13-1McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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Profit Planning

Need For Profit PlanningNeed For Profit Planning Changes In Company Changes In Company

Financial PositionFinancial Position Financial StructureFinancial Structure Planning For ProfitPlanning For Profit

Ch

apte

r

13

Nick Rowe/Getty Images

13-3McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Profit PlanningProfit Planning“…“…a series of a series of

prescribed steps to prescribed steps to be taken to ensure be taken to ensure that a profit will be that a profit will be

made.”made.”

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How Much Profit?How Much Profit?For a private, nonfinancial business:

•What do you think is a “fair” profit to make on its sales, after paying its income taxes? (Give as a percentage of sales after taxes) __________•What do you think the average business makes, in a year, as sales after taxes. ___________

For a grocery supermarket:•What do you think is a “fair” profit to make, as a percentage after taxes? _________•What do you think the average supermarket makes in profits after taxes? _________

5%

½ - 1 ½ %

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Drop In Financial PositionDrop In Financial Position

Uncollectible A/RUncollectible A/RToo Many AssetsToo Many Assets

Negative Cash FlowNegative Cash Flow

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BenchmarkingBenchmarking

“…“…setting up standards setting up standards (for reference) and then (for reference) and then measuring performance measuring performance

against them.”against them.”

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Accounting RecordsAccounting Records

“…“…records of a firm’s records of a firm’s financial position that financial position that reflect any changes in reflect any changes in

that position.”that position.”

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Accounting EquationAccounting Equation

Owners’ Equity+Liabilities

Total Assets

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Balance SheetBalance Sheet

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Current AssetsCurrent AssetsCashCashAccounts ReceivableAccounts ReceivableInventoryInventoryShort-Term Short-Term

InvestmentsInvestmentsPrepaid ExpensesPrepaid Expenses PhotoLink/Getty Images

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Fixed AssetsFixed Assets

EquipmentEquipment

BuildingBuilding

Accumulated Accumulated DepreciationDepreciation

Net Fixed AssetsNet Fixed AssetsRoss Anania/Getty Images

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Total LiabilitiesTotal LiabilitiesCurrent LiabilitiesCurrent LiabilitiesAccounts PayableAccounts PayableNotes PayableNotes Payable

Long-Term LiabilitiesLong-Term LiabilitiesLong-Term LoansLong-Term LoansMortgage PayableMortgage Payable

Royalty-Free/CORBIS

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Working CapitalWorking Capital

Current Assets- Current Liabilities Working Capital

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Owners’ EquityOwners’ Equity

+Capital StockCapital Stock

+Retained Retained EarningsEarnings (c) Duncan Smith/Getty Images

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Income StatementIncome Statement

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RevenueRevenue

CashCash

Accounts Accounts Receivable ReceivableRoyalty-Free/CORBIS

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Types Of ExpensesTypes Of Expenses

FixedFixed

VariableVariableSteve Cole/Getty Images

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ExpensesExpensesMaterialsMaterialsSalariesSalariesUtilitiesUtilitiesDepreciationDepreciationRentRentBuilding Building ServicesServices

InsuranceInsuranceInterestInterest

Office & Office & SuppliesSupplies

Sales Sales PromotionPromotion

Taxes & Taxes & LicensesLicenses

MaintenanceMaintenanceDeliveryDeliveryMiscellaneousMiscellaneous

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Profit (Income)Profit (Income)

“…“…the difference the difference between revenue between revenue

earned and expenses earned and expenses incurred.”incurred.”

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Well-ManagedWell-ManagedSmall BusinessSmall Business

LiquidLiquidBalance Sheet Balance Sheet ImportantImportant

Stability vs. GrowthStability vs. GrowthLong-Range PlanningLong-Range Planning

Royalty-Free/CORBIS

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Initial StepsInitial StepsIn Profit PlanningIn Profit Planning

1)1) Establish GoalEstablish Goal2)2) Determine Volume Determine Volume

For Profit For Profit3)3) Estimate ExpensesEstimate Expenses4)4) Determine Estimated Determine Estimated

ProfitProfit5)5) Compare Estimate Compare Estimate

With GoalWith Goal

Ryan McVay/Getty Images

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Action StepsAction StepsIn Profit PlanningIn Profit Planning

6)6) List AlternativesList Alternatives

7)7) Determine Determine ExpensesExpenses

8)8) Determine ProfitsDetermine Profits

9)9) Analyze AlternativesAnalyze Alternatives

10)10)Select & ImplementSelect & Implement

Lawrence Lawry/Getty Images

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Need For Profit PlanningNeed For Profit Planning

UncertaintyUncertainty PlanningPlanning==

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Planning For ProfitPlanning For Profit1.1. Establish Profit GoalEstablish Profit Goal $ 52,000$ 52,0002.2. Determine Sales VolumeDetermine Sales Volume 530,000 530,0003.3. Estimate ExpensesEstimate Expenses 490,000490,0004.4. Determine Profit EstimateDetermine Profit Estimate 40,000 40,0005.5. Compare Profit To GoalCompare Profit To Goal - -

$12,000$12,0006.6. List AlternativesList Alternatives

a.a. Change Sales VolumeChange Sales Volumeb.b. Decrease ExpensesDecrease Expensesc.c. Add Products/ServicesAdd Products/Servicesd.d. SubcontractSubcontract

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Action Steps In Profit PlanAction Steps In Profit Plan7.7. Expenses Vary With VolumeExpenses Vary With Volume

SalesSales ExpensesExpensesa.a. $364,000$364,000 $364,000 $364,000b.b. $530,000$530,000 $490,000 $490,000c.c. $700,000$700,000 $618,700 $618,700

8.8. VolumeVolume ProfitProfita.a. $364,000$364,000 $ -0- $ -0-b.b. $530,000$530,000 $ 40,000 $ 40,000c.c. $700,000$700,000 $ 81,300 $ 81,300

9.9. Analyze AlternativesAnalyze Alternatives10.10. Select/Implement PlanSelect/Implement Plan

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Breakeven ChartBreakeven Chart

13-27McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Pro Forma Income StatementPro Forma Income Statement