Profit
ž"Profit
is a condition of survival. It is the cost of the future, the cost
of staying in business". Peter Drucker
žProfit
is an essential cost of business activity and must be planned and managed just
like other costs. Successful business performance requires balancing
costs and revenues.
WHAT IS PROFIT PLANNING ?
DEFINITION:
Process of developing a profit plan
that outlines the planned sales revenues and xpenses and the net income or loss
for a time period. Profit planning requires preparation of a master budget and
various analyses for risk and whatif scenarios. Tools for
profit planning include the cost e volume  profit (cvp) analysisand budgeting.
HOW IS IT USED?
The profit plan is used in the following ways:
Evaluating operations.
Determining the need for additional resources such as facilities or personnel.
Planning purchasing requirements.
Anticipating any additional financing needs. Advantages of Profit Planning
The profit plan is used in the following ways:
Evaluating operations.
Determining the need for additional resources such as facilities or personnel.
Planning purchasing requirements.
Anticipating any additional financing needs. Advantages of Profit Planning
Advantages of Profit Planning:
1.
Performance evaluation.
2.
Awareness of responsibilities.
3.
Cost consciousness.
4.
Disciplined approach to
problemsolving.
5.
Thinking about the future.
6.
Financial planning.
7.
Confidence of lenders and
investors.
Factors Affecting Sales
Factors Affecting Sales
žAfter
categories have been selected and current sales divided among them, the various
factors which can affect sales in each category must be considered. These
factors could be either internal or external. Internal factors are those that
you can influence. External factors are those that affect the market served by
your business, but are generally beyond your control.
·
Internal Factors
·
External Factors
Internal Factors:
The following are typical internal factors that could
influence your sales forecast:
ž Promotional plans
ž Expansion plans
ž Capacity restrictions
ž New product introductions
ž Product cancellations
ž Sales force changes
ž Pricing policy
ž Profit expectations
ž Market expansion to new customers or territories
External Factors:
ž Among the external factors that must be considered are the
following:
ž Business trends
ž Government policies
ž Inflation
ž Changes in population characteristics
ž Economic fortunes of customers
ž Changes in buying habits
ž Competitive pressures
Sales forecasting approaches:
• Judgment Based Method
• Quantitative Models
v Time Series Analysis
• Other Methods Of Forecasting Sales
v Multiple Linear Regression
v Exponential Smooting
v Box Jenkins Metod
v Econometrics
Time series analysis:
ž A time series is a set of observations generated sequentially in
time
ž Continuous vs. discrete time series
ž The observations from a discrete time series, made at some fixed
interval h, at times t_{1},
t_{2},…, t_{N} may be
denoted by x(t_{1}),
x(t_{2}),…, x(t_{N})
Introduction (cont.):
ž Discrete time series may arise in two ways:
¡ 1 By sampling a continuous time series
¡ 2 By accumulating a variable over a period of time
ž Characteristics of time series
¡ Time periods are of equal length
¡ No missing values
Components of a time series:
InAreas of application:
ž Forecasting
ž Determination of a transfer function of a system
ž Design of simple feedforward and feedback control schemes
Forecasting:
ž Applications
¢ Economic and business planning
¢ Inventory and production control
¢ Control and optimization of industrial processes
ž Lead time of the forecasts is the period over which forecasts
are needed
ž Degree of sophistication
¢ Simple ideas
¢ Moving averages
¢ Simple regression techniques
¡ Complex statistical concepts
¢ BoxJenkins methodology
Approaches to forecasting:
Selfprojecting
approach
ž Causeandeffect approach
ARIMA models:
ž Autoregressive Integrated Movingaverage
ž Can represent a wide range of time series
ž A “stochastic” modeling approach that can be used to calculate
the probability of a future value lying between two specified limits
ARIMA models (Cont.):
ž In the 1960’s Box and Jenkins recognized the importance of these
models in the area of economic forecasting
ž “Time series analysis  forecasting and control”
¡ George E. P. Box Gwilym
M. Jenkins
¡ 1st edition was in 1976
ž Often called The BoxJenkins approach
Forecasting expenses:
ž What is an expenses forecast?
ž The expenses forecast is an estimate of your ongoing operating
expenses (overheads, outgoings, fixed costs) for the year. It answers the
question of how much it will cost to run your business. The selling price of
your products or services must include an amount to recover these expenses.
Definition of 'BreakEven
Analysis:
ž An analysis to determine the point at which revenue received
equals the costs associated with receiving the revenue. Breakeven analysis
calculates what is known as a margin of safety, the amount that revenues exceed
the breakeven point. This is the amount that revenues can fall while still
staying above the breakeven point.
Uses of Breakeven analysis:
ž Breakeven analysis is a useful tool to study
the relationship between fixed costs,variable costs and returns.
A breakeven point defines when an investment will generate a positive
return and can be determined graphically or with simple mathematics.
ž Breakeven analysis computes
the volume of production at a given price necessary to cover all costs.
Breakeven price analysis computes the price necessary at a given level of
production to cover all costs."
"The main advantage of breakeven analysis is that it explains the relationship between cost, production volume and returns. It can be extended to show how changes in fixed costvariable cost relationships, in commodity prices, or in revenues, will affect profit levels and breakeven points. Breakeven analysis is useful when used with partial budgeting or capital budgeting techniques. The major benefit to using breakeven analysis is that it indicates the lowest amount of business activity necessary to prevent losses." 
