It is within the management purview to determine how much quantum of Revenue or Sales to be earned before Profit is made
By Nwokolo Charles Ike
Most Entrepreneurs establish business to provide goods and services with a motive to achieving returns to the owners in form of Profit. Profit motive is a key objective of most forward looking businesses. The level of activity undertaken by a business determine whether the business will make Profit or Loss and the size of such Profits or Losses. To make Profit a business must cover its costs, fixed and variable costs. When Revenue is low a business is bound to suffer Losses.
It is within the management purview to determine how much quantum of Revenue or Sales to be earned before Profit is made. If Revenue is less than Fixed Costs, Loss will be incurred and where Revenue is greater than Fixed Costs plus Variable Costs Profit will be made.
Fixed Costs are costs that do not change over a stated level of activity. The Variable Costs change with the level of production of goods and services achieved. When Revenue or Sales increase in volume, the Variable costs of the activity also increase and the Fixed Costs remain unchanged. There are some factors that can bring about a change in profit of a business. These are:
• The selling Price per unit or hourly rate of service could be increased or decreased.
• Fixed Costs could be decreased or increased.
• Variable Cost per unit or service could be decreased or increased.
• Increase in the volume of production of goods or services.
Profitability objective or goal must be established in the Company’s Annual program me. Once the quantum of profit has been agreed, plans are drawn up so that all effort and progress are directed toward the achievement of the profit target. The plans are expressed in quantitative terms in form of budget. The budget is set up to serve as control purposes and for monitoring business activity. It is important that managers or heads of departments are involved and brought into the budgeting process for optimum results. The Plans will ensure that:
• There is proper coordination of all the activities of the business.
• The activities are controlled by linking the responsibility of managers or department heads to the budget to help achieve the desired result and the comparison of actual result archived with the expected target.
Sales estimate or budget is made to achieve the Revenue goal. To make Sales forecast, the company or business must consider the success or limiting factors found in the business. The company can make forecast based on the prevailing economic conditions with respect to the goods and services being provided and what is known about the activity of the competitors.
The company can also make estimate based on what the Sales personnel propose to achieve and the total is established. The market base of the Company will be considered, whether it has small customers or larger customers or it is a monopoly.
•Nwokolo Charles is a Consultant. He helps Individuals and Entrepreneurs to plan and set financial goals that fit their needs. He can be reached at cinwokolo@gmail.com, 08030599774.
