Assignment 226

Chapter Fourteen

Basic Financial Planning

Copyright © 2018 by McGraw-Hill Education. All rights reserved.

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Learning Objectives

Explain the need for profit planning for a small business.

Discuss what causes changes in the financial position of a company.

Understand the financial structure of a business.

Apply the theory of cost of goods sold.

Learn how to plan to make a profit in a small business.

Plan for a profit for an actual small business.

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What Is Profit Planning?

Profit planning is a series of prescribed steps to be taken to ensure that a profit will be made.

Determine how much profit you want and how to achieve it.

Learn how to set up an accounting system for your firm and how to read, evaluate, and interpret its accounting and financial figures.

Evaluate, or estimate, your firm’s financial position.

Profit Planning must precede other activities.

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Tracing Changes in a Company’s Financial Position

Accounts receivable may reflect profits, but many of those accounts may not be collectible.

Too much money may be tied up in assets and not available to pay bills as they come due.

The process of tracking cash flow.

Some small firms make a profit and still fail,

since profits are not necessarily in the form of cash.

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Tracing Changes in a Company’s Financial Position

Benchmarking

Setting up standards (for reference) and then measuring performance against them.

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Importance of Accounting

Accounting records are records of a firm’s financial position that reflect any changes in that position.

The continued operation of your business also depends on maintaining the proper balance among its investments, revenues, expenses, and profit.

Day-to-day business is reflected in the financial statements.

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What Is the Financial Structure
of a Business?

Financial structure describe the relative proportions of a firm’s assets, liabilities, and owners’ equity.

Changes constantly as business activities occur.

The total liabilities plus owners’ equity always equals the total assets of the firm.

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What Is the Financial Structure
of a Business?

Balance sheet is a statement of a firm’s assets, liabilities, and owners’ equity at a given time.

The balance sheet is a gauge of the financial health of your company.

Shows how assets are being used.

Provides a snapshot of your company at a given moment.

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Balance Sheet

Figure 14.1

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Assets

Assets

The things a business owns.

Includes cash, accounts receivable, inventory, equipment, building, and other things of value to the company.

Accounts receivable

Current assets resulting from selling a product on credit.

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Liabilities

Liabilities

The financial obligations of a business.

Accounts payable

Obligations to pay, resulting from purchasing goods or services.

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Owners’ Equity

Owners’ equity

The owners’ share of (or net worth in) the business, after liabilities are subtracted from assets.

Owners’ receive income from profits in the form of dividends or an increase in their share f the company through an increase in retained earnings.

Owners’ also absorb loss, decreasing equity.

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Profit-Making Activities
of a Business

Income statement (profit and loss statement)

Periodically shows revenues, expenses, and profits from a firm’s operations.

Net income (profit) = Revenue (income) – Expenses (costs)

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Income Statement

Figure 14.2

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Revenue and Expenses

Revenue (sales income)

The value received by a firm in return for a good or service.

Expenses

The costs of labor, goods, and services.

Cost of goods sold

the total cost in terms of raw materials, labor, and overhead of the business that can be allocated to production

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Profit

Profit (income)

The difference between revenue earned and expenses incurred.

Depending on the type of expenses deducted, profit may be called gross income, operating profit, net income before taxes, or net income.

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How to Plan for Profit in
a Small Business

A well-managed small business has the following characteristics:

It is more liquid than a badly managed company.

The balance sheet is as important to the owner as the income statement.

Stability is emphasizes, instead of rapid growth.

Long-range planning is important.

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Steps in Profit Planning

Establish a profit goal.

Determine the volume of sales revenue needed to make that profit

Estimate the expenses you will incur in reaching that volume of sales.

Determine estimated profit, based on plans resulting from steps 2 and 3.

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Steps in Profit Planning

Compare the estimated profit with the profit goal.

List possible alternatives that can be used to improve profits.

Determine how expenses vary with changes in sales volume.

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Steps in Profit Planning

Determine how profits vary with changes in sales volume.

Analyze your alternatives from a profit standpoint.

Select an alternative and implement the plan

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Profit Planning Applied in a
Typical Small Business

Profit goal is the specific amount of profit one expects to achieve.

Sales forecast is an estimate of the amount of revenue expected from sales for a given period in the future.

Kaizen costing sets cost targets for all phases of design, development, and production of a product for each accounting period.

Breakeven point is that volume of sales where total revenue and expenses are equal, so there is neither profit nor loss.

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Profit Planning Applied in a
Typical Small Business

While an analysis of past costs is helpful in projecting future expenses, be aware that:

The relationships exist only within limited changes in sales volume.

Past relationships may not continue in the future.

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Breakeven Chart for
The Model Company

Figure 14.4

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Alternatives to Increase Profits