Week 6 - Business planning, costs concepts and management Flashcards
What is a business plan
A business plan is a written document that explains and analyses an existing or proposed business venture
A business plan helps to visualise and organise the business and its operations
Business plans can be applied to any type of enterprise regardless of the size.
3 functions of a business plan
• A business plan has three main functions:
- To communicate the future of the business
- To convey the credibility of the business to the reader
- To act as an organizing tool that can help to sell the owner’s idea and convert it into reality
advantages of a business plan
A well prepared business plan provides a clear statement of direction and purpose for a firm.
It provides a suitable means of periodically evaluating the performance of the firm.
The development of a business plan fosters the most effective use of scarce resources: staff, time and money.
An effective plan demarcates responsibilities.
disadvantages of a business plan
o Business plan cannot guarantee the success.
o Sometimes high level of planning may reduce the flexibility and room to move, rather than enhance it.
o Business planning can be time consuming and expensive.
format of business plan (think assignment 2)
- Title page
- Executive summary
- Background
- Marketing plan
- Operating plan
- Financial plan
- Implementation timetable
- Appendices
explain the financial plan section of the business plan
Financial plan typically includes:
Basic assumptions and information in estimating income and expenses
Financial forecast such as sales forecast, purchases forecast, expenses forecast, cash flow forecast, projected Income statement, projected statement of financial position, capital funding projections, etc.
Analysis of financial forecasts such as an analysis of break-even point, mark-ups and margins, projected impact of decisions upon the value of the business, return on assets, etc. Analysis and evaluation of the information content of the business plan is required so that informed financial decisions are supported.
what is an implementation table
o Implementation timetable provides a schedule of the activities needed to set up and run the business. This should include specific dates and details.
o Appendices include any extra useful information
explain management cost concept
Products and services are produced by using resources – materials, equipment, space, time, energy, people, technology – to perform activities
Resources cost money
To make money a business has to sell its products or services at a price greater than what they cost to produce
When all expenses (costs) of running the business are deducted from the revenues earned, what remains is the profit (or loss).
Profit is the excess of revenue over expenses.
Loss is the excess of expenses over revenue.
It is essential for each business to know the cost of its services or products as accurately as possible in order to:
o Fix selling prices to make money (earn a profit)
o To manage/control costs
o To compete with its competitors
Car manufacturers in Australia such as Toyota, Ford and Holden have suffered financially, and/or shut down, because its costs are too high and the companies cannot compete with overseas car makers.
define direct costs + example
Direct costs: These are costs which can be readily traced to a particular product made or service supplied. e.g. The costs of all the ingredients that are used to make a cup of coffee are called Direct Costs for a coffee shop.
define indirect costs + example
Indirect costs: These are costs that cannot be easily traced to a particular product or service. e.g. Rent paid for the shop premise, insurance expense etc.
have a coffeé :)
define product costs
Product costs: These are costs that are a necessary and integral part of a product or service. e.g. purchase cost of a product, the cost of employees providing a service, etc.
define period costs
Period costs: These costs are matched with the income of a specific time period rather than included as part of a cost of the saleable product. e.g. financing costs, selling expenses, etc.
define an explain variable costs
Variable costs change in total directly with increases and decreases in activity level.
e.g. direct materials, direct labour, CoGS, freight costs, fuel.
They are identified on a per-unit basis.
Variable costs stay the same per unit as activity level changes.
Total variable costs change in proportion to change in activity level.
define and explain fixed costs
Fixed costs do not change with increases and decreases in activity level.
e.g. rates, rent, insurance, supervisors’ salaries.
Fixed cost per unit = total cost divided by units of activity level.
Total fixed costs stay the same regardless of changes in activity level.
Fixed costs per unit declines as activity increases.
define and explain fixed costs
Fixed costs do not change with increases and decreases in activity level.
e.g. rates, rent, insurance, supervisors’ salaries.
Fixed cost per unit = total cost divided by units of activity level.
Total fixed costs stay the same regardless of changes in activity level.
Fixed costs per unit declines as activity increases.
costs remain constant regardless of what happens
define mixed costs
Mixed costs includes a fixed cost component plus a variable cost according to activity level, e.g., electricity (fixed line charge plus charge per unit consumed).
Mixed costs are often separated into fixed and variable components at end of period.
what is a cost volume profit analysis
Cost-volume-profit (CVP) analysis examines the effects of changes in costs and volume on an entity’s profits.
CVP analysis is important for:
Planning.
Setting prices.
Determining the best product mix.
Making the maximum use of production facilities.
CVP analysis considers the interrelationships among 5 components:
Volume of level of activity Unit selling prices Variable cost per unit Total fixed costs Sales mix
The following assumptions underlie CVP analysis:
Costs and revenues are linear within the relevant range.
All costs are identifiable as variable or fixed.
Costs are affected only by changes in activity level.
All units produced are sold.
Sales mix is constant if there is more than one product
explain contribution margin statement
Contribution margin statement is used for internal decision-making.
Expenses are classified as variable or fixed and it calculates a contribution margin.
Contribution margin equals the difference between estimated revenue and estimated variable costs. That is, revenue – variable costs.
Total contribution margin indicates how much sales revenue is available to cover fixed costs and contribute to net profit.
It can be stated as both a total amount and on a per unit basis.
CONTRIBUTION MARGIN CALCULATION
Contribution margin calculation
Unit contribution margin = unit selling price – unit variable cost
Total contribution margin = Total sales revenue – total variable costs
Contribution margin ratio =
Total contribution margin ÷ total sales revenue
OR
Unit contribution margin ÷ unit selling price
CONTRIBUTION MARGIN CALCULATION
Contribution margin calculation
Unit contribution margin = unit selling price – unit variable cost
Total contribution margin = Total sales revenue – total variable costs
Contribution margin ratio =
Total contribution margin ÷ total sales revenue
OR
Unit contribution margin ÷ unit selling price
CM per unit
or fixed costs + profit / number of units sold
explain the Contribution margin technique of the break even analysis (formulas)
Break-even point can be defined in terms of sales units by the formula:
Fixed costs / contribuiton margin per unit = break even point in units
Break-even point can be defined in terms of sales dollars by the formula:
Fixed costs / contribution margin ratio = Break even point in dollars
explain the Contribution margin technique of the break even analysis (formulas)
Break-even point can be defined in terms of sales units by the formula:
Fixed costs / contribuiton margin per unit = break even point in units
Break-even point can be defined in terms of sales dollars by the formula:
Fixed costs / contribution margin ratio = Break even point in dollars
Graphic presentation
• An effective way to find the break-even point is to prepare a break-even graph.
• The graph is referred to as a cost-volume-profit (CVP) graph since it shows costs, volume, and profits.
• Units (sales volume) is recorded on horizontal axis.
• Dollars (revenues and costs) are recorded on vertical axis.
explain ‘target net profit’
Target net profit is the profit objective for an individual product line.
Break-even analysis is expanded by adding target net profit to total fixed costs.
required units in sales forumla
Target net profit + Fixed costs / contribuiton margin per unit = Required units in sales
required sales in $$
Target net profit + Fixed costs / contribution margin ratio = Required sales in dollars ($)
unit contribution margin
unit selling price - unit variable cost
total contribution margin
total sales revenue - total variable costs
Total contribution margin Ratio
total contribution margin / total sales revenue
Unit contribution margin ratio
unit contribution ratio / unit selling price
break even point in units formula
fixed costs / contribution margin per unit = break even point in units
break even point in dollars forumla
fixed costs / contribution margin ratio = break even in $
required units in sales
target net profit + fixed costs / contribution margin PER UNIT
required units in dollars
target net profit + fixed costs / contribution margin RATIO
