SAMPLE. Not for training purposes. Student Workbook. BSBSMB402 Plan small business finances. 1 st Edition 2016

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1 Student Workbook BSBSMB402 Plan small business finances 1 st Edition 2016 Part of a suite of support materials for the BSB Business Services Training Package

2 Acknowledgement Innovation and Business Industry Skills Council (IBSA) would like to acknowledge HASCOM Pty Ltd for their assistance with the development of the resource for BSBSMB402A. Writer: Tim Allchin Revised for BSBSMB402 by: Anna Henderson, Business Skills Viability (BSV) (2016). Copyright and Trade Mark Statement 2016 Innovation and Business Industry Skills Council Ltd All rights reserved. Apart from any use permitted under the Copyright Act 1968, no part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, or otherwise, without written permission from the publisher, Innovation and Business Industry Skills Council Ltd ( IBSA ). Use of this work for purposes other than those indicated above, requires the prior written permission of IBSA. Requests should be addressed to the Resource Development Manager, IBSA, Level 11, 176 Wellington Pde, East Melbourne VIC 3002 or Innovation and Business Skills Australia, IBSA and the IBSA logo are trade marks of IBSA. Disclaimer Care has been taken in the preparation of the material in this document, but, to the extent permitted by law, IBSA and the original developer do not warrant that any licensing or registration requirements specified in this document are either complete or up-to-date for your State or Territory or that the information contained in this document is error-free or fit for any particular purpose. To the extent permitted by law, IBSA and the original developer do not accept any liability for any damage or loss (including loss of profits, loss of revenue, indirect and consequential loss) incurred by any person as a result of relying on the information contained in this document. The information is provided on the basis that all persons accessing the information contained in this document undertake responsibility for assessing the relevance and accuracy of its content. If this information appears online, no responsibility is taken for any information or services which may appear on any linked websites, or other linked information sources, that are not controlled by IBSA. Use of versions of this document made available online or in other electronic formats is subject to the applicable terms of use. To the extent permitted by law, all implied terms are excluded from the arrangement under which this document is purchased from IBSA, and, if any term or condition that cannot lawfully be excluded is implied by law into, or deemed to apply to, that arrangement, then the liability of IBSA, and the purchaser s sole remedy, for a breach of the term or condition is limited, at IBSA s option, to any one of the following, as applicable: (a) if the breach relates to goods: (i) repairing; (ii) replacing; or (iii) paying the cost of repairing or replacing, the goods; or (b) if the breach relates to services: (i) re-supplying; or (ii) paying the cost of re-supplying, the services. Published by: Innovation and Business Industry Skills Council Ltd Level Wellington Pde East Melbourne VIC 3002 Phone: Fax: ISBN: Stock code: BSBSMB4021W First published: st edition version: 1 Release date: 2016

3 Table of Contents Getting Started...1 Features of the training program...1 Structure of the training program...1 Your Business...1 Your Business Success...2 Assessment tasks...2 Introduction...3 Section 1 How Much Will I Need?...4 What skills will you need?...4 Costs...4 Profit margin and break-even point...8 Pricing strategies...9 Projected profit statement Section summary Further reading Section checklist Section 2 Making it Work What skills will you need? Introduction to financial plans Cash flow Profit targets Working capital Assets Cash flow projections and capital investments Capital investments Budget targets and the financial plan Section summary Further reading Section checklist Section 3 Where Will the Finance Come From? What skills will you need? Start-up and ongoing costs Appropriate sources of finance Strategies for obtaining finance Section summary BSBSMB402 Plan small business finances 1 st edition version: 1 Innovation and Business Industry Skills Council Ltd

4 Further reading Section checklist Glossary Appendices Appendix 1: Basic business plan Appendix 2: Sample basic business plan (Sophie s Crafty Creations) Appendix 3: Make a presentation Appendix 4: Answers to select learning activities st edition version: 1 BSBSMB402 Plan small business finances Innovation and Business Industry Skills Council Ltd

5 Student Workbook Getting Started Getting Started Features of the training program The key features of this program are: Student Workbook Self-paced learning activities to help you to develop an understanding of key concepts and terms. The Student Workbook is broken down into several sections. Facilitator-led sessions Challenging and interesting learning activities that can be completed in the classroom or by distance learning that will help you consolidate and apply what you have learned in the Student Workbook. Assessment tasks Summative assessments where you can apply your new skills and knowledge to solve authentic workplace tasks and problems. Structure of the training program This training program introduces you to planning small business finances. Specifically, you will develop the skills and knowledge in the following topic areas: 1. How much will I need? 2. Making it work 3. Where will the finance come from? Your facilitator may choose to combine or split sessions. For example, in some cases, this training program may be delivered in two or three sessions, or in others, as many as eight sessions. This unit has been designed for those who have had little or no financial management experience. This unit will give an introduction to the principles of financial management in small business. The intention is to focus on the skills and knowledge that small business operators need to be able to plan effective financial management. Your Business This course is designed for people who have a small business or who are developing one. Many examples and activities require you to consider how you would apply different learning to that small business, which we will call Your Business in the Student Workbook. You can identify those activities in the Student Workbook by the logo on the right. BSBSMB402 Plan small business finances 1 st edition version: 1 Innovation and Business Industry Skills Council Ltd Page 1 of 62

6 Getting Started Student Workbook Your Business Success Innovation & Business Skills Australia has licensed the use of over 200 video vignettes from the Channel 9 television program, Your Business Success. The videos have been carefully selected and embedded into relevant learning and assessment resources in order to assist education providers and students in the learning process. Each video is accompanied by a learning activity. Videos can be found on IBSA s YouTube channel at < Assessment tasks There are a series of three assessment tasks which you will complete throughout the unit. These include a: projected profit statement and rationale finance plan presentation of sources of finance. These assessment tasks will be explained to you in more detail as you undertake them, and you will be provided with a marking sheet which will indicate your result from the list of competencies you have demonstrated. 1 st edition version: 1 BSBSMB402 Plan small business finances Page 2 of 62 Innovation and Business Industry Skills Council Ltd

7 Student Workbook Introduction Introduction Financial management appears to be something that many small business operators love to hate, but no business lasts long without it. In order to be inspired, potential backers will need to gain an understanding of the future of the money that they will invest in the business. The small business operator will need a clear understanding of the financial possibilities, to make decisions that will help achieve business goals and comply with legal provisions. Effective planning is a vital tool in the armoury of any small business operator, and often defines the boundary between success and failure. Financial planning is one part of the overall business planning that must go on, but it is a vital component the money is a major part of what keeps things moving and growing. Learning activity: Basic business plan for Your Business Before you commence the sessions in this unit, you will need to complete the basic business plan in Appendix 1 of this document. The basic business plan will need to be completed with information from a small business (real or hypothetical). Throughout this workbook, we will refer to this as Your Business. Note: You may use the sample business plan in Appendix 2, Sophie s Crafty Creations, to complete the activities in this workbook. Many of the learning activities refer to Sophie s Crafty Creations, but can be applied to Your Business, should you prefer to complete them using your own basic business plan. BSBSMB402 Plan small business finances 1 st edition version: 1 Innovation and Business Industry Skills Council Ltd Page 3 of 62

8 Section 1 How Much Will I Need? Student Workbook Section 1 How Much Will I Need? This section is about planning the financial basics of the business; the costs and the pricing strategy that will be used. Scenario: Sophie s Crafty Creations Sophie had been doing well selling craft ideas and supplies from her garage. At least, she seemed to be selling a lot of things, which was good. She had decided that she would give the business a go for three months and then she would have another look. She was quite pleased with the way that she had managed to juggle her kids and her other commitments, and was dreaming of the future... perhaps a small shop. She thought Sophie s Crafty Creations had a nice ring to it. She sat down one Saturday evening and began to go through the costs that the business had and the sales that she had made. There was a long list of sales, but there was also a long list of costs, and she discovered that her profit margin was not enough to make her business viable. It was time for some creative thinking about her business and her products. In order to know whether your small business will profitable, you need to have some basic skills and disciplines. What skills will you need? In order to work effectively as a small business operator, you must be able to: identify costs associated with the production and delivery of your products/services calculate prices based on costs and profit margins calculate the break-even sales point identify appropriate pricing strategies in relation to market conditions prepare a projected profit statement. Costs Before you can project whether your business will be profitable, you need to understand some of the basic costs of your business. What are costs? In economics, business, retail, and accounting, a cost is the money value of a product or service. 1 st edition version: 1 BSBSMB402 Plan small business finances Page 4 of 62 Innovation and Business Industry Skills Council Ltd

9 Student Workbook Section 1 How Much Will I Need? What is profit? Profit is most simply defined as the difference between the costs of selling something and the price that it is sold at. There are a number of different measures of profit that take into account the different levels of cost to the business. Net profit includes costs such as depreciation and rent, while gross profit only includes the direct costs of production. Some profit measures are calculated before taking out tax, while others are calculated after tax is removed. Clearly, these will produce different results, and it is important to know how the profit measure has been calculated. What is a profit margin? A profit margin is a given amount, usually a percentage, that a business decides to charge for the sale of an item above the costs of producing the item for sale. It is calculated by subtracting the costs of the item from the price and dividing the result by the price. This amount is then multiplied by 100 to give a percentage value. What is mark-up or a margin? Mark-up or a margin is the amount charged on top of the costs for an item to create the profit margin. It is sometimes used interchangeably with profit margin. Learning activity: Define key terms There are many kinds of costs in your business. Search the internet for definitions of the following, and develop an understanding of them before progressing further. Variable costs: Fixed costs: Direct costs: Indirect costs: Break-even point The break-even point for a product or service is the point where total revenue received equals the total costs associated with the sale of the product or service. BSBSMB402 Plan small business finances 1 st edition version: 1 Innovation and Business Industry Skills Council Ltd Page 5 of 62

10 Section 1 How Much Will I Need? Student Workbook Break-even cost and sales point It is important to know clearly when the business is past the break-even point. The following examples show you two methods of determining break-even points. Example: Break-even sales point If you know your prices Consider the following example: Fixed costs = $25,000 Variable costs = $75,000 Total costs = $25,000 + $75,000 = $100,000 Price of units/hours to be sold = $75 Break-even sales point will be $100,000/$75 = units/hours So in order to cover costs charging $75 per hour or unit of work, the small business operator would have to sell units or hours of work. If we wanted to add a profit margin of 10% onto the pricing, because it is good practice for business to allow for contingency costs, we would determine 10% and then add it onto the cost of each unit or hour and do the calculation again. This would be: 10% x $75 = $7.50 So the total price with a 10% profit margin would be: $75 + $7.50 = $82.50 per hour/unit. Break-even sales point (with contingency of 10%) would then be: $100,000/$82.50 = 1213 units/hours. But what if you don t know prices, but you do know how much work is required? Example: Break-even pricing If you know how many hours/units Consider the following example: Fixed costs = $25,000 Variable costs = $75,000 Total costs = $25,000 + $75,000 = $100,000 Amount of units/hours to be sold = 2,000 Break-even price will be $100,000/2,000 = $50 per unit or hour So in order to cover costs producing 2,000 hours or units of work, the price would have to be $50 per unit or hour. 1 st edition version: 1 BSBSMB402 Plan small business finances Page 6 of 62 Innovation and Business Industry Skills Council Ltd

11 Student Workbook Section 1 How Much Will I Need? If we wanted to add a profit margin of 10% onto the pricing, because it is good practice for business to allow for contingency costs, we would determine 10% and then add it onto the cost of each unit or hour. This would be: 10% x $50 = $5 So the total price with a 10% profit margin would be: $50 + $5 = $55 per hour/unit. Examining your competitors Competitors are a good source of information about what the market will handle in terms of pricing. Use the information in the sample basic business plan in Appendix 2 to roughly determine the mark-up and profit margin for the three competitors that have been identified there. Learning activity: Examine competitors to Your Business Read through the completed basic business plan for Sophie s Crafty Creations in Appendix 2, or use the business plan you have created for Your Business. Use the table below to note three competitors to the business. Identify the products or services competitors offer that are similar to those offerred by Your Business or Sophie s Crafty Creations. Identify your competitors costs and determine the mark-up for each of the items. Note these in the second column of the table and then calculate the profit margin for each of them. Name of competitor business Mark-up of similar products and services Profit margin (%) BSBSMB402 Plan small business finances 1 st edition version: 1 Innovation and Business Industry Skills Council Ltd Page 7 of 62

12 Section 1 How Much Will I Need? Student Workbook Of course, your business and your competitors businesses will never be exactly the same; there will be different factors that have an impact on the pricing strategies of each. It is important to identify the differences and assess pricing strategies accordingly. Note the differences between Sophie s Crafty Creations and its competitors using the information given for each of them in Appendix 2. Use this as an example when examining competitors to your own business. Profit margin and break-even point Profit margin is an issue of concern to small businesses because they do not often operate on a high margin, and the difference between viability and failure can be the level of care taken when the profit margin is set. Learning activity: Examine competitors to Your Business Using the data from Sophie s Crafty Creations, or Your Business, and the profit margins you calculated for competitors in the previous activity, decide on a reasonable profit margin for your own or Sophie s products. Then calculate the prices for these products on the basis of the margin and costs. Profit margin (%) Prices of services and products 1 st edition version: 1 BSBSMB402 Plan small business finances Page 8 of 62 Innovation and Business Industry Skills Council Ltd

13 Student Workbook Section 1 How Much Will I Need? Break-even sales point The point at which the costs of the business are covered is an important benchmark to note. This is known as the break-even point, and can be used to develop a price or to ascertain the number of units/hours that need to be bought to keep the business viable. Learning activity: Sophie s break-even point Calculate the break-even sales point for Sophie s Crafty Creations using an average of the prices you calculated and the costs associated with the business. Is this break-even point reasonable? What could be done to make it more reasonable? Make some notes about this below. You may also discuss it in a small group before discussing further with your learning group. Pricing strategies Ensuring your pricing is right is one of the most critical aspects of your small business. Getting it right will have a great impact on the viability and profitability of your business. No-one goes into business to make a loss; however, failing to plan correctly will inevitability lead to you planning to fail. What you charge for a product or service can be determined in many different ways. There are several factors that will influence how you price your product. These include the following. Production costs: In the previous section, we investigated the factors that need to be considered when determining the production costs of your product or service. You need to ensure that your price is more than what it has taken to produce the product. Therefore, using sound financial tools such as budgets and financial plans and forecasts will ensure that the risk of this happening is minimised. BSBSMB402 Plan small business finances 1 st edition version: 1 Innovation and Business Industry Skills Council Ltd Page 9 of 62

14 Section 1 How Much Will I Need? Student Workbook Market position: When you developed your business and marketing plans, you had already decided where you wanted to position your product in the market. Setting your price to reflect your position is important, as too high or too low might mean your product (no matter how good it is) will fail if you do not position it correctly. Conducting market research before you embark on pricing will minimise this risk. Value of your product/service: In deciding to buy a product or a service, price is only one factor in the decision-making process that your customer will undergo. If your customer perceives the product or service has value to them in meeting their needs and wants, then price will be at the lower end of the scale when it comes to making a decision to purchase. You need to ensure that your product is priced at a level where value and quality merge. Understanding your competitors: Successful small businesses keep a watchful eye on what their competitors are doing and how they will respond to competing products. One of the worst strategies you can adopt is entering into a price war with your competitors; this doesn t build customer loyalty or reputation. Focus instead on building value into your product or service that customers will want to pay for. Learning activity: Your prices Go to the following article: Chapman, G., Another way to increase your prices, The Australian Small Business Blog, < 2010/04/another-way-to-increase-your-prices.html>. In this article, Dr Greg Chapman discusses the anchor pricing strategy used by Steve Jobs when Apple released the ipad. Once you have read the article and watched the YouTube video on the page, answer the following questions. You can answer these questions for Your Business or for Sophie s Crafty Creations. Would using the anchor strategy assist you in pricing your product? If yes, why? If no, why not? 1 st edition version: 1 BSBSMB402 Plan small business finances Page 10 of 62 Innovation and Business Industry Skills Council Ltd

15 Student Workbook Section 1 How Much Will I Need? Listed below are different ways of determining price (usually referred to as pricing strategies). In simple terms, a strategy is a systematic plan of action; a strategy should be short and should not contain the detail that is included in either an operational or business plan. Strategies are used as a springboard for further business analysis and detailed planning. Pricing strategies Competitor analysis gaining a clear understanding of the competitor s strategies and their product/service range allows a clear picture of what it is possible for the business to charge. Cost/volume/profit analysis an analysis of the volume of the product/service that the business will have to sell to make a profit. This is used in conjunction with a profit or return on investment that the owner/operator would like to achieve. Cost factors planning the pricing strategy on the basis of the costs to the business in the production and delivery of the product/service. Cost plus pricing cost plus pricing is a simple addition process where a chosen amount of profit is added to the break-even cost of any particular product. Demand-based pricing this is where the price of an item is solely determined by the demand for it, and which therefore is affected by the customer s perception of the service or product. Generally the product or service will be pitching at a low-cost high-volume market, or a higher-cost lower-volume premium market. Discounting this relies on volume selling or on the thought that once a client is attracted to the business, then other products/services can be sold. It is important not to get caught in a discounting war, or the operator may end up losing money with each sale. Discounting is sometimes known as promotional pricing. Market conditions a clear understanding of how the market is functioning. This is usually a large part of the negotiated strategies that happen in car yards and local markets. Penetration pricing usually used for new products, this strategy relies on making an impact on the market before a competitor product appears. A low introductory price is used to quickly build up a large sales volume. This leads to savings in marketing and production. Perceived value a reputation for quality allows a small business operator to charge higher prices, but there is also a psychological aspect to higher prices, because clients may assume something is better quality if it costs more. Generally speaking, pricing up works well if the customer thinks the possibility of choosing a poor product is high, so this particular product/service will be better despite the cost. This generally happens if not much is known about the product, if choosing among a variety of alternatives is hard, if the purchase is a major one with long-lasting impacts and/or if there is a concern about how the purchase will look to friends and neighbours. BSBSMB402 Plan small business finances 1 st edition version: 1 Innovation and Business Industry Skills Council Ltd Page 11 of 62

16 Section 1 How Much Will I Need? Student Workbook Product mix businesses can have a range of products/services available that will generate different amounts of profit, providing an overall profit for the business along with increased sales. One strategy that uses this approach is known as leader pricing, where some items are recognised as attractive and therefore discounted to attract business, in the hope that other products and services may be able to be sold as well. Skimming usually used for new products. Much like penetration pricing, this strategy relies on making an impact on the market before a competitor product appears. In this case, the price is driven by consumer demand, with the possibility of skimming the market charging higher prices as the demand outstrips the supply of the product. This strategy will attract competitors quite quickly, and the strategy will then need to change into a more stable one. Learning activity: Pricing strategies for Your Business Which of the pricing strategies seems most reasonable for Your Business (or Sophie s Crafty Creations)? How would it work? Make some notes about this below. Projected profit statement The projected profit statement provides an estimate of profit (or loss) for a period in the future. It is important to help the small business operator in planning for periods where there will be less available money due to greater costs. It will influence the advertising strategy and other forward planning activities. 1 st edition version: 1 BSBSMB402 Plan small business finances Page 12 of 62 Innovation and Business Industry Skills Council Ltd

17 Student Workbook Section 1 How Much Will I Need? Example: Profit statement Bob s Camping Shop Projected Profit Statement For the period [01/01/2015] to [01/06/2016] Revenue: Gross Sales sales amount $110, Less: Sales Returns and Allowances $2, Net Sales $107, Cost of Goods Sold: Beginning Inventory value of stock held at start of period $20, Add: Purchases $4, Freight In cost of getting stock to the business $ Direct Labour $2, Indirect Expenses related to products $2, $28, Less: Ending Inventory value of stock left at end of period $0.00 Cost of Goods Sold $28, Gross Profit (Loss) $79, Expenses: Advertising signage, advertisements, stationery $ Asset and Equipment Purchases $1, Bad Debts $0.00 Bank Charges $ Charitable Contributions $50.00 Commissions $0.00 Contract Labour $0.00 Credit Card Fees $ Delivery Expenses $ Depreciation all assets $ Dues and Subscriptions all associations and memberships $0.00 Insurance all asset, vehicle, professional and life $1, Interest on mortgages and loans $4, Maintenance $ Miscellaneous $0.00 Office Expenses utilities and consumables $ Operating Supplies $0.00 Payroll Taxes $1, Permits and Licenses all required licenses and certificates $0.00 Postage $ Printing for products $0.00 Professional Fees $ Property Taxes $0.00 Rent $0.00 Repairs $0.00 Telephone $ Travel $0.00 Utilities $ Vehicle Expenses $0.00 Wages $12, Other $0.00 Other $0.00 Other $0.00 Total Expenses $24, Net Operating Income $54, Other Income: Gain (Loss) on Sale of Assets $0.00 Interest Income $ Total Other Income $ Net Income (Loss) $54, BSBSMB402 Plan small business finances 1 st edition version: 1 Innovation and Business Industry Skills Council Ltd Page 13 of 62

18 Section 1 How Much Will I Need? Student Workbook Section summary You should now understand how to develop a pricing strategy for a business using the profit margin, break-even point and an understanding of the competitors and the market. Further reading Australian Bureau of Statistics, < Australian Securities and Investments Commission, < Chartered Accountants Australia and New Zealand, < Institute of Public Accountants, < Section checklist Before you proceed to the next section, make sure that you are able to: identify costs associated with the production and delivery of your products/services calculate prices based on costs and profit margin calculate the break-even sales point identify appropriate pricing strategies in relation to market conditions prepare a projected profit statement. 1 st edition version: 1 BSBSMB402 Plan small business finances Page 14 of 62 Innovation and Business Industry Skills Council Ltd

19 Student Workbook Section 2 Making it Work Section 2 Making it Work This section is about developing financial plans by working with the basics of costs and sales and making sure that the targets that are set will meet requirements for income but also capital investment. Scenario: A sustainable business Sophie had lunch with a friend a successful small business owner in her neighbourhood who encouraged her to think about the sort of return she wanted from her business. Sophie decided to get serious; she thought her business needed to cover its costs as a minimum, and really ought to be something that gave some return for her creativity and hard work. With some help from her friend, they started going through the numbers. Sophie realised that there were some things that would need to be replaced to keep the business going; her glue gun, for one thing. Sophie and her friend made a list together and split it up over the coming months to get an idea of the financial requirements for each period of time. It came together a bit as they made some budget targets and matched them up with some thoughts about how much money would be coming in, given the current rate of sales. In the end, the projections of the cash flow and the budgets gave Sophie a very good idea of what she had to aim for in order to make the business work. Sophie s experience isn t different from most small businesses. She needs to have a roadmap that explains where the business is going; in other words, a financial plan. What skills will you need? In order to develop financial plans, you must be able to: set profit targets to reflect your desired returns identify working capital requirements necessary for profit projections identify asset requirements consider alternative asset management strategies prepare cash flow projections identify capital investment requirements for each operational period select budget targets. BSBSMB402 Plan small business finances 1 st edition version: 1 Innovation and Business Industry Skills Council Ltd Page 15 of 62

20 Section 2 Making it Work Student Workbook Introduction to financial plans Financial plans are a key tool in any small businesses. While operational plans tell you about what you have to do and how you need to get it done, financial plans tell you whether you are making any money doing it. Once again, it is a good idea to do some research to make sure that you understand some of the key terms and definitions. Learning activity: Define key financial planning terms Search the internet for definitions of the following, and develop an understanding of them before progressing further. Working capital: Cash flow: Non-current assets: Asset management strategies: Any other financial planning terms you ve found: Cash flow Cash flow problems are one of the main reasons that small businesses fail. The amount of cash required at any given time in the life of a small business will vary according to the bills that need to be paid and the amount of money that is received. Seasonal variations in sales and credit payments have an impact on the amount of money actually received, so problems often arise when the bills arrive together and the cash received is low. Planning for cash flow variations is a vital part of financial planning in small business. 1 st edition version: 1 BSBSMB402 Plan small business finances Page 16 of 62 Innovation and Business Industry Skills Council Ltd

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