The Principle and Processes of Financial Planning

THE PRINCIPLE AND PROCESSES OF FINANCIAL PLANNING

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1. Principles of Cost and profit applications

Businesses can be viewed as being processes which are made up of outputs and inputs. These inputs and outputs in a business can either have a positive, neutral, or a negative impact to the society into which the business operates in. these inputs and outputs improve the general performance of the business.

The inputs into a business include all the purchased items and the non-purchased items. The purchased items include all the things and items that the company pays for like the materials which are used in the production of the products and services, the supplies, local taxes, contributions, labour, etc. the non-purchased inputs include heating, natural lighting, natural resources, cooling, and wastes coming from other sources among others. The outputs in a business include all the items which are as a result of being in the business and they include the actual products, shareholders, waste from the company, heat, etc.

Costs and profits are very important in any business. Costs incurred by the business can impact the profit margins of the business. The variables to consider in cost and profit margins are the expenses, the contribution margin, the fixed expenses and the net operating income. These variables explain how a company can be less vulnerable to downturns when compared to another company under different circumstances. If a company has a contribution margin which is very high, the operating income would be greater and the profit margins are most likely to increase because the company will realise an increase in the total unit sales but the company generate huge losses in the bad years. If a company has fixed costs which are low and high variable costs, the company will enjoy stability in the net operating income as it will be highly protected from losses which can occur in the bad years when...