Why do Businesses need to Plan and Control?
Must prepare a business plan/forward plan
(set objectives) to ensure that:
Meet customer needs and wants
Manage costs effectively
Stay competitive
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
2.3 How do businesses survive?
1
Why do Businesses need to Plan and Control?
Planning decisions??
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?
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
2.3 How do businesses survive?
2
Why do Businesses need to Plan and Control?
Covering Costs??
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.
F/G/C
2.3 How do businesses survive?
3
What is a Budget?
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.
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
2.3 How do businesses survive?
4
What is a Budget?
Types of budget 
Cash
Sales
Raw materials
Spreadsheet packages – useful
for budgets?
• Can perform calculations
(formula)
• Can run scenarios (what ifs?)
• Can display results on charts
Etc
90
80
70
60
50
East
West
North
40
30
20
10
0
1st Qtr
2nd 3rd Qtr 4th Qtr
Qtr
G/C
2.3 How do businesses survive?
5
Why prepare a Budget?
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?
G/C
2.3 How do businesses survive?
6
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
CASH BUDGET STATEMEN T FOR FION A'S FLOWER SH OP
Januar y
Febr uar y Mar ch
Opening Balance
£1,900
£5,500
-£1,900
Receipts
Sales
Paym ents
Pur chases
Rent
Wages
H eat and Light
Van
Closing Balance
£12,500
£14,400
£14,000
£19,500
£15,200
£13,300
£5,500
£2,000
£1,100
£300
£8,000
£2,000
£1,100
£300
£10,000
£21,400
-£1,900
£9,200
£2,000
£1,100
£300
£500
£13,100
£200
£8,900
£5,500
• try to increase sales
• find a cheaper supplier
G/C
2.3 How do businesses survive?
7
• 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
2.3 How do businesses survive?
8
Break-Even Analysis
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])
TOTAL COST = Fixed Costs + Variable Costs
G/C
2.3 How do businesses survive?
9
Costs &
Revenues
(£)
Break-even
point
Sales
Revenue
Total Costs
Variable Costs
Fixed Costs
Quantity
G/C
2.3 How do businesses survive?
10
Costs &
Revenues
(£)
Break-even
point
Quantity
For an explanation of the shaded areas see next slide
G/C
2.3 How do businesses survive?
11
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
2.3 How do businesses survive?
12
Market Research
Reasons for Market Research
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
C
2.3 How do businesses survive?
13
Market Research
Problems with Market Research
Sampling – may not reflect nations views
People’s behaviour not always predictable
Wording of the questions – leading?
Attitude and personality of the interviewers?
C
2.3 How do businesses survive?
14
FINAL ACCOUNTS
Trading Account
Profit and Loss Account
Balance Sheet
C
2.3 How do businesses survive?
15
Trading and Profit & Loss
Account
TRADING ACCOUNT
PROFIT & LOSS ACC
Gross Profit =
Net Profit =
difference between
money from selling
goods and cost of
buying or making
these goods
gross profit less
expenses
(overheads), eg
wages, rent, lighting
C
2.3 How do businesses survive?
16
Trading and Profit & Loss Account
Trading and Profit and Loss Account for years 1 and 2
less
less
Year 1
£000s £000s
Sales
150
Cost of Goods Sold
90
____
GROSS PROFIT
Expenses
Wages
Selling Expenses
Administration Expen
NET PROFIT
16
20
14
Year 2
£000s £000s
180
110
____
60
50
£10
====
70
20
25
18
63
£7
===
C
2.3 How do businesses survive?
17
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
2.3 How do businesses survive?
18
BALANCE SHEET
Balance Sheets for years 1 and 2
Year 1
Year
£000s £000s
£000s £000s
Fixed Assets
Current Assets
less
Current Liabilities
Financed by:
Capital
Long Term Liabilities
150
80
20
200
100
60
£ 210
====
210
0
£210
====
60
40
£ 240
====
200
40
£240
====
C
2.3 How do businesses survive?
19
ACCOUNTING RATIOS
 highlights liquidity problems
 comparisons - over years and between
competitors
 shows how well business uses its assets
C
2.3 How do businesses survive?
20
T, P & L Acc – Ratios
TRADING ACCOUNT
PROFIT & LOSS ACC
Gross Profit Percentage
Net Profit Percentage
Gross Profit x 100
Sales
Yr 1 = 60%
Yr 2 = 45%
Investigate!!!
Net Profit x 100
Sales
Yr 1 = 28%
Yr 2 = 36%
C
2.3 How do businesses survive?
21
T, P & L Acc – Ratios
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!
C
2.3 How do businesses survive?
22
Balance Sheet - Ratios
Working Capital Ratio
(Current Ratio)
Current Assets:
Current Liabilities
eg 2:1
Measures how easily
short-terms debts
can be paid off
Acid Test Ratio
Current Assets - Stock:
Current Liabilities
Stock is least liquid
asset
Ratio should be
greater than 1
C
2.3 How do businesses survive?
23
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
2.3 How do businesses survive?
24
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
2.3 How do businesses survive?
25
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
2.3 How do businesses survive?
26