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Finance Systems Thought

Finance systems

15% profit

27% expenses

20% sales commission

38% wages

Deposit checks system: add up checks, fill out deposit slip, bring checks to the bank, confirm deposit amount equals amount deposited and verify with receipt.

Break even analysis and create a profit forecast.

Revenues – total variable costs – total fixed costs = profit or loss

Revenue = average selling price x volume of services sold

Variable cost = volume of services sold x total variable costs for each transaction

Fixed costs= constant costs behinds the scenes

Break even point = 0

Break even formula

Avg sales price per unit x number of units sold – avg variable cost x number of units sold – total fixed costs = 0

Break even quantity formula

Break even quantity = Total fixed costs for the period / (avg sales price of product – avg variable cost  in producing that product)

Unit Contribution margin gives you the likelihood of creating a viable and then profitable service.

Unit contribution margin = price per unit – total variable costs

Calculating target profit

Formula: desired after tax profit / (1 – tax rate) = pre tax profit

Calculating Target Volume to reach target profit

Target profit quantity :

1:  target total fixed cost = desired pretax profit + fixed cost

2: target profit quantity = Total fixed cost / contribution margin per unit (total fixed price per unit – total variable cost per unit)

Net present value

Investment opportunity evaluation:

Present value of future must be more than present investment. Using cash flow instead of GAP

Sum of all out flows and inflows of any investment discounted for its present value.

  1. The amount of cash flows – of investment and over time
  2. The relative interest or discount rate that is used to put future cash flow values into present day equivalent.
  3. The time period over which the discounting is to take place

Basic Present Value Formula:

Present Value = Cash flow / (1 + I (the discount rate))^t

Treat for inflation

$90.70 = $100 / (1.05)^2

  1. Estimate total upfront cost for the investment (price, commissions, taxes, etc)
  2. Estimate future expected cash flow over the live of the machine or in a future point in time (5-10 yr max)
  3. Assess the riskiness of the investment: Base discount rate on riskiness to apply
  4. Compute npv, avoid negative NPV
  5. Create what if scenarios base cast, best case, and worst case

INTERNAL RATE OF RETURN:

When discount rate of NPV = 0

To calculate, set NPV to 0 and solve for I