Profit planning
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Nick Rowe/Getty Images. 13. Chapter. Profit Planning. Need For Profit Planning Changes In Company Financial Position Financial Structure Planning For Profit. Profit Planning. “…a series of prescribed steps to be taken to ensure that a profit will be made.”. McGraw-Hill/Irwin.

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Profit Planning

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Profit planning

Nick Rowe/Getty Images

13

Chapter

Profit Planning

Need For Profit Planning

Changes In Company Financial Position

Financial Structure

Planning For Profit


Profit planning1

Profit Planning

“…a series of prescribed steps to be taken to ensure that a profit will be made.”

McGraw-Hill/Irwin

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.


How much profit

How Much Profit?

  • For a private, nonfinancial business:

    • What do you think is a “fair” profit to make on its sales, after paying its income taxes? (Give as a percentage of sales after taxes) __________

    • What do you think the average business makes, in a year, as sales after taxes. ___________

  • For a grocery supermarket:

    • What do you think is a “fair” profit to make, as a percentage after taxes? _________

    • What do you think the average supermarket makes in profits after taxes? _________

5%

½ - 1 ½ %


Drop in financial position

Drop In Financial Position

  • Uncollectible A/R

  • Too Many Assets

Negative Cash Flow


Benchmarking

Benchmarking

“…setting up standards (for reference) and then measuring performance against them.”


Accounting records

Accounting Records

“…records of a firm’s financial position that reflect any changes in that position.”


Accounting equation

Accounting Equation

Owners’ Equity

+Liabilities

Total Assets


Balance sheet

Balance Sheet


Current assets

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Current Assets

  • Cash

  • Accounts Receivable

  • Inventory

  • Short-Term Investments

  • Prepaid Expenses


Fixed assets

Ross Anania/Getty Images

Fixed Assets

  • Equipment

  • Building

  • Accumulated Depreciation

  • Net Fixed Assets


Total liabilities

Royalty-Free/CORBIS

Total Liabilities

  • Current Liabilities

    • Accounts Payable

    • Notes Payable

  • Long-Term Liabilities

    • Long-Term Loans

    • Mortgage Payable


Working capital

Working Capital

Current Assets

- Current Liabilities

Working Capital


Owners equity

(c) Duncan Smith/Getty Images

Owners’ Equity

  • Capital Stock

  • Retained Earnings


Income statement

Income Statement


Revenue

Royalty-Free/CORBIS

Revenue

  • Cash

  • Accounts Receivable


Types of expenses

Steve Cole/Getty Images

Types Of Expenses

  • Fixed

  • Variable


Expenses

Materials

Salaries

Utilities

Depreciation

Rent

Building Services

Insurance

Interest

Office & Supplies

Sales Promotion

Taxes & Licenses

Maintenance

Delivery

Miscellaneous

Expenses


Profit income

Profit (Income)

“…the difference between revenue earned and expenses incurred.”


Well managed small business

Royalty-Free/CORBIS

Well-ManagedSmall Business

  • Liquid

  • Balance Sheet Important

  • Stability vs. Growth

  • Long-Range Planning


Initial steps in profit planning

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Initial StepsIn Profit Planning

  • Establish Goal

  • Determine Volume For Profit

  • Estimate Expenses

  • Determine Estimated Profit

  • Compare Estimate With Goal


Action steps in profit planning

Lawrence Lawry/Getty Images

Action StepsIn Profit Planning

  • List Alternatives

  • Determine Expenses

  • Determine Profits

  • Analyze Alternatives

  • Select & Implement


Need for profit planning

Need For Profit Planning

=

  • Uncertainty

  • Planning


Planning for profit

Planning For Profit

  • Establish Profit Goal$ 52,000

  • Determine Sales Volume 530,000

  • Estimate Expenses 490,000

  • Determine Profit Estimate 40,000

  • Compare Profit To Goal -$12,000

  • List Alternatives

    • Change Sales Volume

    • Decrease Expenses

    • Add Products/Services

    • Subcontract


Action steps in profit plan

Action Steps In Profit Plan

  • Expenses Vary With Volume

    SalesExpenses

    • $364,000 $364,000

    • $530,000 $490,000

    • $700,000 $618,700

  • VolumeProfit

    • $364,000 $ -0-

    • $530,000 $ 40,000

    • $700,000 $ 81,300

  • Analyze Alternatives

  • Select/Implement Plan


Breakeven chart

Breakeven Chart


Pro forma income statement

Pro Forma Income Statement


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