Since the future is uncertain and circumstances are likely to change, why should a business bother to plan?
A business plan serves the following needs:
- As a benchmark against which performance can be evaluated
- Information for CVP analysis (Cost Volume Profit)
What should a business include in its business plan?
- Description of the business
- Marketing plan
- Description of the operations of the business
- Environmental management plan
- Financial plan
How does accounting information contribute to the planning process?
- Accountants determine how revenue, variable costs and fixed costs affect profits.
- Observing cost behaviour patterns lets accountants determine if the costs are fixed or variable
- This information can be used to predict costs.
- Accounting information can help decision makers evaluate alternative plans using CVP
- CVP analysis is a tool that helps managers think critically about different aspects of each plan.
What is CVP analysis? (Cost Volume Profit analysis)
Break-even analysis.
What is a line of credit?
An amount of money a business is allowed to borrow with a prearranged agreed-upon interest rate and a specific payback period.
What is Long-term capital?
Capital that will be repaid to creditors or returned to investors after more than one year.
What are the steps in projecting financial performance?
- The data you use should be as reliable as possible.
- Consider several scenarios because predicting a business’s financial performance is uncertain.
- Revise your projections as more facts become available.
- Ensure that the financial plan is consistent with the information in the other sections of the business plan.
What does CVP analysis tell you?
Cost-Volume-Profit analysis shows how profit is affected by changes in sales volume, selling prices of products and the various costs of a business.
What is a fixed cost?
A fixed cost is a cost that is constant in total and not affected by sales volume.
What is a Variable cost?
A variable cost is a cost that is constant per unit and that changes in total in direct proportion to changes in volume.
What are total costs?
The total costs are the sum of the fixed costs and variable costs at a given volume.
What is the equation for total cost?
Total cost = f + vX
f = Total fixed costs
v = Variable cost per unit sold
X = Sales volume
What is total contribution margin?
The difference between the total sales revenue and the total variable cost.
What is contribution margin per unit?
The difference between the sales revenue per unit and the variable costs per unit.
Why is CVP analysis useful in planning?
Because it shows the impact of alternative plans on profit.
What is the break-even equation?
Unit sales volume (to earn zero profit) = Total fixed costs / Contribution margin per unit.
How does accounting information contribute to the planning process?
By observing cost behaviour patterns accountants are able to classify the costs as either fixed or variable and then to use this classification to predict the amounts of the costs at different activity levels.
What must decision-makers be able to predict in order to estimate profit at a given sales volume?
Decision-makers must be able to predict the products selling price the costs that the business will incur and the behavior of those costs (whether they are fixed or variable)
How can decision-makers predict the sales volume necessary for estimated revenues to cover estimated costs?
To predict the sales volume necessary for estimated revenues to cover estimated costs, decision-makers must rearrange the profit equation into the break-even equation.
How can decision-makers predict the sales volume necessary to achieve a target profit?
Decision-makers must modify the break-even equation by adding the desired profit to the estimated fixed costs.
How can decision-makers use accounting information to evaluate alternative plans?
Based on accounting information alone, the alternative that leads to the highest profit will be the best solution.
