1. Lecture 9 OHT 1

2. SECTION 7 PLANNING THE NEW VENTURE BUSINESS TOOLS Marketing Management Operations Management Financial Management Personnel Management OHT 2

3. Marketing Management Following the Marketing Concept - Being Customer-Oriented Refer to T 1 for Customer-Oriented Marketing OHT 3

4. 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? OHT 4

5. 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. OHT 5

6. 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 OHT 6

7. 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: OHT 7

8. -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 OHT 8

9. 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 OHT 9

10. Illustration of Profit and Loss Statement Refer to T 2 OHT 10

11. 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. OHT 11

12. 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. OHT 12

13. 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 OHT 13

14. 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. OHT 14

15. 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 OHT 15

16. 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. OHT 16

17. 2 main components of Owner’s Equity are capital invested and reserves (retained profits) Illustration of the Balance Sheet Refer to T 3 OHT 17

18. 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. OHT18

19. 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. OHT 19

20. FORMULA: Fixed Cost (Total $) Contribution margin (expressed as $ per unit) Fixed Cost (Total $) Unit Selling Price - Unit Variable Cost OHT 20

21. EXAMPLE:REFER TO T 4 1. Contribution margin Sales price (unit)= 20.00 Variable cost (unit)= 14.0070% _________ Contribution margin= $ 6.00 30% OHT 21

22. 2. Break-even Point Fixed Cost Contribution margin ($ per unit) = 792000 6 = 132,000 units OHT 22

23. 3. Break-even Sales Fixed Costs Contribution margin (%) = 792000 30% = 792000 0.3 = $2,640,000 OHT 23

24. 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 OHT 24

25. 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 OHT 25

26. - 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: OHT 26

27. 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? OHT 27

28. 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? OHT 28

29. 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. OHT 29

30. 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 OHT 30

31. 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 OHT 31

32. 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 OHT 32

33. 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. OHT 33

34. 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 OHT 34

35. 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 OHT 35

36. 5. What Personnel Records to keep? Most common records which should be kept, include: Attendance Record Personal File - contains: - all documents - correspondences - other matters OHT 36

37. 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 OHT 37

38. 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 OHT 38

39. END OF LECTURE 9 OHT 39