Business plan (21)

Business plan

It is a formal documentation which details finance,HR and other strategies of the organization and financial implication of them.

• Uses of the business plan (Objectives)

*It is essential while obtaining bank loan or venture capital.
*It guides and direct the organization.

Advantages

*It helps to allocate resources between department efficiently.
*It facilitate as a measurement of the organization performances.

Disadvantages

*Time waste.

Break even Analysts; break even point (20)

Break even Analysts

Break even analysts means it is an analysts which helps the firm to identify the output level ,they should produce to start earning profits and stop earning losses.

Break even point shows the output level where Total Revenue = Total Cost.

In other words it shows the output level at which the firm stop earning losses and start earning profits.
This can be calculated by formula as:

Break even point = Fixed cost / contribution (SP-VC)


It can be shown graphically as follows,

Advantages of calculating break even point

1. It shows the number of units the firm should sell to start earning profits.
2. It shows the margin of safety,the output level which a business should produce to maintain current profit level.

• margin of safety = actual output - B.E level

3. It is essential while obtaining an external source of finance.
4. It helps the firm to determine the different pricing strategies.

Disadvantages

1.When it calculate they will not take into account market changes.
2.BEP prepared based on assumption which might not be accurate.
3.Preparing a plan doesn't ensure the success of the business it might be a time and cost waste.

Gross profit margin Vs Net profit margin (19)

                    Gross profit margin Vs Net profit margin






Gross profit margin

This is a ratio which shows how much of gross profit is included in every pound of sale. Gross profit can be calculated as:

Net profit margin

Net profit margin shows how much of net profit is included in every pound of sale.

Profit; Gross profit; Net profit (18)

Profit

The difference between the income and cost of the firm is called as profit. It can be calculated as:

Profit = Income - Cost

There are two types of profits,

1. Gross profit
2. Net profit

Gross profit

The profit earn by the firm before meeting the operating expenditure is called as gross profit.

Gross profit = Sales - Cost of sales

Net profit

The profit earn by the firm after meeting operating expenses are net profit.
Net profit can be calculated as:

Net profit = Gross profit - Operating expenses

Revenue; Cost; Fixed cost; Variable cost (17)

Evaluating the business Idea

Revenue - It is the total income earn by the firm by selling their goods and services. It can be calculated as;

Cost

It is the total expenditure incurred by the firm to do their business activities. There are two types of cost;

1. Fixed cost - the cost which does not change with the level of output.
Ex:rent,insurance,salary,advertising

2. Variable cost - the cost which changes with the level of output.
ex:utility bills,wages,raw materials

Leasing; Hire purchases; Overdraft (16)

Leasing
Renting or hiring a machinery or any other asset by paying a monthly rental is called as leasing.
The ownership will never be transferred the user, however maintenance and repairs should be done by the lessee.

Hire purchases

It is where high value assets will be purchased by an agreement between two party's,  here the firm will ask another business to buy the assets on behalf of them and will pay the amount monthly over a period of time, at the end of payment the ownership will be transferred back to the firm.

Overdraft

It is a term loan provided by banks to the current account holders where they will be allowed to withdraw more money than they have in the account using cheques.

Advantages of external sources of finance

1. Hard to obtain finance because high documentation.
2. Interest had to be paid.
3. High Liabilities.

Disadvantages

1. Low opportunity cost.
2. Low interference.

Bank loan (Mortgage Loan); Venture Capital; Share (15)

External Sources of Finance

When the firm obtain finance from sources which are external to the firm.

Bank loan (Mortgage Loan) - When a firm obtain a loan from a bank keeping an asset as the security or collateral it is called as mortgage loan.

 Venture Capital - It is a financial aid provided by an investor to an entrepreneur who has a business an business idea, after identifying the potential success of the business idea the risk will be bourn by the venture capitalist and they will share the profit when the business is success.

Share -  is the share of share capital. Shares can only be issue by limited company.
This is suitable for firms which needs a huge amount of finance.

Sources of Finance; Start-up Capital; Internal sources (14)

Sources of Finance

Start-up Capital

The finance needed to meet all the expenditure to start the business is called as start-up capital. A business may meet start-up capital from two main sources;

1.Internal sources
2.External sources

Internal sources

When the firm use its own finance to start the business it is;

1. Retain profits-When the owner use his own money which is called as retain profits.
2. Sale of assets-owner can sell his assets and obtain finance.
3. Family and friends-the owner can obtain finance from his own family members.

Advantages

1. Easy to obtain finance because less documentation.
2. No interest had to be paid.
3. Less Liabilities.

Disadvantages

1. High opportunity cost.
2. Doesn't focus on the success of business.
3. High interference.

Fiscal Policy; Taxes; Subsidize (13)

Fiscal Policy
It is the government policy which deals with the government income and the expenditure to control same ares
in the economy.

Taxes

Tax is a compulsory payment a firm has to pay to the government when taxes increase cost of production will increase.Therefore
disadvantages to the business as demand will fall for the goods due to high prices.

Subsidize

Subsidize are grant given to producers to encourage production by reducing the total cost of the business.

Exchange rate; Inflation (12)

Exchange rate
Expressing the value of one currency in terms of another.The business which are involved in international trade will be affected by exchange rate.

Inflation

A continues increasement at the general price level of an economy is called as inflation.
Inflation will be measured by different indexes.Inflation will affect the business in different ways.

Advantages

*With the price increasement the business will be able to increase the prices therefore business can get profitsby selling different products.

Disadvantages

*Demand for luxury products will falls.
*Cost of production will increase as they have to provide highier prices for factors of productions.