Module 5.1 - Managing finances and increasing profitability

Module 5.1.
MANAGING FINANCES
AND INCREASING PROFITABILITY
MAROM Club Association, Hungary
NESsT
2018
Project co-funded by the European
Union funds (ERDF and IPA)

What topics will you cover?
• The importance of financial information
– Basic financial definitions, terminology
– Identifying start up and operational costs of the SE
• An introduction to key financial information
– How to define the prices of the products, services
– Break-even calculation
• Tools of the financial management
– Sales revenue forecast; profit and loss forecast; and cash flow forecast
– Financial results
– Key financial forecasts: determining the viability of a business opportunity

Forecasting and planning
Forecasting and planning are key skills which any entrepreneur should develop.
To run a successful social-enterprise you need to understand, create and interpret
financial information.
Have your say:
• Why do you think financial information is important?
• What do you think financial information is used for?
• Which internal and external stakeholders of a business need to see its financial
information?
• Consider the questions above, and discuss your thoughts with other learners in the
comments.

Financial Planning
What is included?
• Initial (start-up)costs;
• Pricing strategy;
• Break-even analysis;
• Financial forecasting.
Why it is important?
• We have, or are likely to be able to obtain the necessary seed capital?
• Considering the real price (according to the competition and to the available
information) and the potential segment, can we break through the break-
even point?
• The more accurate the market research is, the more information we can
obtain to the financial plan.

1. Start-up Costs
 Definition: investment needed before starting (or expanding) a social
enterprise .
 Estimate the length of the period, then it should be relatively simple to
calculate costs involved.
 Gives more formality to the process and in some cases more weight
internally:
• How many hours are we investing on this?
• What would the market value be if we calculate the cost of the advise
our network is providing to us?
 It is important to be as specific as possible, details add up! Research!

1. Start-up Costs: Budget
Type of
Cost
Specific Cost X
Cost (source of
information)
Facilities
First rent/purchase
Deposits (security, water, utility. Other
hookups)
Improvements or refurbishing/fixtures
Other
Equipment
Vehicles
Production machines/equipment
Computer/software
Furniture
Telecommunication
Other
Materials/
Supplies
Starting inventory (or raw materials/work in
progress)
Office and packing supplies
Promotional materials (brochures, displays,
etc.)
Training supplies
Other

1. Start-up Costs: Budget
Type of Cost Specific Cost X
Cost (source of
information)
Professional
services and
fees
Legal (tax, etc.)
Management /marketing / production
consultants
Accounting
Insurance
Design/graphic arts
Promotion and advertising
Licenses/permits/registration
Membership or association fees
Pre-
operations
training
Technical assistance or training
consultants
Tuition or fees (workshops, seminars,
classes, etc.)
Per diem and costs associated with
training (room rental)
Other
Others
For salaries (during start-up)
Reserves-unanticipated costs
Other
Total Start up costs

1. Start-up Costs: Key Questions
How much money do you need to raise?
Where will you get the capital to cover start-up costs?
Does it seem likely that you will be able to raise the necessary capital?

2. Pricing
The price should allow the enterprise to function.
Normally customers focus more on product satisfaction then on the price.
Don't be afraid to charge a good price. This can always be negotiated down if
necessary.
Analyze ahead of time who is going to pay or who going to receive the product
or service (the target market) and how much they value it. You can always take
advantage of offering different prices for different customers.
Identify the unit price of your products and /or services!
Which aspects have you taken into consideration

2. Cost-plus versus value-based pricing
There are two basic methods of pricing your products and services: cost-plus and value-
based pricing. The best choice depends on your type of business, what influences your
customers to buy and the nature of your competition.
Cost-plus pricing: This takes the cost of producing your product or service and adds an
amount that you need to make a profit. This is usually expressed as a percentage of the
cost.
– It is generally more suited to businesses that deal with large volumes or which
operate in markets dominated by competition on price.
– But cost-plus pricing ignores your image and market positioning. And hidden
costs are easily forgotten, so your true profit per sale is often lower than you
realise.
Value-based pricing: This focuses on the price you believe customers are willing to pay,
based on the benefits your business offers them.
– Value-based pricing depends on the strength of the benefits you can prove you
offer to customers.

2. How to build a pricing strategy?
You need to decide whether to use cost-plus or value-based pricing.
• It's important to find out what your competitors offer and what they charge. If you
phone your rivals and ask them for a quote, you can use this information as a
framework.
• It's probably unwise to set your prices too much higher or lower without a good
reason. If you price too low, you will just be throwing away profit. If you price too high,
you will lose customers, unless you can offer them something they can't get
elsewhere.
• The perception of your product or service is also important. In many markets, a high
price contributes to the perception of your product as being of premium value. This
might encourage customers to buy from you - or it might deter price-conscious
customers.
• It can be useful to charge different prices to different customers, e.g. to customers
who purchase repeatedly, or buy add-on or related products, as a thank you for their
loyalty. Bear in mind that customers who are expensive to satisfy will be less
profitable, unless you charge them higher prices. One-off sales may cost you more
than repeat business.

3. Break-even Analysis
 Objective: What is the necessary sales level (in terms of products or
services) to cover my expenses?
 Most important factors:
• The time unit of the analysis;
• Define the sales unit;
• Define the price;
• Calculation of different types of expenses.

3. Break-even Analysis
The UNIT should reflect the way you interpret
the social enterprise.
Period of analysis should be consistent with
the type of product or service being
evaluated.
Examples of units:
 Number (product)
 Hour (consulting service)
 Portion (catering)
 Subscriber (publication)
 Participant (education)
 Night (accommodation)Fix costs (given period)
Price per unit – Variable cost per unit

3. Break-even Analysis: Defining the fix and the
variable costs
Fixed costs:
 These are all operating costs that will
exist once the enterprise is constituted,
which can’t be avoided and which are
independent of the amount of sales being
generated.
Example: wages, rent, utilities, telephone.
Variable costs:
 Costs that are directly related
to the product or service
being provided. They only
exist once a product is
generated or a service is
provided.
 Example: trainers contracted
for specific projects, direct
materials.

Break-even analysis: identify fix and variable
costs
Contracted experts3
Personnel2
Total
Other11
Advertising10
Insurance9
Office supplies8
Printing7
Postage6
Telephone5
Rent/utilities4
Direct material1
VariableFixedExpense

Excercise: calculate the break-even of your
SE
Costs Fixed (per period) Variable (per unit)
Personnel
Experts
Rent
Utilities
Telecommunication
Travelling
Advertising
Material
Others
Total
Price per unit:
Break-even:

3. Break-even analysis: for multiple products
Weighted Average
Weight Price Variable cost Gross profit
30% gloves 0.3 $2 $1 $1
50% pulover 0.5 $20 $8 $12
20% scarf 0.2 $8 $2 $6
Fix costs 10,000
Weighted average price 12.2
Weighted average VC 4.7
Break-even
Total 1,333
Gloves 400
Pullovers 667
Scarfs 267
Single product
Break-even
Gloves 10,000
Pullovers 833
Scarfs 1,667
Sales Price Expense Margin
1 day training 80% 100 40 150%
½ day training 18% 60 30 100%
1 hour seminar
consultancy
2% 10 8 25%
Sales Price Expense Margin
1 day training 80% 44 40 10%
½ day training 18% 90 30 200%
1 hour seminar
consultancy
2% 12 10 20%

3. Interpreting the results from break-even analysis
 Do they seem realistic?
 Do they seem attainable for your organization? (sales potential as well as
production capacity)
 Evaluate under different contexts – simulations under different prices and
cost reduction.
 Key point in the analysis.

4. Financial Projections
 Evaluation of sales, costs and prices
 Objectives:
• Have an idea by when you will reach your goals (OR exercise!);
• Identify sources of risk (operational, financial, etc.).
 Requires solid market research information:
• In order to determine starting point;
• In order to estimate the rate of growth.

4. Revenue Projections: How much money can
you make?
1. The level of revenue is determined based on sales.
2. Sales projections are produced based on market analysis.
3. NB: Don’t look at the break-even point!
“I forget, which one is projected earning
and which is our actual earnings?”

Financial Projections
 Based on the following:
1. Price - How much can you charge for one unit of your product or
service?
2. Sales - How many customers will purchase the product or service? How
much will you be able to sell when you first open?
3. Trends - How do you expect your sales to change (grow) over time?
 Important to consider multiple scenarios – a best case, realistic case and
worst case. Be conservative!! Generally, the worst case is realistic.

4. Revenue and Expenses
1. Total Revenue: The total amount of a company's sales and other sources of
income.
2. Expenses: Business expenses are the costs the company incurs each
month in order to operate, including rent, utilities, legal costs, employee
salaries, contractor pay, and marketing and advertising costs. To remain
financially solid, businesses are often encouraged to keep expenses as low
as possible.
• Startup costs: Startup costs are the expenses incurred during the process of
creating a new business
• Operating costs: Operating costs are expenses associated with the
maintenance and administration of a business on a day-to-day basis.
– Operating Cost = Cost of Goods Sold + Operating Expenses

4. Making Revenue Projections Assumptions
Business Scenario 1 Scenario 2 Scenario 3 Scenario 4
What is your
price per unit
(per product)?
How many
customers will
you have per
day/month
(per product)?
How much will
you sell when
you start your
business?
How much will
you sell in one
year’s time?

4. Excercise: Revenue Projections
Month 1 2 3 4 5 6 7 8 9 10 11 12
Units sold
per month
Price
Total
Revenues
Total
Costs
Net
Income

4. Cost Projections: How much will it cost?
 Expenses usually can be very precisely predicted, if you had an accurate
market research.
 For the financial analysis and for the financial forecasting we use three
different type of expenses:
• Initial costs;
• Fix costs;
• Variable costs.
• The fix costs are not related to sales volume. To design our fixed costs, note
the:
• price changing (inflation, raising of the overhead fees, etc.);
• Change in employment regulations and the increasing wage
expenditure.
• Fixed costs are based on realistic data based either on our experiences
or our research.
 Variable costs vary proportionately depending on our sales.
• Use the specific direct cost (per sales unit);
• For the forecast multiply it by the monthly forecasted number of units
sold. Project co-funded by the European

4. Cost Projection Excercise
Month 1 2 3 4 5 6 7 8 9 10 11 12
Units
sold per
month
Variable
Cost/Unit
Total
variable
cost/
month
Fixed
cost/
month
Total
Costs

4. Net Income: NI
• Net income (NI) is a company's total earnings (or profit)
• Net income is calculated by taking revenues and subtracting the costs of doing
business such as depreciation, interest, taxes and other expenses.
• To calculate net income for a business, start with a company's total revenue. From
this figure, subtract the businesses expenses, operating costs and liabilites to
calculate the business's earnings before tax. Deduct tax from this amount to find the
business's net income.
– NI = TR – BE – OC – L - Tax
• This number appears on a company's income statement and is an important measure
of how profitable the company is over a period of time.
– Bottom Line: This is the total amount a business has earned or lost at the end of
the month. The bottom line is the last financial figure on a ledger. The term can
also be used in the context of a business’ earnings either increasing or
decreasing.

4. Excercise: Profit Projections
Month 1 2 3 4 5 6 7 8 9 10 11 12
Units sold
per month
Price
Total
Revenues
Total
Costs
Net
Income

4. Do not forget!
 The biggest challenge is projecting sales – don’t fit sales to your break-
even!
 Look at different scenarios, try using different units, different assumptions!
 Compare these with other ways of projecting revenue like industry
standards - are you totally off base?
 Small changes can have profound impacts.
 NB: production capacity does not equal sales volume.

5. Financial Systems
• A well-functioning financial system provides us data on the following:
 Sales planning and registering;
 Income planning and registering;
 Expenditure planning and registering;
 Assets registering;
 Liabilities registering;
 Cash and deposit registering.

 Managing cash-flow, financial planning;
 Financial planning ≠ accounting;
 Software;
 Internal controls;
 Allows to check profitability, cost-cutting opportunities, approach
financial difficulties;
 Payment schemes (keeping track of web payment, partial payment,
etc.);
 Separation of different projects;
 Risks (e.g. in lack of proper internal control and alarm system, thefts
may occur);
 Discuss shortcomings of current system, short and long term plan to
overcome them.

5. Cash-flow Management
 Main goal: avoiding lack of liquidity by controlling our payments and the
payments of our customers.
• What possibilities do we have?
 Discounts to motivate our customers to pay earlier;
 Advance;
 Immediate reminder on overdue invoices to our customers;
 In case of „bad payers” accepting only cash;
 Utilize maximally the payment deadlines of our suppliers;
 Preferring suppliers with flexible paying conditions;
 Loan;
 Factoring

• Guidelines for setting up a financial system:
 Trackable;
 Searchable;
 Double-checks;
 Result-oriented;
 Timesheets;
 Clear;
 In harmony with accounting system.

Module 5.1 - Managing finances and increasing profitability

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