Deck 14: Basic Financial Planning

Question 1

How do you establish a profit goal

Answer 1

A profit goal is the specific amount an entrepreneur expects to achieve after selling a planned volume of products/services. To establish a profit goal formulates the first step of profit planning. It is a specific target value which keeps entrepreneurs motivating to achieve that. Based on this target value, the entrepreneurs plan marginal profit on each product they sell.
To establish a profit goal following steps need to be adopted:
• Do not expect a high profit directly. Many times entrepreneurs start with break-even point as their target which means they plan a no profit and no loss goal in the beginning.
• Fix a salary for oneself for managing the business. It will give a fair idea about how much the net income should be.
• Compare the amount with the salary which an individual would get after doing the same work as the business owner is doing at present with the net amount the business is making.
• Set a return percentage on the investment made as the invested money would have paid the return if the same was invested in stocks and bonds.
• Deduction of taxes in both the business and the job should also be compared to draw the actual benefits of business.
All the above points will lead the entrepreneur to a fixed value and that value should be kept as profit goal. As the business grows, the profit goals need to be revised at a certain fixed period. The period may range from 6 months to 1 year.

Question 2

How do you determine planned volume of sales How does profit change with volume of product sold

Answer 2

A sales forecast is the approximate calculation of the amount of revenue expected from the sales for a given period in the near future. This forecast is used each time to estimate revenues for the next quarter and for the upcoming year. Sales forecast is done in simulation with operations and sales budget planning.
To determine planned volume of sales following steps should be adopted:
• Expected amount of revenue will determine the volume of products to be sold in a fixed period.
• Market conditions will determine how much time it will take to sell a fixed volume.
• Levels of sales promotion will decide the impact on which customers' footfall will increase thereby increasing the sales.
• Inflation is a major factor in deciding the sales forecast which in turn affects planned volume of sales.
• Competitors' activities will determine how the sales will be affected in terms of presence of similar businesses in the market.
It can be concluded that accurate forecasting signifies the difference between growth and stagnation of the business. Planning should be done each month for the upcoming six months. Past month should be dropped each time to fix the range of planning. These small steps contribute majorly in determined planned volume of sales.

Question 3

How do you determine planned expenses Variable expenses Fixed expenses

Answer 3

Expenses are also known as the costs of doing business. They include the costs of labor, costs of goods, and costs of services. All the factors which contribute their part in the functioning of business and are chargeable, come under expenses. Some of the essential factors are materials, wages, insurance, utilities, transportation, depreciation, and product promotion.
The planned expenses can be determined using following points:
• The entrepreneurs are required to observe and track the business expenses for one to two months.
• The last years' figures are drawn out to estimate the expense in the same ratio.
• The ratio should be compared with the expenses calculated in first step.
• The excess amount (if any) needs to be adjusted with reference to changes in economic conditions and inflation.
• The amount which is used to improve methods of production should also be segregated.
• The salaries and other compensational allowances which are given to the employees should be planned in advance.
The variable expenses can't be planned exactly as the amount keeps on varying as per the situation. Still an estimated calculation can be done. The expenses vary as and when volume of the sales order is revised. The rewards and incentives are also the part of variable expenses. To plan variable expenses, a fixed percentage of the amount calculated in planned expenses can be segregated. This fund should be separated exclusively for variable expenses.
Fixed expenses are easy to determine as these the fixed amount which is to be repaid by the entrepreneurs monthly, quarterly, or in any fixed period of the time. The loan installments, insurance amount, salaries of the employees, and routine expenses can be planned and fixed. These amounts are known to the entrepreneurs, so they can calculate the same and plan it accordingly.

Question 4

What are some alternatives that could improve planned profits Explain each.

Question 5

Evaluate the way Dorsey and Hill did their financial planning.

Question 6

What are the advantages and weaknesses of the minimum-cash-balance practice

Question 7

Do you think their early personal financial planning influenced their professional financial planning Explain.

Question 8

There is a saying, "If it ain't broke, don't fix it." In view of the firm's present success in paying bills promptly, should it be encouraged to use a cash budget Defend your answer.

Question 9

To what extent do you think the two entrepreneurs will succeed in their venture Explain.

Question 10

Why is planning for profit so important to a small business

Question 11

In analyzing the changing financial position of a small business, what things should you look for

Question 12

"If a small firm is making a profit, there's no danger of its failing." Do you agree Why or why not

Question 13

What is a firm's financial structure What are the components of this structure

Question 14

Explain each of the following: (a) assets, (b) current assets, (c) fixed assets, (d) liabilities, (e) current liabilities, (f) long-term liabilities, (g) owners' equity, (h) retained earnings, (i) income (profit and loss) statement, (j) balance sheet, and (k) profit.

Question 15

What steps are needed in profit planning