Role / Decision / Goals & Constraints Cost Behaviour
Business Size-Up Unit Contribution = Selling price – Variable cost per unit
Environment analysis (Politic, Economic, Social, Technology) Contribution margin rate = UC / Selling price
Competitors analysis Breakeven units = Fixed cost / UC
Consumer analysis (6W) Breakeven sales = Fixed cost / CMR
Breakeven as a % of market = Breakeven sales / Total market sales
Corporate capabilities(HR, projection, objectives, financing, experience)
Financial Size-Up For target profit breakeven, add target profit to breakeven sales
Statement of cash flows (operating, financing, investing)
Return on Investment = Recurring annual return / Initial investment (%)
Future Opportunities Payback = Initial investment / Recurring annual return (# of years)
o Differential analysis
o Contribution analysis Cash Budgeting
o Breakeven analysis 1. Identify nature and timing of all cash inflows, including
Inflows from financing (one-time basis)
o Cash budgeting (inflow, outflow)
o Sensitivity analysis Investment income collection (sporadic)
Decision (PARAGRAPH FORM) Collection from sales (recurring), using sales forecast and schedules.
2. Identify nature and timing of cash outflows
Product / Price / Promotion / Placement
Evaluate effectiveness of strategy Cash operating expenditure
Projected statement Capital expenditure
o Income statement
o Balance sheet (if major changes in assets) Equity reduction
Action plan and contingency plan 3. Subtract outflows from inflows to calculate net cash flow for period
4. Add net cash flow of current period to ending balance of previous period to calculate
When does it make sense to… Example Solutions new ending balance.
Cost behaviour analysis New product launch Non-cash items such as amortization are ignored.
Contribution analysis Pricing decision 5. Consider asking:
Breakeven analysis Assess performance of existing What is the maximum cash requirement? Can we get it?
Cost-price analysis department, product line, etc. If net cash flow is -, what is the cause and can anything be done?
New product / service launch Which variables have the biggest impact on cash flow?
New market expansion
Marketing analysis Existing product service evaluation
Asses fit within industry Projected Income Statement
Develop a new promotional plan 1. Estimate sales forecast
Cash budget analysis Experiencing cash flow problems
2. Estimate expense levels using vertical analysis, management policy, or past I/S.
Cash management issues 3. Apply tax rates if applicable.
New financing is required
Statement of Cash flow analysis Understanding current financial position
Revenue (including d/ inflow) = total revenue
of the company – COGS = gross profit
Anytime an SCF is analyzed –operating expense – d/expense + expense reallocation = total operating profit
Ratio analysis Understand the past
– non differential – d/ interest – d/amortization = net earning before tax
Differential analysis Assess future opportunity Projected Balance Sheet
1. Enter items not expected to change from the last balance sheet.
Assess future opportunity
Projected statement analysis Assess the strategy effectiveness 2. Enter owner’s equity (R/E last year + project net income + planned additional
Determine financing required investment – any dividends / drawings)
3. Use liquidity analysis to and management policy to determine expected level of A/R,
A/P, and inventory.
Projected A/R = Projected credit sales x # days / 360
Projected A/P = Projected purchases x # days / 360
Projected inventory = Projected COGS x #days / 360
4. Include planned fixed asset acquisition and amortization.
5. Include planned debt financing.
6. Estimate accounts not filled using historical data.
7. Plug for cash or bank loan by subtotalling liabilities and equity Profitability / Vertical Statement of Cash Flows
Operations: How much cash was generated from regular operations?
Net income + dep –A/R – prepaid –inventory + A/P – Accrued liabilities