The question must be asked why so many people wish to own their own business. Many answers could be given to this type of question, and without exception each of the answers would surely be valid. Some people will say that their overpowering motivation is to be independent, to be able to make their own decisions, to create their own futures, or not to be dependent on the wishes and fickleness of employers and superiors. Others may say that in this way they could strengthen their financial position, or provide for a need in the community, or live their lives to the full.
Whatever the variety of answers and reasons may be, one single aspect stands head and shoulders above the rest: Not one of these reasons can be valid in the long term and remain valid if the business does not realise a satisfactory return on invested capital. Only once sufficient profit is made in the long term, will entrepreneurs be able to realise their expectations. Therefore a satisfactory return on invested capital is an absolute prerequisite and has extreme importance for any enterprise’s chance of success.
How many managers and owners know exactly, without guessing, at regular intervals whether or not their manufacturing business is profitable. More important is whether their business activities bring in a satisfactory profit.
A lack of correct financial planning and the ignorant management of scarce funds are often the strongest reasons why businesses, and specifically small businesses, fail. In order to manage a business successfully, a businessperson must therefore be familiar with the most important financial concepts and terminology, as well as their use and application in practice. Many business people lose money because they are not familiar with the most important business and financial concepts applied in a manufacturing business. It is therefore the aim of this chapter to explain the most important concepts by means of practical examples and case studies. In this way, various formulas will be developed as you progress with the course.
The concept of profit determination in a manufacturing business will be dealt with in order to provide the manager and owner with a basis to build on.
Various concepts dealt with or still to be dealt with in the field of accounting and business economics, will be discussed here because of the nature and extent of this course, with the emphasis on their practical application. This will afford the businessperson or manager, who may not be familiar with business and financial concepts, the opportunity to become familiar with the most important concepts and their practical application in the manufacturing business environment.
To compete successfully in a highly competitive market requires an in-depth knowledge of costing and administration in the production environment. The basis of any successful business is an effective yet simple bookkeeping and healthy financial management system.
In any small business, planning is dependent on relevant, timely and useful information. The purpose of this chapter is therefore to lay down guidelines for costing of manufactured products and whereby meaningful information can be obtained that is essential for effectively managing of a manufacturing concern.
As a small businessperson, you also serve your community through the creation of job opportunities, and by bringing products and services within their reach. In this way you thus contribute to the uplifting their standard of living. Because you employ people from the community, you also train small business people for the future.
Costing and financial management forms an integral part of the total managerial activities in the small industry. If the small industrialist neglects this important function, future financial problems cannot be excluded. It would not be fair to expect the small industrialist to be a financial expert. However, to be successful, the small industrialist should have a working knowledge of the basic costing and financial principles of a small industry.
The theme of this course covers the basic costs aspect, the flow of cost information sources, break-even analysis and the analysis of financial statements in an industry. These aspects will therefore be covered in greater detail.
Before we embark on our costing and pricing journey we need to remind ourselves that business is about the exchange of goods and money. Costing and pricing is about figures therefore correct calculation of figures in any business in imperative. Today, many business tools are in a form of computer accounting programs such as Pastel accounting, Quick Books etc, however not all businesses can afford computers, let alone the accounting packages. The cheapest tool to perform this activity is a calculator.