equal to zeroEquation => Σ ( V * (1 + i) ^ -t) = 014
  15. 15.  Pros› No need to have get organization Interest Rate› Some companies has its own MARR (minimum attractiverate of return) Cons› difficult to calculate› Can be misleading If a project with 45% IRR but its value is small and it requirestying up a critical developer resource While another with 25% IRR value is big and it requires tyingup the same critical developer resource15
  16. 16. * Required 16Quarter Net Cash Flow at End of quarter Running Total1 -10000 -100002 -5000 -150003 12000 -30004 12000 90005 X X6 X X7 X X8 X X
  17. 17.  Pros› Calculations are easy› Risk Period Cons› Doesnt Take into consideration Value of themoney› What is the profitability of the project ?17
  18. 18. * Required 18Quarter Net Cash Flow Present ValueFactorDiscountedCash FlowRunning Total1 -85750 0.971 -83252 -832522 -14150 0.943 -13338 <03 <04 <05 >06 >07 >08 >0
  19. 19.  Same as Payback period method, it justtakes into consideration the value of themoney19
  20. 20. First Project : have bigged NPV but risky (7 quarters)Third Project : has the biggest ROI (IRR) with least risk but lowest NPVSecond Project has teh lowest ROI but can be combined with the Thirdproject so investment is almost same as the first project while risk andROI is moderate.20
  21. 21.  Make sure to remember the followingOpportunity Cost Types of Revenues› New Revenue› Incremental Revenue› Retained Revenue› Operational Efficiencies21

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