Finance Manager each SME help SMEs benefit from the use of financial models, using relevant costs in decision making associated with out-sourcing and other activities, analyze factors that influence the decision to set prices, using target costing in pricing decisions.
Competency Analysis
Financial managers are competent in each of SMEs in introducing financial modeling and its application in various exercises profit planning, financial models extend from simple, single-product, a cost-driver model to arrive at a more complex model with multiple products and directional charge, deciding factor to consider in making business decisions, including decisions make-or-buy, add or cancel a business unit, determine the optimal use of scarce resources, and pricing of services and goods.
Contribution to Rural Economic Resilience
A. Financial model is the presentation of reality in the business world. One model that allows one to see how something should be done. A financial model that allows an SME to test the interaction of economic variables in various settings. Financial model that requires analysts to develop a set of equations that presents a company's operations and financial relations. This may include such things as the relationship between sales and variable costs, inventory turnover, and the relative proportions of the various products sold. Once the financial model is developed, will be used to investigate different combinations of variables interact with each other to see what the results are expected in different scenarios.
B. Financial model offers several benefits to users. Once a model is developed, the user can concentrate on analysis instead of the interests of the service are discussed. This gives insight to the Finance Manager about possible business results without the risk to try it first. Thus, it is possible to identify a business decision that is not properly before the appointed time.
C. On one view, the model is as good as the information entered. The assumption is wrong in building a model will drive towards the wrong predictions and decisions that are not good business.
D. One model that has proven useful is the model of Cost-Volume-Profit (CVP). The model mimics the effect show the volume changes in the cost of SMEs, income, and profits. This basic model combines four key variables - the volume of sales, costs, revenues, and profits. Basic model can be extended to assess the impact of price, cost, and the change in volume, along with changes in product mix and tax revenues. Although the model is called cost-volume-profit, can also be used by SMEs, non-profit as well. Such SMEs conduct analysis to ensure that they only spend money they have. This is a special type of CVP analysis, called break-even analysis of the situation.
1. Break-even point is the volume of activities that generate income sufficient to cover all costs for an SME. There is a level of sales volume in which an SME does not make any profit, but also not losing.
a. The best break-even point is understood if the revenues and costs expressed in a way that left the presentation of income and the traditional costs. Formats that support in understanding how to achieve break-even point is called the contribution margin format (CM). Types of profit-reporting approach is to separate the costs into two categories: fixed costs and variable costs.
b. CM format of the summary income statement is shown in short form as follows:
Sales Results
Less Total Variable Cost = Total contribution margin
Less Total Fixed Cost = Revenue effort
Less income taxes, other net operating income = Disposable income
c. Breakeven calculation can be fulfilled by using contribution-margin approach. In order to use this approach, the CM per unit must be known, and estimates fixed costs must be known.
d. Another way to calculate the break-even point is to use equation approach.
1. Results of sales - Total cost = revenues. The total cost can be split into variable costs and fixed:
2. Results of sales - variable costs - fixed costs = Income business. The results of sales and variable costs can be expressed in different ways, based on the number of units sold:
3. (Selling price per unit of volume of sales *) - (variable cost per unit * volume of sales) - Cost = Fixed Income business. During, the break-even point, business income is zero, the equation can be written as:
4. (Selling price per unit of volume of sales *) - (variable cost per unit of volume of sales *) - Fixed Cost = Rp. 0. Next, rearrange the equation by adding the Fixed Costs on both sides of the equation, to obtain:
5. (Selling price * volume of sales) - (variable cost per unit of volume of sales *) = The costs fixed. Reconstruct the left, combined sales volume terms, to obtain:
6. (Selling price-variable cost per unit) * Volume of sales = Fixed Costs. Finally, to get the sales volume on one side of the equation, divide both sides by (selling price-variable cost):
7. Volume sales = Fixed Costs / (Selling price - variable cost). This gives the volume of sales at break-even point.
e. CVP model may also form a graph. Make a graph model of helping the Finance Manager to see whether it will take to break even, and then they can see what it takes to make a profit. It also shows how much sales down before a profitable business started losing money.
2. SMEs in business profit outside to perform break-even point. CVP analysis can be used to estimate the sales volume needed to achieve a target profit. If the target amount of business income is known, then extend the model beyond the breakeven CVP is simple and natural. All that is needed is a target of business income is added to the fixed costs are estimated.
3. Profit-makers of SMEs should also pay income tax. Business only to earn income after tax (net income). Thus, CVP analysis becomes more informative if it is necessary to raise the target amount of net income, for it was a tax rate as a percent of business income is assumed. Mathematically, the amount of disposable income can be expressed as a percent of business income.
a. Income after taxes = Income before tax - income tax. The amount of income tax is income before tax * t. Repeated:
b. Income after taxes = Income before tax (Income before taxes * t). Reconstruct the right side of the equation, to obtain:
c. Income after taxes = Income before tax * (1 - t). Dividing both sides of the equation by (1 - t) to obtain:
d. Income after tax / (1 - t) = Income before tax.
4. Variables can be reviewed, moved, and set back, to see a profit if the assumptions about the price, volume, and the costs changed. This change is being met by using computer software and is called sensitivity analysis. Sensitivity analysis shows how the result of a decision-making process change if one or more assumption changes.
5. CVP analysis is good for business is very simple with one product and a simple fee structure. Most SMEs have a lot of products, adding complexity to the analysis of CVP. CVP model can quickly become a modeling tool that can only be used via computer software.
a. In calculating or computing breakeven revenue targets, then the weighted average unit contribution margin (WAUCM) must be reviewed if 'sales mix' to be reviewed.
b. CVP using the idea of 'sales mix' calculating breakeven within and outside the state of impasse. Assumptions 'sales mix' is also used to evaluate the performance, profitability, and to assess the decision-making related to product sold.
6. Limitation uses CVP model are: First, 'sales mix "should remain held in order to calculate the break-even or to assess the sales volume needed to reach a target amount of this income is not a realistic assumption. Another variable is assumed to be constant: the costs, operating efficiency, technology, operations, and cost characteristics. This assumption is not realistic. One third assumption is that there is a linear relationship between costs and revenues, so the quantity discount and ignore the other effects that threaten the accuracy of the CVP model. Perhaps the biggest criticism of the CVP model is the use of a single-unit activity as a director sold-cost / activas. CVP model ignores market conditions, such as product demand, competitive pricing, a generate sales price changes, quality issues, economic conditions generally, inflation, among other variables. Some argue that the CVP is too simple to be useful as a management tool. Others argue that the CVP model should be extended to model-based activities.
CVP and ABC together can provide the Finance Manager with a comprehensive assessment model. By using the ABC approach and consider the costs can be classified as unit, batch, product, customer, or facility-level costs, CVP models need to be modified so that the costs characterized differently than a simple fixed or variable. Total Costs must be classified as: (unit cost variable * number of units) + (cost * number of batches batches) + (Cost of products * the number of products) + (Cost of Customer * customer's order number) + (Facilities Fees * facility cost drivers). Characteristics these costs take some costs that may have been treated as fixed before and is now treated as a variable, but the variability is based on the activity of the number of units sold.
a. By using multiple regression and analysis of accounts, CVP model can be extended to include multiple layers of activity and cost of the referrer. The expansion of the simple CVP model provides many benefits, primarily to provide much better information about what should be done to ensure profitability, also explains the difference that fees exist.
b. Although the CVP model is much more complex when adjusted to - includes various directional costs, it is easier to carry out sensitivity analysis via computer software. Once the money and time invested in a complicated system as described, is the benefit of SMEs to use the model as much as possible in order to evaluate the performance and profitability options to test.
E. CVP model are used solely for short-term decision making. Four types of decisions which the CVP model can provide very helpful information that is (1) decision-make-or-buy, (2) add or dissolve a business unit (eg, a product line), (3) the optimal use of scarce resources, and (4) receipt of special orders.
There is another decision-making tool that can be used in addition to CVP model. Characteristics of information used to create this type of management are described as follows.
1. Three critical characteristics in the decision-making relevance, accuracy, and timeliness. Relevant information only if associated with a particular decision. When making decisions about what should be in the future, relevant information is described as the information differs across alternatives in the future. Information should also be accurate to be useful. Inaccurate information can lead to the Finance Manager approve each SME business decisions are not wise or prudent to refuse. Relevant accurate information becomes less valuable if it was too late to be used in making a decision. Degree of thoroughness of information may be reduced by the need to be made available to base a more appropriate time.
2. Other types of information in decision making is qualitatively than quantitatively naturally. Although most business decisions related in some way to meet profit targets, attention must also be included qualitative as a factor. Qualitative information includes such things as the effect on employee morale, loss of control because the company gave jobs to outsourcing, and its impact on society or the environment. When faced with making a decision, including the difficulty in measuring qualitative factors, the Financial Manager must mobilize standards of skills, experiences, judgments, and ethics.
3. Relevance of information is an important characteristic. Often the Finance Manager are not faced with the simplicity of making a decision. Often they have to choose between alternatives. Relevant costs and revenues is the cost and revenue in the future and alternative differs. When confronted with this dilemma, the Financial Manager should consider the following factors. The first question to be answered is, "Will change the costs or benefits from choosing an alternative be included in the research paper?" If the answer is "yes," then the benefits and costs that must be considered in making that decision.
a. The second issue to consider is whether the period of time will be affected by decisions to be taken. Events in the past does not affect that decision. Only the costs and benefits that will occur in the future associated with the decision. Fees already happened is called a "sunk cost."
b. Although sunk cost is not included as a factor in the assessment of costs and benefits to be obtained in the future, past decisions have not entirely ignored. Information from past events should be seen, at least to understand when a successful and an error occurs. The past can be a good predictor of the future.
4. There is a distinction between decision making and performance evaluation. In making a decision, the costs of past visits to determine just what is good work and what does not. When evaluating performance, cost and repair cost past through productive activities are often the primary basis for the evaluation. Indeed, evaluation of performance of the Finance Manager is based on annual performance of SMEs. Sometimes a decision that will benefit the SMEs in the end have an adverse effect on the profitability of SMEs now. The peak Finance Manager is responsible for evaluating the performance of employees should know the effects of long-term decisions on short-term profits and should not punish employees who make such decisions.
5. Relevant costs and revenues, are considered in many different situations, both have yangn inside and outside of SME business. The use of relevant cost information should be considered in four different types of decisions: decisions to make vs. buy, add or cancel a business unit, to optimize use of scarce resources, and pricing decisions.
F. A decision of make-or-buy is the company's decision to obtain services or goods internally or externally. The decision to purchase services or goods are externally known as "outsourcing." Outsourcing is usually associated with different decisions of SMEs to shift the focus towards meeting the core activity internally and letting other SMEs to meet the surrounding activities: such as technology, information systems, human resources, accounting and payroll activities.
Decisions Make-Or-Buy often part of a long-term corporate strategy. Some SMEs sevara integrate vertically, meaning they carry out all activities from the beginning to the end of their value chain. Other SMEs rely on outside environment for several inputs and specialize only in certain portion of the total process.
1. Outsourcing can result in the elimination of the activity of non-value-added. This is true when an SME does not have a lot of expertise in certain areas.
2. If you make a decision to carry out an activity internally or externally, the information used should be relevant, timely, and accurate. The best way is to think of decision-making costs will vary based on choice to make or to buy.
G. Financial Managers sometimes have to decide whether to add or dismiss a business unit. A business unit may be a product, market area, department, facility, or other types of segments that can be recognized as the other units. The decision to cancel a business unit may occur for a variety of considerations, including the decline in market demand, product obsolescence, or the inability to remain competitive. Companies may decide to add a business unit for the development of new production, expansion into new markets, procurement of another company, or the ability to meet new customer demands. Making the decision to add or cancel a business unit can not be made based on profit and loss balance sheet tersegmen. Financial reporting information that contains the cost allocation that are not relevant to that decision. Financial Managers of SMEs in each decide whether to add or cancel a business unit should be based only on costs and relevant revenues. If a segment of the dissolution, what is a freelance income? What costs are liberated? If the costs exceed the revenue abolished, it may be wise to stop the segment.
1. One factor is the opportunity cost (opportunity cost) to consider, what can be done with the resources freed by disbanding a unit, or resources that will be bound by adding a unit?
2. Another factor is the qualitative factors. Stopping a business unit, as the right financial choices is not necessarily a qualitatively correct, particularly if the public or employees adversely affected by the decision. Outsourcing also resulted in the elimination of jobs, because employees no longer needed.
H. Selecting services and goods to be produced and sold is a common managerial decisions. SMEs are faced with limited capacity, which is called the capacity constraints. Examples include the lack of capacity limits tax accountant skilled; not enough computer programmers, or too little cook in a large restaurant.
1. When faced with a choice of SMEs among the alternatives which are profitable activity, the contribution margin generated by each alternative should be compared. Opportunities that provide the highest contribution margin per unit of scarce resources is to be chosen.
2. Often the case with two or more capacity constraints must be confronted with at the same time, the analysis of activities or group activities can be optimally solved by "liniar programming." which is used to maximize profits or minimize costs.
I. The fourth type of activity is the decision making pricing decisions. Setting too high a price to scare customers from buying the product. Determining the price is too low to make a smaller profit margin.
1. Factor to consider is the customer's perspective. Competitive environment to allow customers free to choose, and competitors are also reacting to the price escalation. If an SME lower price, competitors may respond with a reduction in price, too.
2. Fees must also be considered in setting the price, with consideration of market-driven, competitive pressure. costs of setting a good, based on production costs.
3. Companies must be aware of the laws, political, reputation when it comes to pricing decisions, legislation issues of price discrimination, international law on waste, and market monopoly activities (opponents of the monopoly industries offenders). Political repercussion on the company that took advantage of the public unnatural or customers as a whole (for example, the tobacco industry).
4. The Finance Manager should consider the long-term strategy and short in making pricing decisions. The decision to price-setting should consider the product offers a way of life. The Financial Manager should also consider the special effects, was ordered to have no long-term implications. Product mix and volume adjustments must also be considered in a highly competitive market.
When the notice for pricing short-term decisions, there are several factors other costs that are not relevant. In many short-term decisions, the costs of unit-level variable is the only relevant costs. In other cases, fixed costs or the costs at a higher level than the unit-level might be relevant.
a. When used in pricing decisions, relevant costs must be regarded as basic, minimum sales price. In the long term, this pricing strategy will not work. For example, relevant costs one more passenger on a bus may be close to zero. This may motivate the Finance Manager to offer free driving to small children if their parents pay for their tickets. If the bus company has excess capacity, this strategy can generate additional profits because it would attract customers with small children from another bus that does not absolve a child. Strategy free tickets to be a bit useful if too many of the passengers with small children to buy tickets.
b. Special order pricing is another consideration that requires the determination of relevant costs, a net benefit from taking an order and the amount of production resources must be available to complete that order. If an SME is beyond its capacity and replace the benefit of SMEs to take special orders that generate some margin contributions, though lower than the margin was raised from the sale of ordinary.
5. Company user pricing approach is good and activities-based management to recognize the costs of non-value-added. Companies can not use pure pricing strategy without first managing the fees and charges. Strategies that combine the costs of out-of-control will lead to price too high and result in decreased sales volume, or lower profit margins and lower profits as a result.
6. Target costing is a cost management strategy must be adopted by companies in highly competitive markets. Target costing method used by SMEs to design products and services to meet customers' needs and to achieve corporate profit targets, which are determined by market-based prices, to achieve corporate profit targets, to ensure that all activities are value-added production. Companies should adopt a management philosophy of "Kaizen pricing." or sustainable development. Philosophy assumes the production process efficiency and quality of the process is always improved.
7. Cost-Life-Cycle costs are the costs of certain products from the beginning until no longer manufactured and related customer service activities related ends. Theoretically, the price charged to recover all costs associated with certain products during the whole life.
8. Prices can not legally be charged differentially on different customers for the same product (where there is a purpose to harm competitors). This is price discrimination. Companies in the United States must comply with industry antitrust laws. Robinson-Patman Act prohibits price discrimination. Other law-Clayton Act and Sherman Act - to prevent the resulting price-setting behavior of a monopoly or anti-competitive. Other illegal Pricing is predatory pricing. This occurs when SMEs set for a while under the price in increased demand on a product, and to destroy competition in the competitive sale of the product. The contribution of this kind of thinking can be proposed by the Finance Manager as the draft decision Regent Mayor, District Regulation, or even the Bill
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