Accounting - Topic 2

Importance of Business Planning

• As the company has limited capacity and resources, planning is one means of allocating scarce resources amongst competing uses

• Busisness planning includes the determination and setting of goals for short term and long term developement of the business

• Objectives of business stratergies including changing goals and performance measurement

• Stratergic initiatives include identifying a need/niche in the market and meeting this need by delivering a product or service to meet consumer demand

Goals

A goal is a desired result a person or a system envisions, planned and commits to achieve a personal or orginsational desired end point in some sort of assumed developement. Many people endarvor to reach goals within a finite time by setting deadlines

Objectives

An objective is a specific target for a business. Objectives must be specfic, attainable, measureable, consistent and related to time. The objective of most businesses is to maximise profit. Other objectives include quality of service to customers and social and community objectives

Generic business stratergies

A generic business stratergy is one which is desgined to be used by noone specific business or industry sector but rather can be applied across businesses and industries

Cost Leadership

This business strategy focuses on extreme efficiency:

• It relies on tight cost control so that the company keeps costs to an absolute minimum

• Having the lowest possible costs allows the business to pass this on to the consumer and sell a low cost product thereby gaining market share

• The strategy can be used by companies which produce a high volume of a fairly no frills, standardised product

• This allows the business to take advantage of economies of scale

• This means the average cost per unit falls the greater the production levels

• The aim is for a low-cost product being sold to a large customer base

• The business is involved with mass production and mass distribution

• Due to this, it is a strategy which onyl large firms can engage in

Differentiation

This business strategy focuses on making the product/service offered by the business in some way different to that of its competitors:

• For example, iPhone v other models

• This product differentiation allows for a higher price to be charged due to the customer loyalty that tends to build up in these situations

• The biggest advantage of this strategy is that the customer tends to remain loyal to the product buying it because they want it due to the product it is and not due to the price of it

Strategic initiatives

Are initiatives put into place to help the business gain a competitive advantage

Performance management

• Performance management (PM) includes activities which ensure that goals are consistently being met in an effective and efficient manner

• Performance management can focus on the performance of an organisation, a department, employee, or even the processes to build a product of service, as well as many other areas.

• PM is also known as a process by which organisations align their resources, systems, and employees to strategic objectives and priorities

Reducing costs and risks

• Business risk if a growing concern, especially in today’s economy

• Business owners need to take control of their companies, assess the risks inherent in their firms

• Risks can be operational or financial. For each potential risk, effective implantaton of internal control measures can minimise risk

• Strategic business planning can help reduce the risks by managing the costs associated with a business

Cost

An economic sacrifice of resources for a particular purpose, such as making a product or providing service

Fixed costs

Fixed costs are those that are relatively fixed over a range of activity, volume or output. They do nto change as a direct result of changes in volume (amount of goods produced).

Example of fixed costs

• Rent, rates

• Management salaries

• Depreciation

• Building insurance

• Interest on loans

Variable costs

Variable costs vary directly and proportionately with changes in the level of activity, volume or output. This means that if volume or output goes up or down, costs will go up or down by a proportionate amount.

Examples of variable costs

• Wages of employees who make the products (factory wages)

• Raw materials

Examples of mixed costs

• Vehicle expense (registration, insurance, running costs)

• Electricity

• Telephone costs (line rental plus calls)

What is CVP

Cost volume profit (CVP) analysus enables decision makers to assess how changes in selling price, costs and volume impact upon the performance of a business

Uses of CVP Analysis

Uses of CVP analysis decision making include:

• Where budgeted profits are unlikely to be achieved, management is able to indentify how, within the relevant range of activity, changes in selling pices and/or variable costs per unit, product mix and/or total fixed costs can be made to achieve a target profit

• By revealing how profits are impacted by changes in selling prices and/or variable costs per unit, product mix and/or total fixed costs, management is able to analyse and identify which particular combonation of these variables provides the optimal financial outcome for the business

• Where a constraint exists (e.g. resource inputs such as direct materials or direct labour) or manufacturing capacity (e.g. machine hours), management of a multi product business is able to determine the optimal production mix decision for maximising business profits

Contribution Margin

• Cm per unit - selling price per unit (CP) - variable cost per unit (VC).

• Total CM = Total revenue (sales) - Total variable costs

• CM per unit represents the revenue available after subtracting variable costs from sales to cover fixed costs and add to profit

Break-even

The point where revenue equal variable and fixed expenses or where no profit or loss is made. Helps managers determine the minimum number of untis that need to be sold in order to cover all costs. Any amount of units sold above breka even will result in profit.

Margin of safety

• Provides managers with information about hwo far sales can fall before a buisness starts to make a loss

• Provides managers a guide in offering discounts

• A reduction in the margin of safety can send warning signals to management that there may be a problem

• Gives managers time to investigate changes and make adjustments to production or costs

Past Costs

Costs that are irrelevant to making a current decision. They are in the past and can’t be changed by any future action. For example buying a machine 5 years ago in a past cost.

Relevant information/Future costs

Costs that are relevant to making a decision as they will have to be paid now or in the future. For example delivery costs on buying products and Having them delvered rather than te business making themselves

Opportunity Costs

Opportunity costs are the potential benefit that is forgone as a result of choosing one alternative over anoher. Opportunity costs meet the defintion of a future cost.