L2 New Venture Creation Module 3

New Venture Creation: NCV Level 2 Downloaded from hlayiso.com New Venture Creation: Level 2 1

Module 3 Financial requirements of a new venture Downloaded from hlayiso.com New Venture Creation Level 2 2

In Module 3 we shall be covering: how to determine the income & expenditure of a new venture how to determine the financial and cash flow requirements of the new venture how to implement pricing and costing principles identifying the resources to obtain start-up capital Downloaded from hlayiso.com New Venture Creation Level 2 3

Can the new venture make money from its product choice? Product choice Product price Product cost Downloaded from hlayiso.com New Venture Creation Level 2 4

Important financial questions to answer first What are all the costs involved in the proposed new venture? What is the break-even point of this new business? In which way can the proposed new business be financed? What is profit, how is it calculated and how can a profit be made? How much do the products of the new business actually cost? How much do competitors charge for the same products? Downloaded from hlayiso.com New Venture Creation Level 2 5

What make up the Income & Expenditure of a new venture? Sales Costs The products or services that a The total costs of the business business sells to its customers are made up of: for a particular period (e.g. for Variable Costs which vary a day/week/month/year) in according to sales volumes order to generate profits Fixed Costs which stay the same regardless of changes in sales Income & Expenditure Profit The money left over in the business after ALL costs have been deducted from total sales Downloaded from hlayiso.com New Venture Creation Level 2 6

Understanding business terminology are also called …… These turnover income Sales revenue expenses Costs net income Profits Downloaded from hlayiso.com New Venture Creation Level 2 7

Because costs are deducted from sales, profits will always be LESS than sales Sales Costs Profit Downloaded from hlayiso.com New Venture Creation Level 2 8

Getting to the Sales figure The sales figure is arrived at by multiplying the selling price (SP) by the number of units sold. For example: x 100 = R 50 000 SP R 500/pr Downloaded from hlayiso.com New Venture Creation Level 2 9

Variable and Fixed Costs Variable costs increase as sales increase Fixed costs remain constant Fixed Costs Variable Costs Sales Downloaded from hlayiso.com New Venture Creation Level 2 10

Examples of fixed and variable costs Fixed Costs Variable Costs • rent • raw materials • salaries e.g. cloth, buttons, thread for shirts • electricity • direct labour add your own: add your own: ……………………………………….....…. ………………………………………..… …………………………………………..… ………………………………………..… …………………………………………….. ………………………………………….. …………………………………………….. ………………………………………….. ……………………………….……………. ……………………………….…………. Downloaded from hlayiso.com New Venture Creation Level 2 11

Getting to the Profit figure Sales Less: Cost of Sales Variable costs = Gross Profit Less: Expenses Fixed = Net costs Profit Downloaded from hlayiso.com New Venture Creation Level 2 12

For example: R Sales 1 000 Less: Cost of Sales 500 = Gross Profit 500 Less: Fixed Expenses 200 = Net Profit 300 Downloaded from hlayiso.com New Venture Creation Level 2 13

Calculating Profit % Gross Profit % = Gross Profit X 100 Sales = R 500 X 100 = 50 % R 1000 Net Profit % = Net Profit X 100 Sales = R 300 X 100 = 30 % R 1000 Downloaded from hlayiso.com New Venture Creation Level 2 14

The Weighted Average Gross Profit % (WAGPP) Example: Retailer selling milk and bread (1) (2) (3) Product % of Gross Profit % Weighted Sales per product Gross Profit % (1) x (2) milk 65 % 29 % 19 % bread 35 % 33 % 12 % Therefore the WAGPP is: 19 % (milk) + 12 % (bread) = 31 % Downloaded from hlayiso.com New Venture Creation Level 2 15

Budgeting A Budget is: a detailed financial plan of what is most likely to happen in the future always for a specific time period (normally 1 year) reviewed at regular intervals (normally every month) to compare actual performance against the budget drawn up for each key function of the business • a sales budget • a production budget • a materials budget • a labour budget • an administration budget Downloaded from hlayiso.com New Venture Creation Level 2 16

Key questions to ask when drawing up the Sales Budget Market size Competitor analysis How big is the potential How many and what type of market? products are my competitors selling? Sales Budget Market Research Financial Research How many people are likely to How many products does the buy the product or service business need to sell so that it offered by the new business? doesn’t make a loss? Downloaded from hlayiso.com New Venture Creation Level 2 17

Format of the Sales Budget Sales Budget Months Jul Aug Sep Oct Nov Dec Forecast unit sales 500 800 1200 1200 1500 300 Selling price per unit R8 R8 R8 R8 R8 R8 Sales Budget (R) 4000 6400 9600 9600 12000 2400 6 months Sales Budget = R 44 000 Downloaded from hlayiso.com New Venture Creation Level 2 18

The benefits of budgeting Budgeting helps the owner of the new venture to: control expenditure by planning before committing funds to spend provide targets that actual results can be compared with coordinate all business activities by integrating all functional budgets effectively utilise resources in the best way determine business objectives in terms of money evaluate the performance of different departments against budget standards Downloaded from hlayiso.com New Venture Creation Level 2 19

The Assets of a business Fixed Assets Current Assets Long-term Short-term Cash Debtors Stock Downloaded from hlayiso.com New Venture Creation Level 2 20

The Liabilities of a business Long-term Liabilities Current Liabilities Shareholders L-term Loans Overdrafts Creditors Tax Downloaded from hlayiso.com New Venture Creation Level 2 21

The Break-even point of a business Break-even point Fixed Costs Variable Costs Sales Downloaded from hlayiso.com New Venture Creation Level 2 22

For example: R Selling price per unit 50 Less: cost price per unit 30 = gross profit per unit 20 If fixed costs are 2000 then the Break-even point = 2000 20 = 100 i.e. the business has to sell 100 units to cover its fixed costs Downloaded from hlayiso.com New Venture Creation Level 2 23

Checking the Break-even calculation R Sales: 100 units @ R 50 per unit = 5000 Cost of Sales: 100 units @ R 30 per unit = 3000 Gross Profit: = 2000 If fixed costs are 2000 then gross profit (R 2000) – fixed costs (R 2000) is 0 i.e. the business has sold 100 units to cover its fixed costs and is now in a position to start making a “net profit” Downloaded from hlayiso.com New Venture Creation Level 2 24

What about the Break-even value? Selling price per unit R 50 Less: cost price per unit R 30 = gross profit per unit R 20 Gross profit % = R 20 x 100 R 50 = 40 % Break-even value = R 2000 40 % = R 5000 Downloaded from hlayiso.com New Venture Creation Level 2 25

Checking the Break-even value calculation R Sales: 100 units @ R 50 per unit = 5000 Gross Profit: 40 % of R 5000 = 2000 If fixed costs are 2000 then gross profit (R 2000) – fixed costs (R 2000) is 0 i.e. the business has sold R 5000 to cover its fixed costs and is now in a position to start making a “net profit” Downloaded from hlayiso.com New Venture Creation Level 2 26

The ‘once-off’ start-up costs of a business Fixed Assets Pre-operating Costs • land & buildings • telephone • machinery • answering machine • vehicles • vacuum cleaner • furniture • counters • tools • kitchen equipment • cash register • cell phones • scale • computers Downloaded from hlayiso.com New Venture Creation Level 2 27

The Cash-flow Statement The Cash-flow Statement deals with: the money coming IN and the money going OUT helping the business to prevent cash shortages the percentage of sales for cash and those on credit the cash payments due to suppliers the cash required to pay monthly fixed costs Downloaded from hlayiso.com New Venture Creation Level 2 28

The Forecast Cash-flow Statement Months Jul Aug Sep Oct Nov Dec Money in bank (R) 1 000 1 800 2 600 -1 600 12 000 19 600 CD sales (R) 30 000 30 000 30 000 60 000 45 000 45 000 DVD sales (R) 2 500 2 500 2 500 5 000 5 000 7 500 Total Cash IN (R) 33 500 34 300 35 100 63 400 62 000 72 100 CD cost of sales (R) 18 000 18 000 18 000 36 000 27 000 27 000 DVD cost of sales (R) 1 700 1 700 1 700 3 400 3 400 5 100 Other costs (R) 5 000 Fixed costs (R) 12 000 12 000 12 000 12 000 12 000 12 000 Total Cash OUT (R) 31 700 31 700 36 700 51 400 42 400 44 100 Closing balance (R) 1 800 2 600 -1 600 12 000 19 600 28 000 Downloaded from hlayiso.com New Venture Creation Level 2 29

Keeping financial records Source documents These documents are essential in order to compile proper financial records of all business transactions Examples are: • receipts • sales invoices • delivery notes • bank deposit slips • petrol slips Proper financial records are required to compile proper financial statements that explain the financial position of the business Downloaded from hlayiso.com New Venture Creation Level 2 30

The 3 Key Financial Statements Income Statement Balance Sheet Cash-flow Statement Downloaded from hlayiso.com New Venture Creation Level 2 31

Factors influencing pricing Target market Competitors Convenience Costing What is the price What prices are How much more Does the selling that the identified direct competitors are customers price cover all target market charging for their willing to pay for costs and leave will accept? products? convenience? enough for profits? Downloaded from hlayiso.com New Venture Creation Level 2 32

Pricing Concepts Skimming “Loss leader” A high introductory The prices of a few popular price is set to recover products are reduced to R & D costs entice customers to buy Competitive pricing Final price Odd pricing The price is set just Pricing is set at a level below the price of which sounds a lot less competitors e.g. R19-99 vs. R20-00 Cost-plus pricing The cost of each product is calculated and then a mark-up is calculated Downloaded from hlayiso.com New Venture Creation Level 2 33

Calculating the % ‘Mark-up’ To calculate Gross Profit % we know the formula is: Gross Profit X 100 Sales e.g. R 4 / unit X 100 = 40 % R 10 / unit BUT calculating the Mark-up % uses the formula: Gross Profit X 100 Cost of Sales e.g. R 4 / unit X 100 = 66,7 % R 6 / unit Downloaded from hlayiso.com New Venture Creation Level 2 34

Costing principles for various types of business Units sold / month less the cost price / unit Trading • stock • transport • sales commission Units produced / month less the cost price / unit Manufacturing • raw materials • direct labour • power e.g. electricity Service Service hours / month less the cost price / hour • material used Downloaded from hlayiso.com New Venture Creation Level 2 35

The procedure for compiling cost prices Step # 1: determine all potential variable costs per product/service Step # 2: add up all potential fixed costs for a month Step # 3: add up all start-up costs (also calculate monthly repayments) Step # 4: add the loan repayment amounts to monthly fixed costs Step # 5: compile a monthly sales forecast Step # 6: multiply variable cost per product/service by the sales forecast Step # 7: add up all the variable and fixed costs to determine total monthly costs Downloaded from hlayiso.com New Venture Creation Level 2 36

For example: In a trading business you buy chickens for R 9 each. You buy 200 chickens at a time and pay R 200 for the transport i.e. R 1 each. Variable costs are: R 9-00 (chickens for re-sale) plus R 1-00 (transport costs per chicken) = R 10-00 per chicken Fixed costs are: R 200-00 (telephone) plus R 300-00 (rent) plus R 1 500-00 (salaries) = R 2 000-00 If you sell the chickens for R 20 each and expect to sell 600 chickens per month then the sales will be R 12 000, the variable costs will add up to R 6 000 (600 x R 10) and the fixed costs will remain R 2 000. TOTAL MONTHLY COSTS = R 8 000-00 (variable + fixed costs) Downloaded from hlayiso.com New Venture Creation Level 2 37

Financing the business: Capital requirements Working capital Start-up capital Growth capital to pay for stocks & to buy fixed assets to finance expansion operating expenses Downloaded from hlayiso.com New Venture Creation Level 2 38

Funding options to start a business Financial requirements • start-up capital • working capital • growth capital Equity Borrowed Capital Own funds Short-term loans • bank overdraft Family and friends • trade credit Long-term loans Shares • bond Downloaded from hlayiso.com New Venture Creation Level 2 39

Using Financial Institutions Banks Other Institutions • current accounts • Khula • savings accounts • Business Partners • internet banking • Micro lenders • telephone banking • Chambers of • auto-banking Commerce Downloaded from hlayiso.com New Venture Creation Level 2 40

but … BEFORE you start your own business … Hard work Downloaded from hlayiso.com New Venture Creation Level 2 41