1. Before embarking on planning, be clear about personal goals.. (See Figure 2)
   Make sure the goals set are the true goals. For example is the goal to become a successful business person to create a busy life style, providing both social and business contacts, or to provide financial security which allows provision for family and the development of other social activities?
   What level of income do you require to meet your annual expenditure needs?
   What is your target relating to personal wealth creation, both outside and additional to the business, or developing the worth of the business?
2. Convert the relevant personal goals into business goals.
   For example, what trading profit level is required to meet personal goals? Does the level of profit need to be increased significantly? Will this require a significant expansion of the business?

   Figure 2:-Sole Trader - Personal Requirements converted to a Profit Requirement

   Figure 2 shows the calculation of a Trading Profit requirement, if the sole trader is to meet his/her personal expenses needs, and acquire a target personal wealth in addition to the value of the business. The target wealth, for the purposes of the example is set at one million dollars at today's values in 20 years time. Such an exercise inevitably involves assumptions relating to time scale, inflation (even 2% makes a significant difference over 20 years), and taxation. The example is not meant to detail how the calculations should be done, but rather to show how personal objectives can be evaluated and converted into business goals. It should, of course, be adjusted to meet individual income requirements, circumstances and aspirations.
   
    

    

   CALCULATION OF PROFIT REQUIREMENT
   The objective is to provide a gross salary, which will cover living expenses and allow investment outside of the business to create, in 20 years time, wealth equivalent to one million dollars at "todays" dollar value
   BUDGETED PERSONAL EXPENDITURE		PROFIT REQUIREMENT CALCULATION
   EXPENSE ITEM	ANNUAL SPEND $	ITEM		WEALTH ADDITION $
   Life Assurance Medical Insurance Rates Insurance House Insurance Contents Electricity Garden Maintenance House Maintenance Furniture Replacement Telephone Petrol Car Insurance Car Servicing Car Registration Cash Living Clothing Golf Subscription Entertainment Holidays Small Sundries Extraordinary Medical	1,200 1,644 1,200 400 350 1,300 668 1,000 1,800 2,928 2,016 800 400 400 13,000 4,000 1,100 3,000 5,000 500 2,000 950	Objective Inflation Adjustment 20 years @ Period Investment Return Annual Investment Required Add: Company Tax* Total Salary Trading Profit Required**	2% Years Gross 11% 33%	1,000,000 1,485,947 20 Net 7.92% 32,760 16,136 48,896 63,411 112,307
   Total Expenditure Tax @ average 28% Gross Salary Required	45,656 17,755 63,411	*Assumes the investment requirement is taken as dividend ** Before salary and tax

   
   
   
    

3. Alternative to the above, objectives can be less personal being more specifically related to the mission statement. Objectives should be expressed in terms of market share targets, profitability, finance and personnel ratios etc. (See Figure 3)

   Figure 3:- Company objectives

   Figure 3 illustrates a selection of items that typically would be included in the objectives of a company. When "etc." is quoted, it indicates that the example shown is likely to be repeated many times for other instances of the same item.
   For convenience the objectives of the company are shown as one document. In practice there would be a separate document compiled by each senior manager (for chief executive approval) linked, as illustrated in the example, to the policy statement and possibly to a management by objectives scheme.
   
    

    

   Business Plan for your Payroll Department
   COMPANY .....XYZ Manufacturers Ltd
   April 5th 1999.....to 31st March 2000
   COMPANY OBJECTIVES
   AREA		OBJECTIVES
   		PRESENT	POLICY	PLAN YEAR	FUTURE YEARS
   MARKETS Product A(etc.)	Market Area 1 Market Area 2 Market Area 3 Market Area 4(etc)	Market Share Present 11% 16% 18% Nil	Market Share Minimum 15% 15% 15% 15%	Market Share Plan 13% 20% 20% Nil	Market Share Strategic 20% 20% 20% 15%
   CUSTOMERS SERVICE Stock Availability Delivery Within Rep Call Frequency DEBT COLLECTION	% of Orders Received Market Area 1(etc.) Category A (etc.) Debtor Weeks Overdues	79% 3 days 3.6 weeks 8.9 21%	90% 2 days 3.0 weeks 7.5 >10%	85% 3 days 3.2 weeks 8.0 15%	90% 2 days 3.0 weeks 7.5 >10%
   PRODUCT QUALITY Customer Returns Factory Rejects Specifications PRICE (Gross Margin) Product A (etc.) STOCK TECHNOLOGY Product A (etc.)	% of Sales % of Production Products Covered Customer Cat A (etc) Raw Materials Work in Progress Finished Goods Resistance (etc.)	2.9% 3.9% 50% 34.7% 6 weeks 7 weeks 13 weeks 200 kgs	>2.0% >2.0% 100% 36.0% 5 weeks 5 weeks 12 weeks 200 kgs	2.5% 3.0% 75% 36.0% 5 weeks 6 weeks 12 weeks 200 kgs	>1.0% >1.0% 100% 36.0% 5 weeks 5 weeks 12 weeks 250 kgs
   SUPPLIERS RAW MATERIALS (etc.) PAYMENTS Creditors	Number Max Contract Per. Notice Period Cost Reduction Local Area (ave) National (ave) International Overall	11 6 months 6 months Not Appl. 4 weeks 6 weeks 3 months 6.2 weeks	8 to 12 4 months 4 months Not Appl. 4 weeks 6 weeks 3 months 7.0 weeks	10 5 months 5 months -3% 4 weeks 6 weeks 3 months 6.5 weeks	5 to 10 3 months 3 months -5% 4 weeks 6 weeks 3 months 7 0 weeks
   EMPLOYEES LABOUR TURNOVER EFFICIENCY Direct Workers Sales Force Sales Administration General Admin TRAINING Snr. Exec Course (etc.)	Factory Salaried Factory Efficiency Cost Ratio to Sales Cost Ratio to Sales Cost Ratio to Sales Number to Train	30% 8% 81% 5% 7% 6% 4	Max 20% Max 5% 90% 4% 5% 5% All Snr. Mgt.	25% 7% 85% 5% 6% 5% 4	20% 5% 90% 4% 5% 5% 5
   SHAREHOLDERS DIVIDENDS	Interim Final	4 cents 8 cents	2/3 of Profit Available	4 cents 9 cents	5 cents 10 cents
   FINANCE Gearing Ratio PROFIT Trading Profit	Borrowing÷Equity Return on Capital	61% 16%	50% 25%	55% 20%	50% 25%

   
   
   
    

4. Separate the business goals into short term and long term.
   Short term being those which can be achieved in the current year. Long term being those that require strategic changes to the business over the longer term. Where objectives indicate that changes from present performance is planned, an action plan specific to that objective should be compiled, showing how and in what time scale the objective will be achieved.

1. Write a brief description of the business
2. List the type of product(s) or service(s) supplied. Assess the each product in relation to the product of competitors.
3. Complete a SWOT analysis. (See Figure 4) That is consider the Company's current Strengths; Weaknesses; Opportunities and Threats. A well prepared SWOT analysis, will indicate the areas that require action plans.

   Figure 4:- SWOT Analysis

   Figure 4 1llustrates the sort of items that may be included in the SWOT analysis of a company supplying a range of products, both nationally and internationally.
   To be able to prepare a SWOT analysis which will help to determine priorities, it is essential that:-

   1. An objective view is taken of the performance and efficiency of the Company to date.
   2. Reasonable estimates have been made, indicating the Company's market share.
   3. There is knowledge of the market share and the performance of the Company competitors.

   List the factors which you consider are the reasons for the Company's success. That is, what is its competitive advantage?
   Consider how external factors influence the business. For example, factors such as Economic (e.g., inflation and exchange rates); Political Climate; Social Climate; and Technology.
   Consider how internal factors, such as Image; Location; Personnel etc., influence the business.

    

   Business Plan for your Payroll Department
   COMPANY .....XYZ Manufacturers Ltd
   April 5th 1999.....to 31st March 2000
   BUSINESS ANALYSIS - SWOT
   STRENGTHS XYZ Ltd is a long established (10 years) company and has a reputation as a reliable supplier. The quality of its products, given their price range, is very competitive. Production quality systems in place are superior to those of its competitors.	OPPORTUNITIES Many smaller competitors are ideal acquisition targets. Better production control systems can improve service and lessen down time. Due to the reduction in tariff protection, there are significant opportunities, in the medium term, to develop Market Area 1. In the longer term there will be opportunities in Market Area B. Using cheaper imported raw materials, provided reliable suppliers can be identified
   WEAKNESSES The service ratio is 10% below the Company's objective of 90%. Downtime in the factory is excessive due to material shortages. Market share in Market Area 1, is below the Company's minimum market share target.	THREATS The reduction in tariff protection and import restrictions is likely to result in increased competition from low cost producers in developing countries. Competition from local producers is increasing. 4 new competitors have entered the market this year.

   
   
    

    

4. Summarise the business performance of the last few years in terms of Sales, Costs and Operating Profit.

1. By product/activity state the following:-
   1. The target market(s)
   2. Customers - why they specifically come to the company.
   3. The estimated market size and the Company's market share objective. (See Figure 5)
   4. The growth factor. That is , is the market for the particular activity/product, growing; static; or declining. (See Figure 5)
   5. Market research needs. That is the research you need to undertake during the planning period, to help you meet your marketing plans.
   6. Advertising methods and focus.
2. Compile an analysis of competitors on the following lines:-
   1. List all the competitors in the field.
   2. Analyse their strengths and weaknesses.
   3. List their products.
   4. Rate their pricing structures compared to your own.
   5. Make an assessment of their promotional activity compared to your own.
   6. Make an assessment of their distribution methods compared to your own.
3. Basing your estimates on Objectives, Previous experience and the Marketing Analysis estimate the sales (excluding indirect taxes, such as sales taxes; G S T; V A T; etc.) for the year as follows:-
   1. For each activity or product group, estimate the sales for the year. (See Figure 5) If quantities are important, then the estimate should be done in both quantity and value terms.

      Figure 5:- Market Share Assessment

      Figures 5 shows the sales history and market share calculations for a hypothetical Product Group-A in Market Area 1, together with the estimated sales projections for the Plan Year.
      To calculate market share, requires that an indicator or indicators, relevant to the business and on which calculations can be based, needs to be established. The market share calculations illustrate the principles of how market share can be estimated in particular circumstances.
      The example illustrates the use of population statistics and knowledge of competitor operations.
      Note that the Action Plan to acquire a competitor, would be backed up by data determined from an investigation and investment appraisal of the project contained in a medium term Strategic Plan.

       

      Business Plan for your Payroll Department
      COMPANY .....XYZ Manufacturers Ltd
      April 5th 1999.....to 31st March 2000
      MARKET SHARE ASSESSMENT
      PRODUCT GROUP Market Growth Expected		Product A 2% per Yr	MARKET AREA Price Inflation Expected	Market Area 1 2% per Yr
      SALES HISTORY This Year Act/Est Previous Year 1 Previous Year 2 Previous Year 3 Previous Year 4	Units '000 4.3 4.1 4.0 3.4 2.7	$'000 55 52 50 40 30	COMPETITORS Competitor A Competitor B Competitor C Others (10 total) Total	SIZE INDICATOR Twice Same Half 4 times 7½ times
      ESTIMATED TOTAL MARKET Basis of calculation:- Competitors Basis Households - Total in Market Area 1 Expenditure per household Total Expenditure (Source - Government statistics) Total Market current year Market share Total Market Business Plan for your Payroll Department Year			CALCULATION $55k x 8½ 660 $897/annum 660 x 897 500 ÷ 55 500 x 1.02 growth x 1.02 infl	RESULT $'000 467.5 592.0 (say) 500.0 11% 520
      ACTION PLAN Aquire the competitor ABC Ltd in Market Area 1 - Region 2, where the Company's representation per household is lower than in other main conurbations.
      BUDGETED SALES Actual/Estimated Sales adjusted to Plan Year Aquisition ABC Ltd ABC Ltd - Total Sales $22k per annum Total Budgeted Sales Budgeted Market Share TARGET MARKET SHARE			CALCULATION 55 x 1.02 growth x 1.02 infl completed June 6 mths = 11.0 x 1.02 growth x1.02infl 57.2 + 11.4 68.6 ÷ 520	RESULT $'000 57.2 11.4 68.6 13.2% 15.0%

      
      
      
       

   2. Summarise the sales details to determine the sales for the year.

      Figure 6:- Sales and Market Details

      Figure 6 illustrates a typical summary showing estimated market size, market share, quantities, prices and the total sales for the year.

       

      Business Plan for your Payroll Department
      COMPANY .....XYZ Manufacturers Ltd
      April 5th 1999.....to 31st March 2000
      SALES and MARKET DETAILS
      Prod Code	Product Description	Market 1	Market 2	Market 3	Total
      Estimated Quantities - Total Market
      1 2 3	Product - A Product - B Product - C	40,000 15,000 8,250	16,150 14,780 20,000	7,900 8,400 10,000	64,050 38,180 38,250
      Market Share
      1 2 3	Product - A Product - B Product - C	13.1% 35.0% 12.5%	20.0% 50.0% 15.0%	10.0% 15.0% 20.0%
      Planned Quantities
      1 2 3	Product - A Product - B Product - C	5,240 5,250 1.031	3,230 7,390 4.600	790 1,260 2.080	9,260 13,900 7,711
      Prices
      1 2 3	Product - A Product - B Product - C	$13.10 $10.25 $15.75	$13.00 $9.75 $15.00	$11.75 1$9.25 $13.50
      Sales Values
      1 2 3	Product - A Product - B Product - C Total Sales	68,644 53,813 16,238 138,695	41,990 72,053 69,000 183,043	9,283 11,655 28.080 49,018	119,917 137,520 113,318 370,755

      
      
      
       

   3. Estimate the production levels needed to support planned sales. (See Figure 7)
      Production will need to vary from sales:-
      • When stock levels need to be increased to support an increasing sales activity, or reduced if the opposite is the case.
      • When stock needs to be produced to support a development project.
      • If the Company has a policy to increase stock (say to support improved customer service) or reduce stocks (say to liquidate obsolete stock).

      Figure 7:- Quantity Planning Schedule

      Figure 7 shows the type of calculation which determines the level of production output, production input and purchasing to achieve planned levels of stock. It is important also that this calculation is completed logically, otherwise the plan will not include the correct levels of stock and the finance to support it.
      Note that the example assumes that the same stock ratios apply to the whole of the product range. In some businesses it is possible that different stock holding ratios will apply to different product groupings.

       

      Business Plan for your Payroll Department
      COMPANY .....XYZ Manufacturers Ltd
      April 5th 1999.....to 31st March 2000
      QUANTITY PLANNING SCHEDULE
      Prod Code		Fin Gds Op/Stk	Plan Sales	Fin Gds Cl/Stk	Req Prod Fin Gds	W I P Op/Stk	W I P Cl/Stk	Req Prod Input	Raw Matl Op/Stk	Raw Matl Cl/Stk	Req RM Purch
      Stock Ratios(wks)		13.0	52.0	12.0	47.0	7.0	6.0		6.0	5.0
      1 2 3	Product - A Product - B Product - C Total	2,315 3,475 1,928 7,718	9260 13,900 7,711 30,871	2,137 3,208 1,779 7,124	9,082 13,633 7,562 30,277	1,353 2,030 1,126 4,509	1,159 1,740 965 3,864	8,888 13,343 7,401 29,632	1,159 1,740 965 3,864	966 1,450 804 3,220	8,695 13,053 7,240 28,988
      Calculation Examples:- Finished Goods - Closing Stock: 9,260 ÷ 52 x 12.0 = 2137 Required Production - Finished Goods: 9260 - 2315 + 2137 = 9082 Work in Progress - Opening Stock: 9082 ÷ 47.0 x 7.0 = 1353 Required Production Input: 9082 + 1,159 - 1,353 = 8888

      
       

1. If the plan anticipates changes from the Company's current performance, then these changes should be supported by an Action Plan. The Company Objectives (Figure 3) indicate that a number of improvements, in different areas, are included in the Business Plan for your Payroll Department. The Action Plan data may be from a medium term strategic plan or a plan specific to the Business Plan for your Payroll Department year.
   For example the improvements in debtors ratios and the stock ratios should be supported by action plans, as should the acquisition to increase the market share of Product A in Market Area 1 in Figure 5.
2. A separate Action Plan should be produced for each specific project.
3. The documented action plan can be compiled and reported in any format which suits the particular plan. It should list the things that have to be done to implement the plan, in a realistic timetable.
4. The Action Plan report and valuation should be for the duration of the Plan to completion, even if this exceeds the planning period.
5. The Action Plan should then be evaluated in terms of costs; benefits and finance requirements. Try to do this separately for each element of the Plan then summarise it into the affect it will have on the Company's profit and loss A/c and Balance sheet for each year of the plan.

   Figure 8:- Action Plan - Acquisition of ABC Ltd

   Figure 8 illustrates what the Action Plan to support the acquisition of ABC Ltd (see Figure 5) may look like.

    

   STRATEGIC PLAN
   COMPANY .....XYZ Manufacturers Ltd
   From April 5th 1999.....To 29 April 2002
   ACTION PLAN
   Acquisition ABC Ltd - September 1999
   Motivation To increase market share in Market Area 1 and avoid confrontation with Competitor A Acquire the contacts and goodwill developed by ABC Ltd in this market area
   Action Schedule
   By Week Ending	Action					Completed By
   14/5/99 28/5/99 11/6/99 18/6/99 2/7/99 16/7/99 23/7/99 27/8/99	Contact the owner to explore his interest in a sale Compile a preliminary heads of agreement. Pass to the solicitor for his input Peliminary heads of agreement from solicitor Negotiate and agree Heads of agreement Basis of assets and stock valuation. Goodwill element Date of transfer Heads of agreement to solicitor to draw up agreement documents Meeting with owners and solicitors to go through the agreement Exchange and sign the agreement Take stock and assume control					11/5/99 26/5/99 11/6/99 16/6/99 13/7/99 5/8/99 5/8/99 27/8/99.
   Financial Summary
   Net Assets Acquired Fixed Assets Working Capital Operating Capital Employed Less:-Borrowings Net Assets Acquired Goodwill Consideration		1999 $'000 3.0 6.3 9.3 3.0 6.3 1.0 7.3	Forecast Trading Result Sales Operating Costs Trading Profit Less:-Restructuring Costs Goodwill Written Off Synergy Benefits Adjusted Trading Profit Average Capital Employed Return on Capital	1999 $'000 22.0 20.3 1.7 -3.0 -1.0 -2.3 5.2 -44.2%	2000 $'000 44.0 40.6 3.4 - 2.0 5.4 10.3 52.4%	2001 $'000 44.0 40.6 3.4 - 2.0 5.4 10.3 52.4%

   
    

1. Estimate the Capital Expenditure that will be required during the year to replace existing fixed assets. (See Figure 9)
2. Estimate and/or summarise from Action Plans the Capital Expenditure that will be required for additional fixed assets.
3. Estimate the sales of assets that are planned to occur and the gain or loss resulting from the disposal. (See Figure 9)
4. Calculate the depreciation charge.
5. Calculate the movement in fixed assets, by calculating and deducting the depreciation charge and adjusting for additions and disposals. (See Figure 10)

Figure 9 illustrate fairly typical summaries of capital expenditure and disposal plans. In larger companies it is probable that something similar to the top half of the schedule would be submitted by different managers detailing their investment proposals. Expenditure on additional items should be justified by an appraisal procedure and/or inclusion in an action plan. The timing of the purchases and disposals are required for later depreciation and cash flow calculations.

Figure 10 illustrates the information required to calculate the movement in fixed assets and how that information can be summarised

1. Ensure that each element included in the Business Plan for your Payroll Department is included in the objectives of someone in the organisation, and that all elements in the plan are covered.
2. Monitor that the activities included in Action Plans are implemented in accordance with the planned timetable.
3. Plan the schedule to be used for comparing actual performance with the plans. The frequency of the comparison will depending on how critical the activity is to the achievement of planned objectives. Some activities may be compared daily, e.g. sales order intake and sales, action plans monthly, others on a quarterly basis e.g. routine expense overheads.
4. Implement activities to correct deviations from plans and/or revise targets where necessary.

1. The profit objective for a company is usually expressed by the ratio of profit to capital employed (return on capital).
2. The capital and financial structures of companies vary enormously. A ratio that effectively measures management performance, which is not distorted by these different structures is the percentage ratio of Trading Profit to Net Operating Assets. The Capital Employed figure should be Operational Net Assets before all financing and taxes owing or owed (excluding indirect sales taxes and added value taxes such as VAT and GST). The fixed asset figures should be increased ideally to replacement cost, but if this figure is not known, at least to original cost. The Trading Profit calculated on this basis, is before interest charges and taxes (except indirect sales taxes and added value taxes such as VAT and GST), but after a reasonable salary reward for the management and other business activities of the directors. If capital employed varies significantly on a seasonal basis or regularly during the course of a month, (indicated by the variation in the level of borrowings) then average figures should be used.
3. It is recommended that a suitable return to aim for, for small businesses is around twice the borrowing costs of the company or three times a safe investment return whichever is the higher. That is if the company can borrow at a rate 11% and a safe investment return is 8%,it should aim for a return of 24%. This ratio can of course be revised in accordance with personal objectives (See Figure 2)

 

1. Sales Details
   From the details contained in the marketing plan list the quantities and sales prices by product grouping and market and calculate the sales values. (See Figure 6)
   For the Business Plan for your Payroll Department model to be totally interactive it must react correctly to both changes in volumes and also changes in sales and cost prices. A quantity base should be established for the sales calculations, even if such a base does not "naturally" exist. "Unnatural" base units can be such things as:-
   • The "first estimate" of sales
   • Jobs categorised as "Small", "Medium", "Large", etc.
   • Products grouped by type, e.g. cards, leaflets, stationery, etc.

   Whatever base unit is chosen, it must be possible to compile a relevant product specification for that unit. (See Product Specifications below)
   
    

2. Quantity Planning Schedule
   See Figure 7. For wholesalers and retailers the schedule will be simpler, because the movement in finished goods is all that is required.
    
3. Product Specifications
   Create a product specification for each product grouping. If a technical specification already exists, it is probable that the information required can be obtained from this source. As a minimum, the specification should detail raw material usage by type, the processes/operations required to manufacture the product and the production time. Where a product grouping covers a number of products, the specification should represent the "average" product of the group.

   Figure 11:- Product Specifications

   Figure 11 illustrates a product specification format, which indicates the minimum amount of detail required.

    

   PRODUCT SPECIFICATIONS
   		MATERIALS			PROCESSES
   Prod Code	Product Desc	Raw Matl 1 Kgs	Raw Matl 2 Kgs	Raw Matl 3 Units	Process 1 Lab Hrs	Process 2 M/c Hrs	Process 3 Cure Hrs
   1 2 3	Product -A Product - B Product - C	1.27 0.98 2.35	0.58 0.47 0.75	4 4 4	0.267 0.215 0.175	0.125 0.085 0.150	0.075 0.075 0.075

   
   
   
   Illustrated is the three types of production time encountered in manufacturing processes

   1. Labour Hours: Is the estimated time required by labour to complete a task.
   2. Machine Hours: Is the estimated time required by a machine or machines to complete a task. Machine hours are required for product costing purposes, when different products require a different ratio of labour hour input to machine hour input. For example; if when producing one type of product an operator looks after three machines, but looks after four machines when producing another type of product, then machine hours will require to be calculated separately from labour hours.
   3. Cure Hours: Used here to describe the requirement for a process to be completed, which involves neither labour or machinery. Such a process would be waiting for a glue to achieve the required strength before further processing can continue. It could of course be described in any way which describes the process.

   
    

4. Raw Material Costs
   1. Record the cost per unit for each type of raw material.
   2. Using the information from the Quantity Planning Schedule and Product Specifications, calculate the raw material values for:
      • raw material stocks, opening and closing
      • purchases
      • required for to input to production
      • consumed by production.
      • work in progress stocks opening and closing.

   
    

   Figure 12:- Raw Material Costs and Stock Levels

   Figure 12 illustrates the calculations relating to the level of the purchasing, consumption and stock of raw materials.

    

   RAW MATERIAL COSTS and STOCK LEVELS
   Unit Cost/Unit			Material 1 Kgs $0.75	Material 2 Kgs $0.35	Material 3 Units $0.06
   Prod Code		Product Units	Material 1	Material 2	Material 3	Total
   1 2 3 1 2 3	Raw Materials Opening Stock Product - A Product - B Product - C Total Value Closing Stock Product - A Product - B Product - C Total Value	1,159 1,740 965 3,864 966 1,450 804 3,220	1,472 1,705 2,268 5,445 $4,084 1,227 1,421 1,889 4,537 $3,403	672 818 724 2,214 $775 560 682 603 1,845 $646	4,636 6,960 3,860 15,456 $927 3,864 5,800 3,216 12,880 $773	$5,786 $4,821
   1 2 3	Purchases Product - A Product - B Product - C Total Value	8,695 13,053 7,240 28,988	11,043 12,792 17,014 40,849 $30,636	5,043 6,135 5,430 16,608 $5,813	34,780 52,212 28,960 115,952 $6,957	$43,406
   1 2 3	Input Required Input Product - A Product - B Product - C Total Input Cost	8,888 13,343 7,401 29,632	11,288 13,076 17,392 41,756 $31,317	5,155 6,271 5,551 16,977 $5,942	35,552 53,372 29,604 118,528 $7,112	$44,371
   1 2 3	Consumption Required Production Product - A Product - B Product - C Total Consumption Cost	9,082 13,633 7,562 30,277	11,534 13,360 17,771 42,665 $31,999	5,268 6,408 5,672 17,347 $6,071	36,328 54,532 30,248 121,108 $7,266	$45,337
   1 2 3 1 2 3	Work in Progress Opening Stock Product - A Product - B Product - C Total Value Closing Stock Product - A Product - B Product - C Total Value	1,353 2,030 1,126 4,509 1159 1,740 965 3,864	1,718 1,989 2,646 6,354 $4,765 1,472 1,705 2,268 5,445 $4,084	785 954 845 2,583 $904 672 818 724 2,214 $775	5,412 8,120 4,504 18,036 $1082 4,636 6,960 3,860 15,456 $927	$6,752 $5,786

   
   
   
    

5. Capital Expenditure
   See the notes above and Figures 9 & 10, which illustrate the details required relating to capital expenditure and disposals. If depreciation is charged on asset purchases in the year of purchase, then the depreciation for the accounting periods subsequent to the purchase should be adjusted for the depreciation relating to each purchase. This analysis although not difficult can be quite extensive.
6. Costs & Expenses
   The purpose of this exercise is to calculate or estimate the costs and expenses for the year, allocate these to a process or department (cost centre) either directly or indirectly, by a relevant allocation table and calculate cost rates.
   1. Calculate the process hours required to support production requirements. The calculation is Output Quantity Required times Process Hours Per Unit. The basic information for the calculation is from the Quantity Planning Schedule and Product Specification data respectively. Add an allowance for idle/waiting time, if appropriate.
       

      Figure 13:- Calculation of Process Hours

      Figure 13 illustrates the calculations of the process hours per year.

       

      Product Description	Output Required Units	Process 1 Labour Hours	Process 2 Machine Hours	Process 3 Cure Hours	Total Process Hours
      Product - A Product - B Product - C	9,082 13,633 7,562	2,425 2,931 1,323	1,135 1,159 1,134	681 1,022 567	4,241 5,112 3,025
      Total Idle/Waiting Time	30,277 15%	6,679 1,002	3,428 514	2,271 341	12,378 1,857
      Total Process Hours		7,681	3,943	2,611	14,235

      
      
       

   2. Estimate the fixed items of cost for the year. These are those costs and expenses which do not change when the volume of business changes. They should be analysed in accordance with the Company's departmental structure or function. The usual analysis separates Manufacturing; Selling and Distribution and Administration Expenses.

      Figure 14:- List of Fixed Expenses

      Figure 14 illustrates the types of expenses that are usually included in this category

       

      FIXED EXPENSES
      Factory Fixed Expenses Leased Equipment Light Heat Insurances Rates Rent Depreciation Buildings* Depreciation Pl & M/cy* Depreciation Fixtures* Total Factory Fixed Expenses *See Figure 10	---$--- 950 1,500 2,200 1,200 6,240 695 6,804 2,108 21,697	Selling & Dist. Fixed Expenses Salaries Office Expenses Total Fixed Sales & Dist. Exp.	---$--- 18,100 2,900 21,000
      		Administration Fixed Expenses Salaries Accountancy Bank Charges Fees Computer Software Licences and Registrations Subscriptions Total Admin. Fixed Expenses	---$--- 14,000 1,900 800 39 600 45 560 17,944

      
      
       

   3. Establish the variable cost links and variable ratios most suitable for the Company and calculate the variable costs.
      Wherever possible variable costs should be calculated linked in a relationship to a basic element on which their level will logically rely, for example in the illustration:
      • Direct labour is total labour hours (including idle time) multiplied by the labour rate per hour.
      • Ancillary labour is estimated to be 20% of direct labour.
      • Holiday pay is based on the number of days holiday estimated for the year related to the level of pay calculated for the labour hours produced in the days worked.
      • Selling and distribution and administration variables linked to the level of sales

      The table below gives a reasonably complete list of the types of variable expense and shows the logical linking and the ratio of expense to that link.

      Figure 15:- Calculation of Variable Costs

      Figure 15 illustrates the links, estimated variable ratios and the calculations, which establish the level of variable costs.

       

      CALCULATION OF VARIABLE COSTS
      Note:- Some of these calculations rely on standing information, or estimates and calculations, the bases of which are detailed in other paragraphs	Data for the basis of the calculations
      	Data Description Weeks in the year Working Days Direct Labour Rate Total Labour Hours Wages Total Process Hours Kilo Watt Hours Plant & Equipment (WDV) Total Wages & Salaries Sales		Value 52 235 $18.10 7681 $166,836 14,235 70,581 43,336 $219,585 $370,755
      Operating Costs - Variable	Link	Variable Ratio	Operating Cost $
      Factory Wages Direct Wages Ancillary Wages Holiday Pay Total Wages	Lab Hrs Direct Wages Wages ÷ Wkg Days	x Lab Rate x 20% x Hol Days	139,030 27,806 17,749 184585
      Factory Expenses Cleaning & Laundry Power Repairs & Maintenance A.C.C Levies Total Factory Variable Expenses	Process Hours Kilo Watt Hours W.D.V. Pl. & M/cy Tot Wages & Salaries	x 4% x 6% x 8% x 1.25%	569 4,235 3,467 2,709 10,980
      Selling & Dist. Expenses Freight & Couriers Advertising Vehicle Expenses Debt Collection Total Selling & Dist. Variable Exp.	Sales Sales Sales Sales	x 2.50% x 1.75% x 0.25% x 0.10%	9,269 6,488 927 371 17,055
      Administration Expenses Stationery & Postage Telephone General Expenses Total Administration Variable Exp.	Sales Sales Sales	x 0.35% x 0.50% x 0.20%	1,298 1,854 742 3,893

      
      
       

   4. Establish relevant allocation tables used for allocating costs and expenses to cost centres.

      Figure 16:- Allocation Bases to Cost Centres

      Figure 16 illustrates some typical examples of bases used to allocate costs to departments and cost centres

       

      ALLOCATION BASES to COST CENTRES
      Basis Description	Basis No.	Process 1	Process 2	Process 3	General Factory	Total Factory	Sales & Dist.	Admin.	Total Company
      Power (K.W. Hours) Total Process Hours Floor Area (sq mtrs) Pl. & M/cy (W.D.V) Fixt. & Fittings(W.D.V) Total Wages & Salaries ($) Sales ($)	2 3 4 5 6 7 8	1,000 7,681 132 3,250 1,130 153,821	49,677 3,943 265 20,151 1,130 0	19,194 2,611 210 11,267 753 0	710 32 4,334 1,506 30,764	70,581 14,235 639 39,002 4,519 184,585	21 2,167 1,130 21,000 370,755	38 2,167 1,883 14,000	70581 14,235 698 43,336 7,532 219,585 370755

      
      
       

   5. Analyse (allocate) the operating cost to cost centres, either directly , by estimation, by calculation or by using an appropriate allocation table. Total and balance the figures.

      Figure 17:- Allocation of Operating Costs to Departments and Cost Centres

      Figure 17 illustrates a table, detailing the allocation of operating costs to departments and cost centres.

       

      ALLOCATION of OPERATING COSTS to DEPARTMENTS and COST CENTRES
      Operating Costs($)	Fixed Var.	Basis	Process 1	Process 2	Process 3	General Factory	Total Factory	Sales & Dist.	Admin.	Total
      Wages Direct Wages Ancillary Wages Holiday Pay Total Wages	v v v	Calc. Direct Calc.	139,030 14,790 153,821	0 0 0	0 0 0	27,806 2,958 30,764	139,030 27,806 17,749 184,585	0 0	0 0	139,030 27,806 17,749 184,585
      Factory Variable Exp. Cleaning & Laundry Power Repairs & Maint. A.C.C. Levies Total Fact. Variable Exp.	v v v v	Direct 2 5 7	60 260 1,923 2,243	2,981 1,612 0 4,593	1,152 901 0 2,053	569 43 347 385 1,343	569 4,235 3,120 2,307 10,232	0 173 226 400	0 173 175 348	569 4,235 3,467 2,709 10,980
      Factory Fixed Exp. Lased Equipment Light & Heat Insurance Rates Rent Depreciation Buildings Depreciation Pl. & M/cy Depreciation Fixtures Total Factory Fixed Exp.	f f f f f f f f	Est. 4 5 4 4 4 5 6	300 284 165 227 1,180 131 510 316 3,114	650 569 1023 456 2,369 264 3,164 316 8,811	451 572 361 1,877 209 1,769 211 5,451	69 220 55 286 32 680 422 1,764	950 1,373 1,980 1,099 5,713 636 6,124 1,265 19,139	45 110 36 188 21 340 316 1,056	82 110 65 340 38 340 527 1,502	950 1,500 2,200 1,200 6,240 695 6,804 2,108 21,697
      Total Factory Expenses			159,177	13,404	7,504	33,871	213,956	1,456	1,850	217,262
      Sls & Dist.Variable Exp. Freight & Couriers Advertising Vehicle Expenses Debt Collection Total Sls & Dist. Var. Exp.	v v v v	8 8 8 8	0 0 0 0 0	0 0 0 0 0	0 0 0 0 0	0 0 0 0 0	0 0 0 0 0	9,269 6,488 927 371 17,055	0 0 0 0 0	9,269 6,488 927 371 17,055
      Sls & Dist. Fixed Exp. Salaries Office Expenses Total Sls & Dist. Fixed Exp.	f f	8 8	0 0 0	0 0 0	0 0 0	0 0 0	0 0 0	18,100 2,900 21,000	0 0 0	18,100 2,900 21,000
      Total Selling & Distribution Expenses			0	0	0	0	0	38,055	0	38,055
      Admin. Variable Exp. Stationary & Postage Telephone General Exenses Total Admin. Var. Exp.	v v v	Est. Est. Direct	0	0	0	185 185	0 185 0 185	649 1298 1,946	649 371 742 1,761	1,298 1,854 742 3,893
      Administation Fixed Exp. Salaries Accountancy Bank Charges Fees Software Licences Subscriptions Total Admin. Fixed Exp.	f f f f f f f	Est. Direct Direct Direct Direct Direct Direct	0	0	0	0	0 0 0 0 0 0 0 0	0	14,000 1,900 800 39 600 45 560 17,944	14,000 1,900 800 39 600 45 560 17,944
      Total Administration Expenses			0	0	0	185	185	1,946	19,705	21,837
      Total Operating Costs			159,177	13,404	7,504	34,057	214,141	41,457	21,555	277,153

      
      
       

   6. Analyse the figures between fixed and variable expenses, and balance to the total.
   7. Choose the basis to calculate cost rates. Usually related to the means of measuring output, which in the case of the illustration is process hours, for production departments and total product costs, for selling and administration.
   8. Calculate the cost rates by dividing the costs by the chosen basis.

      Figure 18:- Variable and Fixed Cost Analysis and the Calculation of Cost rates

      Figure 18 illustrates the analysis of costs between variable and fixed and the calculation of the cost rates

       

      ANALYSIS OF COSTS BETWEEN VARIABLE and FIXED CALCULATION of COST RATES
      	Process 1	Process 2	Process 3	General Factory	Total Factory	Sales & Dist.	Admin.	Total
      Variable and Fixed Cost Analysis($) Variable Fixed Total	156,064 3,114 159,177	4,593 8,811 13,404	2,053 5,451 7,504	32,293 1,764 34,057	195,002 19,139 214,141	19,401 22,056 41,457	2,109 19,446 21,555	216,512 60,641 277,153
      Cost Rate Base Unit Process Hours Factory Cost plus Materials($)	6,679	3,428	2,271	12,378		259,478	259,478
      Calculated Cost Rates Variable Fixed Total	$23.3651 0.4662 $23.8313	$1.3396 2.5701 $3.9097	$0,9041 2.4003 $3.3044	$2.6088 0.1425 $2.7513		7.48% 8.50% 15.98%	0.81% 7.49% 8.31%

      
      
       

7. Product Costs
   1. Calculate the product costs. The quantity data relating to materials is taken from the Product Specification and is multiplied by the costs as detailed on Figure 14 - Raw Material Costs and Stock Levels.
      The Labour & Overhead Cost is arrived at by multiplying the process hour details from the Product Specification by the cost rates calculated on Figure 18 - Calculation of Cost Rates.

      Figure 19:- Product Cost Presentation

      Figure 19 illustrates a typical product cost presentation for products which embody the characteristics of the products in the plan

       

      PRODUCT COST
      Product - C						Revised : 5/4/99
      MATERIALS	Qty	Unit	Cost/ Unit	Variable Cost		Fixed Cost	Total Cost
      Material 1 Material 2 Material 3 Total Materials	2.35 0.75 4	Kgs Kgs Units	---$--- 0.7500 0.3500 0.0600	---$---1.7625 0.2625 0.2400 2.2650		---$---	---$--- 1.7625 0.2625 0.2400 2.2650
      PROCESSES	Process Hrs		Cost Rates Variable		Cost Rates Fixed
      Process 1 Process 2 Process 3 General Factory Total Factory	0.175 0.150 0.075 0.400	Lab Hrs M/c Hrs Cure Hrs Tot Hrs	23.3651 1.3396 0.9041 2.6088	4.0889 0.2009 0.0678 1.0435 5.4012	0.4662 2.5701 2.4003 0.1425	0.0816 0.3855 0.1800 0.0570 0.7041	4.1705 0.5865 0.2478 1.1005 6.1053
      Total Production Cost				7.662		0.7041	8.373
      Selling and Administration Sales & Distribution Administration			7.48% 0.81%	0.6258 0.0680	8.50% 7.49%	0.7115 0.6273	1.3373 0.6953
      TOTAL COST				8.3600		2.0429	10.4029
      Product Profitability Selling Price Contribution Contribution per Process Hour Gross Margin Gross Margin %				Mkt 1 ---$--- 15.75 7.39 18.47 7.38 46.9%	Mkt 2 ---$--- 15.00 6.64 16.60 6.63 44.2%	Mkt 3 ---$--- 13.50 5.14 12.85 5.13 38.0%	Average ---$--- 14.70 6.34 15.81 6.33 43.0%

      
      
       

   2. Contribution and gross margin calculations shown on Figure 19 - Product Cost, are not essential for the compilation of the Business Plan for your Payroll Department, but are useful for assessing the relative profitability of different product groupings.
      The variable cost indicates the lowest selling price that can be accepted for a product without detriment to the company's operating profit. The more a company sells of a product, at a price below the variable cost level, the more it will lose.
   3. Figure 19 shows the production cost of Product - C to be $8.3703. The production cost of Product - A is $9.7798 and for Product - B is $7.871

   
    

8. Finished Goods
   The finished goods stock, opening and closing, and the cost of production and sales, can now be calculated, by multiplying the quantities from the Quantity Planning Schedule by the Production Cost of the product.
   The illustration below also provides for incorporating a stock write down reserve into the stock value calculations. Stock write down reserves are applied to stock if the estimated realisable value or replacement value of the stock is less than the cost value of the stock. Actual realisable values are adjusted downwards, to reflect the cost of selling and administration yet to be incurred, before arriving at the realisable value to be applied to stocks. If it is anticipated that, during the plan year, the level of obsolete stock will be reduced, then a reduction in the write down reserve should be incorporated into the plan. Note however that in such a case the incidence of the clearance of obsolete stock should be included in the sales estimates. In the illustration there is a small release of stock write down reserve due to the overall reduction in stock levels. The estimate of the proportion of stock value to be included in the reserve has not changed.

   Figure 20:- Finished Goods Stock; Required Production Cost and Cost of Sales Calculations

   Figure 20 illustrates the calculations which determine the value of opening and closing finished goods stock, the cost of required finished production and the cost of sales.

    

   FINISHED GOODS VALUES Stock; Required Production and Cost of Sales
   Prod Code	Description	Product Quantity	Product Cost	Product Cost Value	Write Down Reserve	Write Down Value	Net Value
   1 2 3	Opening Stock Product - A Product - B Product - C Total	2,315 3,475 1,928 7,718	--$--9.7798 7.8751 8.3703	--$-- 22,640 27,366 16,138 66,144	--%-- 10.0% 7.5% 12.0%	--$-- 2,264 2,052 1,937 6,253	--$-- 20,376 25,314 14,201 59,891
   1 2 3	Required Production Product - A Product - B Product - C Total	9,082 13,633 7,562 30,277	9.7798 7.8751 8.3703	88,821 107,361 63,296 259,478			88,821 107,361 63,296 259,478
   1 2 3	Calculated Cost of Sales Product - A Product - B Product - C Total	9,260 13,900 7,711 30,871	9.7798 7.8751 8.3703	90,561 109,464 64,543 264,569		-174 -158 -150 -481	90,387 109,306 64,393 264,087
   1 2 3	Closing Stock Product - A Product - B Product - C Total	2,137 3,208 1,779 7,124	9.7798 7.8751 8.3703	20,900 25,263 14,891 61,054	10.0% 7.5% 12.0%	2,090 1,895 1,787 5,772	18,810 23,369 13,104 55,282

   
    

1. All the figures are now available to complete the Profit and Loss Account up to the Operating Profit stage and can be copied from the schedules compiled so far.
   .Current year estimates are for comparison purposes. They are not part of the calculations (apart from stocks) and are simply best estimates.
   It is assumed that the Business Plan for your Payroll Department will be completed prior to the start of the Plan Year. The Current Year will therefore not be completed when the plan is being compiled, consequently figures relating to it will be partially actual and partially estimated

   Figure 21:- Operating Profit

   Figure 21 illustrates a typical presentation of a Profit and Loss A/c up to the Operating Profit stage. In addition the details are referenced to the "Figure Illustration" in which the basis for arriving at the value of the item is detailed. "Est." (estimate) indicates there is no basis other than "Best Estimates". "Act" (actual) indicates that the information should be available from the Company's actual accounting records

    

   OPERATING PROFIT
   Current Year		Item Description		Plan Year
   Fig Ref	Est/Act $			Plan $	Fig Ref
   Est	320,000	Total Sales		370,755	6
   Act Act Est 12 12	5,600 6,300 39,837 5,786 6,752	Materials Consumed Opening Stock Raw Materials Work in Progress Add:- Purchases Less:- Closing Stock Raw Materials Work in Progress	--$-- 5,786 6,752 4,821 5,786	12,538 43,406 10,607	12 12 12 12 12
   	39,199	Materials Consumed		45,337	12
   	280,801	Added Value		325,418
   Est Est Est Est Est Est Est Est Est Est Esr Est Est Est Act 20	125,438 25,400 16,047 321 3,365 4,972 1,995 950 1,489 2,150 1,165 6,240 3,500 495 193,527 52,789 59,891	Factory Cost Direct Wages Ancillary Wages Holiday Pay Cleaning and Laundry Power Repairs and Maintenance A.C.C. Levies Leased Equipment Light Heat Insurances Rates Rent Depreciation Deprecation Additions Total Factory Cost Finished Goods Stock Add:- Opening Stock Less:- Closing Stock	--$-- 139,030 27,806 17,749	184,586 569 4,235 3,467 2,709 950 1,500 2,200 1,200 6,240 6,540 3,067 217,262 55,891 55,282	15 15 15 15 15 15 15 15 14 14 14 14 14 10 10 20 20
   	225,624	Cost of Sales		267,208
   	94,376	Gross Profit		103,547
   Est Est Est Est Est Est	8,000 6,000 800 389 17,700 2,800	Selling & Distribution Expenses Freight & Couriers Advertising Vehicle Expenses Debt Collection Salaries Office Expenses		9,269 6,488 927 371 18,100 2,900	15 15 15 15 14 14
   	35,689	Total Selling & Distribution Expenses		38,055
   Est Est Est Est Est Est Est Est Est Est	1,200 1,600 700 13,600 1,880 958 39 1,200 45 550	Administrtion Expenses Stationery & Postage Telephone General Expenses Salaries Accountancy Bank Charges Fees Computer Software Licenses & Registrations Subscriptions		1,298 1,854 742 14,000 1,900 800 39 600 45 560	15 15 15 14 14 14 14 14 14 14
   	21,772	Total Administration Expenses		21,837
   	36,915	Operating Profit		43,655

   
   
    

2. To complete the Profit and Loss Account requires the calculation of:-
   • Non trading items, such as profit or loss on sale of fixed assets and abnormal expenditure or income.
   • Finance costs, which can be related to long term finance arrangements (e.g. Term Loans) and short term arrangements (e.g. Overdraft)
   • Taxation
   • Dividends

   
    

3. The Plan has two non trading items:-
   • Profit on sale of Fixed Assets $1,445 (see Figure 9)
   • Abnormal costs relating to the acquisition of ABC Ltd $4,000 (see Figure 8).
     Comprising $3,000 restructuring costs and $1,000 of goodwill written off.

   
    

4. Term Loan finance usually involves the repayment of a fixed amount at regular intervals, which will comprise an element of both capital repayment and interest. In each repayment the proportion of the interest payment will decrease and the capital repaid will increase as the loan is paid off. If the Company has a substantial amount of finance on this type of arrangement then a reasonably effort should be made to establish the correct proportion of interest and capital repayment that will apply for the plan year. If the amount does not merit a sophisticated calculation then best estimates will suffice.

   Figure 22:- Term Loan Calculations

   Figure 22 illustrates the calculations required to include accurate values separately for the interest and capital portions of the monthly repayments.

    

   TERM LOAN CALCULATIONS
   Term Months	Loan Amount	Interest Rate	Monthly Repayment
   36	$10,000.00	11%	$327.39
   The amount of the monthly repayment can be obtained by the use of the Microsoft "PMT" or the Lotus "@PMT" spreadsheet functions. If the term loan is an existing arrangement, the provider of the loan will usually advise the amount of the repayment
   Schedule of Interest and Capital Repayments
   Month	Amount Owing	Monthly Interest	Monthly Repayment	Capital Repaid
   1 2 3 4	--$-- 10,000.00 9,764.28 9,526.40 9,286.34	--$-- 91.67 89.51 87.33	--$-- 327.39 327.39 327.39	--$-- 235.72 237.88 240.06
   Calculation Method	=Amount Owing minus Capital Repaid	=Amount Owing Times Interest Rate Divided by 12		=Monthly Payment minus Monthly Interest
   Continuing these calculation to month 36, results in a total repayment of $11,785.94. The total payment comprising an interest payment of $1,785.94 and a capital repayment of the $10,000 term loan Months 12 to 24 are included in the Business Plan for your Payroll Department Example. The schedule of payments are detailed below
   Month	Amount Owing	Monthly Interest	Monthly Repayment	Capital Repaid
   12 13 14 15 16 17 18 19 20 21 22 23 24	--$-- 7,284.90 7,024.29 6,761.30 6,495.89 6,228.05 5,957.75 5,684.98 5,409.70 5,131.90 4,851.56 4,568.64 4,283.13 3,995.01	--$-- 66.78 64.39 61.98 59.55 57.09 54.61 52.11 49.59 47.04 44.47 41.88 39.26 Total 638.75	--$-- 327.39 327.39 327.39 327.39 327.39 327.39 327.39 327.39 327.39 327.39 327.39 327.39 Total 3,928.68	--$-- 260.61 263.00 265.41 267.84 270.30 272.77 275.27 277.80 280.34 282.91 285.51 288.13 Total 3,289.89

   
   
    

5. If the overdraft level is relatively low, or the company does not have significant seasonal variations in the level of overdraft, it is probable that a reasonable estimate of the interest paid can be made fairly simply. In these circumstance best estimates may well be adequate. If the opposite is true, the interest calculation is reasonably sophisticated. It relies on an estimate of the opening overdraft and therefore in effect
   • Completion of the estimate for the current year including the opening balance sheet
   • An analysis of the cash movement for each accounting period.

   This more sophisticated calculation will be illustrated when the procedure for analysing the plan into accounting periods is added to this paper. The exercise continues for now on the basis that a "Best Estimate" of interest cost for the year will be reasonably accurate.

6. The remainder of the items which adjust Operating Profit to Retained Profit for the year can now be established and are illustrated in Figure 23 below.

   Figure 23:- Retained Profit

   Figure 23 illustrates the adjustment of Operating Profit to Retained Profit. Details are referenced to the "Figure Illustration" in which the basis for the item is illustrated. "Est." (estimate) indicates there is no other basis than "Best Estimates". "Act" (actual) indicates that the information should be available from the Company's actual accounting records
    

    

   PROFIT RETAINED
   Current Year		Item Description		Plan Year
   Fig Ref	Est/Act $			Plan $	Fig Ref
   21 Est Est 22 Est Calc Act	36,915 0 886 11,250 12,136 24,779 8,177 16,602 11,068 5,534	Operating Profit Non Trading Items (Profit)Loss on Sale of Assets Abnormal Total Non Trading Items</> Finance Charges Interest Term Loan Bank Interest Total Finance Charges Profit Before Taxation Taxation* Net Profit Dividends Paid** Retained Profit	--$-- (1,445) 4,000 639 12,482	43,655 2,555 13,121 27,979 9,233 18,746 12,000 6,746	21 9 8 22 Est Calc Est
   *Taxation is the Trading Profit Before Tax, times a tax rate of 33%. It assumes that the directors monthly income is included in the salary costs. **Dividend paid depends entirely on the policy. In the case of the exercise, two thirds is distributed. For the sake of simplicity, dividends are not accrued.

   
    

1. Debtors consist of Trade Debtors; (amounts owed-by customers etc.) plus any prepayments, that is bills or expenses paid in advance. The method of calculating the trade debtors, is to:-
   • Estimate the sales for the last 2 to 3 months of the year. Do not overlook non trading sales such as assets sales.
   • Estimate of weeks sales that are owed by customers (Debtor Ratio - see Figure 3 Company Objectives). Note that the debtor levels will include indirect taxes (GST in New Zealand, VAT in Europe; sales taxes in some states of the USA), so ensure that the debtor ratio reflects this
   • Calculate the debtors by dividing the sales by the number of weeks and multiplying by the Debtor Ratio.

   Figure 24:- Trade Debtors

   Figure 24 illustrates the estimates and calculations required to establish a trade debtor figure. Where applicable, details are referenced to the "Figure Illustration" in which the basis for the item is illustrated. "Est." (estimate) indicates there is no other basis than "Best Estimates". "Act" (actual) indicates that the information should be available from the Company's actual accounting records.

    

   TRADE DEBTORS
   Current Year		Item Description	Plan Year
   Fig Ref	Est/Act		Plan	Fig Ref
   Est Est Est	$83,000 0 0	Sales (for the last 3 month of the year) Trade Sales Asset Sales Other Sales	$96,396 1,265 0	Est 9 Est
   Act 3	$83,000 13 8.9	Total Sales for 3 months Number of weeks Debtor Ratio - weeks	$97,661 13 8.0	Act 3
   	$56,823	Calculated Debtors	$60,999
   The calculation is:- 97,661 ÷ 13 x 8.0 = 60,999

   
   
    

2. The level of prepayments has no particular pattern. Items prepaid are often expenses such as rents and insurance, but they could also include special trading arrangements. If they are substantial then they should be estimated and scheduled separately for inclusion in the balance sheet. For smaller companies a "Best Estimate" based on previous accounting records will often be accurate enough. The amount to be included in the balance sheet is the amount remaining prepaid at the balance sheet date. The same calculation should be applied to estimates for the Current Year for expenses items which are prepaid. Figure 25 illustrates a simple schedule of prepayments.

   Figure 25:- Prepayments

   Figure 25 illustrates the estimates and calculations required to establish a prepayment figure. Where applicable, details are referenced to the "Figure Illustration" in which the basis for the item is illustrated. "Est." (estimate) indicates there is no other basis than "Best Estimates". "Act" (actual) indicates that the information should be available from the Company's actual accounting records

    

   PREPAYMENTS
   Current Year		Item Description	Plan Year
   Fig Ref	Prepayment		Fig Ref	Annual Amount	Prepayment Period	Prepayment
   21 21	--$-- 1,613 520	Insurance Rent	14 14	--$-- 2,200 6,240	9 months 1 month	--$-- 1,650 520
   	2,133	Total Prepayment				2,170
   Calculation example:- 2,200 ÷ 12 x 9 = 1,650

   
   
    

3. Creditors consist of Trade Creditors; (amounts owed-to suppliers of goods and services) plus any Other Creditors, that is expenses or costs incurred and included in the Profit and Loss Account but are not yet billed or discharged.
   The method of arriving at the level of trade creditors is virtually the same as that for debtors:-
   • Estimate the purchases and expenses for the last 2 to 3 months of the year. Do not overlook non trading items, such as fixed asset purchases.
   • Estimate the number of weeks credit you will be taking (Creditor Ratio). Note that calculated creditor levels must include GST, so ensure that the creditor ratio reflects this.
   • Calculate the creditors by dividing the sales by the number of weeks and multiplying by the Creditor Ratio.

   Figure 26:- Trade Creditors

   Figure 26 illustrates the estimates and calculations required to establish a trade creditor figure. Where applicable, details are referenced to the "Figure Illustration" in which the basis for the item is illustrated. "Est." (estimate) indicates there is no other basis than "Best Estimates". "Act" (actual) indicates that the information should be available from the Company's actual accounting records

    

   TRADE CREDITORS
   Current Year		Item Description	Plan Year
   Fig Ref	Est/Act		Plan	Fig Ref
   Est Est 25	$17,000 0 1,613	Purchases and Expenses (for the last 3 month of the year) Trade Purchases and Expenses Asset Purchases Prepayment Adjustment	$21,070 0 1,650	Est 9 25
   Act 3	$18,613 13 6.2	Total Purchases and Expenses for 3 months Number of weeks Creditor Ratio - weeks	$22,720 13 6.5	Act 3
   	$8,877	Calculated Creditors	$11,360
   The calculation is:- 22,720 ÷ 13 x 6.5 = 11,360

   
   
    

4. The level of "Other Creditors" has no particular pattern. In addition to the items illustrated, other items outstanding can be bills paid in arrears on a regular (say) quarterly basis. If they are substantial then they should be estimated and scheduled separately for inclusion in the balance sheet. For smaller companies a "Best Estimate" based on previous accounting records will often be accurate enough.
   The items included below are related to the payment of wages and salaries to employees, and the payment of Pay As You Earn (PAYE) liabilities to the Inland Revenue Department (IRD). It is assumed that wages are paid one week in arrears; tax deductions from employees average 28% and are paid to the IRD monthly.
   Figure 27 illustrates a simple schedule of "Other Creditors".

   Figure 27:- Other Creditors

   Figure 27 illustrates the estimates and calculations required to establish the "Other Creditors" figure. Where applicable, details are referenced to the "Figure Illustration" in which the basis for the item is illustrated

    

   OTHER CREDITORS
   Current Year			Item Description	Plan Year
   Fig Ref	Annual Amount	Amount Owed		Fig Ref	Annual Amount	Owed Period	Amount Owed
   21 21 21	--$-- 125,438 25,400 16,047	--$-- 1,738 351 222	Net Wages Owing Direct Wages (Gross) Ancillary Wages (Gross) Holiday Pay (Gross)	15 15 15	--$-- 139,030 27,806 17,749	1 week 1 week 1 week	--$-- 1,925 385 246
   	2,311		Total Net Wages Owing				2,556
   21 21 21 21 21	--$-- 125,438 25,400 16,047 17,700 13,600	--$-- 3,377 684 432 413 317	PAYE Taxes Owing Direct Wages (Gross) Ancillary Wages (Gross) Holiday Pay (Gross) Salaries - Selling & Distribution Salaries - Administration	15 15 15 14 14	--$-- 139,030 27,806 17,749 18,100 14,000	5 weeks 5 weeks 5 weeks 1 month 1 month	--$-- 3,743 749 478 422 327
   	5,223		Total PAYE Taxes Owing				5,719
   	7,535		Total Other Creditors				8,274
   Calculation example:- Net Wages Owing: 139,030 ÷ 52 x (1 - 28%) = 1,925 PAYE Taxes Owing: 139030 ÷ 52 x 5 x 28% = 3,743

   
   
    

5. Indirect taxes, are typically taxes on sales or value added type taxes such as Value Added Tax (VAT) in Europe and General Services Tax (GST) here in New Zealand. How the amount of indirect tax owing to the IRD at any particular balance sheet date is calculated will depend entirely on the local rules.
   Illustrated below are the calculations based on the rules for the collection and payment of GST. Being a value added type tax, the calculations are reasonably sophisticated. They are therefore a good example of the type of calculations necessary to establish a balance sheet value for these type of taxes.
   Companies have various options to chose from. The option illustrated is based on the one most commonly adopted.
   Basic elements:-
   • The tax rate is 12.5%.
   • The tax period is 2 months.
   • The tax is added to the invoiced sales to the home market.
   • Tax is included on almost all the bills the company pays for supplies and services.
   • In the month following the tax period, the Company pays to the IRD the GST on the cash received from sales offset by the GST included on the purchases and expenses paid.

   Figure 28:- Indirect Taxes

   Figure 28 illustrates the estimates and calculations required to establish a GST tax owing at the balance sheet date. Where applicable, details are referenced to the "Figure Illustration" in which the basis for the item is illustrated. "Est." (estimate) indicates there is no other basis than "Best Estimates

    

   INDIRECT TAXES
   Current Year		Item Description	Plan Year
   Fig Ref	Est/Act		Plan	Fig Ref
   Est 9 Est Est 24	--$-- 60,500 0 0 60,500 43,556 50,509 53,547	Related to Sales of the Last 2 months Product Sales Asset Sales Other Sales Total Sales Add:- Opening Debtors (excluding tax) Less:- Closing Debtors (excluding tax) Sales Cash Received (excluding tax)	--$-- 70,443 0 0 70,443 46,214 53,421 63,236	Est 9 Est Est 24
   	6,693	GST on Cash Received from Sales @ 12.5%	7,905
   Est 9 Est Est Est 26	13,800 0 0 13,800 372 13,428 7,733 7,891 13,270	Related to the Purchases and Expenses of the Last 2 months Purchases and Expenses Capital Expenditure Other Purchases Sub Total Less: Prepayment Adjustment Total Purchases Add:- Opening Creditors (excluding tax) Less:- Closing Creditors (excluding tax) Purchases and Expenses Cash Paid (excluding tax)	17,317 0 0 17,317 381 16,936 10,745 10,098 17,583	Est 9 Est Est Est 26
   	1,659	GST on Cash Paid for Purchases and Expenses @ 12.5%	2,198
   	5,034	GST Owing	5,707
   Calculation Examples Debtors and creditors are adjusted to exclude the GST element as follows:- Closing Debtors: 60,099 ÷ (1 + 12.5%) = 53,421 (Figure 24 refers) Closing Creditors: 11,360 ÷ (1 + 12.5%) = 10,098 (Figure 26 refers)

   
   
    

6. Direct taxation is the tax charged on the profit the company generates. The owed or owing position to be included in the balance sheet will depend on the local rules and which vary enormously from country to country. The rules plus the history of previous years, showing the liability or otherwise at the balance sheet date, should provide the basis for calculating or estimating a relevant tax figure.
   Figure 29 below illustrates the relevant calculations assuming the company is domiciled in New Zealand.
   Tax Rules:-
   • Tax rate on profits is 33%
   • The country has a system of Provisional Tax, which attempts obtain payment for the tax on profits, with 3 equal payments during the tax year.
   • Provisional Tax payments are determined by:-
     • The company estimating its likely liability. If it underpays using this method, penalties can be imposed.
     • A payment based on the previous year's tax liability plus 5%. If the company underpays using this method no penalties are imposed. Established companies with a consistent profit record, tend to opt for this method

   If the system works correctly, tax owed or owing for a financial year that coincides with the tax year should not be substantial

   Figure 29:- Direct Taxation

   Figure 29 illustrates the calculations required to establish the Direct Taxation at the balance sheet date. Where applicable, details are referenced to the "Figure Illustration" in which the basis for the item is illustrated. "Est." (estimate) indicates there is no other basis than "Best Estimates. "Act" (actual) indicates that the information should be available from the Company's actual accounting records

    

   DIRECT TAXATION
   Current Year		Item Description		Plan Year
   Fig Ref	Est/Act $			Plan $	Fig Ref
   23	24,779	Profit Before Taxation	$	27,208	23
   23	8,177	Taxation Terminal Tax (Current Year) Tax Liability for the Year Provisional Tax Paid Terminal Tax Paid Total Tax Paid	9,233 221 8,586 221	9,454 8,807	23 Act Calc Act
   Act	221	Tax Owing		647
   Calculation Example Provisional Tax Paid: 8,177 x (1+5%) = 8,586

   
   
    

7. All the information is now available to complete the balance sheet. The balance sheet is analysed showing the total of the capital employed required to run the business and the financial structure which finances the capital employed.
   • Capital employed is the total of:-
     • Fixed Assets at cost less Depreciation.
     • Stock Values of Raw Material, Work in Progress and Finished Goods.
     • Debtors and prepayments.
     • Creditors
     • Indirect Taxes owing. As the Company is acting as a tax collector, these balances are classified as part of the operational
   • The financing of capital employed is the total of:-
     • Shareholders Equity; comprising Issued Capital; Capital Reserves; Share Premium Account; General Reserve; Retained Earnings and Shareholders Current Accounts.
     • Direct Taxation owing or owed. Classified as finance because it is related to an appropriation of profit rather than its generation.
     • Term Loans
     • Overdraft or in hand balances.

   Figure 30 shows the balance sheet analysed in this way.

   Figure 30:- Balance Sheet

   Figure 30 illustrates the content and the recommended analysis of the Balance Sheet. Where applicable, details are referenced to the "Figure Illustration" in which the basis for the item is illustrated. "Act" (actual) indicates that the information should be available from the company's actual accounting records.

    

   BALANCE SHEET
   Current Year		Item Description		Plan Year
   Fig Ref	Est/Act $			Plan $	Fig Ref
   		FIXED ASSETS
   10 10 10 10 10 10 10 10 10 10 10	60,000 5,000 55,000 61,000 24,000 37,000 21,000 14,000 7,000 142,000 43,000	Land & Buildings Cost Depreciation Reserve Written Down Value Plant & Machinery Cost Depreciation Reserve Written Down Value Fixtures & Fittings Cost Depreciation Reserve Written Down Value Total Fixed Assets Cost Depreciation Reserve	--$-- 73,000 2,695 72,200 28,864 22,240 14,708 167440 42,267	70,305 43,336 7,532	10 10 10 10 10 10 10 10 10 10 10
   10	99,000	Fixed Assets - Written Down Value		121,173	10
   		NET CURRENT ASSETS
   12 12 20 24 25 26 27 28	5,786 6,752 58,891 72,429 56,823 2,170 131,422 8,877 7,534 5,034 21,445	Current Assets Stocks Raw Materials Work in Progress Finished Goods Total Stock Trade Debtors Prepayments Total Current Assets Less: Current Liabilities Trade Creditors Other Creditors Indirect Taxation Total Current Liabilities	--$-- 4,821 5,786 55,282	65,889 60,099 2,170 128,158 11,360 8,274 5,707 25,341	12 12 20 24 25 26 27 28
   	109,977	Total Net Current Assets		102,818
   	208,977	CAPITAL EMPLOYED		223,991
   		FINANCED BY:-
   Act Act Act 23 Act 29 22 Calc	35,000 12,345 37,685 5,534 90,564 16,813 107,377 221 7,285 94,094 101,379	Shareholder's Equity Issued Capital General Reserve Profit & Loss A/c B/fwd Retained Profit Equity Shareholder's Current A/c Total Shareholder's Equity Taxation Borrowings Term Loan Bank Overdraft Total Borrowings	35,000 12,345 43,219 6,746 3,995 105,225	97,310 16,813 114,123 647 109,220	Act Act Calc 23 Act 29 22 Calc
   	208,977	CAPITAL EMPLOYED		223,991
   Calculations Profit & Loss A/c B/fwd is: 37,685 + 5534 = 43,219 The level of capital employed has been calculated. All elements of financing are known or have been established, with the exception of the overdraft level, which logically is the balancing figure.