Hello. I'm Frank Sabbih and I'm a third year BSc mechanical engineering at the University of Energy and Natural Resources in Ghana. I believe in business and also entrepreneurship as a whole. We're now going to turn to the vital task of interpreting a business's expected financial performance. While they may not at first appear to be the most exciting aspect of your idea, forecasting and planning are key skills for any entrepreneur or entrepreneurial team to develop.
Financial information is important. It provides entrepreneurs with the evidence to support their decisions about a business and helps to justify those decisions when they present them to other people. As the venture begins to trade they can also compare previous forecasts with actual performance using financial statements to help improve the accuracy of business planning.
We're going to consider the key basic elements which need to be understood and included when developing an initial forecast. These include a sales revenue forecast, profit and loss forecast, and what is known as a cash flow forecast. Some of these concepts may seem quite abstract. So as you consider each one I will illustrate them by applying them to an example of a cake stall.
In order to develop a sustainable business, we first need to know what the business will be selling to generate revenue and how much we will charge. Once this is decided we then need to predict what volume of sales we expect over a regular period such as a week or month. By looking at our sales revenue forecasts we are then able to see how the way in which we market our idea, both in terms of price and number of sales, has a direct financial impact on the business. As a result of the sales forecast we can then consider ways in which we might need to adapt this idea by perhaps changing the selling price or revising the expected number of sales to see the effect on our total sales revenue. Here's an example. If I hope to sell a slice of cake for 1 dollar each on a stall at a local fair, five sales would generate a total sales revenue of $5 for the day.
If I can increase my volume to 20 slices I can expect a revenue of $20 But if I increase the price of each piece to $5 I'll only need to sell four slices to generate the same sales revenue of $20 Of course, I would need to ask myself whether the customers will really be prepared to pay that much for a slice of cake. Now think of some other combinations we could consider of price per unit and number of sales to reach a sales revenue of $100 at the fair. You could also think about how you might encourage people to pay more per unit or buy more units.
We're now going to consider how we forecast the business' future profits or losses. While forecasting sales revenue is a useful indication of how much we have brought in from our sales and marketing activity, profits forecasting helps us to assess the financial potential of our overall business opportunity. Profit refers to the amount we have remaining once we've accounted for the cost of doing business. Profit is therefore a good indicator of the viability of our business proposition. In addition, profits can be used to invest in the development of the business or to reward their owners for their investment. So they are often used as a measure of business success.
Profits are calculated by taking away the value of cost from the sales revenue. If sales are forecast to be greater than costs, this suggests there'll be a profit, which may be a good indication of the viability of an idea. However, if costs are forecasted to be greater than sales this suggests there'll be a loss, which may be a sign that there is a problem with our business proposal. A simple measure of profit known as gross profit can be obtained by comparing our forecasted sales revenue against our forecasted cost of sales. Revenue against our forecasted cost of sales. This tells us how viable our business idea is. In our example, the idea was to sell cakes. Let's say our cake costs us $2 to make.
So if we made 10 cakes in preparation for the day our total direct cost of sales is $20 We took eight slices out of each cake and sold each of these for 1 dollar. While we're making $8 of sales revenue per cake, the cost to make these cakes means we end up with a gross profit of $6 per cake. If I sell all my available 80 slices in a day, I'll make a sales revenue of $80 but minus the $20 it cost me to make cakes. I take home a gross profit of $60 at the end of the day. So far so good.
However, I also need to include my operational overheads, which I have to pay for regardless of how many cake slices I sell, known as fixed costs. If the organizer at the fair provides us stand tables and some paper plates for free this doesn't cost me anything. But I would expect they'll apply a daily charge to use a stand so that the organizers can make money out of the event themselves. If this costs $30 for the day, then bearing in mind that my gross profit on $80 slices of cake was $60 I will now take home a net profit of $30 for the day. This is still a viable business proposition. So while our gross profit indicated the viability of our idea, selling cakes, net profit indicates the viability of our business model, the way we sell cakes. In our case this was selling slices at a fair stand, but there are other ways I could have decided to sell them, which might change my net profit forecast. Indeed, learning about this has also taught us about another business model. Running fairs makes money from charging from stands. Perhaps I should move into that line of business. Now thinking about everything you've heard about so far, think about how you could improve the gross profit and net profit of our cake selling business.
While forecasting sales revenues and profits or losses will provide a good indication about the future potential of our idea, we also need to consider the vital issue of cash flow. If a business were a body cash would be its lifeblood. And cash is used to pay for a business's costs. Without it even a very successful and profitable business can fail. A cash flow forecast is developed in order to estimate how well a business will be able to pay for its costs on a regular basis as it continues to trade. Considering our cash flow forecast means that we have to think about the timing of sales and purchasing.
We may also need to consider seeking alternative ways to generate cash at times when our sales aren't enough to cover our costs, such as when the business first launches. Returning to our cake stall example, we were pretty confident that our business proposition will be successful if we sold 80 slices of cake every day at the fair. However, before we can sell any slices at all, we need to somehow find our $20 to buy the raw ingredients to make the 10 cakes we need in the first place If the owners ask us to pay their daily charge on arrival, we then need to find an additional $30 That's $50 spent before we've even sold a single slice.
How can we improve the situation? You might also want to think about this in relation to launching and running your own business or another example.
We've considered a number of key financial forecasts to try and determine the viability of a business opportunity. These have included sales revenue forecasts, profit and loss forecasts, and cash flow forecasts. In the end it may seem difficult to feel any connection between financial forecasts based on numerous assumptions and your gut feel for an entrepreneurial opportunity you passionately feel is worth acting on. However, using financial accounts to develop forecast is a useful way to examine the viability of your idea and the way you plan to act on opportunity. They also allow you and others to evaluate the potential for success as part of an overall business plan. As the business launches you can then start to evaluate your forecasts by comparing them to statements from your business trading activity to enable you to think about whether your predictions were accurate and how you'll continue to plan for the future.
Here are three questions. Number one-- What would be the best combination of price per unit and number of sales to achieve a sales revenue of $100 selling cakes at a fair? Number two-- How could you improve the gross profit and net profit of the enterprise? Number three-- How could you improve the long term viability of the business proposition? You might also want to consider these in relation to your own business idea or another example. I look forward to hearing your contribution on the discussion boards below.
Interpreting financial performance
Financial information is important; it provides entrepreneurs with the evidence to support their decisions about a business and helps to justify those decisions when they present them to other people.
Have your say:
What would be the best combination of price per unit and number of sales to achieve a sales revenue of $100?
How could you improve the gross profit and net profit of the enterprise?
How could you improve the long term viability of the business proposition?
Analysing financial information
In any business, financial information is critical to monitoring performance.In this activity, you have the opportunity to spend some time looking at an organisation’s financial information.The task is to choose a successful business which interests you, and find and review its financial information. If you have a business or business idea, you might want to investigate the financial information of a potential competitor.
To help you with this ,Financial information for reputable companies can usually be found on the internet under the corporate section of a company’s website.
Take your time to familiarise yourself with the financial reports of your chosen company and look at how the financial information which we have covered in this course has been presented.
If you have an image of the company you’re investigating, or examples of the financial information you are analysing, please share them in the comment and if possible along with a paragraph answering the questions below..
Questions.
What features do you think you need to look for when assessing a company’s financial information?
Can you find any specific examples of where your chosen company plans its business proposition in the following year based on risks identified in the current financial statement and annual report?
Over the past year and a half, a friend of mine have worked with several bands. And he also released a vinyl compilation at the end of last year. On top of this, he is also a music journalist. And he has voluntarily contributed to online publications for two years. And last summer, he took part in a high-profile internship, which has enabled him to develop himself as a personal brand too. The idea spawned from his sheer passion for music. He has always been lucky enough to know from an early age that he wanted to work in the music industry. So he managed to get his foot in the door as early as he could with as much work experience as possible.
However, it was when he actually spoke to someone who is well-respected in the music industry that he realised he needed first-hand experience to stand out in such a highly competitive industry. It was this conversation that gave him the determination to set up of his own business. And the idea of working with small bands had been something he had always dreamed of. He has been going to gigs from an early age, watching small unsigned acts grow year on year. And these same bands are now travelling the world, touring their music. It was this that made him realise that he had an ear for upcoming music, and this suits his business perfectly. he discovered that he has one major problem with his business.
He absolutely love doing what he do, and he spend so much time on it. But due to the nature of the music industry, the revenue that he is creating is not making the business profitable. Now he need to discover where he is focusing his energy to make the business more profitable, and he has several options to do this. His first option is to recruit more bands because this will enable him to build up the roster and expose the brand to more people. The only problem with this is that he already spend a lot of time working on the business. And by recruiting more bands, he will have even less time to focus his energy on the bands that he currently working with.
The second option would be to release more records because this would increase his sales and, therefore, increase the revenue. The only problem with this is that he’d have to rely on the bands to make new music, which sometimes isn't feasible due to their other commitments, such as touring. The third option is to start running festivals because he makes revenue through selling tickets, and this would be a great opportunity to exploit the business brand. The only problem with this is that the independent music festivals are highly concentrated these days, which means that even some of the bigger independent festivals are seeing a decrease in ticket sales.
His final option is to become a freelance music journalist, which would allow him to find paid work within the music industry. The only downside to this is that it completely takes focus away from the original ideas of the business.
Now that I've given you all of my options, I'm looking for your help. Share it in the comment. please begin your comments with “hi”
