Why plan, and over what time?
Planning means choosing goals and the steps to reach them before acting.
- Short term (up to 1 year): daily and monthly jobs, stock, cash.
- Medium term (1–3 years): new products, more staff.
- Long term (over 3 years): new factory, new country, the firm's vision.
Plans need fresh facts. A business watch means regularly checking prices, competitors, laws, technology and customer tastes, so the plan stays up to date.
Forecasts and budgets
A forecast is a careful guess about the future, for example next year's sales. It can come from surveys of customers, past sales trends or expert opinion.
A budget turns the forecast into money targets: expected income and spending for each month.
- Variance = actual − budget. A big gap shows something to fix.
- Firms make a sales budget, a production budget and a cash budget.
Break-even point
Fixed costs (rent, salaries) stay the same whatever you sell. Variable costs (materials) rise with each unit.
The contribution of one unit = price − variable cost. It first pays the fixed costs, then gives profit.
Break-even quantity = fixed costs ÷ contribution per unit. At this point there is no profit and no loss. The margin of safety = expected sales − break-even sales.
Time value of money and planning tools
Money today can earn interest, so it is worth more than the same money later. Future value = present value × (1 + r)n. Going backwards (discounting) tells what a future amount is worth today.
Planning tools:
- Gantt chart: a bar for each task on a timeline.
- Spreadsheet simulation: change one number (price, sales) and see the result; this is a 'what if' test.
Each department plans its part: operations (what to make, when), marketing (who to sell to, how) and finance (where money comes from and goes).
Key formulas and definitions
- Contribution per unit = price − variable cost per unit
- Break-even quantity = fixed costs ÷ contribution per unit
- Total cost = fixed cost + variable cost per unit × quantity
- Profit = revenue − total cost
- Margin of safety = expected sales − break-even sales
- Future value = present value × (1 + r)ⁿ
- Present value = future value ÷ (1 + r)ⁿ
- Variance = actual − budget
Worked examples
1. Fixed costs ₹30,000 a month, price ₹500, variable cost ₹200 per unit. Find the break-even quantity.
Contribution = 500 − 200 = ₹300. Break-even = 30,000 ÷ 300 = 100 units a month.
2. In the same firm, expected sales are 140 units. Find the profit and the margin of safety.
Revenue = 140 × 500 = ₹70,000. Total cost = 30,000 + 140 × 200 = ₹58,000. Profit = ₹12,000. Margin of safety = 140 − 100 = 40 units.
3. ₹10,000 is invested at 8% a year. What is it worth after 3 years?
10,000 × 1.08³ = 10,000 × 1.2597 ≈ ₹12,597.
4. Budgeted sales were ₹80,000; actual sales were ₹72,000. Find the variance.
Variance = 72,000 − 80,000 = −₹8,000 (adverse: sales were below budget).
5. What is ₹11,664 received in 2 years worth today at 8%?
Present value = 11,664 ÷ 1.08² = 11,664 ÷ 1.1664 = ₹10,000.
6. A shop must survey the market (2 weeks), then get a loan (3 weeks), then fit out (1 week). Advertising (2 weeks) can run during the fit-out. What is the shortest time to open?
The tasks that must follow each other: 2 + 3 + 1 = 6 weeks. Advertising runs alongside, so opening is in week 7 at the earliest.
Common mistakes
- Thinking a forecast is a promise. It is a careful guess and must be checked against actual results.
- Dividing fixed costs by the price instead of by the contribution (price − variable cost).
- Treating ₹1,000 next year as equal to ₹1,000 today. Money today can earn interest.
- Making one plan and never updating it. A business watch keeps the plan fresh.