2. Key financial
variables to plan the
success of your
business
Set realistic and
profitable price for
your product or
service
Calculate start
Funding requirement
Predict the costs for
your business
Forecast sales
required to meet
targets
VARIABLES PRICE FINANCE
COSTS VOLUME
FinancialObjectives
9. • Personal savings
• Family/friends
• Loans
• Crowdfunding
• Competitions &Grants
• Venture Capital & Angel Investors
Options for Start Up
10. • Balance Sheet
• Capitalisation Table
• Income Statement
• Cashflow Statement
• Operating Profit
Advanced Financials
BILL REICHERT
ART OF START UP
FINANCE
11. Key financial
variables to plan the
success of your
business
Set realistic and
profitable price for
your product or
service
Calculate start
Funding requirement
Predict the costs for
your business
Forecast sales
required to meet
targets
VARIABLES PRICE FINANCE
COSTS VOLUME
FinancialObjectives
Hi and welcome to this short self learning tool about how to set Financial Objectives for your Start up or Growth Business.
Obviously this is a complex subject, however we all need to start somewhere. This session will provide you with some simple tools and approaches to help you:
Evaluate the financial viability of your business
Understand the simple variables which will make your business profitable
Predict costs and set Financial Objectives for your business
Work out how to price your Products or service
Set sales targets to ensure the stability of your business.
In this session you will build a simple Cashflow for your business. This is an essential element of your business plan and will be required if you decide to look for Funding to help the Start up or growth of your business.
At the end of this session you will be able to conduct a Business Sanity checker to help you evaluate if you have a viable idea.
Whilst financial planning can be extremely complex, there are a few key variables which can be manipulated in order to evaluate the business viability.
Funding – how much initial investment will be put into the business. Start Up funding is normally required to pay for an initial costs or equipment before the enterprise starts. Obviously you will be looking to pay this back during the operation of the business. There are a large number of places to look for this initial funding stage, but if you are looking to find external funders they will require to see your business and financial plans.
Costs – the overall costs of the business are likely to including staffing, equipment, stock and premises. Any initial funding accessed is also likely to become an overhead as the businesses pays back the loan.
Price – There are a number of ways that the price of the product can be set, however advantageous pricing will be a key factor in the success of your business. This is one of the key income variable.
Sales Volumes – The other key income variable is how many of the product / service you will sell in order to break even or make a profit.
We will look at each of these variables separately, however they will all have an effect on each other, when costs go up, then more sales value (price) or sales volume will be required. So it is important that you continue to review all the variables together when producing your financial plan.
So how do we know how much we need to sell in order to create a profit for your business.
Please click on the Cashflow forecast icon to download a simple spreadsheet for your own cashflow The formulas have been prepopulated – but if you are comfortable with spreadsheets feel free to change them.
When you have download the Cashflow Forecast you will see a number of Income lines – we discuss these later in the session.
Let’s start here with your company’s outgoings or costs for the business.
We have a Pre-start expenses column which can be used to populate any potential outgoings before the business starts operating. This might include purchase of stock, premises, or equipment.
The Expenditure lines outline direct costs incurred for the creation of the product or service such as stock, labour used for the creation of your product and fixed assets – such as machinery.
Overheads are the costs of running the business itself and will include
Employee wages, tax and National Insurance costs, Premises Rents. Utilities including internet and phone, insurances, stationary, equipment etc.
Drawings are any monies that the business owners take out of the business.
(Add any additional expenditure rows you need for your specific business)
Please ensure your include all the start-up costs in your business, this might be one off costs for equipment, R&D and fitting out your premises. This will help you understand the funding requirements of your business.
The summary lines include
Total Income & Expenditure,
Balance (which can be + or -)
and Bought forward – which means profit or loss brought forward from the previous month.
Now it is time for some research. Please spend some time working out the expenditure of your business. Be as accurate as you can and get help if you need it.
At the end of this exercise you should have a good idea of what it will cost to run your business over a 12 month period.
We will return to this spreadsheet when we know more about the income lines.
Pricing Strategy is essential and it’s worth spending some time doing your research.
Hubspot offers some excellent advice on pricing for start ups. This article also shows ideas of industry based pricing for example in Digital, Events, Services and Restaurant businesses.
We will review some of these pricing strategies with you.
Cost Plus Pricing also known as Markup pricing essentially adds a profit margin onto the cost of production. Cost-plus pricing is typically used by retailers who sell physical products.
You might be able to compete on price if your costs will be significantly lower than your competitors, which means you can charge a similar rate and make more profit – or afford to compete on price.
Competition-based pricing is also known as competitive pricing or competitor-based pricing. This strategy focuses on the existing market rate for a company’s product or service; it doesn’t take into account the cost of their product or consumer demand.
A high-low pricing strategy is when a company initially sells a product at a high price but lowers that price to encourage buying. Discounts, clearance sections, and year-end sales are examples of high-low pricing in action.
Premium, luxury and prestige pricing is when companies price their products high to present the image that their products are premium. Prestige pricing focuses on the perceived value of a product rather than the actual value or production cost.
Whatever pricing strategy you use – you should always be aware of the Competitors price. Your pricing strategy must be relevant and correct, so when setting prices, it’s essential to complete the Competitor Analysis to review prices of products and services similar to yours.
The Expenditure from your cashflow should start to give you an indication of your own costs and where you can expect to set your prices. Review this along-side your competitors’ prices.
You can use this information to adjust your price using the pricing strategy you feel is most relevant to your business.
In order to create a forecast for your business we must have an idea of sales volumes.
If you have one product or service this might be easy. For example if you are going to manufacture Trainers – then there will largely be one unit price for this product. However this can get complicated if you are offering the product at different prices for example selling direct to customer, through retailer, through a retail chain.
In this case you might add additional sales lines to your Income Forecast line with different costs and volume eg Sales Direct, Sales Retail, Sales Wholesale.
You might be looking at a hospitality business and be selling rooms or food and beverage. Again you can add lines to your Income Line e.g. Room, Food, Beverage.
For food and beverage you might work out the average potential spend by customer e.g. Coffee + cake x 2 = or Average Table Meal Price. For rooms don’t forget the seasonal changes.
You might sell a number of products e.g. Stationary company, for this it’s best to work out an average sale per customer.
You might be selling a service such as real estate – in this case work out the average % margin in for your sales.
Try to make your costing model simple for the process of forecasting. As a tip I would work out on the highest value of a product or service and allow yourself some margin to offer discounts later.
The Business Sanity Check is there to see if you have a business which will make profit.
Take your total out goings and divide by price of your product = total number of products you will need to sell to reach cost
Divide number of products by time period – year / month / week / day – Does this look realistic to you?
Variable you can change:
Reduce / Increase the price of the product (keep checking your prices against your competitors and market rate)
Reduce / Increase your costs (Please be realistic on any costs cut or increased)
Change sales volumes
See how quickly you could make profit when adjusting these numbers.
The aim is obviously to make money. One of the major failings of start up business is to charge to little.
If you need to review the market again – push your price to the top you think the market will bear
You can now go back to your Cashflow forecast and input income and units
Bio-Lunchbox is an idea from an Entrepreneur called Jane who looking to retail Lunchboxes made from Bio-Degradable material. She is looking to complete a financial analysis to see if importing and reselling the Lunchboxes is a viable business.
Please download and read through the business scenarios
She runs through four costing scenario's – and creates a Cashflow Forecast for each scenario which you should also download. She evaluates the business viability and makes changes in order to increase profit. In the scenarios she reviews costings for her business, price of her product and the volume of sales.
In scenario version 1 she has input the predicted costs of her business and worked out the total income she would make selling her product at a low end market rate. Based upon this information she finds that the business would result in an overall loss.
In Version 2 Jane looks at the costs of the business. She shops around to find a cheaper Lunchbox. She decides to take on the Marketing responsibilities herself so reducing staffing overheads, and finds a cheaper e-commerce supplier. With these changes the business starts to make a small profit.
In Version 3 Jane looks at her pricing strategy and finds that she can increase the unit price to £15. She has also worked out the delivery costs and charges. These small changes significantly increase the profitability of the business.
In Version 4 Jane is planning for growth. Jane looks into the seasonal nature of lunchbox sales and feels she can sell more in peak buying periods. She and a funder invest a total of £10k into the business, allowing her to order a second batch of Lunchboxes to maximize on the peak selling period.
Jane also factors in £1500 a month drawings for herself.
This slightly decreases the year 1 profitability based on Version 3 – but the advantages are that she is now earning an income, paying off the initial loan and has surplus stock to take her into year 2.
Many business require funding for start up or growth, especially if they are ambitious to grow quickly. Funding can help with premises, equipment, staffing, R&D and many other requirements.
You should have add any such overheads into your cashflow plan in the pre-start expenses column.
Once you have added in your sales forecasts it is likely that on paper your business will still be in the red. However you now have a much clearer idea of how much funding you require to get your business started.
As with any financial commitment there are benefits and barriers to finding the money.
The more can self fund, the more you own and control your own enterprise (and the less you have to pay off in the long run). The vast majority of business start ups will require an initial investment from the owners / starters, and if you read many Entrepreneur biographies you will find they normally started borrowing the money from family or friends.
However, with a good business plan and sound financial plan there are a large number of additional sources of start up funding. A simple internet search will lead you to Business Support Agencies, Start Up Loans, Angels and Grants.
There are also more direct routes to build funding for your business including Crowdfunding, and some forward looking businesses will lend money to their supply chains.
Whatever the route – don’t be afraid to borrow for your business, but make sure you have done your numbers and evaluated the risks.
As you would imagine Finance is a huge part of Business Start Up and Growth. Here we have covered some tools you can use to build a simple Cashflow and test the viability of your business.
In the medium and long term you are likely to become engrossed with the finances of your start-up, and businesses obviously requires a better understanding.
Bill Reichert is a founder of a number of businesses in the Silicon Valley. His series of videos about The Art of Start Up Finance is a great place to get a more in depth understand of the Finance needs of your business. He offers clear explanations and will help you take your understanding of finance to the next level.
These videos are definitely worth a watch.
Using these forecasting tools can take some time to get used to and you are likely to return to your plan repeatedly as costs changes and you plan evolves over time.
Keep working with your Key Variables of Cost, Price and Volume to ensure that your business remains financially viable,
Make sure you re-valuate the costs of your business as they will change over the start up phase and throughout the lifecyle of your business.
Make sure you have priced your products or service in a way which will make your business sustainable. Start up businesses tend to under-price which can lead to problems in the long run.
Set yourself sales targets to ensure the stability of your business, these should be incorporated into your Sales and Marketing Plan, and make sure you are collecting sales data so that you can continually check that you are meeting the income targets that you require.
