e better prepared to respond to changing conditions. For example, if our base case scenario projects steadily declining profits over the next five years due to rising costs, we might consider several potential responses. One option could be to increase our fares. We might model the impact of raising our base fare by $0.25 and our per-mile rate by $0.10. This could help offset rising costs, but we'd need to carefully consider how it might affect our competitiveness and demand for our services. Another strategy could be to extend the life of our vehicles. If we currently replace our taxis every three years, we might consider keeping them for four years instead. This would reduce our depreciation expense, but it might also increase our maintenance costs. We'd need to model both effects to understand the net impact on our bottom line. We might also look at ways to reduce our fixed costs. This could involve moves like relocating to a smaller office or renegotiating our insurance contracts. Each of these options would have pros and cons that we'd need to carefully evaluate. By modeling these different options, we can make an informed decision about the best path forward. We might find, for instance, that a combination of a small fare increase and extended vehicle life allows us to maintain profitability without significantly impacting our competitive position. It's important to remember that financial forecasting and decision-making is not a one-time event, but an ongoing process. As time passes, we need to continually compare our actual results to our forecast, understand the reasons for any variances, and adjust our projections and strategies accordingly. For example, if we find that fuel costs are rising faster than anticipated, we might need to accelerate our plans for fare increases or look into more fuel-efficient vehicles. On the other hand, if we're seeing higher demand than expected, we might consider expanding our fleet sooner than originally planned.This process of continuous review and adjustment allows us to stay agile and responsive to changing market conditions, helping ensure the long-term success of our business. It's a key part of what separates successful businesses from those that struggle to adapt to changing circumstances. As we apply these concepts, it's crucial to keep in mind a key principle of financial strategy: the importance of achieving profitability before pursuing aggressive growth. As Clayton Christensen notes in his work, "The Innovator's Solution: Creating and Sustaining Successful Growth," businesses that rush to grow before establishing a profitable business model often find themselves in trouble. They may achieve impressive revenue growth, but if they haven't learned how to generate consistent profits, they can find themselves losing money at an alarming rate as they scale up. Instead, Christensen advocates for what he calls "good money" - capital that is patient for growth but impatient for profits. This approach focuses on establishing a sound, profitable business model before pursuing rapid expansion. By doing so, businesses can ensure that as they grow, they're replicating a model that generates value rather than one that consumes it. In the context of our taxi service, this might mean focusing on optimizing our operations and achieving consistent profitability in our current market before considering expansion to new cities or significant fleet expansions. It might also mean being willing to forgo some growth opportunities if they would compromise our ability to operate profitably. As we conclude this chapter, it's worth emphasizing that understanding and effectively using cost drivers is a powerful tool for financial forecasting and decision-making. By identifying the factors that drive your costs and revenues, you can create more accurate projections, anticipate potential challenges, and make informed decisions to guide your business toward financial success. Remember, the goal of this process is not to predict the future with perfect accuracy - that's impossible in the dynamic world of business. Instead, the aim is to understand the range of possible outcomes, be prepared for different scenarios, and make decisions that position your business for success across a range of potential futures. As you apply these concepts to your own business, keep in mind that every industry and company is unique. The specific cost drivers and strategic options will vary based on your particular circumstances. The key is to apply the principles we've discussed - identifying cost drivers, creating detailed forecasts, conducting scenario analysis, and continuously reviewing and adjusting your plans - in a way that's tailored to your business's needs. By mastering these skills, you'll be well-equipped to navigate the financial challenges and opportunities that lie ahead, helping to ensure the long-term success and sustainability of your business. Conclusion Cost drivers help you predict the future of what might happen in a business based on known information. You too can choose your future, as you follow modern-day prophet Russell M. Nelson's (2023) counsel to think celestial. He taught, "An understanding of God's fabulous plan takes the mystery out of life and the uncertainty out of our future. It allows each of us to choose how we will live here on earth and where we will live forever." In this section of the chapter, you will learn how to predict the future by using cost drivers and controls to understand your business's future. You'll also outline the steps you need to take to achieve acceptable results. an example of a financial statement Figure 1 First, you need to create a forecast for the coming years. It isn't as simple as copying and pasting this year's numbers because those figures are unlikely to remain the same.To make sure the forecast is accurate, you need to understand the drivers of each cost, and determine how they are going to change over time. What we will do with this example, we will put in change % column the amounts will change annually based on the drivers and controls. This amount will be our best estimation. the change % column Figure 2 From a revenue perspective, the fares are unlikely to change much because they depend on the competition. The number of taxis will probably stay the same as well since you can't afford another one right now. For the change percentage, set it all to 0%. calculating direct materials per mile Figure 3 From a variable cost perspective, you have oil, tires, fuel, and maintenance. The costs of these will be greatly influenced by inflation. Oil is very volatile these days, so put 4% in the "Change" column. Since tires and fuel are oil-based, they will likely change by the same amount, so put 4% for them as well. Maintenance and repairs are not going to be as volatile, so you can assume it will not change as much; set it to 3.5%. In real life, you wouldn't come up with these numbers randomly. You would check the current state of inflation and what the future looks like. You should also consider the macroeconomic factors at play. Ultimately, based on your findings, you would then decide if you need to change your sources or contracts. All these considerations will influence the numbers you input in the "Change" column. driver wages and benefits Figure 4 You can't expect to pay your employees the same amount every year because as inflation increases, their expenses will also rise. To retain your employees and keep them motivated, it's important to adjust their wages accordingly. For this example, let's say you plan to increase their wages by 3% each year. When it comes to driver benefits, you've decided to allocate 22% of their wages for this purpose, as reflected in the equation for cell C25. This percentage could cover various benefits, such as health insurance, retirement plans, paid time off, and bonuses. Offering a robust benefits package can enhance employee satisfaction and loyalty. Unless you decide to revise your benefits structure, you won't need to input any changes in the "Change" column for this aspect. However, it's a good practice to regularly review and potentially update your benefits based on employee feedback and industry standards to ensure they remain competitive. calculating admin payroll taxes and benefits Figure 5 Workers' compensation will be set by the government. In future years, you can assume that the government may need more funding, so they could charge everyone 4% more. For manager and dispatcher salaries, you can assume that they will increase at the same rate as driver salaries, which is 3%. However, it's important to regularly verify these assumptions to ensure they align with market conditions and company performance. costs per taxi Figure 6 With taxi licensing, insurance, and registration, the costs will be similar to workers' compensation. You can expect that the government will likely charge the same rates to ensure they can provide better services. more costs per taxi Figure 7 For vehicle cleaning and insurance, you should set the change at 3% due to inflation. other costs Figure 8 The remaining costs in admin other may be more influenced by inflation, so you should predict that they will change by 3.5%. communications costs Figure 9 Move down to the communications section to your dispatch software. You will most likely have a five-year contract for that, so it won't change at all. The communication and GPS/Tracking systems will probably change by 4% due to inflation. The cell phone service will likely only change by 2% because the market is extremely competitive. marketing/ advertising Figure 10 Skip over depreciation for now. For marketing and advertising, you can assume that your competition will grow over the years, so you will want to expand your marketing efforts. Estimate that this will change by 7%. You have a contract for office rent, so it will only change by 2%. Utilities will change by around 3%. So, we are going to insert some columns to project the detailed costs from year to year. Our formula for each one of these years will grow the amount from the previous year by the estimated percentage change assumption. These formulas take the amount from last year and multiply it by 1 plus the predicted growth rate. In other words, next year will be the amount you had last year, plus the growth you've forecasted. oil costs Figure 11 If you change the growth rate for oil or any other expense, you can see how that would impact your predictions for future years. Now that you have forecasted the details of what will happen in your business, you can look line by line to identify what is driving those costs and what the resulting impact will be. One other thing to do is to make sure that the details tie or referenced to the summary financials. So, any changes in details will automatically update the summary financials. total variable cost direct labor, direct material, total variable cost Figure 12 You can see that the revenue remains the same over the next five years, but you can start to observe the impact of inflation in the variable costs below. Looking at the amount you charge for fares, you can increase the fare by $0.50 for the first mile and $0.25 for each additional mile in 2024. You won't know what your competition will be doing with their prices at that time, so you might consider temporarily dropping fares since your rates will be higher. Eventually, you hope the market will stabilize, but for now, adjust your prediction to 40 fares a day for 2024. Revenue Figure 13 Even with the drop in fares per day, you can see that your revenue still increased for that year. Let's see how this affected the numbers in your income statement. Let's look at the "Taxi IS Summary" again. Taxi IS Summary Figure 14 When you look at your net profit over the years, you can see a decline that significantly increases in the last two years compared to the previous numbers, but only if you raise your fares by $0.50 and $0.25. What if that doesn't happen? Let's run those numbers. an additional fare of $1.75 Figure 15 What if each fare can only go up by a quarter? This would make your initial fare $3.25 and your additional fare $1.75. Net profit 54702 Figure 16 Back in the "Taxi IS Summary," you can see that revenue still increases, though not as much as before, but your business will be okay. Now that you've increased revenue, look for costs you can control. Open the "Details and Drivers" sheet. the equation: =+D49*(1+$I49)*.5 Figure 17 In the admin other section, you have costs for a security contract. In the future, you might consider talking to other taxi companies about storing your taxis at the same location to save money. This could potentially cut your costs in half, so instead of multiplying by 1 in 2023, you would multiply by 0.5. net profit Figure 18 Going back to the "Taxi IS Summary" sheet, you can see that changing that amount brought your revenue back up to where it would be if you had increased your fares by $0.50. drivers/controls Figure 19 Understanding the drivers and controls is crucial for the future success of your business. The drivers help you predict the environment your business will face, while the controls are the variables you can adjust to achieve the best outcomes. Many businesses develop a best-case scenario, a worst-case scenario, and a normal forecast when creating their financial plans. In your case, the worst scenario could involve not being able to increase your fares. If that happens, you will need to reduce costs significantly to stay afloat, such as renting a smaller office or cutting back on electricity usage. The advantage of a forecast is that it allows you to identify potential problems before they arise, so you can prepare accordingly. This highlights the value of understanding drivers and controls; you can approach problems with clear ideas for changing outcomes. You've also learned how the duration for which you keep your fixed assets impacts your spending on them. Remember to categorize your expenses effectively to avoid cluttering your income statement. This will help you analyze each aspect of your business and understand how costs flow together. It's crucial to recognize how costs change from year to year and what influences those changes. Identify the controls you can implement to manage expenses and revenue effectively. As you create a forecast for your business, make sure to outline both a worst-case scenario and a best-case scenario. The worst-case scenario will help you determine how deeply you need to cut or what changes are necessary to ensure success. June Operating Expense July Operating Operating Expenses (use exactly these numbers) Indirect labor: $1,250 Template you can use to update your COGS with no Dishwasher Labor Costs May Opex Item Price COGS Mat COGS Lab Total COGS GM$ GM% Payroll tax: $156 Chicken Soup $5.49 Indirect labor: $1,250 Spicy Sausage Soup $5.99 Benefits: $100 Beef & Bean Soup $6.99 Payroll tax: $156 Italian Bread $1.27 Rent: $1,100 Soft Drinks $1.82 Benefits: $100 Electricity: $239 Rent: $1,100 Gas: $60 Electricity: $228 Insurance: $425 Balance Sheet Information that you don't have for the first 6 months. Gas: $74 Balance Sheet Information Jan-25 Feb-25 Mar-25 Apr-25 May-25 Jun-25 Ads & Signage: $325 Cash $7,245 $8,555 $8,407 $8,007 $3,339 $3,567 Insurance: $425 Accounts Receivable $31 $81 $61 $71 $101 $114 Web page: $75 Inventory $168 $133 $103 $114 $148 $106 Ads & Signage: $300 Accounts Payable $191 $155 $119 $124 $149 $147 Accountant: $250 Taxes Payable (just equal to Tax Expense) $(296) $258 $16 $(99) $(183) $(31) Web page: $75 Long Term Debt (Loan Balance) $7,805 $7,608 $7,410 $7,211 $7,010 $6,808 Payroll service: $75 Total Liabilities $7,699 $8,022 $7,546 $7,236 $6,976 $6,923 Accountant: $250 Stock $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 Internet: $125 Depreciation: +117.38 Payroll service: $75 Internet: $125 Information you may use to start your cash flow statement for January. You will need to calculate the missing cells for January and all parts of the cash flow for future months. This information could also be derived knowing that Maria just started her business in Jan. Depreciation: Prior monthly depreciation + $117.36 Cash Flow Statement Jan-25 Comments Net Income Depreciation Accounts Receivable $(31) The are the initial movements in these accounts for the first month, since they started at zero when the business began Inventory $(168) The are the initial movements in these accounts for the first month, since they started at zero when the business began Accounts Payable $191 The are the initial movements in these accounts for the first month, since they started at zero when the business began Taxes Payable $(296) The are the initial movements in these accounts for the first month, since they started at zero when the business began Cash Flow From Operations Plant Improvements $(9,595) All the initial fixed assets were purchased when she started the business. Free Cash Flow Dividends Stock $10,000 Started the business with $5,000 of her own money plus $5,000 of her aunts. Change in Long Term Debt $7,805 Got a loan from the bank for $8,000, payment each month is $253.47. The loan is being reduced by this amount each month minus the portion going to interest (check you income statement) Cash From Financing Change In Cash Closing Cash $7,245 Same as January's ending cash balance These are the ratios to calculate for each month Ratios Days Sales Outstanding (DSO) Days Inventory Outstanding (DIO) Days Payable Outstanding (DPO) Inventory Turnover Working Capital Working Capital Days Current Ratio Leverage Debt/Equity Contribution Margin ROS ROA ROE Information that you can use for your Financing tab Jan-25 Feb-25 Mar-25 Apr-25 May-25 Jun-25 Jul-25 Aug-25 Sep-25 Oct-25 Nov-25 Dec-25 Jan-26 Feb-26 Mar-26 Apr-26 May-26 Jun-26 Jul-26 Aug-26 Sep-26 Oct-26 Nov-26 Dec-26 Payment # 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Principle Paid $195.13 $196.56 $197.99 $199.43 $200.89 $202.35 $203.83 $205.32 $206.81 $208.32 $209.84 $211.37 $212.91 $214.46 $216.03 $217.60 $219.19 $220.79 $222.40 $224.02 $225.65 $227.30 $228.95 $230.62 Interest Paid $58.33 $56.91 $55.48 $54.03 $52.58 $51.11 $49.64 $48.15 $46.66 $45.15 $43.63 $42.10 $40.56 $39.00 $37.44 $35.87 $34.28 $32.68 $31.07 $29.45 $27.82 $26.17 $24.51 $22.84 Total PMT $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 $253.47 Payroll tax $156.00 $156.00 $156.00 $156.00 $156.00 $156.00 $156.00 $156.00 $156.00 . Base on the information above, using it with this spreadsheet to complete the calculations and analyses for July through December of this story below: By mid-July, operating day will be 15.5 days and daily volume of July as growth by 5% compare to june were daily volume was Item Daily Volume Price Chicken Soup 24.4 $ 5.49 Spicy Sausage Soup 11.1 $ 5.99 Beef & Bean Soup 7.0 $ 6.99 Italian Bread 31.9 $ 1.27 Soft Drinks 19.9 $ 1.82 and the Interest Expense = $51.11 Tax Rate is still 25.0% was about $ 51.11 and tax rate 25% Maria had found herself reflecting on how far her business had come. With steady sales growth, improved operations, and a strong sense of community support, she could finally envision a brighter future for Maria's Soup Shack. While there was still plenty of work to do, Maria felt confident enough to start planning for two priorities close to her heart: rewarding her hardworking employees and honoring a financial promise to her aunt. Rewarding the Team Maria knew she wouldn't have made it through the restaurant's challenging first months without her team's dedication. Marco's innovative marketing ideas, the cook's consistent quality, and the server's friendly and attentive service had all contributed to the restaurant's growing success. "If the numbers keep looking good," Maria thought, "I want to give back to the people who've stuck with me through this journey." She began sketching out a plan to offer her employees a year-end bonus as a token of appreciation. Maria calculated that if business remained steady or improved, she could set aside $1,200 for bonusesenough to give each team member a meaningful gift while keeping her cash flow intact. It would also cost a bit more for payroll taxes in December (12.5% on the $1,200), but she really wanted to reward the team for a job well done! To achieve this goal, Maria decided to monitor her monthly financial statements even more closely. She also created a forecast of her financial statements through the end of the year in order to make sure there were no surprises. Honoring Her Aunt's Investment Maria's aunt had been a key figure in helping the Soup Shack get off the ground. When Maria needed a bit more funding to cover startup costs, her aunt had stepped in with a $5,000 investment, asking only that Maria pay her back when the business could afford itplus a $1,000 return as a gesture of gratitude. Maria wanted to fulfill this promise by the end of the year. She recognized that while her cash flow was improving, she needed to approach the buyout strategically to ensure it wouldn't strain the restaurant's finances. To make this happen, Maria forecasted her cash flow statement through the end of the year, including a reduction of Stock by $5,000 to give her aunt back her investment plus a dividend of $1000 to give her aunt a well earned return on her money (20%) for taking a risk on her. Balancing Cash Flow Maria knew that both the bonus fund and her aunt's buyout would require careful planning. She sat down with Marco and the accountant to create a cash flow projection for the rest of the year. They considered factors like: Growth Opportunities: With Marco's ongoing efforts, Maria hoped to see continued growth in foot traffic and customer loyalty, further boosting revenue. She though that volumes were starting to solidify, and with Marco's help, she thought she would be able to grow her sales by 5% each month through the end of the year. This was certainly doable with Marco's help and marketing ingenuity. Operating Costs: Marco's salary, the cost of the web page, and Administrative costs would remain consistent. She also figured that it would be reasonable to estimate that electricity would be the same as June through the rest of the year, but gas costs could double starting November when the weather turned colder. Costs for ads and signage would also settle down to around $125/month. The planned bonus would be $1,200 in December with an extra $150 for the payroll taxes on the bonus. Forecast Assumptions for Revenue July - December Revenue Information Item Daily Volume Price Chicken Soup Grow each month by 5.0% $ 5.49 No change in price Spicy Sausage Soup Grow each month by 5.0% $ 5.99 No change in price Beef & Bean Soup Grow each month by 5.0% $ 6.99 No change in price Italian Bread Grow each month by 5.0% $ 1.27 No change in price Soft Drinks Grow each month by 5.0% $ 1.82 No change in price Forecast Assumptions for COGS Will stay at new levels that have no dishwasher labor costs. Forecast Assumptions for Operating Costs July - Dec Forecast - Operating Expenses Indirect Labor $ 1,250 No change to Marco's salary, but added $1,200 for bonus in December Payroll Tax (12.5%) $ 156 Payroll taxes on Marco's salary but with $150 extra in December for the bonus Benefits $ 100 Maria agreed to pay $100/month towards Marco's health insurance costs Rent - Train Station $ 1,100 No change for this fixed cost Electricity $ 239 Should be fairly flat through the rest of the year Gas $ 60 $60 in the warmer months, but $120 starting November Insurance $ 425 No change for this fixed cost Ads and Signage $ 125 Should be fairly flat through the rest of the year - no other campaigns planned Web Page $ 75 No change for this fixed cost Accountant $ 250 No change for this fixed cost Payroll Service $ 75 No change for this fixed cost Internet $ 125 No change for this fixed cost Forecast Assumptions for Interest Expense (Also in the supplemental spreadsheet) Jul-25 Aug-25 Sep-25 Oct-25 Nov-25 Dec-25 $ 49.64 $ 48.15 $ 46.66 $ 45.15 $ 43.63 $ 42.10 Forecast Assumptions for Balance Sheet : Cash - use Cash to balance the balance sheet Days Sales Outstanding (DSO) 0.6 Days Inventory Outstanding (DIO) 1.6 Days Payable Outstanding (DPO) 2.5 Plant and Equipment section - as per Fixed Assets calculations Taxes Payable = Tax Expense (assumes we pay each month for the prior month) Long Term Debt - reduces by principal amount paid each month Stock - no change till December, when we reduce and pay Maria's aunt back her initial $5,000 investment Dividends - no dividends till December when we pay Maria's aunt $1,000 dividend Staying Focused Maria was determined to balance her financial goals without compromising the quality of her food or the customer experience. She decided against taking on any additional debt or cutting corners, choosing instead to focus on steady, organic growth. As she looked toward the second half of the year, Maria felt a sense of cautious optimism. "If I stick to the plan," she thought, "I can take care of my employees, honor my family, and keep building something truly special." With her priorities clear and her team behind her, Maria felt ready to tackle the challenges and opportunities ahead. For the first time, she wasn't just survivingshe was thriving. Looking at the balance sheet, what is the total Total Assets for November?

Choix de groupe de rponses

Between $17,940 and $17,990

Between $18,095 and $18,145

Between $18,250 and $18,300

Between $17,785 and $17,835

Looking at the cash flow statement, what is the total Dividends for December? (to the nearest dollar) Looking at the cash flow statement, what is the total Depreciation for December? (to the nearest dollar) Looking at the cash flow statement, what is the total Cash Flow From Operations for September? (to the nearest dollar) Looking at the cash flow statement, what is the total Dividends for September? (to the nearest dollar) Looking at the cash flow statement, what is the total Change In Cash for September? (to the nearest dollar) What is the total ROA for September? (remember September has 30 days)

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Between 41.4% and 41.8%

Between 43.0% and 43.4%

Between 43.8% and 44.2%

Between 42.2% and 42.6%

What is the total Working Capital for September?

Choix de groupe de rponses

Between $6,090 and $6,130

Between $5,820 and $5,860

Between $5,550 and $5,590

Between $5,280 and $5,320

What is the total Debt/Equity for September?

Choix de groupe de rponses

Between 1.1 and 1.3

Between -0.1 and 0.1

Between 0.5 and 0.7

Between 1.7 and 1.9

What is the total ROE for December? (remember December has 31 days)

Choix de groupe de rponses

Between 24.6% and 25.0%

Between 26.2% and 26.6%

Between 27.0% and 27.4%

Between 25.4% and 25.8%

What is the total Working Capital Days for July? (remember July has 31 days)

Choix de groupe de rponses

Between 16.1 and 16.3

Between 17.3 and 17.5

Between 16.7 and 16.9

Between 15.5 and 15.7