COMM 103 Chapter Notes - Chapter 13: Interest Expense, Angel Investor, Trade Credit
PART THREE: MANAGING THE VALUE CHAIN
COMM 103
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(CHAPTER THIRTEEN) UNDERSTANDING BUSINESS FINANCES
TEXTBOOK SUMMATIVE
The chapter covers the following concepts:
●The Fundamentals of Financial Analysis
●The Revenue model
●Cost Structure and Cost Drivers
○Variable vs. Fixed Costs
○Breakeven Point Analysis
●Margin Requirements
●Cash Operating Cycle
●Capitalization requirements
○Sources of Funds
●Putting it All Together
●A Note Pertaining to NFPS
●Management Reflection - The Need for Capital
●Appendix - Advanced Topics Relation to BEP, Pricing, and The revenue Model Management
THE FUNDAMENTALS OF FINANCIAL ANALYSIS
The ability to analyze and draw conclusions regarding the financial integrity of an organization is
fundamental for a CFO to understand the organization’s current situation (revenue generation, sales
trends, etc) and the strategic and tactical planning decisions going forward. CFO’s draw conclusions
through FIVE KEY AREAS
1. Revenue Model
2. Cost Structure and Cost Drivers
3. Margin Requirements
4. Cash Operating Cycle (COC)
5. Capitalization Requirements (ROIC)
CFOS review these financial statements to determine how well the company is doing against its
objectives.
THE REVENUE MODEL
Dollars generated by the company can be calculated through the following formula:
Per Unit Selling Price x Quantity Sold = Sales Revenue
The revenue model analysis also allows us to ask questions, like:
●Which products within our portfolio are seeing increases in revenue? Likewise, which
products are seeing decreases?
PART THREE: MANAGING THE VALUE CHAIN
COMM 103
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●How much of our revenue is reliant on a single product?
○If there is only ONE product, than a company is 100% reliant on the success of that
product
○If there are MULTIPLE products, then work must be done to deduce the percentage
of revenue that arises from each product.
●Are sales predominantly driven as a result of selling to new customers, or existing
customers? What are the sales contribution of each?
●If we are relying on repeat sales for a product, what is the frequency of purchase for our
producer? Is it daily, weekly, annually, every three years, or so on?
●Are we dependant upon a small percentage of our customers for most of our sale? If so, who
are they and are sales from these customers increasing or decreasing?
●Is the selling price of our product being pushed down due to increasing competition? Are we
able to manage selling price reductions through contracts and/or other mechanisms;
thereby protecting further selling price declines?
●What about average revenue per customer transaction? Are we able to increase this by
bundling, packaging, or regrouping the way that we offer products and services?
Such questions can continue to grow depending on the nature of products one sells.
COST STRUCTURE AND COST DRIVERS
At its basic form an organization’s cost base is made up of total costs associated with delivering the
organization’s products or services to the market place.. These can include:
●The procurement of parts/resources
●Manufacturing costs
●Distribution costs
●Marketing and sales costs
●Administration costs
●Post-purchase service and support costs
TOTAL COST BASE FORMULA
Direct or Variable Costs + Indirect or Fixed Costs = Total Cost Base
In analysing the composition of an organization’s cost base, one can identify two fundamental
conclusions:
●The percentage of costs that are considered direct or variable costs vs those that are
considered indirect or fixed.
●The cost areas (if any) that make up a significant percentage of the overall cost base
VARIABLE COSTS (or “direct costs”) are costs that are directly tied to the manufacturing of a product
or the delivery of a service depending on the type of business being assessed. These will include:
●Cost of components or resources needed for product/service
●Cost of labour
●Cost of packaging and distribution
PART THREE: MANAGING THE VALUE CHAIN
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INDIRECT COSTS are those costs that, although not directly tied to the manufacturing or distribution
of a specific product, nonetheless exist as a result of conducting/operating one’s business. These
include:
●Insurance
●Utilities
●Interest expense on debt
●Administration costs
***It is important to note that fixed costs represent an expense that is uncontrollable in the near term;
meaning that managers have little ability to change its amount.
COMMITTED COSTS are another type of indirect cost that a company commits itself to within an
operating year, and are often spend in advance or at the front end of a manufacturing/sales cycle.
Examples of this would include:
●Marketing costs and advertising expenditures
●Software technology updates
●R&D costs
COST LADDER
TOTAL COST-BASE COMPOSITION
Document Summary
Management reflection - the need for capital. Appendix - advanced topics relation to bep, pricing, and the revenue model management. The ability to analyze and draw conclusions regarding the financial integrity of an organization is fundamental for a cfo to understand the organization"s current situation (revenue generation, sales trends, etc) and the strategic and tactical planning decisions going forward. Cfo"s draw conclusions through five key areas: revenue model, cost structure and cost drivers, margin requirements, cash operating cycle (coc, capitalization requirements (roic) Cfos review these financial statements to determine how well the company is doing against its objectives. Dollars generated by the company can be calculated through the following formula: Per unit selling price x quantity sold = sales revenue. The revenue model analysis also allows us to ask questions, like: If there is only one product, than a company is 100% reliant on the success of that product.