FM - Financial Plan [LESSON]
Financial Plan
A profit, cash flow, margin, and sales example
Let's look at an example of how profit, cash flow, margins, and sales effect the decisions a company makes.
The goal: Jim just turned 16 and would like a car. His parents are making him pay half of the car, so he needs to raise $1000 in the next two months.
The plan: Jim decides to start a Blow Pop business. He will purchase his product in bulk at Sam's club and sell the lollipops to students at his school.
The finances: It cost $10.40 for a box of 100 Blow Pops. Jim has enough money from his birthday to buy one box of Blow Pops. Each Blow Pop cost him about $.10 (10.4 cents to be exact). To make things simple we are not going to look at tax.
The research: Jim wants to know how much he should charge for each Blow Pop, so he takes a survey of his potential customers in one of his classes. Here are his findings:
| Price per Blow Pop | # of students out of 30 who will buy | Revenue per class | Profit per Class | Profit per box of Blow Pops | Profit for 1 Month (20 days) and 6 classes |
|---|---|---|---|---|---|
| $.10 | 25 | 2.50 | (-0.10) | $(-0.40) | $(-12.00) |
| $.25 | 18 | 4.50 | 2.63 | $14.60 | $315.36 |
| $.50 | 7 | 3.50 | 2.77 | $39.60 | $332.64 |
Pricing decision: Determining the price to sell the Blow Pops is important! If Jim decided to sell them for $.10 he wouldn't cover his cost of buying the box! If he decided to sell the Blow Pops for $.50 he wouldn't make as much profit quickly, the price is too high. So Jim decides to sell the Blow Pops for $.25 each.
The Profit Margin: If Jim is going to sell his Blow Pops for $.25 and it cost him $.104 (10.4 cents) per Blow Pop, here is how he can figure out how much he is making per Blow Pop!
If Jim's profit margin had been less that 50% he would be able to meet his goal of making $1000 in two months. Some companies like Walmart have low profit margins, meaning they price their products really close to their cost. Walmart can make money off of a low profit margin because they sell a very large quantity of items.
The Market: Jim has 6 classes with 30 students. Assuming that he can sell 18 Blow Pops per class each day how much profit will he earn in 4 school weeks (1 month)?
6 classes
x 18 Blow Pops
x .146 profit per Blow Pop
x 20 days selling
$315.36 net profit for 1 month
He sold 2,160 Blow Pops in one month, costing him $224.64. Wait a minute!?? How did he get the cash to buy all of those Blow Pops?? He turned his profit into cash flow that allowed him to buy more Blow Pops!
Will he make his goal of $1000 in two months? NO!
What can he do?
- Sell more Blow Pops (hire a sales force, work during passing period and lunch etc.)
- Change prices
- Choose another product that will have a larger profit margin (or add another product)
- Find another merchant to purchase his Blow Pops that will be cheaper
Career Highlight
Marketing Research Program of Study
Marketing research is the study of consumers behavior.
Students who study marketing research learn to gather information that helps businesses make decisions about what products to sell. Students learn to understand what makes consumers buy products or services.
Marketing research programs include courses on:
- Survey research methods
- Market testing
- Consumer needs and preferences
- Psychology
- Statistics
- Research methods
Financial Analyst - Career
A financial analyst analyzes money. They determine if someone is a good credit risk for a bank, or if a certain stock should be bought, sold or held onto. Financial Analyst is a general career that could go in many directions. Major company financial decisions can weigh on your say.
Qualifications
- Bachelor's degree in a related field (finance, economics, business or even computer engineering)
- Master's degree
The more you know about the industry you are analyzing the better!
Review
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