November 2005

Mapping the Process - "New Product Development"

Financial Management

i)   Budgeting

Budgeting is a process that tells you whether expected income will be sufficient to cover expected costs and leave a profit.

A complete budget has three components.

• The Operating Budget
• The Cash Flow Budget
• The Capital Expenditure Budget

a)  The Operating Budget

Summarizes the expected sales revenue, production costs, overhead cost, and profits for a future period of time.

How to Determine the Operating Budget

• Estimate sales for the upcoming period.
• Calculate the cost of acquiring and preparing the product in order to meet sales estimates.
• By subtracting the cost of goods from the sales estimate, you have determined the amount of money left over to pay overhead costs and profits.
• Overhead costs are associated with the general operation of the business.
• These costs include insurance, taxes, wages, utilities, etc.

**   The total overhead costs are subtracted from the gross margin (money remaining to pay overhead costs) to determine profits.

b)  The Cash Flow Budget

Summarizes the timing and amount of cashflow in and out of the business over a period of time.
     *   a cash inflow = sales of goods and services.
     *   a cash outflow = payment of bills.

The cash flow budget describes:
     * when cash should be received.
     * when cash payments should be made.

**  The main goal of determining a cash flow budget is to ensure that there is adequate cash on hand to meet the cash outflows.

c)  The Capital Expenditure Budget

• The purpose of the capital expenditure budget is to determine when, where, and how much money will be spent on investments such as property and equipment.
• They are budgeted separately due to the large financial commitment associated with purchasing such items.

**Planning for finances will tell you how much money you will need and when you will need it. As a result, you will prepare for the investments or loans required well ahead of time.

ii)  Pricing Strategies

a)   Break Even Analysis

• The break-even analysis can be a useful tool in determining the pricing strategy for your product.
• After determining the fixed and variable costs and expenses it is possible to determine how many units must be sold at a certain price in order to break even.
• There are no profits or losses at the break-even point.
• After determining the break-even point, the price can then be set to cover variable costs, overhead costs and profit.
• Break-even analysis demonstrates what can happen when prices are changed. For example, if you decide to lower the price of your product, you must anticipate a resulting increase in sales to offset the lower contribution to the fixed and variable costs.
• The break-even analysis will give you valuable information for budgeting and controlling costs.

Example:

P = Sales price per unit
Q = Quantity
F = Fixed Costs and Expenses (total)
V = Variable Costs and Expenses (per unit)
PQ = F + VQ

b)   Cost Plus Prices

• A process involving adding a constant percentage or amount to the seller's cost.

c)   Going With The Competition

• A process that entails setting your price the same as the competition.
• A major problem associated with this method can occur if the competitive rate does not cover your costs and expenses.

d)   Planned Profit Prices

• Incorporates a net profit into every price by using a break-even approach.
• Sales volumes can be estimated at different prices.
• By comparing the resulting sales volumes at different prices to the direct cost per unit sold and overhead, the level of profits can be determined.

e)  Psychological Pricing

• Consumers often relate price to quality. The higher price induces the idea of higher quality, the lower price suggest inferior quality.

f)  Odd-Even Pricing

• Many retailers believe by ending selling prices in odd numbers, sales increase.
• They will set selling prices to end in 1,3,5,7, or 9. Often just below some round number i.e. $9.99.
• It is viewed that $9.99 fits in a range of $0.01 to $9.99 rather than in the higher range of $10.00 - $19.99.

iii) Additional Recommendations For Financial Management

a)  Balance Sheet - "Statement of Financial Position"

• Statement of what the business owns (assets), what the business owes (liabilities), and what it is worth (owners investment).
• Illustrates the financial condition of the company at that moment.
• Prepare a balance sheet for the opening day of business.
• By performing monthly, quarterly, and yearly balance sheets, you can compare current figures against previous ones, and monitor whether your business is losing or gaining in net worth.

b)  Monthly and Yearly Income Statements

• A monthly income statement show revenue, less costs and expenses, and therefore the net income for the month.
• A yearly income statement illustrates the gross revenue for the year and subtracts the total costs and expenses.
• Income statements illustrate month by month, how much you are making or how much you have gone in the hole.
• Income statements can provide a useful management tool for planning, by comparing income statements for current and previous years, month by month.
• Trends in sales, costs and expenses are determined by observing increases or decreases in percentages of the various items.

iv) Additional Information

- Accounting Information

Canada/Manitoba Business Service Centre
250-240 Graham Avenue
P.O. Box 2609
Winnipeg, Manitoba  R3C 4B3
Phone:  (204) 984-CBSC (2272) or toll-free in Manitoba 1-800-665-2019
Info-Fax:  (204)984-5527 or toll-free in Manitoba 1-800-665-9386 (must have a touch tone phone and fax machine to access this service)
Fax:  (204) 983-3852
E-Mail:  manitoba@cbsc.ic.gc.ca
Internet:  http://www.cbsc.org/manitoba/index.html

Kuhtey & Company
(Specializing in Small Business)
Certified General Accountant
270 - 1630 Ness Avenue
Winnipeg, MB
Phone:   (204) 786-6430
Fax:   (204) 774-7687

-  Resource Information

Federal Business Development Bank
Suite 1100, 155 Carlton Street
Winnipeg, MB
R3C 3H8
Phone:   (204) 983-6234
Fax:   (204) 983-0870

Women's Enterprise Centre
130 - 240 Graham Avenue
Winnipeg, MB
R3C 0J7
Phone:   (204) 988-1860
Fax:   (204) 988-1871

Canada/Manitoba Business Service Centre
250-240 Graham Avenue
P.O. Box 2609
Winnipeg, Manitoba  R3C 4B3
Phone:  (204) 984-CBSC (2272) or toll-free in Manitoba 1-800-665-2019
Info-Fax:  (204)984-5527 or toll-free in Manitoba 1-800-665-9386 (must have a touch tone phone and fax machine to access this service)
Fax:  (204) 983-3852
E-Mail:  manitoba@cbsc.ic.gc.ca
Internet:  http://www.cbsc.org/manitoba/index.html

-   Business Publications Ordering Form
-   A Place to Start: Exploring New Business Ideas
-   Business Plan Development & Marketing

Canada/Manitoba Business Service Centre
250-240 Graham Avenue
P.O. Box 2609
Winnipeg, Manitoba  R3C 4B3
Phone:  (204) 984-CBSC (2272) or toll-free in Manitoba 1-800-665-2019
Info-Fax:  (204)984-5527 or toll-free in Manitoba 1-800-665-9386 (must have a touch tone phone and fax machine to access this service)
Fax:  (204) 983-3852
E-Mail:  manitoba@cbsc.ic.gc.ca
Internet:  http://www.cbsc.org/manitoba/index.html