14-1 Profit Planning Need For Profit Planning Need For Profit Planning Changes In Company Financial Position Changes In Company Financial Position Financial Structure Financial Structure Planning For Profit Planning For Profit Chapter 13 Nick Rowe/Getty Images

14-2 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Profit Planning “…a series of prescribed steps to be taken to ensure that a profit will be made.” Profit planning must precede other activities

14-3 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Revenue Cash Accounts Receivable Royalty-Free/CORBIS

14-4 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Types Of Expenses FixedVariable Steve Cole/Getty Images

14-5 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Expenses  Materials  Salaries  Utilities  Depreciation  Rent  Building Services  Insurance  Interest  Office & Supplies  Sales Promotion  Taxes & Licenses  Maintenance  Delivery  Miscellaneous

14-6 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Profit (Income) “…the difference between revenue earned and expenses incurred.”

14-7 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Well-Managed Small Business (according to Dun & Bradstreet ) Liquid Liquid Balance Sheet Important Balance Sheet Important Stability vs. Growth Stability vs. Growth Long-Range Planning Long-Range Planning Royalty-Free/CORBIS

14-8 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Initial Steps In Profit Planning 1)Establish Goal 2)Determine Volume For Profit 3)Estimate Expenses 4)Determine Estimated Profit 5)Compare Estimate With Goal Ryan McVay/Getty Images

14-9 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Action Steps In Profit Planning 6)List alternatives to improve profits 7)Determine how expenses & profits vary with volume 8)Analyze alternatives vis-à-vis profit 9)Select an alternative & implement Lawrence Lawry/Getty Images

14-10 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Need For Profit Planning  Uncertainty  Planning =

14-11 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Planning For Profit 1.Establish Profit Goal$ 52,000 2.Determine Sales Volume 530,000 3.Estimate Expenses 490,000 4.Determine Profit Estimate 40,000 5.Compare Profit To Goal -$12,000 6.List Alternatives a.Change Sales Volume b.Decrease Expenses c.Add Products/Services d.Subcontract

14-12 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Action Steps In Profit Plan 7.How Do Expenses Vary With Volume Sales Expenses Sales Expenses a.$364,000 $364,000 b.$530,000 $490,000 c.$700,000 $618, Volume Profit a.$364,000 $ -0- b.$530,000 $ 40,000 c.$700,000 $ 81,300 9.Analyze Alternatives 10.Select/Implement Plan

14-13 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Breakeven Chart

14-14 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Pro Forma Income Statement

14-15 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Exercise Perform a profit plan for: Perform a profit plan for: A consulting business (2 groups) A consulting business (2 groups) A day care center (2 groups) A day care center (2 groups) Compare groups – who is most realistic? Compare groups – who is most realistic?

14-16 Budgeting And Controlling Operations And Taxes Small Business Control Small Business Control Types Of Budgets Types Of Budgets Obtaining Information & Ratios Obtaining Information & Ratios Taxes & Tax System Taxes & Tax System Record Keeping & Tax Reporting Record Keeping & Tax Reporting Factors/Problems In Getting Credit Factors/Problems In Getting Credit Chapter 14 Photodisc Collection/Getty Images

14-17 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Control “…the process of ensuring that organizational goals are achieved.”

14-18 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Control Process 1. Setup Standards 2. Measure Performance 3. Actual vs. Planned 4. Deviations Excessive? 5. Take Corrective Action

14-19 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Set Standards Units Consumer/Produced Units Consumer/Produced Standard Hours Per Unit Standard Hours Per Unit Miles Per Gallon Miles Per Gallon Price Paid/Charged- Price Per Unit Price Paid/Charged- Price Per Unit Requires Requires Intuition Intuition Past Performance Past Performance Measurement Measurement Comparison Comparison Communication Communication Keith Brofsky/Getty Images

14-20 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Effective Controls Timely Timely Cost Effective Cost Effective Accurate Accurate Quantifiable Quantifiable Measurable Measurable Indicate Cause/Effect Indicate Cause/Effect Responsibility of one Responsibility of one Acceptable Acceptable PhotoDisc Imaging/Getty Images

14-21 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Budget “…a detailed statement of financial results expected for a given future period.”

14-22 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Types Of Budgets  Capital  Operating  Cash Flow Steve Cole/Getty Images

14-23 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Operating Budget Sales Sales Production Production Personnel Personnel Royalty-Free/CORBIS

14-24 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Cash Flow Budget Plan Daily/Weekly Cash Needs Plan Monthly Cash Needs Prepare For Cash Flow Crisis Establish/Maintain Good Credit Establish/Maintain Good Credit Set Aside Funds To Earn Interest Set Aside Funds To Earn Interest Schedule Payments Schedule Payments Keep Fixed Costs Low & Tie Variable Costs To Revenue Keep Fixed Costs Low & Tie Variable Costs To Revenue

14-25 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Cash Budget Format BudgetActual Expected Cash Receipts $$$$$$$$ Expected Cash Payments $$$$$$$$ Cash Balances $$$$$$$$ Cash- Capital Investment $$$$$$$$

14-26 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Cash Balance Beg. Of Month- Balance + Total Cash Receipts - Total Cash Payments End Of Month- Balance

14-27 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Budgetary Control “…the system of budgets used to control a company’s financial activities.”

14-28 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Credit/Collections Control  Identify Slow Payers  Investigate Customer’s Ability & Willingness To Pay  Monitor Past Due  Write-Off Uncollectibles Steve Cole/Getty Images

14-29 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Audit “…a formalized examination and/or review of a company’s financial records.”

14-30 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Types Of Audits FinancialInternalOperations

14-31 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Feedback Obtain Information Obtain Information Observation Observation Oral Reports Oral Reports Written Memos/Reports Written Memos/Reports Compare Actual vs. Standards Compare Actual vs. Standards Jacobs Stock Photography/Getty Images

14-32 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Causes Of Poor Performance  Wrong Objectives  Customers Not Buying  Poor Scheduling  Theft/Spoilage  Too Many Employees  Lost Opportunities  Too Much Free Service/Donations

14-33 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Ratios “…relationships between two or more variables.

14-34 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Ratio Comparison Values Firm’s Current Value Current Value Past Value Past ValueFirm’s Current Value Current Value Industry Values Industry Values Can Be Interrelated

14-35 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Financial Ratios

14-36 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. U.S. Tax System Determines Taxes & Who Will Pay Collection Of Taxes Internal Revenue Service-

14-37 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Taxes IndirectDirect

14-38 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Selected Direct Taxes

14-39 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Tax Effects  Income Tax On Profits  Employer Withhold/Match  Owner Personal Taxes  Transfer Of Ownership  Business Decisions  Government Administrative Cost Of Collection

14-40 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Types Of Taxes Excise/Intangible Property Excise/Intangible Property Sales & Use Sales & Use Federal, State, & Local Income Federal, State, & Local Income S. Meltzer/PhotoLink/Getty Images

14-41 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Licenses, Permits & Registrations Federal Federal Business License Business License Employer’s Federal Tax ID Number Employer’s Federal Tax ID Number Mailing Permits Mailing Permits State State Incorporation/Partnership Incorporation/Partnership Trade Name Registration Trade Name Registration Professional Registrations Professional Registrations City/County City/County Zoning Permits Zoning Permits Building Permits Building Permits Royalty-Free/CORBIS

14-42 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Taxable Income “…total revenues minus deductible expenses.”

14-43 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Deductible Expenses Cost Of Goods Sold Cost Of Goods Sold Selling Selling Administrative Administrative PhotoDisc/Getty Images

14-44 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Cost of Goods Sold & Inventory Valuation First-In, First-Out (FIFO) First-In, First-Out (FIFO) Last-In, First-Out (LIFO) Last-In, First-Out (LIFO) Average Cost Average Cost Kim Steele/Getty Images

14-45 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Employment-Related Taxes Income Tax Withholding Income Tax Withholding Social Security/Medicare Social Security/Medicare Unemployment Compensation Unemployment Compensation Federal Administration Federal Administration State State Workers’ Compensation Workers’ Compensation

14-46 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Owners’ Personal Taxes Salaries & Bonuses Withdrawn From Company Salaries & Bonuses Withdrawn From Company Dividends Dividends Contract For Business Sale Contract For Business Sale Noncompete Clause Noncompete Clause Seller Warranties & Representations Seller Warranties & Representations Purchase Price Purchase Price Retro Americana

14-47 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Credit Management Decide Method Of Customer Payment  Cash  Check/Debit  Credit Set Credit Policies & Practices Administer Credit Operations Jack Star/PhotoLink/Getty Images

14-48 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Credit vs. Debit Card Use