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Nick Rowe/Getty Images. 13. Chapter. Profit Planning. Need For Profit Planning Changes In Company Financial Position Financial Structure Planning For Profit. Profit Planning. “…a series of prescribed steps to be taken to ensure that a profit will be made.”. McGraw-Hill/Irwin.
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Nick Rowe/Getty Images 13 Chapter Profit Planning Need For Profit Planning Changes In Company Financial Position Financial Structure Planning For Profit
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.
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 %
Drop In Financial Position • Uncollectible A/R • Too Many Assets Negative Cash Flow
Benchmarking “…setting up standards (for reference) and then measuring performance against them.”
Accounting Records “…records of a firm’s financial position that reflect any changes in that position.”
Accounting Equation Owners’ Equity +Liabilities Total Assets
PhotoLink/Getty Images Current Assets • Cash • Accounts Receivable • Inventory • Short-Term Investments • Prepaid Expenses
Ross Anania/Getty Images Fixed Assets • Equipment • Building • Accumulated Depreciation • Net Fixed Assets
Royalty-Free/CORBIS Total Liabilities • Current Liabilities • Accounts Payable • Notes Payable • Long-Term Liabilities • Long-Term Loans • Mortgage Payable
Working Capital Current Assets - Current Liabilities Working Capital
(c) Duncan Smith/Getty Images Owners’ Equity • Capital Stock • Retained Earnings
Royalty-Free/CORBIS Revenue • Cash • Accounts Receivable
Steve Cole/Getty Images Types Of Expenses • Fixed • Variable
Materials Salaries Utilities Depreciation Rent Building Services Insurance Interest Office & Supplies Sales Promotion Taxes & Licenses Maintenance Delivery Miscellaneous Expenses
Profit (Income) “…the difference between revenue earned and expenses incurred.”
Royalty-Free/CORBIS Well-ManagedSmall Business • Liquid • Balance Sheet Important • Stability vs. Growth • Long-Range Planning
Ryan McVay/Getty Images Initial StepsIn Profit Planning • Establish Goal • Determine Volume For Profit • Estimate Expenses • Determine Estimated Profit • Compare Estimate With Goal
Lawrence Lawry/Getty Images Action StepsIn Profit Planning • List Alternatives • Determine Expenses • Determine Profits • Analyze Alternatives • Select & Implement
Need For Profit Planning = • Uncertainty • Planning
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
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