Lecture 9

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SECTION 7 PLANNING THE NEW

VENTURE

• BUSINESS TOOLS

• Marketing Management• Operations Management• Financial Management• Personnel Management

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• Marketing Management

• Following the Marketing Concept - Being Customer-Oriented

• Refer to T 1 for • Customer-Oriented Marketing

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• BASIC FINANCIAL TOOLS

• It provides information which makes it possible for you to know:

• How money came in and went out?• What you own and what you owe?• How money will come in and will go out?

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• All the above information you will have if you produce for your business:

• A Profit and Loss (Income) Statement;• A Balance Sheet; and• A Cash-flow Forecast

• 1. The Profit and Loss Statement• measures all income less expenses to arrive at the

moment of profit or loss.

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• Uses of the P & L Statement

• is a measure of how the business has performed over a specific period of time

• investments, purchase of assets, and distribution of profits are just a few of the decisions that rely on the information provided in the profit and loss statement

• creditors and investors consider the profit and loss statement very valuable

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• Components of the Profit & Loss Statement

• 1. Sales/Revenue• revenues are the funds received by a business for

services rendered or goods sold during the fiscal year.

• 2. Cost of Goods Sold• it is the net cost of the products sold by the

business during the period of the P & L Statement.• It is calculated as follows:

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• - Beginning inventory plus purchases for the period less the inventory at the end of the period.

• 3. Gross Profit• is the difference between sales revenue and the

cost of goods sold• is a key determinant in product pricing• as a percentage of sales should at least remain

constant and ideally continue to improve• 4. Expenses• these are various costs of operating the business

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• represent the amounts incurred for the year even if payment has not yet been made

• 5. Net Profit• this is the profit after allowing for all expenses

• FORMULA: Sales/Revenues - Cost of Goods Sold• = Gross Profit - Other Expenses• = Net Profit

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• Illustration of Profit and Loss Statement

• Refer to T 2

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• 2. The Balance Sheet

• it is a ‘snap shot’ picture of the business on that particular point in time.

• It shows what the business owns and what it owes.

• It is usually prepared on an annual basis.

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• Uses of the Balance Sheet

• By looking at Balance Sheets of several years, one can recognise growth or decline in various phases of the company’s financial position.

• Reveals the company’s ability to meet both short-term and long-term debts.

• Are also important to creditors who make loans to the business because they reveal the business’ potential for payment of debts.

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• Components of the Balance Sheet

• - is a measure of the basic accounting equation• where Assets = Liabilities + Capital (Owner’s

Equity)

• ASSETS• total of the company’s assets shows what the firm

owns• usually divided into 3 categories

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• 1. Current Assets • Current assets are assets that can be easily and

quickly converted into cash.

• Current assets are generally listed in order of liquidity

• 2. Fixed Assets• Fixed assets are items of property that are not

used up over short periods of time.• Fixed assets represent the resources of the

company.

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• 3. Intangible Assets• Items that have value to the business but do not

exists as tangible property.

• LIABILITIES• are the debts of the business• there are two categories

• 1. Current Liabilities• Current liabilities consists of debts which the

company must need within a 12 month period

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• Sources of finance used in the day-to-day operations.

• 2. Long Term Liabilities• Long term liabilities are debts that are due in more

than a year’s time from the date of the balance sheet.

• 3. Owner’s Equity• Owner’s equity or capital is the difference between

the total values of the assets and liabilities of a firm.

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• 2 main components of Owner’s Equity are capital invested and reserves (retained profits)

• Illustration of the Balance Sheet

• Refer to T 3

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• 3. Break-Even Analysis

• for any business, the break-even point is the level of sales at which, a business neither makes a profit nor incurs a loss.

• At the break-even point, total costs exactly equals total revenues, and net profit is zero.

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• Calculation of the Break-Even Point

• the difference between the sales price and the variable cost for each unit is called the contribution margin

• the contribution margin can be used to calculate the break-even point mathematically.

• the contribution margin can be expressed as either a dollar amount or as a percentage of a sales dollar.

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• FORMULA:

• Fixed Cost (Total $)• Contribution margin (expressed as $ per unit)

• Fixed Cost (Total $)• Unit Selling Price - Unit Variable Cost

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• EXAMPLE: REFER TO T 4

• 1. Contribution margin

• Sales price (unit) = 20.00• Variable cost (unit) = 14.00

70% • _________• • Contribution margin = $ 6.00

30%

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• 2. Break-even Point

• Fixed Cost• Contribution margin ($ per unit)

• = 792000• 6• • = 132,000 units

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• 3. Break-even Sales

• Fixed Costs• Contribution margin (%)

• = 792000• 30%• = 792000• 0.3•

• = $2,640,000

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• CHECK:

• Total Revenue = Total Costs

• Selling price x Units sold = FC + VC x Units sold

• 20 x 132,000 = 792,000 + 14 (132,000)

• $2,640,000 = 792,000 + 1,848,000

• $2,640,000 = $2,640,000

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• 4. CASH FLOW FORECAST

• a) What is a Cash Flow Forecast?

• is a measure of change in cash the business has on hand from month to month

• records or projects all cash receipts less all cash payments

• can show the effects of a wide number of things like:• - the effect of giving and taking credit• - seasonal patterns of trade• - the point at which a cash shortfall or overdraft

is greatest

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• - the expected length of time to break-even

• b) Why should you produce a forecast?

• Cash flow forecast with detailed written back-up will be essential in applying for any grants or loans.

• c) How to start producing a cash flow?

• A meaningful CFF can be produced only after you have done enough research to know such things as:

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• What level of sales you are aiming for?• How sales will vary over the months?

• How much you will need to pay for things like stock, rent, wages, transport, insurance, and so on?

• How much money you need to borrow and what the repayment terms will be?

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• STAFF AND PERSONNEL MATTERS

• 1. Planning for Future Staff Needs

• Work out business goals and likely staff need for 12 to 18 months ahead.

• Regularly review the firm’s staff• - How many are employed?• - What are the training needs of existing and

new workers?

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• If business is to grow• - What new skills will be required?• - Staffing numbers required?

• 2. Staff Recruitment and Selection Procedures

• Things to consider are:• - what the duties of the job are?• - type of experience required• - level of responsibility• - skills needed• - physical factors such as age, health, strength,

etc.

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• 3. Staff Training• How do you get your new employees started on

the job? [Induction]

• Physical layout• Starting and finishing times, wages and

conditions of work• Local rules and customs• - punctuality• - registering attendance• - coffee breaks, etc

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• Supervisory practices• Information about the firm• - its size, its history, future plans, etc.

• More specific training needs - main ways this can be approached are:

• Informal on the job training• - used for fairly simple jobs• - new staff placed beside an experienced worker• - less costly method•

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• Systematic on the job training• - training plan is provided• - carefully go through all the tasks involved in

the job

• Off the job training• - when training need become more

complicated• - attend short training courses• - part-time training in the evening

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• 4. What Motivates Workers?• Some of the likely important motivators are:

• Management style• - the manager should be consistent, predictable

and reasonable when deciding on staff matters• - the manager should be able to make people

feel comfortable• Physical work conditions• - premises should be well ventilated, clean,

properly lit, proper toilet facilities, etc.

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• The pace of work• - the manager needs to exercise good

judgement about the pace of work - the pace should be neither too fast or too slow.

• Employment conditions• - level of pay• - holiday pay• - sick leave• - medical benefits

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• Importance of motivation

• Poorly motivated workers can lead to :• low levels of output• poor quality of output• high levels of staff absenteeism• high levels of staff turnover• low profitability and failure for the business

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• 5. What Personnel Records to keep?• Most common records which should be kept,

include:

• Attendance Record• Personal File - contains:• - all documents• - correspondences• - other matters

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• Employment Record Cards• - personal information•

• - work history• - wage records• - job records• Wages and Deductions Record

• 6. Laws Relating to Employment of Staff• Wages• - minimum wage level

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• Hours of work• - standard working week - generally between

40 to 45 hours

• - excess of normal hours - paid overtime rate• Paid leave• - set annual holiday period• Safety• - standards to ensure industrial safety and

health

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END OF LECTURE 9

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