Strategic Financial Management is crafted to empower learners with the tools and insights necessary to navigate financial principles within organizational contexts effectively. Through this module, learners will engage with analytical techniques, theories, and models of management accounting, gaining proficiency in evaluating budgetary processes, recommending funding sources, and appraising investment options. This introduction sets the stage for learners to delve into the multifaceted realm of strategic financial management, where they will explore concepts crucial for informed decision-making in business environments.
AIM OF THE MODULE
The aim of this module is to enable learners to apply financial principles relevant to management in an organizational context. By engaging with analytical techniques and theories/models of management accounting, learners will develop the capability to evaluate budgetary processes, recommend funding sources, and appraise investment options, thus enhancing their strategic financial management competencies.
THE OBJECTIVES OF THIS MODULE ARE:
Critically analyze the financial performance of businesses through the evaluation of financial statements.Critically appraise investment options using financial appraisal methods and justify strategic investment decisions based on relevant financial information.Explore the relationship between budgeting, cost control, and organizational performance, including variance analysis and corrective actions.Utilize information and communication technology in financial management, including financial analysis and resource planning.Demonstrate a comprehensive understanding of strategic financial management principles through coursework, meeting specified assessment criteria across learning outcomes.
FRIENDS BREAK EVEN ANALYSIS
Friends: A charitable organization, Friends sponsors group activities and offers adult companionship to troubled youths from single-parent families. The organization screens, trains, motivates, and supervises adult volunteers who are paired with children referred by local agencies or concerned parents. While Friends can complement professional help a child may receive, its primary role is preventive: providing a meaningful adult relationship for children before they become severe parental or societal challenges.
Founded in 1911 in Cincinnati, Ohio, Friends is a nationwide organization with over 200 local agencies across the country. The parent office, Friends Central, is located in New York. Although Friends Central assists in establishing and administering local programs, each agency is responsible for raising its own funding.
The Culver City branch in Forsyth County, Virginia, launched just six months ago and operates with a budget of $60,000 for the current year. While modest by most standards, achieving this budget will be challenging due to the organization’s newness and the nationwide recession impacting Culver City.
Approximately 30 percent of the necessary funds will come from the United Appeal, with the remainder sourced from a government grant, fundraising events, and donations.
The Importance of the Dance: The organization’s final planned event is a dance, aiming to raise $8,000— the projected yearly deficit. Beyond addressing the shortfall, the dance serves other purposes. The Forsyth County United Appeal encourages local agencies to establish their own fundraising events.
There’s even talk that the United Appeal may implement a financing scheme matching every dollar raised.
There are discussions about the United Appeal implementing a financing scheme where it matches every dollar in profit generated by an organization. Friends Central also encourages local agencies to establish their own financial base. Research indicates that agencies heavily reliant on external funding tend to stagnate, partly due to the accompanying restrictions. Nationally, the United Appeal closely oversees organizations it heavily funds, but Friends Central aims to avoid such rigidity by encouraging local units to raise a significant portion of their budget independently. While the Forsyth County United Appeal has previously followed a policy of minimal intervention, it remains uncertain when this philosophy might change. A successful event could elevate Culver City’s Friends organization from an agency-in-formation to a provisional agency, allowing them to serve more children.
Regarding the upcoming dance, tickets will be priced at $50 per couple, and drink sales are expected to net $10 per couple. The event will take place at the Mountain Lodge, which boasts a ballroom seating 300 couples. Bob Lyttle, a lodge manager and Friends board member, has secured a donated ballroom from the owners. Hors d’oeuvres will be provided at a cost of $5.00 per couple, covering labor and miscellaneous expenses totaling $500. The only remaining expense is the band, with the choice between the Flames and the Charms. Both bands play a mix of old-time rock and roll and beach music, but the Flames come at a higher cost of $6,000, while the Charms charge $3,000.
Arguments in Favor of Each Band
Supporters of the Flames contend that this band will boost ticket sales. They emphasize the Flames’ 15 years of experience and their recognition among the 30-45-year age group, which constitutes the target audience for the dance. These proponents advocate for a long-term perspective. They argue that decisions should not be limited to a single year; rather, we must consider their impact on future dances. According to them, the Flames will set the tone for the event and enhance its popularity in the long run. This becomes particularly relevant if the United Appeal implements its matching scheme for funds raised by charities from events like the dance. Additionally, they highlight that selecting the Flames would be a significant achievement for Culver City, resulting in increased publicity for the dance and benefiting the Friends organization. They emphasize that these intangible factors should not be overlooked.
On the other hand, supporters of the Charms acknowledge that the Flames are the superior band. However, they question whether the Flames can generate enough additional sales to offset the increased cost. Both sides agree that approximately 200 tickets will likely be sold even if the Charms are chosen. Nevertheless, there is concern that dance tickets may not sell as well as anticipated. Bill Frady, an accountant, points out that the $50 ticket price might be steep for the town, especially given the economic context. Realistically, they may not be able to sell all 200 tickets. The Flames would increase overhead costs, and the Friends organization cannot afford to incur a loss on this dance. Their top priority is eliminating the deficit, as there is no room for budgetary slack. Any shortfall could impact staff salaries, which would be both unfair and detrimental to the organization’s business. In summary, they emphasize that immediate concerns take precedence, and future dances can be addressed after navigating this year’s challenges.
Supporters of the Charms acknowledge that any additional publicity resulting from using the Flames would benefit the organization known as Friends. However, they remain unconvinced that the Flames would be the best long-term strategy for the organization. Lyttle highlights that two local philanthropists have expressed interest in their agency. He believes that these individuals would provide financial assistance in case of a shortfall. However, he cautions that their future support might be less likely.
Lyttle is confident that if Friends can stand independently this year, these philanthropists will be generous in subsequent years, as they appreciate agencies striving for self-sufficiency. While he agrees with Frady that the Charms approach makes more sense, he questions whether lowering the ticket price to $40 per couple could be a viable option. Speculating, he wonders if the organization could potentially gain more through increased volume despite the reduction in unit price.
After extensive discussion, all parties agree that even if the Charms are used, selling 200 tickets is highly probable, with 150 being the absolute minimum. Additionally, it is estimated that reducing the price to $40 will boost sales by 20 to 40 tickets.
ASSIGNMENT: FOR QUESTIONS 1 TO 4 ASSUME THE PRICE OF A TICKET IS $50.
Break-Even Ticket Sales and Percentage:
Assuming a ticket price of $50, calculate the break-even ticket sales for each band.Express your answer as a percentage of the estimated ticket sales.
Profit Table for Charms and Flames:
If the Charms are selected, develop a table showing the profits for the dance at ticket levels of 150, 200, 250, and 300 (sellout).Repeat the same for the Flames band.
Compensating for Higher Cost:
How many extra tickets must be sold to compensate for the higher cost of the Flames band?
Total Tickets Needed for Fundraising:
If the dance is to raise $8,000, how many tickets must be sold if the Flames band is used? What about the Charms band?
Ticket Price Proposal:
Evaluate the proposal to lower the ticket price to $40. What implications, if any, does it have for the band choice?
Band Selection:
Based on your previous answers and other information provided in the case, which band would you pick? Why?
Assumptions and Their Validity:
The break-even and profit formulas used are based on certain assumptions. What are these assumptions, and are they likely to hold for this situation? Explain.
Fixed Ticket Sales Assurance:
Suppose the dance organizers are sure that 270 tickets could be sold at a price of $50 regardless of the band used. How would this affect the band choice?
Demand Curve Knowledge:
How would knowledge of the demand curve for each band be helpful in determining which group to use and what price to charge?
