Lecture 9

1. OHT 1 Lecture 9

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

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

4. OHT 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?

5. OHT 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.

6. OHT 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

7. OHT 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:

8. OHT 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

9. OHT 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

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

11. OHT 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.

12. OHT 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.

13. OHT 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

14. OHT 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.

15. OHT 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

16. OHT 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.

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

18. OHT18 • 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.

19. OHT 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.

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

21. OHT 21 • EXAMPLE: REFER TO T 4 • 1. Contribution margin • Sales price (unit) = 20.00 • Variable cost (unit) = 14.00 70% • _________ • Contribution margin = $ 6.00 30%

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

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

24. OHT 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

25. OHT 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

26. OHT 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:

27. OHT 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?

28. OHT 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?

29. OHT 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.

30. OHT 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

31. OHT 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

32. OHT 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

33. OHT 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.

34. OHT 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

35. OHT 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

36. OHT 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

37. OHT 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

38. OHT 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

39. OHT 39 END OF LECTURE 9