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A. Scope and Objectives of Financial Analysis

Within the scope of the circus comprehensive profit planning and control is viewed as a process designed to help management effectively perform significant phases of the planning and control functions. This model as designed for the circus involves:

- development and application of broad and long range objectives of the enterprise

- specification of enterprise goals

- development of a strategic long range profit plan in broad terms

- specification of a tactical short range profit plan detailed by assigned responsibilities (divisions, departments, projects)

- establishment of a system of periodic performance report detailed by assigned responsibilities

- development of follow-up procedures

The financial plan consists of a strategic long range profit plan which involves sales, cost and profit projections, major projects and capital additions, cash flow and financing, and personnel requirements. A tactical short range annual profit plan is also included in the financial plan which consists of the following subgroups:

Operating Plan:

• Sales plan
• Plan of displays
• Administrative expense budget
• Transportation expense budget
• Appropriation type budget (show diversification from the usual practice, promotion, advertising)

• Assets
• Liabilities
• Owner’s equity

B. Analysis of Cost Estimates and Basic Accounting Statements

There are several cost factors affecting the cost accounting of the company. Parallel to the number of the cost figures, there are some ways to estimate these costs. A brief summary of the costs are listed below:

• Salaries and wages : There are 67 employees working for the company, fourty of whom are hired for the circus shows. Additional to the patents of the show characters, some money is paid annually. From the data that average annual salary of a citizen is $15,000/year (Book of marketing by Evans/Berman) ,the average salary of an employee may be estimated to be:

$[15,000*(1+70%)]*(40/67)+$[15000*(1+20%)]*(27/67)=$24,300,

which means that average income of the show characters are about 70% higher than the average of USA wheras those of technical and administrative staff is assumed to be 20% higher. Additionally, a well-known showman is hired for the ads and brand. This is estimated to bring a cost of $100,000 annually. Briefly the total employee cost will be $24,300*67+$100,000=$1,728,100 annualy.

• The tents should be constructed on large areas. The rental cost incurred by the area may be difficult to estimate, but we can find an upper bound of $1000 for a two-days show. The total renting cost would then be ($1200/show)*(270 shows/year)=$324,000/year.

• The transportation vehicles are hired as a beginning investment, which is assumed to cost $82000/truck*12trucks=$984,000/year. The cost of the transportation is just the mileage cost of the trucks and trailers. The annual tournee requires a travel of about 10000km.(estimate from scale). The average mileage cost is about $1/km/vehicle. We have 12 vehicles in total. Then the total cost becomes 20,000km/yr*12 vehicles*$2/km/vehicle=$480,000/year. Another means of transportation, railroads will probably cost less but not considered during this analysis.

• As found in their web site, an Australian circus (Ashton’s Circus) states that all of the properties for a circus establishment cost around $2,500,000. This figure in sum includes tents, costumes, ring decoration, equipments of the acrobats and magicians, electrical installations, cages and other relevant material. With the purchase of new equipment and extended quality this number may become $3,500,000. For a planning horizon of 10 years (with no inflation assumption, an annual interest rate of 4%), the annual payments is assumed to be: $3,500,000*(A/P,4%,10)=$3,500,000*0.12329=$431,515

• The depreciation of the investments are smoothed to 10 years. Annual depreciation cost =$3,500,000/10years=$350,000/yr.

• For the insurance of the investments 6% premium is paid. The percentage is the intuitive estimation for the risk of the business considering the business fluctuations.Hence the insurance cost becomes: $3,500,000*(6%)=$210,000/yr.

• Advertising and promotional budget can be calculated to be 10% of the expected annual ticket sales, which is simply:

• Overhead and other pertinent costs including administrative expenses, the basic food and nutrients, supply materials, utilities, maintanance and construction costs, etc. may be estimated to be around 30% of the total yearly costs excluding depreciation, which equals

• Income tax is assumed to be 30% .

• Sales revenue is calculated as [($22.5*8 shows*14 cities)+($19.5* 5 shows*10 cities)+($17.5*5 shows*21 cities)+($22.5*3 shows*1 city)]* 1300 audiance =$7,020,000

• Vendor fees is simply the total number of audiance times $1 (average snack and drinks sales per person), which is 1300audience/show*270shows*$1=$351,000.

• An annual marketing cost of $579,000 is incurred as discussed in the Marketing section.

• Click here for the income statement of the company

• Click here for the balance sheet of the company

 
C. Project Financing

Financing of the resources used in order to initiate the business is done by using a 10 year loan, to be taken from a bank of which the interest rate is assumed to be around 5% which was already discussed in the previous section. This number was generated from the recent market statistics of Federal Bank of USA. If the income statement submitted in Figure 3 is carefully examined, it can be stated that the payback period turns out to be 3 years assuming that the profits after tax figure is stable at least during this period. Although there is no immediate need and reasoning to prepare a balance sheet at this point, a pro-forma balance sheet representing the end of the first operating year estimated that the company will incur is presented in Figure 4. Since the real cost items and the opportunities of business can only be realized during the lifecycle of the company no what-if analsis will be made at this point, as most of the calculations are based on realistic but not actual assumptions. In the preceding section the effects of uncertainity to the financial decisions will be analyzed which is a situation much closer to reality.

D. Economic and Financial Evaluation Under Conditions of Uncertainity

The existence of harsh competition in the eastern region of the continent as well as the Canadian region make the demand estimation difficult in the sense that 46 markets with three distinct business structures that are entered are subject to intensive marketing efforts of both national and domestic circuses. Therefore the construction of a loyal customer base, being eligible to create new games and shows that will take the company one step further and endeavours to enter new promising markets while increasing the capacity, and segmentation of the prices are primary concerns. The financial assumptions made in the preceding sections are firmly related with the financial market conditions as well. For instance the interest rates, lease prices, equipment and supplies prices, fuel prices and the price of land are all closely releated with the financial decisions and their consequences.