1. 2.3 How do businesses survive?1 Must prepare a business plan/forward plan (set objectives) to ensure that: Meet customer needs and wants Manage costs effectively Stay competitive Why do Businesses need to Plan and Control? Contains goals: Short-term – eg increase sales locally Long-term – eg expand nationwide Check these goals against business plan regularly and take action if not achieving F/G/C

2. 2.3 How do businesses survive?2 product or service? how many to make? how many workers? when will I make a profit? what price? new product? size of product? how much will it cost? what materials? Planning decisions?? Why do Businesses need to Plan and Control? Successful business must meet the needs of its customers – its product/service must:  be of suitable quality  in the quantities required  at a suitable price  available to the correct consumer market  which consumers want to buy F/G/C

3. 2.3 How do businesses survive?3 Why do Businesses need to Plan and Control? Businesses must cover costs or they will make a loss Some new businesses will aim to only cover costs or break-even (ie not make a loss) in the first few years - to get established Profit is the amount made after costs are paid. Forecasting income and costs allows businesses to make decisions and plans eg – get a loan or overdraft in a month where income is low. Covering Costs?? F/G/C

4. 2.3 How do businesses survive?4 A plan that a business prepares for the year ahead. It is based on the objectives of the business and provided targets for the employees to achieve. What is a Budget? shows the money that is likely to come in and how it will be spent over the coming months checks if a business can earn enough money in expected sales to pay for expected costs anticipates what lies ahead (business can take action to reduce risks, etc) G/C

5. 2.3 How do businesses survive?5 Spreadsheet packages – useful for budgets? Can perform calculations (formula) Can run scenarios (what ifs?) Can display results on charts What is a Budget? Types of budget  Cash Sales Raw materials Etc G/C

6. 2.3 How do businesses survive?6 Greater control over the future of the business – gives targets and reduces RISKS Weaknesses or difficulties can be anticipated before they happen Less uncertainty and fear about future Decisions can be made eg purchase asset? Why prepare a Budget? G/C

7. 2.3 How do businesses survive?7 Problems shown by the Cash Budget? Shows a problem in February: what can we do? arrange a loan/overdraft buy the van on Hire Purchase try to increase sales find a cheaper supplier G/C

8. 2.3 How do businesses survive?8 the point at which the sales revenue of a business equals its total (running) costs at break-even all the running costs have been paid off by the money coming in from sales allows you to work out how many items you need to produce and sell and cover those costs in order to break even if you sell any units above the BEP you will therefore make a profit G/C

9. 2.3 How do businesses survive?9 Fixed Costs are those costs which stay the same irrespective of how much you sell or produce (eg rent for premises, insurance premiums) Variable Costs are those costs which increase directly as sales or production increases (eg power to machines, some wages [where workers are paid according to how much they produce]) Break-Even Analysis TOTAL COST = Fixed Costs + Variable Costs G/C

10. 2.3 How do businesses survive?10 Costs & Revenues (£) Quantity Sales Revenue Fixed Costs Total Costs Break-even point Variable Costs G/C

11. 2.3 How do businesses survive?11 Costs & Revenues (£) Quantity Break-even point For an explanation of the shaded areas see next slide G/C

12. 2.3 How do businesses survive?12 The green shaded area (to the left of BEP) shows the losses made at the appropriate levels of sales since Total Cost is greater the Sales Revenue. The blue shaded area (to the right of BEP) shows the profits made at the appropriate levels of sales since Sales Revenue is greater the Total Cost. Therefore the BE chart allows you to calculate whether a profit or loss will be made at any level of sales. G/C

13. 2.3 How do businesses survive?13 Find out what is happening in the market at the moment Help predict the future – for product development Find out why sales have fallen Investigate if there is a market for a product/service Market Research Reasons for Market Research C

14. 2.3 How do businesses survive?14 Sampling – may not reflect nations views People’s behaviour not always predictable Wording of the questions – leading? Attitude and personality of the interviewers? Market Research Problems with Market Research C

15. 2.3 How do businesses survive?15 FINAL ACCOUNTS Trading Account Profit and Loss Account Balance Sheet C

16. 2.3 How do businesses survive?16 Trading and Profit & Loss Account TRADING ACCOUNT Gross Profit = difference between money from selling goods and cost of buying or making these goods PROFIT & LOSS ACC Net Profit = gross profit less expenses (overheads), eg wages, rent, lighting C

17. 2.3 How do businesses survive?17 Trading and Profit & Loss Account Trading and Profit and Loss Account for years 1 and 2 Year 1Year 2 £000s£000s£000s£000s Sales150180 lessCost of Goods Sold 90110 ________ GROSS PROFIT 60 70 lessExpenses Wages1620 Selling Expenses2025 Administration Expen14 5018 63 NET PROFIT £10 £7 ==== === C

18. 2.3 How do businesses survive?18 BALANCE SHEET FIXED ASSETS eg premises, equipment CURRENT ASSETS eg cash, stock, debtors CURRENT LIABILITIES eg loans, creditors WORKING CAPITAL: current assets less current liabilities CAPITAL EMPLOYED : capital invested once liabilities have been deducted Shows the worth of the business on a particular date C

19. 2.3 How do businesses survive?19 BALANCE SHEET Balance Sheets for years 1 and 2 Year 1Year £000s £000s £000s £000s Fixed Assets 150 200 Current Assets 80 100 less Current Liabilities 20 60 60 40 £ 210 £ 240 ==== ==== Financed by: Capital 210 200 Long Term Liabilities 0 40 £210 £240 ==== ==== C

20. 2.3 How do businesses survive?20 ACCOUNTING RATIOS 4 highlights liquidity problems 4 comparisons - over years and between competitors 4 shows how well business uses its assets C

21. 2.3 How do businesses survive?21 T, P & L Acc – Ratios TRADING ACCOUNT Gross Profit Percentage Gross Profit x 100 Sales Yr 1 = 60% Yr 2 = 45% Investigate!!! PROFIT & LOSS ACC Net Profit Percentage Net Profit x 100 Sales Yr 1 = 28% Yr 2 = 36% C

22. 2.3 How do businesses survive?22 Rate of Stock Turnover= Cost of Goods Sold Average Stock = ???? Times Average Stock= (Opening Stock + Closing Stock)/2 A rate of 1.3 times means that stock has changed only once in a year! Rate of turnover depends on product. A fishmonger will have a rate of 300 times a year! T, P & L Acc – Ratios C

23. 2.3 How do businesses survive?23 Balance Sheet - Ratios Acid Test Ratio Current Assets - Stock: Current Liabilities * Stock is least liquid asset * Ratio should be greater than 1 Working Capital Ratio (Current Ratio) Current Assets: Current Liabilities eg 2:1 Measures how easily short-terms debts can be paid off C

24. 2.3 How do businesses survive?24 Balance Sheet - Ratios Return on Capital Employed = net profit x 100 capital employed eg 53% This means a return of £53 for every £100 invested. C

25. 2.3 How do businesses survive?25 SUMMARY OF RATIOS PROFITABILITY - return on capital employed, gross profit to sales, net profit to sales LIQUIDITY - working capital ratio, acid test ratio ASSET USAGE - rate of stock turnover, asset utilisation C

26. 2.3 How do businesses survive?26 Use of Ratios Compare between 2 years – can see if company has improved, has new idea worked, etc. Compare between companies - you can compare 2 similar companies to see if one is better managed, better resources, etc. Compare against expected (forecast) performance C