(Solved)Business Planning: Budgeting and Breakeven Analysis Bu
Business Planning: Budgeting and Breakeven Analysis
Budgeting in business is similar to budgeting in your personal life, but it has the added dynamic of variable streams of funds and ever changing expenses. It does not, however, need to be difficult. In fact, if you spend time building a budgeting model (as will be seen in this chapter), you can have great budgets with minimal time investment.
The Budgeting Process
In accounting, there is a concept called Cost Volume-Profit Analysis. This is an intimidating title that simply means this: when your sales go up or down, some of your expenses will change. If you consider things like electricity, payroll, cost, etc., it makes sense that if you sell more of something you will likely have more costs. Right? Well, this takes that concept just a bit farther but is not that complicated.
Cost Volume-Profit Analysis
“Cost Volume Profit Analysis is a means of predicting the effects of changes in costs and sales levels on the income of a business” (Larson).
Types of Costs
Fixed costs are those costs that are the same regardless of your sales volume (See Semi-Variable and Stair Step Costs for exceptions). Rent is a good example of a fixed costs in that your rent stays the same if you have zero sales or numerous sales.
Variable costs are those costs that are associated with your volume of sales. An example of a variable cost would be the parts needed to make a specific item such as computer chips in a computer or sugar in a soda bottle. The more items you produce, the more of these costs you will incur.
Semi-Variable and Stair Step Costs
Some costs do not fit the description of either a fixed or variable cost, as they are a blend of the two. A good example of this is utilities. Often with utilities you will pay a minimum amount for service plus a variable amount for kilowatts used. This makes it a semi-variable cost.
Earlier we looked at rent as a fixed cost. However, what happens when you are producing your maximum number of items in the space you are renting? You would, naturally, have to acquire more space and that would increase your rent. This is called “Stair Stepping” costs. Stair Stepping is when you have a cost that is fixed for a range of sales but takes a step up in costs at certain levels, as with what happened in the rent example.
So often, new business owners read the “how-to” and see things like Break Even Analysis and glaze over. Similar to Cost Volume Profit Analysis, the name is more intimidating than actually doing the analysis. Breakeven, in simplest terms, is how many units a company must sell (in units or dollars) in order to break even, covering all fixed and variable expenses. It is important to know your breakeven as it gives
you realistic estimations of how much your sales need to be to start making a profit. In fact, a breakeven analysis is one way to know whether you should go forward with a project.
There are many uses for the breakeven analysis besides your initial need to see what your sales volume needs to be. One of the primary uses for a small business is to estimate the volume of sales needed to produce a targeted profit. This is important for two main reasons. The first reason is that you are in this to make a profit, not break even. You can stay at home and break even, so why work and take risk just to stay the same economically? The second reason is to see how much flexibility you may have in lowering or increasing sales price or to see the effect of changes in cost of materials or labor.
Using the techniques from lecture notes develop plan for Budgeting and Breakeven Analysis for the business concept that you have chosen earlier.
usiness Planning: the Concept
Many times the concept phase is either given (such as when you purchase an existing business) or has been bouncing around in your mind for some time. However, it is important not to be too casual about this phase of your plan. Although a restaurant selling hotdogs and hamburgers may seem obvious, the subtleties that separate you from others may not be so easy to see at first.
Consider again the typical hair salon seen in every city. How do you feel about it? Does it engender a strong emotion at all? Now consider the sports themed hair salon. How would that make you feel? Which salon engenders a stronger emotion? If you are a sports fanatic, the sports themed salon will likely excite you, making you feel something special about yourself and your experience with the salon. It is
this feeling that will not only attract a certain clientele but will often allow for an increase in prices and profitability. This concept is covered in-depth in marketing but should be considered at this stage as well.
When developing your concept there are 5 main questions upon which you should focus:
1. Who are trying to attract?
2. What feeling are you attempting to engender?
3. Is there market need for this emotion?
4. How will you be different from others?
5. How long will this opportunity last?
Who Are You Trying to Attract?
Your first reaction to the question of who you want to attract may be, well…everyone, but that is most likely not the case. Much like the beauty salon focusing on men who love sports, your business will have nuances that focus on a specific demographic. It is this demographic that you will focus your attention regarding marketing and other critical decisions for your business.
To best determine who you want to attract, consider in your mind’s eye your first week of business. What does it look like? Who do you see coming in the door as your customer? It is that person on which you want to focus your attention.
What feeling are you attempting to engender?
According to the demographic you are targeting, your business should engender a feeling for the customer. Everything from the color of the walls to the music playing in the background all set a mood that should be attractive to your customers. In the case of the sports-themed beauty salon, the stadium seating, sports networks on the televisions, and the staff wearing jerseys all engender a feeling of being in a sports stadium. People who do not like sports would not be attracted to this theme, but the target market, likely young males, will be very attracted to this theme and will not only come to the salon, but will likely pay a premium for that feeling.
Consider the last time you bought clothes or at least shopped for them. You can buy clothes in many different outlets, but you chose to buy from that store in particular. Why? If you shop in a mall, you have likely experienced clothing stores that have very scantily clad young people on large posters outside the store and modern loud music playing inside. Obviously this store is not trying to attract a seventy-year old grandmother. So who are they trying to attract? Clearly they are targeting a young demographic and have focused the feel of the store to that narrow audience. When
their customer buys from them, the customer receives a feeling much more about the store than about the actual clothing purchased. It is that feeling that is incredibly important when developing the concept for your business.
Is there market need for this emotion?
So, now that you have some idea of the feeling or emotion you want to engender in your audience, you need to ensure there is an actual market for that emotion. Not all feelings have the same appeal and yours may be too narrow to be viable. It is important to point out at this stage that you should not fall too madly in love with your concept. Remember, the purpose of a business is to make money. If you’re great idea will not make you money, or enough money to make it worth your while, then move on to another idea.
If we look again at the sports themed beauty salon and agree that the major audience for this emotion is young males (Yes, women like sports too, but not in the same numbers), it would not make much sense to place this salon next to an all-female university. However good the idea is, it has to match the market need.
How will you be different from others?
Although there are some very original ideas, most are not original and are simply an attempt to build a better mousetrap so to speak.
How long will this opportunity last?
Every idea, regardless of its impact on society, runs its course. That course may be short lived or may last many lifetimes, but eventually something will come along and replace it.
Using the techniques from lecture notes develop a concept of business (you can pick any business activity, company or individual).
satyanarayanasatyanarayana answered this
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Business planning must be important for every business.To implement the plan there should be the concept in which we believe the most which gives more success.There should be clear mission,vission and a clear goal regarding the concept.I had planned the concept of business from a company who sells the shoes and appraisals.
There would be many shoes and appraisals shops in our locality.Local shops are having the low quality and if we spend money also they doesnot give the assurance for the product so that very small amount of people get attracted and engender the emotion of very intended groups.But i picked up an products of an branded company which give more advantages to the buyer if they spent money on the products also.They feel comfortable on using their company products and sometimes branded stores offer coupons which will be benefited during their purchase of the products.This may engender the emotion because they feel surprised of the cupons and the mode of recieving the sutomers.
Who are trying to attract?
Sports people,some people will goes to workout every day,casual wear appraisals for the employees which give more dignity if they wears will be attracted by those products.They give additional advantages to the customers.
What feelings are you tempting to endenger?
Clothing should be availble in all the designs of the latest trends,Shoes should be feel comfortable by the sutomers,Interior which made in the showroom should be more attractive so that customer will have positive impact on the store.Feedback most be taken from the customers who visited the store because we can accomodate according to their wish.By providing the products according to their wish makes them feel and tempt them to buy the products.In all sizes and colours clothings should be provided by that young sters can be attracted very easily.I recruit the sales people who are in pleasing expression that who was smiley to reciev the customers.
Is there market need for this emotion?
There should be the market need because our store was intended for the customer need and provide service according to the wish.For some of the business there should not be need of market emotion because it doesnot sense for the growth of business.
How will you be different from others?
While planning itself it was important to have an idea about that our business should be different from others.We should provide the products in the trendy manner so that people think that it was different from other appraisal stores.
How long will this oppurtunity last?
shoes and appraisals doesnot lost their identity in anytime.By introducing the trendy products name and fame will be last for the long time.Customers should trust our product that it gives more benefits by this reason our product will be lasts long time.
this is my previous Businee Plan,
Answer to Business Planning: Budgeting and Breakeven Analysis
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