Location and Business Plan
Question :
Discuss about the Accounting for Managers ?
Gola and Costa set for establishing a business of selling fruit juices. The location of the shop is inside Shopping Arcade and nearby a supermarket. Their plan is to provide fresh juices to their customers, earn a significant amount of profits and sell off the same in the future course of time. They will follow just in time for inventory management. Gola is under the impression that they will be successful in earning profits by controlling their cost as he believes that for running a successful business, only profitability is the foremost criteria. Posta believes that their business will be successful due to their choice of location and due to the eating habits of the people. Since there has been a significant shift in the eating habits, people have become more conscious for their healthy well-being and this was one of the reasons why both the entrepreneurs had propagated such kind of idea of business.
As an Aspiring MBA graduate studying accounting for managers and being there friend, I can make them understand and analyse many other aspects apart from profitability and location of business. Since I am specializing in the field of Management and Finance I can help them in some statistical analysis which they are significantly missing on their part. Before setting of the business, it is very important to discuss the kind of industry in which they are supposed to enter a detailed analysis is required to be done right from the point of financial investment to related cost both fixed and fluctuating , expected return in fair terms. It is also relevant that they search for their competitors and analyse their business as for how they are creating an impact in the business environment.
The location of the business, which they have decided is quite favourable. However, to achieve the same, both of them have to make a significant investment in terms of leasing. It refers to borrowing the property against paying for its value for a significant period of time. For this, they have to enter into an agreement with the lessor of Shopping Arcade. It is equally important that they understand the terms and conditions of leasing properly and should have a lease term of 5 years so that they can cover all their cost during this period of time (BusinessDictionary.com, 2016).
For the purpose of investment, they need to have availability of funds. It is required that they approach a bank who can arrange for their finance. They need to convince the bank regarding their potential profitability of business. For this, they should have the significant backup plan on paper which is able to prove with reasonable estimates and assumptions that their prospective business is a successful plan for the future. It is also important that they should be aware of the cost of capital which will be required in their leasing terms. After arranging the significant amount of loan and arranging the same for the lease the next part is to analyse various types of cost associated with their business.
Cost Analysis and Break-even Point
Cost can be divided into fixed and variable component. For example, fixed cost will be the lease amount which is to be spread for the period of 5 years cost. Blending machines, refrigerators, furniture, benches washing up sinks, falls into fixed cost. Variable cost will be the cost of raw materials like all those fruits which will be purchased on a daily basis. Fixed costs remain the same irrespective of the level of output while variable cost changes as per the level of output. Variable cost can increase or decrease as per the level of production but fixed cost remains the same throughout the level of production (Boundless, 2016).
After analysing all the significant cost, the next component is the break-even analysis. Break even analysis refers to the function where it is required to determine what is required to sell on a monthly or annual basis in order to cover the cost of doing the business. Like, if fixed cost is $2, 00,000 and expected contribution will be $4, break even will be $50,000. This means they will earn profits after covering $50,000(Cleverism, 2016).
Setting up of standards and its importance:
It is also required to set a standard for sales. This will act as a benchmark for their business as how much is required to earn in order to cross the level of breakeven point and earn a significant share of profit. By setting up standard it can be later compared with the actual sales figure. Like, for first quarter sales expected is $15,000 but actual sales was $18,000. Thus, it is a favourable condition for them as actual has exceeded its standards. With the actual figure and standards, variances can be computed for the future relevance (AllBusiness.com, 2016).
The reason behind the setting up of a standard is equivalent to setting up of short term goal which will be quite helpful in achieving a long-term goal for the business. For cost, monthly expected expenditure is $10,000 but actual came to $12,000. Reason for extra $2,000 will be analysed and corrective action to be adopted for the same. Budgeting helps us to identify unnecessary expenditures and in making us adaptable towards the frequent changing financial position of the business. Budgeting ensures that we will have sufficient amount of money in order to meet the requirement of the business. It will be advisable to Gola and Costa that they should understand the essence of budgeting and implement the same for the success of their business. The concept of budgeting will help Gola and Costa immensely. It is an important tool which will control the flow of money in their business. It will also ensure that their business will turn out to be very effective and efficient in the long run (Mymoneycoach.ca, 2016). One of the main reasons behind the term of the lease is to cover all kind of fixed cost during that period.
Since it is the plan of Gola and Costa to sell off their business in future, it is required that their business should run in scientific and profitable manner. For this, they need to understand the relevance of documentation in terms of recording finance, lease papers terms of bank loans etc. The prospective buyer will analyse the business in his own way. Unless and until he finds it’s economically viable, he will not take over the business. Now, economic viability can be analysed by way of proper maintenance of records, lease papers, bank loan’s terms, and conditions etc. He will analyse that whether the said business was profitable or not. Whether the bank loan taken has been paid off and all other statutory dues or complied with or not. Lease papers will also be verified. This needs to be understood by Gola and Costa since the beginning of their business.
It is very important that they should keep in mind since the beginning regarding selling off their business in the future course of time. This will drive them more proactively to achieve their short term plan which is in the form of standards. By achieving the short-term standard, they will be able to achieve their ultimate aim, i.e. profitability. Unless and until the business is not profitable, it won’t remain attractive for the prospective buyer to take over the same in future. It is also important that the business gains popularity amongst the consumers. This will help in creating the brand image for Gola and Costa and will it yield in terms of goodwill while selling off the business. Both the buyer and seller will be in a profitable position if a business has developed a brand image of its own in the market.
Conclusion:
The whole process is beyond the concept of capital investment decisions. It involves the role of management accounting as in terms of setting targets and achieving the same, producing raw materials i.e. inventory management, handling the customers and creating a favourable image in front of them etc. So, apart from having the knowledge of finance, it is equally important that Gola and Costa should be aware regarding management accounting and other important aspects. With the help of the above-stated concept, it will help Gola and Costa to have the efficient and effective setup of business.
To conclude, it is required that Gola and Costa should not only rely on the concept of profitability or location of business. They should be quite aware regarding the concept of break-even analysis, an estimate of sales and setting up of targets, different types of cost involved and their implications, importance of budgeting in their business, arrangement of investment with the help of a loan from bank and requirements for selling off their business in future. By following these above concepts of finance and management accounting, they will surely succeed in their attempt for a successful venture (Debitoor.com, 2016).
Reference
AllBusiness.com. (2016). Creating a Budget and Sales Forecast | AllBusiness.com. [online] Available at: https://www.allbusiness.com/creating-a-budget-and-sales-forecast-977-1.html [Accessed 11 Dec. 2016].
Boundless. (2016). Types of Costs. [online] Available at: https://www.boundless.com/economics/textbooks/boundless-economics-textbook/production-9/production-cost-64/types-of-costs-240-12338/ [Accessed 11 Dec. 2016].
BusinessDictionary.com. (2016). What is a lease? definition and meaning. [online] Available at: https://www.businessdictionary.com/definition/lease.html [Accessed 11 Dec. 2016].
Cleverism. (2016). Break-Even Analysis: What, Why, and How. [online] Available at: https://www.cleverism.com/break-even-analysis/ [Accessed 11 Dec. 2016].
Debitoor.com. (2016). Management accounting – What is management accounting? | Debitoor. [online] Available at: https://debitoor.com/dictionary/management-accounting [Accessed 11 Dec. 2016].
Mymoneycoach.ca. (2016). What is Budgeting and Why is it Important? | My Money Coach. [online] Available at: https://www.mymoneycoach.ca/budgeting/what-is-a-budget-planning-forecasting [Accessed 11 Dec. 2016].
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