Financial Plan Sales and Fixed Expenses

Question: Discuss about theFinancial Plan for Sales and Fixed Expenses. Answer: Introduction The financial plan assesses the viability of undertaking a project. It helps in determining if the undertaking of the project would lead to value creation for its investors. All the parameters like sales, variable, fixed expenses and other expenses are estimated keeping in mind the nature of the industry in which the business would be involved and they are included in computing profitability of the project. Here the financial viability of the bakery is being assessed to decide for undertaking the project by the investor. Start- Up Cost It refers to the cost required for the initiation of business (Morah, 2008). The investment that has to be additionally made by the investor for starting the business forms a part of the start-up cost. The commitments that have been undertaken by the investor prior to the initiation of the project would not form a part of the start-up cost. It is the cost that has to be incurred prior to the realization of benefits from the business or project (Schmidt, 2015). Here, the initial investment of $200000 has to be made to purchase the bakery caf business. It would be run on the premises that have been taken on a lease rent of 3000 per month by the owner. Keeping in mind the above situation we can state that the start-up cost for the business is $200000. Since the agreement for the lease has been entered into by the owner prior to the purchase of the bakery and is a fixed financial commitment on the part of the owner it will not be considered as a part of start-up cost. It is assumed that all the important equipment and another asset that are required for operating the bakery business will be available in the amount that is being rendered for the purchase of the bakery business. Sales Forecast It means projecting the sales for the business in the forthcoming period. It is done keeping in mind the demand of the product in which the entity deals and the preference of the product of the entity over the products of its consumers. It is an essential tool for managing the business of any size (Infoentrepreneurs.org, 2016). The effectiveness of the sales forecast would depend on the assumptions and drivers that have been undertaken for assuming the sales. It is essential to study the sales forecast at proper interval and revise it in case of requirement noting the decisions that have led to such revisions. Sales largely depend upon the price at which the product is being offered to the consumers. Therefore, it is important to price the product in such a manner that the entity is able to maximize its profit. In the given case, the bakery business is being acquired by the owner but since it will be conducted on the leased premises of the owner we can assume that it will have to build its own demand and would have to penetrate the market. The sales in the initial months would be lesser as compared to the later months where an increase in the demand for the products can be expected due to the gaining popularity of the business. The sales forecast for the current year has been made hereunder keeping in mind the industry of the business. Month January February March April May June Units 1000 1200 1450 1600 1700 1750 Month July August September October November December Units 1800 2000 2300 2700 3000 3500 Break-Even Analysis Break-even refers to the point at which the total contribution is equal to the fixed expense that has to be incurred. It is the point at which the company neither makes any profit nor suffers any losses by undertaking the business or project. It is the point at which the total sales income is equal to total expenses, both fixed and variable (Tsorakidis et al., 2014). To compute the break-even point of a business it is essential that all the associated costs are included in the computation of break-even. Break-even point is the minimum number of units that are required to be sold by the business to finance its fixed expenses. The break-even analysis for the business has been made hereunder to identify the minimum number of units that are required to be sold. Fixed Expenses Rent Expense- 36000 Interest Expense 6000 Total Fixed Expense 42000 Sale Price per Unit - $5 Variable Cost per Unit - $2 Contribution per unit - $3 Break- Even point = Total Fixed Expense/Contribution per unit = 42000/3 = 14000 units. For the above computation the following have been assumed:- The sale price of each unit would be $5. The variable cost for each unit would be$2. The investment of $100000 would be financed by loan @6% p.a. Therefore, it would generate a yearly interest of $6000 that would be payable by the business. Therefore, the break-even point for the business would be $14000 by keeping in mind all the assumptions. The rent would be included in fixed expense even though the lease agreement has been entered into by the owner prior to purchase of business because it is a fixed commitment on the part of the owner and since the premises will be used for operating the business it is important to include this cost as fixed expense for the computation of break-even point. Conclusion It is feasible to operate a business in case it is financially viable. A business is viable if the revenue that is generated by the business is able to recover its portion of the variable cost and the considerable portion of fixed cost at the initiation of the business. Some businesses might have a longer gestation period and might not be viable initially to the investor. By studying the expected sales forecast and the break-even point it is concluded that the expected sales forecast is higher than the break-even point which will result in profit for the business from the year of initiation. Therefore the business is financially profitable. References Cafferky, M. and Wentworth, J. (2010).Breakeven analysis. Garrison, R. and Noreen, E. (2000).Managerial accounting. Boston: Irwin/McGraw-Hill. Infoentrepreneurs.org. (2016).Forecast and plan your sales. [online] Available at: https://www.infoentrepreneurs.org/en/guides/forecast-and-plan-your-sales/ [Accessed 11 Oct. 2016]. Morah, C. (2008).Business Startup Costs: It's In The Details. [online] Investopedia. Available at: https://www.investopedia.com/articles/pf/09/business-startup-costs.asp [Accessed 11 Oct. 2016]. Readyratios.com. (2012).Break-even Point. [online] Available at: https://www.readyratios.com/reference/analysis/break_even_point.html [Accessed 11 Oct. 2016]. Schmidt, M. (2015).Start Up Costs and Organizational Costs Defined Explained.. [online] Business Case Web Site. Available at: https://www.business-case-analysis.com/start-up-cost.html [Accessed 11 Oct. 2016]. Shillinglaw, G. (1977).Managerial cost accounting. Homewood, Ill.: R.D. Irwin. Tsorakidis, N., Papadoulous, S., Zerres, M. and Zerres, C. (2014).Break Even Point. [online] Break Even Analysis. Available at: https://hvtc.edu.vn/Portals/0/files/635830040786447267break-even-analysis-1.pdf [Accessed 11 Oct. 2016].