Introduction to Financial Planning

Every business utilises the monetary resources that it has, in order to conduct its activities successfully.

These resources could be profits from the business or the capital that is ploughed into the business by the owners.

CAPITAL EXPENDITURE- the business capital is used to purchase the fixed assets.

RETAINED PROFITS- financial resources that the business generates as a direct result of its profitability.

WORKING CAPITAL- used for the day to day running of the business including bill payments, stock purchases, wage payments and others.

FIXED COST- incurred by the business as a result of the business operations. Regardless of the level and type of business activity, fixed costs are standard and fixed.
Employees wages, bills for utilities, rental payments and insurance. These costs can increase to reflect the rise in prices of the above mentioned for any reason including inflation.

VARIABLE COST- not constant and increase or decrease as a direct result of the output levels of the business.
There is direct proportional relationship between the variable cost and output. Hence with an increase in the level of production of the goods and service, the higher the variable cost will be.

Variable Cost = Total Cost - Fixed Costs.

TOTAL COST- the sum total of both the fixed and variable cost which the business accrues as a direct result of its operation.

AVERAGE COST- the cost per unit of production.

Average Cost = Total Costs / Output

DIRECT COST- the variable costs of the business which directly relate to the output level of production.

INDIRECT COSt- fixed costs which are accrued by the business that are spread across the business in different areas.
The rent is paid by the business for the use of all departments involved in production. It's essential and can't be categorised as a variable cost which changes.

CALCULATION OF PRICE- the price of a product of any business is not a random figure plucked out of the air. In order to setmthenprice of say good or service.
Business Costs- direct, indirect, fixed and variable costs.
Competitor Prices- these could be lower and hence the business must be sensible in setting its price to attract clients.

PRICING POLICY- setting the price of goods and services.

Firstly the competition in the market among established leaders makes it more difficult for a new business to set its price.
Secondly, start up costs will be high as its a new business. It may not have the access to benefits of large scale production.
It would like its business service and product to gain maximum exposure at a relatively early stage. . It needs to be cautious in determining its pricing policy.

CALCULATION OF BUSINESS REVENUE- business revenue is the amount of profit which the business makes from its daily activities addicts efforts to sell products and services to its respective market.

The price per unit of the product is multiplied by the number of units of the products sold.

Sales Revenue = Average Price x Volume of Goods Sold.

Increase revenue by increasing the average price ear unit of product, and increasing the volume of the products on the market,

CALCULATION OF PROFIT- the profit that a business makes is the difference between the total revenue of a business and the total costs of a business.
GROSS PROFIT- the total amount it makes before the deduction if any tax. It'd an estimate of the actual costs a business needs to accrue in order to generate a desired level of revenue.
OPERATING PROFIT- refers to the deduction of overhead costs from the total gross profits. These overheads include the business fixed costs.
PRE TAX PROFIT- the profit derived after the major one off costs have been deducted from her operation profit.
NET PROFIT- profit of the business which has been deducted of tax. Once corporation tax has been decucted, this is the level of profit left available for distribution to shareholders, it'd also from this that retained profits are derived. These are ploughed back to be invested in the business.

The higher the profit of a business the more attractive it is to investors and the shareholders, e level of profit reflects the performance of business and his effective the operating strategies and plans have been.

Profit = Total Revenue - Total Costs

There a sting relationship between profits, revenues, price and cost.

Profits are generated when revenues are Hugh, as a result of good performance of the business. The higher the price in relation to the volume, the higher will be the revenue and hence the profits.

The costs need to be kept to a minimum in order to produce more and generate the maximum returns. However, in the case that the output costs as a direct result of an increase in revenue is equal to or exceeds the revenue generated, then there would be no profit made from the business. The higher the priced are in direct relation to the revenue.

Businesses always endeavour to minimise costs and create the most favourable opportunities for profit maximum.