Profit Planning

2. Nick Rowe/Getty Images 13 Chapter Profit Planning Need For Profit Planning Changes In Company Financial Position Financial Structure Planning For Profit

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

4. How Much Profit? • For a private, nonfinancial business: • What do you think is a “fair” profit to make on its sales, after paying its income taxes? (Give as a percentage of sales after taxes) __________ • What do you think the average business makes, in a year, as sales after taxes. ___________ • For a grocery supermarket: • What do you think is a “fair” profit to make, as a percentage after taxes? _________ • What do you think the average supermarket makes in profits after taxes? _________ 5% ½ - 1 ½ %

5. Drop In Financial Position • Uncollectible A/R • Too Many Assets Negative Cash Flow

6. Benchmarking “…setting up standards (for reference) and then measuring performance against them.”

7. Accounting Records “…records of a firm’s financial position that reflect any changes in that position.”

8. Accounting Equation Owners’ Equity +Liabilities Total Assets

9. Balance Sheet

10. PhotoLink/Getty Images Current Assets • Cash • Accounts Receivable • Inventory • Short-Term Investments • Prepaid Expenses

11. Ross Anania/Getty Images Fixed Assets • Equipment • Building • Accumulated Depreciation • Net Fixed Assets

12. Royalty-Free/CORBIS Total Liabilities • Current Liabilities • Accounts Payable • Notes Payable • Long-Term Liabilities • Long-Term Loans • Mortgage Payable

13. Working Capital Current Assets - Current Liabilities Working Capital

14. (c) Duncan Smith/Getty Images Owners’ Equity • Capital Stock • Retained Earnings

15. Income Statement

16. Royalty-Free/CORBIS Revenue • Cash • Accounts Receivable

17. Steve Cole/Getty Images Types Of Expenses • Fixed • Variable

18. Materials Salaries Utilities Depreciation Rent Building Services Insurance Interest Office & Supplies Sales Promotion Taxes & Licenses Maintenance Delivery Miscellaneous Expenses

19. Profit (Income) “…the difference between revenue earned and expenses incurred.”

20. Royalty-Free/CORBIS Well-ManagedSmall Business • Liquid • Balance Sheet Important • Stability vs. Growth • Long-Range Planning

21. Ryan McVay/Getty Images Initial StepsIn Profit Planning • Establish Goal • Determine Volume For Profit • Estimate Expenses • Determine Estimated Profit • Compare Estimate With Goal

22. Lawrence Lawry/Getty Images Action StepsIn Profit Planning • List Alternatives • Determine Expenses • Determine Profits • Analyze Alternatives • Select & Implement

23. Need For Profit Planning = • Uncertainty • Planning

24. Planning For Profit • Establish Profit Goal $ 52,000 • Determine Sales Volume 530,000 • Estimate Expenses 490,000 • Determine Profit Estimate 40,000 • Compare Profit To Goal -$12,000 • List Alternatives • Change Sales Volume • Decrease Expenses • Add Products/Services • Subcontract

25. Action Steps In Profit Plan • Expenses Vary With Volume SalesExpenses • $364,000 $364,000 • $530,000 $490,000 • $700,000 $618,700 • VolumeProfit • $364,000 $ -0- • $530,000 $ 40,000 • $700,000 $ 81,300 • Analyze Alternatives • Select/Implement Plan

26. Breakeven Chart

27. Pro Forma Income Statement