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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
Business, planning includes setting goals and objectives which can boost workplace production, motivate employees, and sets clear and concise desired results
As a company has limited capacity and scarce resources, business planning is one means of allocating scarse resources amongst competing users which then reduce risks
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.
