Improve Your Business: Handbook (ILO, 1986, 144 p.) 8. PLANNING (introduction...) Planning sales and costs (introduction...) Your business plan Estimating the sales Estimating the direct costs Estimating the indirect costs New investments (introduction...) Choosing new machines

Improve Your Business: Handbook (ILO, 1986, 144 p.)

8. PLANNING

Nothing in the world stands still for ever. Some businesses may go along for years in the same way and make a good living for their owners, but sooner or later they will find that they must change.

This is because:

· customers no longer want your goods - they want something new or something better;

· other businesses have come up which promote their products more actively than you do;

· machines and equipment have grown old, cost more to run and break down frequently. They must be replaced;

· the business is growing and it is necessary to decide how it shall grow and how much.

If you are wise, you will begin to think about the future long before you must do something, so that you have time to prepare yourself. Most of your days are busy with running your business, but there are evenings and other times when you can stop and ask yourself "Where do I go from here?"

You must start to make plans for your sales and costs for the months ahead, and think of new investments you will have to make in order to carry out your plans.

The sooner you start to think about the future, the more time you have to look around, get advice and find the best way to go.

BE WISE: THINK ABOUT THE FUTURE

Figure

ASK YOURSELF: "WHERE DO I GO FROM HERE?"

Planning sales and costs

Planning is thinking out, and then working out in detail, what you intend to do in a future period of time and how you expect to get there.

Planning for your business is similarto what you do when you set out on a journey. Before you start on a journey you plan or think out three things:

PLANNING A BUSINESS IS LIKE PLANNING A JOURNEY

ASK YOURSELF:

· WHERE DO I WANT TO GO?
· HOW WILL I GET THERE?
· HOW LONG WILL IT TAKE ME?

1. Where you want to go Before you start out on any journey you think out where you want to go, e.g. from London to Nairobi.

Figure

2. How you will get there Then you think out in detail how you will get there, e.g. by plane, boat or over land. You also choose which route you will follow, e.g. London-Paris-Rome-Nairobi or London-Nairobi direct.

3. How long the journey will take, and the distance:
You think out how long it will take, for example:

	Time taken	Distance
London - Paris	1/2 hour	500km
Paris - Rome	1 1/2 hours	1,500km
Rome - Nairobi Total	6 hours	6,000 km
	8 hours	8,000 km

Planning the future of your business is the same:

1 You think out or forecast where you want your business to go, e.g. you think you will get sales of 100,000 NU next year.

2. Then you think out how you will get there, e.g. you will sell more of the products you already make-chairs - and add a new product - beds.

3. Lastly, you think out how long it will take and what you should achieve, e.g. you will make sales of 8,000 NU per month during ten months, but in each of November and December you intend to sell 10,000 NU. The annual total will therefore be 100.000 NU.

BUSINESS PLAN

Your business plan

YOUR BUSINESS PLAN

You should make a plan for your business for the next year (e.g. 1987) or, if your business is growing fast, for the next three years. You write your plan down on paper. What you write must be your best estimate of what you think you can achieve with the resources you have in your business, e.g. with the machines, workers and cash that you have plus your own ability.

Your business plan is your estimate of the sales, costs and profit which you think you can achieve.

You estimate what is likely to happen to three basic parts of your business:

· the sales;
· the direct costs; and
· the indirect costs.

If you estimate these three elements reasonably accurately, you will have a good idea of how much profit you are likely to make.

YOUR BUSINESS PLAN IS YOUR ESTIMATE OF FUTURE SALES, COSTS AND PROFIT

Estimating the sales

Sit down and work out what you believe the sales are likely to be during the next year, i.e. for the 12-month period 1 January-31 December. You do this using your knowledge of the past year. When you do this, you are making what is called a sales forecast.

The most important thing about any sales forecast is that, if all goes well, it must be possible to achieve the figure which you estimate or guess. If it is just not possible, then that is not forecasting - it is dreaming. For example, if the business which you are in is producing stools and you have sold 2,500 of them at 40 NU (total sales 1 00,000 NU) in 1986, then it may be possible for your business to sell 3,000 in 1987 with extra sales push and some luck, but it would not be wise to make plans to sell 10,000 stools in 1987. That is unrealistic. Your business does not have the workers, the machines or even the money to expand as fast as that.

It will be necessary to forecast the expected number of stools which you will sell in the next year, and also their value. Let us assume that you agree on a sales forecast figure of 3,000 for 1987. During 1986 you improved the quality of your stools by using better-quality wood, and made them more attractive by using brighter paint. As a result you sold more of them during the last few months of the year. Therefore you estimate that you can charge a price of 50 NU per stool for 1987.

Your sales forecast for 1987 is now:

TO MAKE A SALES FORECAST:

1 ESTIMATE HOW MANY PRODUCTS YOU WILL MAKE AND SELL
2 ESTIMATE THE PRICE
3 MULTIPLY THE NUMBER OF PRODUCTS BY THE PRICE

Figure

Estimated no. of stools 3,000

x

Selling price 50 NU

=

Expected sales for next year 150,000 NU

Once you have this figure, you must then decide what your sales will be during each month of the year. You know that sales are roughly the same in each month, apart from November when your sales are three times greater than normal, and April, when they are usually a little higher than normal. The first stage in making up your business plan is to fill in the monthly sales figures, as shown below.

ALLOCATE YOUR ESTIMATE OF TOTAL SALES OVER THE DIFFERENT MONTHS

ENTER THESE FIGURES INTO YOUR BUSINESS PLAN

Details	Jan.	Feb.	Mar.	Apr.	May	June	July	Aug.	Sep.	Oct.	Nov.	Dec.	Total
Sales	10,006	10,000	10,000	20,000	10,000	10,000	10.000	10,000	10.000	10,000	30.000	10,000	150, 000

Estimating the direct costs

Figure

ESTIMATE YOUR DIRECT COSTS: COST OF LABOUR AND COST OF RAW MATERIALS

The next stage is to estimate the costs of production, or direct costs. These are the costs of labour and materials used in actually making the stools. First, let us look at your production plan. You plan to make 3,000 stools over 12 months. You could produce each month the number you plan to sell in that month.

However, this would mean paying excessive overtime in April and November, which would be expensive.

You could get the lowest production costs by making the same number of stools each month. This number would be:

On the other hand, this involves a certain amount of "manufacturing for stock" (i.e. making stools that will remain in stock for several months before being sold). This could lead to "cash flow" problems, with cash flowing out to pay for labour and materials long before cash flows in from sales. This in turn could mean the need for a loan or an overdraft, and thus extra interest payments. So although making 250 stools each month may mean the lowest production cost, it does not mean the lowest total costs. In addition, the production workers each have to have three weeks' holiday during the year, so the idea of making the same number of stools each month is not very practical.

You know that with five production workers you can produce 220 units per month without needing overtime work (overtime is paid at 50 per cent more than regular time). You are going to take on a sixth production worker. You estimate that during the first few months of the year you are able to produce 250 units per month without paying overtime and after that, when the new worker is fully trained, 270 units. In November, to meet increased demand in December, you decide to produce 360 stools by paying overtime. Since December contains a third week's holiday, and the peak demand will be over, you aim to produce only 230 stools.

You now produce the following production plan:

ONCE YOU KNOW YOUR SALES AND DIRECT COSTS YOU CAN ESTIMATE YOUR GROSS PROFIT

REMEMBER: SALES LESS DIRECT COSTS GIVES GROSS PROFIT

Month	Starting stock	Production	Sold	Ending stock	Comments
Jan.	30	250	200	80	30 units in stock
Feb.	80	250	200	130	at start of year
March	130	250	200	180
April	180	250	400	30
May	30	200	200	30	One production
June	30	200	200	30	worker on leave
July	30	200	200	30	during this period
Aug.	30	270	200	100
Sept.	100	270	200	170
Oct.	170	270	200	240
Nov.	240	360	600	0
Dec.	0	230	200	30

Now consider the production costs. The hourly wage rate, including holiday pay and all other fringe benefits, was 4.50 NU and your records of the last few months showed that each stool took 3.6 work-hours to produce. You expect that this will rise by 6-7 per cent during the next three months while the new worker gets used to the job, but this would be offset by some new tools which you will introduce to speed up the manufacturing operations. You estimate that for January, February and March you should allow 3.7 work-hours per stool, and after that 3.5 work-hours. From July you decide to give the workers a wage rise, bringing the hourly wage rate to 4.80 NU.

Now you can calculate your labour costs per stool:

· January, February and March:
4.50NU x 3.7 = 16.65NU;
· April, May and June
4.50NU x 3.5 = 15.75NU;
· July to December:
4.80NU x 3.5 = 16.80NU.

Multiply these costs by the number of stools you plan to produce each month to find your monthly labour costs.

You have also calculated that materials (wood, paint, glue, etc.) amounted to a cost of 9.70 NU per stool. You have a guarantee from your suppliers that they will not raise prices this year. Multiply the cost of materials by the number of stools you plan to produce for each month.

You can now fill in the next few lines of your business plan.

Details		Jan.	Feb.	Mar.	Apr.	May	June	July	Aug.	Sep.	Oct.	Nov.	Dec.	Total
Sales		10,000	10,000	10,000	20,000	10,000	10,000	10,000	10,000	10,000	10,000	30,000	10.000	150,000
Less: Production costs of which
	Labour	4,163	4,163	4, 163	3,938	3,150	3,150	3,360	4,536	4,536	4,536	6,048	3,864	49,607
	Materials	2,425	2,425	2,425	2,425	1,940	1,940	1,940	2,619	2,619	2,619	3,492	2,231	29,100
Gives: Gross profit		3,412	3,412	3,412	13,637	4,910	4,910	4,700	2,845	2,845	2,845	20,460	3,905	71,293

Estimating the indirect costs

Now you have to prepare estimates of your indirect costs. The biggest indirect costs are for the supervisor, who receives 950 NU per month, and your secretary (part-time) who receives 350 NU per month. So indirect wages are 1.300 NU per month.

SUPERVISOR: 950 NU

Then there are all the other overhead costs. Looking at your accounts for the previous year you find the following:

Insurance	500
Postage	800
Telephone	150
Electricity	800
Water	180
Stationery	420
Travel	840
Sundries	820

Consider these one by one. There will be some increase because of inflation (which is, say, 10 per cent per year) and because you are now doing more business.

SECRETARY: 350 NU

Insurance

After a talk with the insurance agent you learn that insurance costs will increase to 750 NU. This is to be paid in two instalments of 375 NU in March and September.

Figure

Postage

No increase in postal rates is expected. You allow 900 NU for postage, or 75 NU each month.

Figure

Telephone

Telephone rates are expected to increase by 20 per cent. You allow 150 NU plus 20 per cent (i.e. 180 NU) for telephone costs, or 30 NU every two months.

Figure

Electricity

Electricity rates are to go up by 10 per cent, and you think you should allow another 10 per cent for increased use. This will come to 800 NU plus 20 per cent, making 960 NU, or 240 NU every three months.

Figure

Water

You have no information about a water rate increase, but you reckon that you should allow for an increase of about 10 percent, say to 200 NU, or 50 NU every three months.

Figure

Stationery

You allow an increase of about 20 per cent, to 504 NU, stationery costs. This comes to 42 NU per month.

Figure

Travel

These costs can be held to about the same level as last year: 840 NU, or 70 NU per month.

Figure

Sundries

These will rise at about the same rate as inflation (10 per cent). You decide to allow 900 NU for sundries, or 75NU per month.

Figure

You are now ready to complete your business plan as follows:

Details	Jan.	Feb.	Mar.	Apr.	May	June	July	Aug.	Sep.	Oct.	Nov.	Dec.	Total
Sales	10,000	10,000	10,000	20,000	10,000	10,0010	10,000	10,000	10,000	10,000	30,000	10,000	150,000
Less: Production costs of which:
Labour	4,163	4,163	4,163	3,938	3,150	3,150	3,360	4,536	4,536	4,536	6,048	3,864	49,607
Materials	22,425	2,425	2,425	1,425	1,940	1,949	1,940	2,619	2,619	2,619	3,492	2,231	29,100
Gives: Gross profit	3,412	3,412	3,412	13,637	4,910	4,910	4,700	2,845	2,845	2,845	20,460	3,905	71,293
Less: Indirect costs of which:
Staff wages	13,00	1,300	1,300	1,300	1,300	1,300	1,300	1,300	1,300	1,300	1,300	1,300	15,600
Insurance			375						375				750
Postage	75	75	75	75	75	75	75	75	75	75	75	75	900
Telephone		30		70		30		30		30		30	180
Electricity			240			240			240			240	960
Water			50			50			50			50	200
Stationery	42	42	42	42	42	42	42	42	42	42.	42	42	504
Travel	70	70	70	70	70	70	70	70	70	70	70	70	840
Sundries	75	75	75	75	75	75	75	75	75	75	75	75	900
Total indirect costs	1,562	1,592	2,227	1,592	1,562	1,882	1,562	1,592	2,227	1,562	1,562	1,882	20,834
Gives: Net profit	1,850	1,820	1,185	42,045	3,348	3,028	3,138	1,253	618	1,253	16,898	2,023	50,459

The business plan shows that you estimate that you will make a net profit of 50,459 NU during the 12 months. Out of this you have to pay yourself, pay interest on loans, make loan repayments and build up the reserves of the business so as to finance future expansion and to have funds in reserve in case of unexpected events.

The above is a simple example of how a business plan is drawn up. It starts with the sales forecast and then the production plan. It takes account of changes in personnel and other changes (e.g. in prices) and brings them all together to form a general plan for your business for the next " planning period ", which is usually a year.

This business plan has a most important use. It is used to control the operation of your business. Each month you can make up a business report on what actually happened, and compare your actual sales, costs and profits with the figures you wrote into the business plan. Then you can decide what action you must take to improve your business.

CHECK YOUR PROGRESS

Figure

IF YOU KNOW WHERE YOU WANT TO GO, YOU CAN CHECK WHETHER YOU ARE ON THE RIGHT TRACK

New investments

As time goes on, machinery, equipment, motor vehicles, even buildings, become worn out or out of date. There comes a time when they must be replaced if output is to be kept up. If you are doing well, your business will want to grow. You will need more machines, more vehicles, bigger buildings.

When a machine becomes difficult to operate, makes poor work and begins to break down often, you must ask yourself: "Isn't it time to buy a new one?"

The workers on the machines will soon tell you of the difficulties they have. Your supervisor, if you do not run your workshop yourself, will tell you about breakdowns.

You must also keep good output records. Then it is easy to see when the output of a machine is falling.

Figure

WHEN YOU KEEP GOOD OUTPUT RECORDS YOU CAN SEE WHEN OUTPUT IS FALLING

Example

Suppose you are the owner of a tile press which has been regularly making 1,000 tiles a day. During the past year the workers on the press complain of difficulties; there are more spoiled tiles.

Breakdowns and repair bills are getting bigger, and the daily output is now only about 700 tiles a day.

You sell the tiles for 2 NU a tile. In the past you made and sold 5,000 tiles in a five-day week, which brought in 10,000 NU a week. Now, with an average of 700 tiles a day, the machine is making only 3,500 tiles a week. Income is down to 7,000 NU a week, so you are losing 3,000 NU a week, or 144,000 NU in a 48-week year. That is a lot of money. If you used to make 30 per cent profit on an output of 5,000 tiles a week (i.e. 3,000 NU), you do not make a profit any more. The time has come to replace your press.

You must first get information about new tile presses of different makes and compare their prices and outputs. It helps if you can see some of the presses in operation or learn about them from people who have used them.

A modern press will certainly do better than an old press like the one you have. If the press you like costs 150.000NU, including shipping, import duties and installation, and can make 6,000 tiles in a five-day week, you will get 2,500 more tiles a week than you are getting from your old press, i.e. 5,000 NU a week more and 240,000 NU more in a year (48 weeks).

This is a great difference. You will be able to recover the money which you invested in the new machine in two or three years, and costs or repair will also be much lower. You will have fewer breakdowns and higher-quality tiles.

BEFORE MAKING ANY INVESTMENT:

· GET INFORMATION
· COMPARE PRICES AND OUTPUTS
· TRY TO SEE THE EQUIPMENT YOU WANT IN OPERATION

Note: Every case is not as clear as this one, which has been made simple. That is why it is very important to keep good records of output, repair bills and so on for each important machine. Only then do you have good information in order to be able to compare old with new and decide when to replace.

Choosing new machines

DO YOU HAVE THE KNOWLEDGE TO JUDGE WHAT IS BEST FOR YOU?

Not many owners of small businesses have the technical knowledge to be able to make a choice between many different machines, which may be much more modern than the ones they know.

They are often persuaded by sales representatives to buy machines and other equipment which are too big or in other ways not the best for their needs. Sales representatives may be more interested in making the biggest sale than in selling exactly what is best for you. Be on your guard1 If you choose badly, you are wasting your money.

WHAT YOU WANT

WHAT THE SALES REPRESENTATIVE WANTS TO SELL YOU

When you buy an important new machine, you are buying not only for today but for the future. Some of the questions you must ask yourself are:

· Do you want a machine or piece of equipment of the same type, and with the same output, as the one you have?

· Do you think you will have the same or a bigger demand for your products in the next five years? How much bigger?

· Is there a newer process, cheaper and perhaps easier to operate (with less-skilled workers), which is now used instead of your old machine and process? Have you looked at it?

· Can your workers operate the new machine without additional training? If not, where can they be trained? Locally? At the manufacturer's business?

· Will the new machine work with your present raw materials? If not, will you be able to buy the new type of raw materials easily, and at what cost?

· Is there any company in your country or nearby which has the new machine or process you are thinking of buying? Can you go and look at it when it is working and learn about it?

Once you have got quotations for your new machine or equipment, you should:

· get written guarantees of output and quality of production. Even then, check with someone who has used the machine;

· check on the delivery date. Do not trust promises that look too good;

· buy enough spare parts and make sure they are the ones you will need most. Find out if you can get servicing and spares in your country or from nearby;

· obtain detailed instructions on operation and maintenance;

· make sure you get the best terms for installation and start-up;

· try to obtain advice from a Small Business Centre, a technical college or a consultant.

Remember: Buying new capital equipment is a very serious matter and if you are not careful you can waste a great deal of money - your money!