Financial Yield Calculator

Financial Yield Calculator This calculator works out the Financial Yield of your business. Financial Yield is the rate of return that you earn on the assets invested in your business. It is expressed as a percentage. Cashflow and profit remain important financial measures, but Financial Yield, of which profit is a component, is a better indicator of the long term sustainability of your business. This comparative tool, * calculates the financial yield from your firm, * benchmarks your yield against others in your sector * allows you to develop and test future options/scenarios, and * offers advice about how to improve your financial yields The New Zealand Tourism Strategy identifies pathways to high-yielding sustainable businesses. A final section of this tool enables you to assess the yield and sustainability of your business from different perspective, and suggests some ways you might improve yield. The calculator allows you to enter data for one or up to five years at a time. You can use the calculator at any time to enter new data and save it so that you can see how your performance has changed each year. It also allows you to compare your own results with your sector and tourism as a whole. To ensure accurate calculation and comparisons refer to your Annual Accounts for the data requested. This benchmarking tool is a product of the Yield Research Programme funded by the Ministry of Tourism and the Tourism Industry Association, and undertaken by Lincoln University. How to use this calculator Introduction There are four main sections of this calculator. You will start by inputting figures from your recent accounts. Yo firm’s financial yield will be automatically calculated. On the next page (Compare) your yields will be graphed s can benchmark yourself against other businesses in your sector. You can then go to a page which offers ideas a how to increase your financial yield, or you can go to the “Business Sustainability” page, which encourages you think about whether your current business structure is truly sustainable from your perspective. Step 1. Step 2. Step 3. Fill in your business name and click on the drop down menu to select the business sector which best describes your business. Fill in the first year for which you are entering data and then click on the drop down menu to select th number of years for which you wish to enter data. Take information from your Statement of Financial Performance (P & L) and from your Statement of Financial Position and enter it into the input worksheet. You may enter data from up to five separate Total expenses include all operating and overhead costs involved in running the business. Expenses includes leases, depreciation, interest and salary for working owners if this is shown separately in you account. Assets refers to total assets of the business as shown in the Statement of Financial Position. Owner E sometimes termed "Net Assets" will generally be shown in the last line of the liabilities. Step 4. Enter separately the total expenditure on interest. This has already been included in expenses, but ne also to be shown separately here. Also enter the value of owners wages and salaries if these are iden separately in your expenses. Your Financial Yield will be calculated automatically. Step 5. Click on "Compare Your Financial Yield". Your financial yield for the year(s) you have entered data for automatically calculated and placed on a graph which shows the financial yields from 1999-2000 to 2 for all other New Zealand companies in your sector. You can see how you compare. Look on the left axis of the graph and you will see how you compare. For example, if the dot represen your company is on the 20% line, then 20% of all companies in your sector had a worse yield than yo and 80% had a better yield. Step 6. For Small Business Owners who want to think about the Sustainability of your Business, click on the "Sustainability for SMEs" button found on the Financial Yield comparison page. is calculator by inputting figures from your recent accounts. Your next page (Compare) your yields will be graphed so you tor. You can then go to a page which offers ideas about usiness Sustainability” page, which encourages you to sustainable from your perspective. wn menu to select the business sector which best and then click on the drop down menu to select the Performance (P & L) and from your Statement of heet. You may enter data from up to five separate years. costs involved in running the business. Expenses or working owners if this is shown separately in your wn in the Statement of Financial Position. Owner Equity, hown in the last line of the liabilities. This has already been included in expenses, but needs alue of owners wages and salaries if these are identified ill be calculated automatically. cial yield for the year(s) you have entered data for will be ich shows the financial yields from 1999-2000 to 2002-03 . You can see how you compare. how you compare. For example, if the dot representing companies in your sector had a worse yield than you did, ut the Sustainability of your Business, click on the ncial Yield comparison page. Business Name: Sector: Financial Year: Number of years: Two years All Tourism Sectors (Enter your business name here) (Select) (Enter the first year of the data you are comparing. It does not matter what month your financial year ends) Year 1 From your Statement of Financial Performance (P&L) Year 2 Total Sales Total Expenses (including Leases, Depreciation and Interest) How much of this was interest? How much of this was owners wages or salaries? From your Statement of Financial Position Total Assets Total Liabilities Owners Equity YIELD Financial Yield Comparison with All Tourism Sectors 100% Percentage of businesses achieving this yield or less 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -28% -24% -20% -16% -12% -8% -4% 0% 4% 8% Financial Yield Percentages 12% 16% 20% 24% 28% Comparable sector data is only available for the percentage range -28% to +28% Legend: Your Business: Cumulative Yield: All Tourism Sectors For you to stay in business in the short term, you must be able to pay all your costs. To stay in business in the long term you must make enough money to replace worn out or out-of-date assets. However, simply making a profit does not imply that your business is truly sustainable. To be sustainable, you must generate a profit which is sufficient to pay you an acceptable income for the time you put into the business, and give you an acceptable return on investment the money you have put into the business. Each business is different and your financial results may be affected by factors which are very particular to your business and personal goals. This may mean your most recent result is best compared with your own previous results and less comparable with others in your sector. None-the-less the graphing of your result against your sector will give you some idea of where you are positioned against other similar businesses. Revenue, expenses and assets are key components of Financial Yield. For ideas on how to improve your Financial Yield, click on the buttons below. * * * * Other business support websites: * The New Zealand government business website * Request the Tourism in Action CD (TIA members only) * The Small Business Company * Yellow Pages Group * New Zealand Trade & Enterprise * The National Bank of New Zealand * ANZ * BNZ * Westpac Review your pricing strategy Decisions you make around pricing will affect future demand for your product and therefore reviewing your prices is an important task worthy of very careful consideration. Identify your pricing objectives: We give some examples below, and others exist. The important thing is to be clear what your objective is. * Increasing the volume of sales * Maximising your profit * Maximising your return on investment * Retaining or increasing market share Three main factors influence pricing decisions: * Your cost structure * The prices of your competitors * The price your visitors are 'willing to pay' Common pricing methods:# * Cost plus: This calculates the price by calculating the variable costs incurred and adding a percentage for profit and fixed costs. * Market penetration pricing: Setting prices at a lower level than your competitors in order to increase your market share. * Flexible pricing: This takes into account market demand and suggests changes in prices according to the season, place, product or volume of sales. * Skimming pricing: Setting a particularly high price to indicate a highly differentiated product. * Matching your competitors Have you * * * * * * * asked yourself these questions? Will your cost structure give you the profits that you seek? Are you aware of the impacts of discounting? Did you know that discounting may not increase your profit? What are your competitors' products priced at? Consider your quality and benefits compared with your competitors. How are you perceived by your visitors? How do you want to be perceived? Have you set up a schedule for regularly reviewing your prices? Have you considered all of the different aspects of your business that will be affected by a price change. # Source: Witt, S.F. & Moutinho. Tourism Marketing and Management Handbook. ^ Back to top Some ways to improve your Financial Yield Manage your expenses Fixed costs are those that are always present regardless of how much you sell, e.g., rent or salaries. Variable costs are those that rise as your sales increase such as transport and food. * * * * * Review your expenditure against your budget regularly (every quarter). Check your fixed costs are in line with your expectations. Check the relationship between your costs and sales are as expected. If not, why is this? Are there unnecessary, small but regular, expenditures you are making that can be avoided? Is your record keeping sufficiently tight for you to know all your expenses? ^ Back to top Review your assets Current assets are cash and other assets that can easily be converted to cash. Fixed assets are items owned that have a relatively long life such as land, buildings and equipment. * Know how all of your assets are contributing to your business. * Are you holding assets that are not being utilised in the business? If so, look at whether they can be a generator of revenue or they are best sold releasing cash for other purposes. * Would it be advantageous to lease rather than own some of your assets? * Some of the benefits of leasing are: * You don't have to pay the full price of the asset up front * You pay for the asset over a fixed period of time * It is usually tax deductible * Maintenance costs may be covered within the lease * Do you have any unique assets and how are you utilising them for your competitive advantage? * Remember your staff are also assets - are you utilising their skills, knowledge and experience fully? ^ Back to top Increase your revenue Increase prices * Are you covering all your costs? * Do your prices match your competitors? If yes, is this appropriate or do you offer a higher level of service or additional value? * Are your prices appropriate for your position or niche in the market? * Do your prices give you an adequate return on your own time? * When did you last increase your prices? * See the section on "Reviewing your pricing strategies" Increase visitors * Review your marketing strategy - is it reaching your target audience and your most profitable segments? * Review your distribution channels: to identify which are your most effective distribution channels request the handbook 'Paths to the Market: Developing an Effective Tourism Distribution Strategy' by Douglas Pearce. This is freely available from the Victoria Management School, Victoria University, contact: linda.walker@vuw.ac.nz * Can you work with others in your destination in a way that increases visitor numbers for both of you? * Improve your current products, visitor experience, interpretation, and customer services. Broaden the products and services you offer visitors * What additional features will entice your visitors to spend more with you? * Consider adding features and benefits that will entice a new type of visitor * Is there scope to develop new products and services that will generate new income streams for you? ^ Back to top Introduction This section is aimed at small business operators. It is designed to help them better understand what they are getting out of their business. This will give them a better appreciation of whether their business is sustainable in the medium term from their own unique perspective. What makes a business sustainable ? Profits alone will not necessarily make your business sustainable. To be sustainable, your business must generate a sufficient profit to pay you an income and give you a return on your investment which is acceptable to you. If your business currently does not make at least this much profit, then you should review the suggestions in “Some Ways to Improve Your Financial Yield”. What are the real returns to your investment of time and equity Total profits are split between your salary and the return you get on your equity. You might like to consider what salary you could get in the best alternative job available to you. Now think about what annual salary you need to earn in this business to keep working in it, rather than taking that alternative job (take everything into account including your quality of life and the relative pleasure of working in your business instead of being somewhere else). Now enter both numbers into the table. Enter the value of the loans you have personally made to your business, as shown in your balance sheet at the end of each year, and any interest on those loans which was included in your total interest expenses on the data input sheet. Finally, enter the rate of return (% before tax) that you think you should earn on the money you have in this business (take into account risk and the return you might get in alternative investments). Salary required for you to keep doing your current work in the business: Salary you could get in the best alternative job available to you: Required Rate of return for your money invested in this business: 0 Sustainability for SMEs $ $ 0% 0 0 0 0 Loans from you to your business (check on Balance Sheet) How much interest does the business pay on your loans (from the expenses in your annual accounts) We've used the figures from the input page: Total Sales Total expenses (including Leases, Depreciation and Interest) Owners Equity Owners wages or salaries $ $ $ $ - $ $ $ $ - $ $ $ $ - $ $ $ $ - $ $ $ $ - Result 1 This result shows you what real rate of return (you can think of it as the % interest) you are earning on your investment after allowing for the salary you need to keep you working in your business. Is this better than the rate you have nominated? If not, then review the way your are operating this business. Go to “Some Ways to Improve Your business” #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! Result 2 This second result turns the analysis on its head and shows what salary you are really earning, after allowing for a reasonable return on your investment. Is this more than the salary you said you “need to earn” to stay in this business? If not, then review the way your are operating this business. Go to “Some Ways to Improve Your Financial Yield”. $ $ $ $ $ - Why is Financial Yield Important from a Business Sustainability Perspective? In recent years, “yield” has become a central issue in tourism - many operators and agencies are now seeking “high yield” tourism. Financial Yield is the rate of return to the assets invested in a firm. This is an investor-focused calculation which enables businesses of any size to compare their returns within and across tourism sectors and with the returns they might be able to get elsewhere in the economy. Maximising yield is not the same as maximising volume or even of maximising profits, which you might do simply by making your business bigger. However, increasing the size might require more assets, and hence increasing the business size might not increase the returns per dollar of assets. Simple volume-based measures of activity (e.g. visitor count and turnover), convey little information about business sustainability from an investor’s viewpoint. An investor needs to see a sufficient return per dollar invested to continue investing in the operation. There are businesses around which make large profits in dollar terms, but where this still equates to a small return on each dollar invested in the business. Such businesses might be unable to get sufficient investment capital to be sustainable in the long term. How is Financial Yield Calculated? The particular formula we have used to develop the benchmark is: FY = ((Revenue - expenses) x 0.67 + interest + owner salaries and wages)/Assets In this calculation, expenses includes all the costs involved in running a business as shown in your set of accounts. These expenses include all costs of running the business include overheads such as interest, depreciation and in some cases a wage for the owners. The profit (revenue – expenses) is multiplied by 67 % to get the after tax cash available to pay a return to owners equity in the business. Profit is the return paid to equity (the shareholders assets) and interest is the return paid to debt (formal loans to the business made by the bank, and possibly by you). Because we want to calculate the financial yield to total assets, we add together the after tax profit and the interest and divide the result by total asset value. Owners Salary and Wages (OSW) as a return to Assets In the calculations to establish the Financial Yield benchmarks, thousands of sets of business accounts were processed, but there was no opportunity to find out whether the accounts showed a realistic value for owners’ labour. For that reason the Statistics New Zealand precedent of treating OSW as a return to capital was followed. It is essential that the same process be used with your accounts when you are compared to other companies in the “Compare Your Financial Yield” part of this Calculator. It may seem surprising that owners’ wages and salaries are also added back to after tax profits and interest to get the total return to capital. In principle, the owners wages represent a return to labour and not a return to capital. However, it is well known that accounts of small businesses show a figure for owners’ wages and salaries which are tax-effective, rather than figures which truly represent the cost to the company. They may show a salary for someone who actually spent no time in the business, or they may considerably understate the true value of time spent in the business. Owners income is treated as a return to assets. For this reason, if you increase the “Value of Owners Salary and Wages” in the input sheet, and do not change Total expenses (which include OSW), then the implication for the calculation is that all costs other than OSW have decreased. This implies that the return to Assets (the Financial Yield) has increased. How To Treat OSW in calculating Sustainable Yield for Small Businesses In calculating whether a small business is sustainable, it is important to correctly account for the true value of the owner’s labour in the business. Even if a business earns a high Financial Yield on the capital invested, the business is not sustainable if the owner stops working because the wage being paid is too low. In the Sustainable Small Business section of the Calculator, the true costs of owners’ labour are deducted from the reported profits when the true returns to the owners’ investment are calculated. ctive? ng “high yield” ulation which ns they might be imply by making siness size might business continue investing quates to a small capital to be ounts. These me cases a wage owners equity in the (formal loans to the assets, we add processed, but hat reason the same process be part of this to get the total wever, it is well e, rather than ent no time in the and Wages” in the is that all costs of the owner’s not sustainable if om the reported