Improve Your Business - Planning For Your Business

Planning For Your Business
IMPROVE
YOUR BUSINESS
Planning for
Your Business
International Labour Office

Copyright © International Labour Organization 2015
First published 2015
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International Labour Office
Improve your business (IYB): planning for your business / International Labour Office, Enterprises Department.
- Geneva: ILO, 2015
ISBN: 9789221287483; 9789221287490 (web pdf ); 9789221287414 (set)
International Labour Office Enterprises Dept.
enterprise development / business strategy / management development / small enterprise / business
03.04.5
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About the Start and Improve Your Business (SIYB) Programme
The Start and Improve Your Business (SIYB) programme is a management-training programme developed
by the International Labour Organization (ILO) with a focus on starting and improving small businesses
as a strategy for creating more and better employment for women and men, particularly in emerging
economies. With an estimated outreach in over 100 countries, it is one of the world’s largest programmes
in this field.
The programme has four inter-related packages - Generate Your Business Idea (GYB), Start Your Business
(SYB), Improve Your Business (IYB) and Expand Your Business (EYB).
The ILO implements the programme using a three-tier structure comprising Master Trainers, Trainers and
the end beneficiaries – potential and existing entrepreneurs. The Master Trainers licensed by the ILO are
responsible for developing the capacity of the Trainers to effectively conduct SIYB training. Thereafter, the
Trainers train entrepreneurs in SIYB packages. The ILO plays a critical role in identifying and disseminating
best practices, carrying out trainings, monitoring activities, performing quality control and providing
technical advice on the implementation of the SIYB programme.
About Improve Your Business (IYB)

Improve Your Business (IYB) is a management training programme for owners and managers of small
enterprises who want to sustain their businesses, increase sales and reduce costs. It addresses the core
question of how to improve the performance of your business.
IYB originates from a programme developed by the Swedish Employer’s Confederation for local small and
medium entrepreneurs. Later, the methods and materials were adapted by the ILO to meet the needs of
people running small businesses in developing countries.
The IYB training programme is supported by a set of six manuals (marketing, costing, buying and stock
control, record keeping, planning for your business, and people and productivity). These manuals can be
taught individually or all combined in a full course. If the full course using all the manuals is delivered, the
duration is approximately seven days. The IYB training uses an active, problem-centred learning approach
to small business management through, for example, short cases and graphic illustrations.
The IYB Planning For Your Business manual explains how entrepreneurs can run their business more
efficiently if they prepare plans for the different areas of operation.
Authors and acknowledgements
The IYB Planning For Your Business manual is a result of a collective effort and reflects the experience and
knowledge gathered by implementing the programme for nearly three decades. In particular, the contributions
of SIYB Master Trainers and Trainers who have tested, designed and implemented the programme in different
countries over the years have been invaluable. There are many colleagues from the network of SIYB practitioners,
consulting firms and in the ILO, whose experience, support and constructive suggestions made the publication
of this training manual possible.
This manual is based on the materials originally developed in 1994 by the ILO SIYB Regional Project Office in
Harare, Zimbabwe, where it was written and edited by Hakan Jarskog, Barbara Murray and Mats Borgenvall.
The author team of the 2015 version, which revised the existing text and wrote new chapters to include recent
thinking in enterprise development and related fields comprises Duong Thi Kim Chung and Pranati Mehtha.
Stylistic and language editing were carried out by Steve Raymond.
Many thanks are due to SIYB senior Master Trainers Dissou Zomahoun, Gemunu Wijesena, Sibongile Sibanda
and Walter Verhoeve for the review of the draft manuscript and suggestions based on their training experience.
A special thanks to Marek Harsdorff from the Green Jobs Programme of the Enterprises Department of the ILO
for his contribution to the content of the manual. Short contributions, advice and assistance on integrating
linkages to finance in the manual were received from Cheryl Frankiewicz and Severine Deboos (Technical
Expert in the Social Finance Unit of ILO’s Enterprises Department).
The internal layout and illustrations were carried out by Thai Van Luan and the cover design was developed by
Maurizio Costanza.
The review efforts and technical contributions of the SIYB Global Coordination Team members who provided
invaluable support to the development and finalization of the manual is greatly appreciated: Merten Sievers
(Specialist – Value Chain Development and Business Development Services), Eva Majurin (SIYB Global
Coordinator) and Thokozile Newman.
Contents
INTRODUCTION i
1. What is this manual about? i
2. Who should read this manual? i
3. Objectives of this manual i
4. How to use this manual? i
PART I - planNing for the future 01

1. What is planning? 01
2. Is planning necessary? 02
3. How can planning improve your business? 06
4. Useful plans 07
4.1 Sales and Marketing Plan 07
4.2 Production and Cost Plan 08
4.3 Profit Plan 08
4.4 Cash Flow Plan 08
4.5 Loan Access Plan 08
5. Tips for making a plan 08
Summary 11
Assessment 1 12

PART II - DoING A business analysis 15
1. Analyse your sales and marketing 17
1.1 Get past data 17
1.2 Compare your records 17
1.3 Find reasons 18
2. Analyse your production and costs 20
2.3 Find reasons 22
3. Analyse your profit 23
3.3 Find reasons 25
Summary 26
Assessment 2 26
PART III - ForecastING changes in THE external environment 29

1. What is a forecast? 29
2. Changes that may impact your sales and marketing 31
3. Changes that may impact your production and costs 32
Summary 35
Assessment 3 36
PART IV - MANAGING RISK 37

1. What is risk? 37
2. What is Risk Management? 38
3. Stages in the Risk Management process 39
4. Risk Management strategies 40
Summary 42
Assessment 4 42
PART V - Making plans 43

1. Set business objectives 43
2. Incorporate Risk Management strategies in planning 44
3. Make a Sales and Marketing Plan 44
3.1 How to make a Sales and Marketing Plan? 44
3.2 How to use the sales forecast? 50
4. Make a Production and Cost Plan 51
4.1 How to make a Production and Cost Plan? 51
4.2 How to use the cost forecast? 66
5. Make a Profit Plan 66
6. Make a Cash Flow Plan 68
6.1 Does your business run out of cash? 69
6.2 How to make a Cash Flow Plan? 71
6.3 Use your Cash Flow Plan to improve your business 76
6.4 How often should you make a Cash Flow Plan? 78
7. Make a Loan Access Plan 78
7.1 Is a loan necessary for business? 78
7.2 Choosing a financial institution 79
7.3 Calculating interest on your loan 79
7.4 Preparing to qualify for the loan 81
7.5 Planning for loan management 81
Summary 83
Assessment 5 84
Answer to Activities 86
WHAT DID YOU LEARN IN THIS MANUAL? 89

Can You Help? 90
Action Plan 94
Answers 97
Useful business words 101

INTRODUCTION |
1. What is this manual about?
When you are running a business, it is easy to be overwhelmed by day-to-day problems and lose track of the
bigger picture. However, successful businesses invest time in planning for the future. They prepare and then
review plans and regularly monitor business performance. This manual will guide you through the process of
making the right plans for your business.
2. Who should read this manual?
Planning For Your Business is one of the manuals in the Improve Your Business (IYB) series. It is useful for
entrepreneurs who are running small enterprises and who wish to develop their businesses, increase sales and
reduce costs.
3. Objectives of this manual
When you have completed this manual, you should be able to:
•• Explain the benefits of business planning
•• Describe the steps of making business plans
•• Develop plans for your business
•• Use the plans to improve your business
4. How to use this manual?
In this manual you will find:

•• Stories of businesses: Compare these examples with your own business and use them to improve the
performance and profitability of your business.
•• Activities: Practical exercises in the middle of each part that help you to proactively think about the
concepts and how to apply them to your own business.
•• Summary: This is provided at the end of each part. Use it to review the key points.
INTRODUCTION | i
•• Assessment: This is provided at the end of each part. Answering the questions will help you to assess
how well you understand the content presented in that part.
•• “Can You Help?”: These are exercises at the end of the manual which will give you an opportunity to
apply your new knowledge and skills in specific situations. By doing these exercises, you will find out
how much you have learned from the whole manual.
•• Action Plan: Fill in and use the Action Plan near the end of the manual. This will help you to put your
new knowledge into practice.
•• Answers: Answers to Assessments and “Can You Help?” exercises are given at the end of the manual.
Finish each exercise before you look at the answer.
•• Useful Business Words: You can look up the meaning of business words that you do not understand.
This part is at the end of the manual.
•• Important notes: Each of these notes has important information. Use this information to the best of
your ability. You can find these notes in the middle of different parts of the manual.
Several icons are used within the manual to help guide your study. Examples of the icons and their meanings
are listed below:
When you see this icon, you have activities to do or questions to answer.
When you see this icon, you find an answer for your activities and assessments here.
When you see this icon, it signifies that the information in this part is extremely important.
When you see this icon, you have to complete assessments that help you measure what you have
learned.
When you see this icon, you will know you have just completed one part and the important ideas that
were presented are being summarized here.
When you see this icon, it tells you where to find more information or what to do.
ii | Planning For Your Business

PART I |
planning for the future

1. What is planning?
Planning means thinking about and organizing the activities required to achieve a desired goal. For your
business, planning means thinking about and working out what to do in the future to improve your business.
For example, before you buy goods or raw materials, you think about:
•• What goods or materials do you need?
•• How much do you need?
•• Where to buy the goods or materials?
•• How much will the goods or materials cost?
•• When do you need the goods or materials?
Before you start preparing plans for your business, you need to know how well your business has been
performing; for example, what have your sales, marketing, costs, business capacity and profit been in the past.
This is called Business Analysis. You can analyse your business by using the information in your Basic Record
Book. You will learn how to do a Business Analysis on page 15. You also need to forecast changes in the external
environment that may impact your business and identify risks to which your business is exposed.
I need to analyse the

information from my
record books before I
plan for next year.
PART I | Planning for the future | 01

2. Is planning necessary?
Some business people do not make plans. They do not think ahead to prevent problems. They do not know
how well their business will perform in the future. Look at what happened to their businesses:
I did not make a profit

last year. My costs were
too high! My rental costs
are very high in this
shopping complex.
Sorry Fatuma. To give your business

a loan, the bank must know what you
expect your sales, costs, profit and
cash flow to be next year.
02 | Planning For Your Business

What went wrong at Danda Music and Video Shop?
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How could planning have helped Danda?
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Did Convenient Grocery get a loan from the bank?
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How could planning have helped Fatuma?
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Your answers may be similar to the answers below:

Danda Music and Video Shop did not make a profit because costs were too high. If Danda had made a plan, she
would have thought about the future and would have known that her costs would be high. She could have
done something about it before her business started to lose money.
Convenient Grocery did not get a loan from the bank. A plan would have helped Fatuma to show the bank
manager what sales, costs and profit Convenient Grocery expects next year. The bank must know what profit a
business is likely to have in the future before it can think about giving a loan.

Here are two more businesses which did not plan ahead. Look what happened to these businesses:
I do not buy from

I do not understand. My
Tasty Bread anymore.
prices are low, so why
They never have buns.
are my sales so low?
They only sell loaves.
I bought a new laptop last

Juma, there is no plastic week. It was expensive. So,
to make the poles that the now there is not enough cash
customer ordered. to buy raw materials.

What went wrong at Tasty Bread?
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How could planning have helped Murray at Tasty Bread?
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What went wrong at Plastic Solutions?
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How could planning have helped Juma at Plastic Solutions?
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You may agree that:

Many people do not want to buy large loaves of bread. They want to buy buns, rolls and other types of bread.
So sales of loaves are low at Tasty Bread. If Murray at Tasty Bread had been aware of the changing need of
customers and had made a plan to satisfy the need, he could have made buns too and Tasty Bread would have
had more sales.
Plastic Solutions did not have enough cash to buy raw materials after purchasing the laptop. Planning would
have helped Juma to know if she absolutely needed to make that purchase and whether she had enough cash
to make the purchase.

3. How can planning improve your business?
Plans provide your business with quality information that helps you to make good business decisions and to
monitor the performance of the business.
•• If your business is performing well, planning can help you to do even better in the future.
•• If your business is not performing well and has some problems, planning can help you to solve problems.
Planning can help you to predict problems before they arise, so that you can act to prevent them.
These are four important reasons why you should make a business plan:
1. A plan shows you if your business can 2. A plan shows you which part of your
expect to make a profit in the future. business you can improve.
If my costs are After talking to my

high, maybe I should customers, I can
increase my prices. see that they want a
different product. I
should start making
buns, rolls and whole
wheat loaves.
Make a plan to see whether the projected To work out an effective plan, you have to
sales are sufficient and the costs are low think carefully about everything that affects
enough so that you can make a profit. your business.
3. A plan shows others how well your 4. A proper plan shows you how much money
business can expect to do in the future. will come into and go out of your business.
I can see from this plan that your My plan shows me that I will not have
business will do well next year.
enough cash to buy any equipment until
Good, now we can think about
giving your business a loan. September. I must wait until then or
the business will run out of cash.
Make a plan to show the bank when Make a plan so that your business
you apply for a loan. does not run out of cash.

ACTIVITY 1
What is your business?
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Does your business have any problems?
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How could proper planning help to solve the problems at your business?
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4. Useful plans
This manual shows you how to make five kinds of plans that are useful for your business:
4.1 Sales and Marketing Plan
Sales and marketing are closely related. Your marketing activities definitely influence the sales of your
business. Therefore, small businesses often pair up their Sales and Marketing Plan. In a Sales and Marketing
Plan you make a forecast of activities your business will do next year with its seven “P”s: Product, Price,
Place, Promotion, People, Process, Physical Evidence. You also make a forecast of the amount of
sales you expect to have for each month of the following year. This plan helps your business to meet
customers’ needs by providing the right goods or services at a price that customers will pay.

4.2 Production and Cost Plan
A major part of most business costs are incurred in the production process. How many items your business will
produce and what raw materials your business will use both affect your costs. Therefore, the Production Plan
and Cost Plan are often combined. In a Production and Cost Plan, you propose improvements in production
and forecast your costs for each month of the following year. This plan helps your business to work out cost-
effective ways of making goods or providing services.
4.3 Profit Plan
In a Profit Plan, you make a forecast of your Gross and Net Profits for each month of the following year. This
helps you plan how your business will make a profit.
4.4 Cash Flow Plan

The Cash Flow Plan is a forecast of how much cash you expect to come into your business and how much cash
you expect to go out of your business each month. This plan helps you to make sure your business does not
run out of cash at any given time.
4.5 Loan Access Plan

In a Loan Access Plan, you make a forecast of how much your business may need to borrow, when it is needed
and who you can approach for the loan. This plan enables your business to access good sources of funding.
5. Tips for making a plan
When you make plans for your business, remember:

•• Make your plans as simple as possible. Then they are easy to understand and use.
I was worried about my I learn a lot about my business when

business. So, I got a business I make plans. I only put what is really
plan made for me. But it is too necessary in my business plans so that
difficult for me to understand. I understand what everything means.

•• Choose the most suitable period for your plans. You can make your plans for three months, one year,
five years or for whatever period is best for your business.
I make my Sales and

My business needs a Cash Marketing Plan for
Flow Plan every 3 months. one year.
•• Divide your plans into months. Except for the Loan Access Plan, the plans should be divided into months.
In your Basic Record Book you divided your records into months. When you divide your plans into months,
you can compare your records with your plans each month. Then you can see if your business is proceeding
according to your plan.
I planned to sell $5,000

worth of products last
month. But my records show
that my sales totalled only
$4,000. I must find out why.

•• Make your plans before you need to use them. Do not wait until one plan is finished before you begin
preparing the next plan.
I always make my plans in

December for the next year. That
way the plan is ready when the
new year starts.
•• Make inquiries and use the information gathered to make your plans. For example, when you forecast
the cost of materials or goods, ask your supplier about next year’s prices. Do not guess!
I am sure I will make

much more profit next
year. Things seem very
good for my business.

•• Keep your plans updated. Things may change that could make your plans no longer valid. For example,
costs of raw materials may increase, while customers’ demand may decrease, affecting your sales, costs and
profit plans. Review your plans regularly and update them when there is a change that affects them.
Crushed plastic
price has increased
10% this year. I
must update my
costs forecast.
SUMMARY
Planning means thinking about and organizing the activities required to achieve a desired goal. For your
business, planning means thinking about and working out what to do in the future to improve your business.
Before you start preparing plans for your business, you need to know how well your business has performed
previously. What have your sales, marketing, production, costs and profit been in the past? This is called a
Business Analysis. You will also need to forecast changes in the external environment and then you can take
steps to improve your business by managing risks, increasing sales, cutting costs and improving profit.
Four important reasons to make a plan for your business:
•• It tells you if your business can expect to make a profit in the future.
•• It shows you which part of your business you can improve.
•• It shows the bank how well your business can expect to perform in the future.
•• It shows you how much money you can expect to come into and go out of your business.

Planning will provide your business with quality information that helps you to make good business decisions
and to monitor the performance of the business. The following five plans are useful for your business:
•• Sales and Marketing Plan
•• Production and Cost Plan
•• Profit Plan
•• Cash Flow Plan
•• Loan Access Plan
A Sales and Marketing Plan helps your business understand and meet customers’ demand. A Production
and Cost Plan helps your business devise cost-effective ways of making goods or services. A Profit Plan helps
your business plan how to make a profit. A Cash Flow Plan helps your business to make sure that you do not
run out of cash at any time. A Loan Access Plan enables your business get access to good funding sources.
When you make plans:
•• Make them simple
•• Choose the most suitable period
•• Divide them into months
•• Make them before you need to use them
•• Make inquiries and use the information gathered
•• Keep them updated
ASSESSMENT 1
You have just completed Part I of this manual. Do the two exercises below to check your understanding. Finish
the exercises before comparing your answers with those on page 97.
1. Practise your business language
Complete each sentence by choosing the right word or words from the list below:
Planning Sales and Marketing Plan Production and Cost Plan
Cash Flow Plan Profit Plan Loan Access Plan
1. Thinking and working out what to do about something before it happens is called …………………….
2. When you make a forecast of how much money your business will need to borrow, when it is needed and
who you will approach for it, you are making a ……………………………………………………
3. A …………………………………………………..…………………. helps your business to work out cost-

effective ways of making goods or services.

4. In a …………………………………………………… you make a forecast of your Gross and Net Profit for
each month.
5. A …………………………………………………………… helps you to make sure your business does not

run out of cash at any time.
6. When you make a forecast of the price your customers will accept to pay and the new product feature your
customers will want, you are making a ………………………………………………………………..
2. Which one is correct?
Circle the correct or best ending for each sentence.

1. Planning is necessary...
a. for very large businesses only.

b. for large and small businesses.
c. for retailers only.
2. Making a plan will...
a. force you to think about every part of your business.

b. help you work out how much your business is worth.
c. enable you to calculate the exact profit your business is going to make next year.
3. The most suitable period for your plans is...
a. three months.
b. one year.
c. whatever period that suits your business.
4. Your plans should be divided into...
a. months.
b. quarters.
c. a whole year.
5. When you have worked out your plans...
a. strictly follow the plans.

b. keep them in a safe place.
c. review and update them regularly.

PART II |
DoING A business analysis
Juma, why should Chris, you must understand

I do a Business how your business did in the
Analysis before I past before you can plan for
prepare my plans? the future.
Before you can make plans for your business, you must know how your business did in the past. You do this by
using your business records. This is called a Business Analysis. Without past data, entrepreneurs have to make
plans based on their intuition.
Juma is a manufacturer who runs Plastic Solutions, which produces plastic poles out of recycled plastic. Chris
runs a retail shop. They are discussing the process of planning.
PART II | Doing a business analysis | 15

I think I should Chris, I am going to be
make a Profit Plan. making my plans for next
But, I do not know year. I start by analysing
how to begin. my business records.
The purpose of a Business Analysis is to identify areas in which your business was not doing well, the areas
where it was doing well and how it can further improve.
Your Basic Record Book is the most important source of records for analysing your business. There are three
important analyses:
•• Sales and Marketing analysis
•• Production and Cost analysis
•• Profit analysis
Learn more about the Basic Record Book and how to keep records in the IYB RECORD
KEEPING MANUAL.
To analyse your business, you should follow these three steps:
Step 1 Step 2 Step 3

Compare your
Get past data Find reasons
records

1. Analyse your sales and marketing
Analyse your sales by comparing monthly and yearly sales to see if sales were rising or falling. Analyse your
marketing activities to find the reason behind the fluctuations. Accordingly, you can plan to increase your sales
and improve your business.
1.1 Get past data
Use your Basic Record Book to find out how much sales your business made each month last year and each
month this year. If the data for this December is not available yet, make your best estimation.
Juma looked at her Basic Record Book and found the information on monthly sales. She made her best
estimation for December sales figure. She, then, added up all the monthly sales to get the total yearly sales.
Below is the sales data for her poles:
November December December Total this Total last

this year this year last year year year
Sales value ($) 8,650 9,200 10,971 80,950 66,815
1.2 Compare your records
Compare your monthly and yearly sales to find out if there is a change. Are your sales rising or falling?
Chris, I see that this year my sales for December are higher
than those for November. But compared with December last
year, my sales for the month are much lower, even though
the total sales this year are higher. I wonder why?

1.3 Find reasons
It is important to understand the reasons for changes.

Juma and Chris discussed the issue and decided that the reason her December sales were higher was that
many people want to renovate their homes in December so they buy poles for their construction projects. That
was the reason that, every year, her December sales were higher than November sales. But she is still not clear
why sales for December this year were lower than for December last year, even though her overall sales were
better this year.
Some changes are more difficult to understand. You may need to think carefully about your marketing
activities this year. Remember the seven “P”s of marketing: Product, Price, Place, Promotion, People, Process
and Physical Evidence.
Look at each ‘P’ one by one and try to think of reasons why sales may be falling.
Here are some questions to ask yourself when you analyse your amounts:
Product • Did we sell the goods or services our customers wanted?

• Which products sold well? Why?
• Which products did not sell? Why?
Price • How were our prices this year compared to last year?
• Were our customers willing to pay the prices we set?
Place • Is my business in a good place?

• Did we sell our goods or services directly to our customers?
• Did we sell to retailers or wholesalers? Did this increase our sales?
Promotion • How did we promote our goods or services this year?

• Did we use advertising and sales promotion?
• Did we get any publicity?
• Did I improve my skills as a salesperson?
• Which type of promotion produced the highest sales and best profit for
my business?
People • Are my employees adequately trained and motivated?

• Did I deploy my employees in the best way?
• Are my employees adequately remunerated?
• Did we have enough sales staff?
Physical Evidence • Does our good or service have good appeal?

• Are our services or goods giving our customers the best possible experience?
• Are our offices/distribution points appealing and clean?
• What other visual elements do we need?
• Is it easy for our customers to access our goods and services?

Process
• Are our processes efficient and timely?

The IYB MARKETING MANUAL tells you more about how to understand
and satisfy your customers and how to increase your sales.
I did not sell as many poles this

December. I had no promotion.
Last year I had campaigns on the
advantages of plastic poles!
Now Juma understands some of the reasons for the changes in her sales:
•• We raised our price by 10% this year due to the increase in the price of raw materials.
•• Sometimes we did not have enough goods to sell due to machine breakdowns. We could have sold
more if we always had goods available for sale.
•• We had no promotion in December this year; therefore our sales this December were lower than last
December.
“ If your business sells different goods or services, you may need

to analyse the sales and marketing activities of each
“
product separately.

ACTIVITY 2
Are sales in your business rising or falling? Why?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
2. Analyse your production and costs
A change in your costs can be an important indicator of the efficiency of your production or operation. Analyse
your costs by comparing monthly and yearly costs to see if they were lower or higher. Then analyse your
production to find out the reasons for the variations.
In addition to the cost analysis, an investigation of quality issues, an analysis of variations in production
quantity or an analysis of sales can also reveal whether your business has been performing well and what
needs to be improved.
To analyse production and costs, Chris and Juma used the same steps as they did for analysing sales and marketing.
2.1 Get past data
Get information about all your business costs each month this year and last year from your Basic Record Book.
Again, make your best estimation if some information is not yet available. If you are a multiple products
manufacturer or service operator, you may need to get data about the costs for each product from your
Detailed Cost Record.
You can work out the number of items produced each month using data in your Basic Record Book. However,
data relating to product quality may be harder to find. You can measure defection rates by maintaining a
production log book which includes important details of your daily production and operation or you can
collect customers’ feedback on product quality.
Learn more about the Detailed Cost Record and how to keep records
in the IYB RECORD KEEPING MANUAL.

Juma got the monthly cost data from her Basic Record Book. She added up all the monthly figures to determine
the yearly cost.

COSTS
Material Costs ($) 4,800 5,400 4,640 48,615 33,698
Labour Costs ($) 900 900 850 10,800 10,200
Overhead Expenses ($) 2,150 2,170 2,410 25,440 17,560
The number of items she produced was as follows:

Production quantity 300 360 400 3,240 2,900
Compare your figures to find out if there is a change of costs, production quantity or product quality.
There was no problem with

product quality. However
The total of the costs for this production was sometimes
year was higher than for last not able to provide enough
year. However, the Overhead poles for sales.
Expenses this December
were lower than those of
last December.

2.3 Find reasons
An increase in the total cost is not necessarily bad and a reduction in total costs might not always be good. You
must analyse each type of cost as well as the whole production process and find out why the cost was higher
or lower.
Similarly, a reduction in monthly production quantity is not necessarily a production problem. You must
examine the situation carefully to find the root cause.
Here are some examples of questions to ask yourself:
•• How much did my business produce?
•• Is the production capacity of my business appropriate?
•• Did I make good use of all the space I rented?
•• Did I waste or save material?
•• Did material prices increase or decrease? Were my employees fully occupied?
•• Was my production process effective?
•• Were my employees adequately skilled and motivated?
Juma and Chris analysed the Basic Record Book closely to find out the reasons for the changes in Plastic
Solutions’ costs. Here are some examples of what they found:
Material Costs were much higher this year than last year. That seems bad. But Juma knew that production this
year were higher than last year. The more products you produce, the more raw materials you need. So there
may be a good reason for the increase in Material Costs. To check this, Juma compared the Material Cost per
item for the two years:
This year Last year
Material Cost per item ($) 15 11.6
The Material Cost per item this year was much higher than last year. Juma found that the reasons for the
increase were twofold. The price of the raw materials had increased and more material was consumed when
the machines broke down.
Labour Costs were rising as compared to last year. Juma did not recruit more workers, but she decided to
increase the workers’ salary because their productivity had improved. Juma compared the Labour Cost per
item to see if the increase in the Labour Costs negatively influenced her profit margin.
This year Last year
Labour Cost per item ($) 3.3 3.5
Labour Cost per item had fallen this year. Juma knows that her workers were more skilful, so their productivity
was higher. However, Juma knows that there were still a lot of downtimes in production as a result of machine
breakdowns that made Labour Cost per item higher.

Overhead Expenses had increased significantly this year. Juma recruited two sales staff and their wages were
the reason for the higher Overhead Expenses.
However, Overhead Expenses last December were higher than this December. Juma paid for promotional
activities last December, but she did not do promotions this year. The very high sales in December last year as
a result of the promotional activities were worth the higher Overhead Expenses.
Learn more about the way to work out cost per item in the IYB Costing Manual.
Production quantity this year was higher than last year. However, due to machine breakdown, there were
not enough poles for sales in August and December. Plastic Solutions did not want to keep a stock of finished
goods. But in September and October , sales were lower than expected and Juma had to stock finished goods.
This stock enabled her to partly meet high sales demands for November and December where production was
low.
ACTIVITY 3
Are costs in your business rising or falling? Which costs are rising or falling? Why?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
3. Analyse your profit
Your business needs to cover its costs and make a profit for it to survive and grow. Your Gross Profit is the
amount of money left after you have subtracted your Material and Labour Costs from the money received
from sales. The Net Profit is the amount of money left after you have subtracted Overhead Expenses from the
Gross Profit. The Net Profit shows you the total result of your business. It tells you how well or how badly your
business is performing.
Learn more about calculating your Gross Profit and Net Profit in the IYB
Record Keeping Manual.

Analyse your profit by using the same steps you used for analysing sales and costs.
3.1 Get past data
Get the profit data of recent years from your business’ Profit and Loss Statements. Use the information from
your Basic Record Book to make Profit and Loss Statements if you have not created them.
Learn how to create a Profit and Loss Statement in the IYB Record
Keeping Manual.
These are Juma’s Profit and Loss Statements for the previous three years.
Profit and Loss Statement

1/1/11 - 31/12/11
Profit and Loss Statement
1/1/12Sales............................................$57,500
Profit and Loss Statement - 31/12/12
1/1/13Sales............................................$66,815
- 31/12/13 Material Costs..........................$29,168
Sales............................................$80,950
Material Costs..........................$33,698
Labour Costs............................$9,720
Material Costs..........................$48,615
Labour Costs...........................$10,200
Gross Profit.............$18,612
Labour Costs...........................
Gross $10,800
Profit.............$22,917
Overhead Expenses.............$16,520
Gross Profit............. $21,535
Net Profit.................$ 2,092
Net Profit.................$ 5,357
Net Profit................($ 3,905)
Compare your Gross Profit to examine the effectiveness of your production process. Your Gross Profit can be
very low even if your sales are high because of your high Material and Labour Costs.
Compare your Net Profit to find out if the Net Profit is higher or lower than before. You may have a very high
Gross Profit, but if your Overhead Expenses are also high, you can end up with a very low Net Profit or even
a loss!

Juma’s profit trend was:
The year
This year Last year before last
year
Gross Profit ($) 21,535 22,917 18,612
Net Profit ($) (3,905) 5,357 2,092
From the Profit and Loss Statements, Chris and Juma can see that the Net Profit was negative this year. This is
shown by writing the figures within brackets. It means that Plastic Solutions made a loss, even though its Gross
Profit was just a little bit lower than for the previous year. They also found out that sales for this year were much
higher than for last year. So the Gross Profit and Net Profit this year should be higher than for last year, but they
are not. Juma must find out why.
3.3 Find reasons
Why is Plastic Solutions’ Gross Profit for this year lower than that of last year when the sales for this year were
much higher than for last year?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
Why is Plastic Solutions’ Net Profit this year negative although its Gross Profit this year is higher than that of
two years prior when the business made a profit?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
You may have noticed from Plastic Solutions’ Profit and Loss Statements over the last three years that the
Material Costs this year were very high. Though sales have risen this year, the increase in sales was not as great
as the increase in costs. This was the reason for the lower Gross Profit.
Negative Net Profit means that the Gross Profit is not enough to cover Overhead Expenses. At Plastic Solutions,
Overhead Expenses were much higher this year as compared to the previous two years. This was the reason for
a negative Net Profit.
Once you have done your Business Analysis you need to forecast changes in the external environment and
develop plans for the following year.

SUMMARY
Before you can make plans for your business, you must know how your business did in the past. Use your
records to analyse:
•• Your sales and marketing
•• Your production and costs
•• Your profit
When you do a Business Analysis, you can follow these steps:
Step 1 Step 2 Step 3

Compare your
Get past data Find reasons
records
Get past data from your Basic Record Book. Compare and analyse your sales and costs. Find out:
•• If sales are rising or falling and why?
•• Which costs were higher and why?
•• Which costs were lower and why?
Study your Profit and Loss Statements. Compare and analyse your profit. Find your profit trend and analyse why
it is rising or falling.
ASSESSMENT 2
You have just completed Part II of this manual. Try the exercise below to check your understanding. Finish the
exercise before comparing your answers with those on page 97.
Which one is correct?

1. To do a Business Analysis, you need...
a. lots of cash.
b. credit sales.
c. information from your records.

2. To find out the reasons for changes in your sales, you should...
a. carefully study your past sales figures.

b. analyse the effect of your marketing this year.
c. ask your customers.
3. To find out if a change in your cost is good or bad, you should...
a. compare the cost per item.

b. look at your sales as the cost is always proportional to sales.
c. cost increases are always bad.
4. The purpose of a Business Analysis is...
a. to make plans for improvement.

b. to understand how your business performed in the past.
c. both of the above are correct.
5. When doing a Business Analysis, you use...
a. your business records from last year.

b. your business records from this year.
c. your past records.

PART III |
Forecasting changes in THE

external environment
Your business does not stand alone. It is operating in a market. Therefore, to ensure that your improvement
plans are feasible, you must understand external factors as well. For entrepreneurs, it is important to know not
only what happened but also what is likely to happen in the market. It means you need to forecast changes in
the external environment that may affect your business.
1. What is a forecast?
A forecast is your prediction of what will happen to your business in the future. When you know what is likely
to happen you can plan ahead. For example, a weather forecast on the radio or television tells you what the
weather is likely to be on the next day so that you can get ready.
We must take our

umbrellas to work
and school.
Tomorrow it will
rain.
PART III | Forecasting changes in the external environment | 29

When you make plans for your business you should anticipate the changes that are likely to occur in the
external environment and how they will affect your business. You may want to estimate how the changes will
impact your marketing, sales, production process, costs, profit and cash flow in the future. Or you may even
want to reassess your business’ strengths and weaknesses and identify new opportunities and threats.
Look at how these business people think ahead and make forecasts.
Customers are Import of cheap clothing from our

more demanding. neighboring country is increasing.
They will prefer It will be very tough for local
salons which not tailoring businesses.
only take care of
their hair but also
help them relax.
A business person can forecast changes in A business person can forecast changes in
customers’ buying behaviours. market competition.
A nearby supermarket is going The exchange rate

to start operating next year. may be lower this
It will attract many of year as a result of
my customers. inflation. The price of
imported materials
will rise.
A business person can forecast changes that A business person can forecast changes in
affect his or her sales. the price of raw materials.

2. Changes that may impact your sales and marketing
Think about the environment in which your business is operating and consider anything that will affect your
sales and marketing.
What changes in the external environment may affect the sales and marketing of businesses?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
There are many changes in the external environment that may affect the sales and marketing of a business.
Below are some examples:
•• Customers: Changes in demand of customers. The behaviour of the consumers will definitely have
an impact on the number of products a business can sell. Changes in customers’ demand require
appropriate marketing responses, such as improving or renewing current products, changing
distribution channels, etc.
•• Competitors: If competition becomes fiercer, a business may have to reduce the price of its products
or run more promotions.
•• Alternative products: If there is a new alternative product in the market, customers will have more
options and it is possible that a business that sells only the old product will lose a certain number of
customers.
•• Economy: When the economy is expanding, customers are willing to spend more money; and when
the economy is in a recession, customers will spend less.
•• Regulations and policies: New regulations and policies that impact customers’ buying behaviours,
such as import taxes or value added taxes will increase the cost, which will then affect the demand for
that good or service.
Are there other Are competitors

You will learn from experience businesses starting introducing products
to compete with my that are superior
about changes that affect the
business? to ours?
sales and marketing of your
business. The more experience
you accumulate, the better
Are there any
forecast you will make. To be able Are there any new regulations,
to forecast the above changes, changes in customers’ policies or changes
constantly ask yourself these demand or consuming in the economy
behaviours? that can affect my
questions:
business?

Here are some of Juma’s forecasts about changes in the external environment that may affect Plastic Solutions’
sales and marketing:
•• Customers are more concerned about the environment. They prefer environmentally friendly products
and will be willing to pay a little bit more for those products.
•• The economy is doing well and stable.
•• There are plenty of alternative products with a lower price.
ACTIVITY 4
Have you foreseen any changes in the external environment that may affect the sales and marketing of your
business next year? What are they?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
3. Changes that may impact your production and costs
Think about the environment in which your business is operating, plus think of anything that will affect your
future production and costs.
What changes in the external environment may affect the production and costs of a business?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
You may have listed many changes based on your personal experience. Below are some examples of changes in
the external environment that affect the production and costs of a business that you may not have considered:
•• Supply of raw materials: If something such as bad weather leads to a shortage of the raw material
that a business uses, it will possibly lead to an interruption in the production of the product and the
price of that material will increase.
•• New technologies: Things such as new materials, advanced production processes and new waste
management methods often help businesses reduce the costs of production, improve productivity
and increase product quality.

•• Skills supply issues for product ranges: If workers with the skills needed for a business become
scarce, the business may find it difficult to recruit enough people and may have to pay more to get the
people who have the proper skills.
•• Economy: Inflation, fluctuation in exchange rates or an economic crisis will impact all business costs.
•• Regulations and policies: New government policies, such as environmental protection laws, waste
management requirements or regulations concerning employee benefits and insurance may affect
the production and operation of businesses and increase costs.
If these changes occur, forecast how the changes will impact your production as well as each of your business
costs and then ask yourself the following questions:
Are there any better Is there a possibility

ways to produce my that materials will be in
goods or services? short supply?
Is there a significant
Are there any
fluctuation in Material
cheaper materials
Costs? How does the
that meet our
change relate to our
requirements?
overall costs?
“ When answering these questions, remember to be realistic.
“
Make sure you base your answer on facts,
not on wishes and dreams.

Juma forecasted changes that may affect Plastic Solutions’ production and costs as follows:
•• The price of raw materials increased significantly this year. However, the prices will not fluctuate next
year, as the forecast for the economy is stable.
•• The government is offering incentives for industrial complexes in order to encourage entrepreneurship.
I will take advantage of this scheme and negotiate lower rates with my estate agent.
ACTIVITY 5
Have you foreseen any changes in the external environment that may affect the production and costs in your
business next year? What are they?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
Your business depends on opportunities in the economic environment, the political environment,
the social environment and the technological environment. However, these environments also present
threats that bring the element of risk to the business. In the next part we will examine how to identify and
manage risks.

SUMMARY
A forecast tells you what is likely to happen in the future.
Changes in the external environment do impact your business. To plan for the future you have to forecast
changes in the external environment, watch for likely changes that may affect your business and estimate
their impact on your business.
Some examples of change that may affect the sales and marketing of your business are:
•• Customers’ demand
•• Competitors’ actions
•• Alternative products
•• Changes in the economy
•• New regulations and policies
Some examples of changes that may affect the production and costs process of your business are:
•• Supply of raw materials and skilled labour

•• New technologies
•• Changes in the economy
•• New regulations and policies

ASSESSMENT 3
You have just completed Part III of this manual. Try the exercise below to check your understanding. Finish
the exercise before comparing your answers with those on page 97.
1. A forecast tells you...
a. what is likely to happen in the future.

b. what profit you made last year.
c. about the past.
2. When you forecast changes in the external environment...
a. focus on big changes.

b. focus on changes that may affect your business.
c. try to identify all possible changes.
3. You should base your forecast on...
a. your wish.
b. your past records.
c. facts.

PART IV |
MANAGING RISK
Every business operates under a lot of uncertainties. When you understand your business and the external
environment within which it operates, you are better equiped to identify uncertainties.
Uncertainties may occur in the overall business operation processes, from input supplies, to processing and
marketing. Therefore, owners and managers of businesses should be aware of the possible uncertainties and
be prepared to manage them before making specific plans for the future.
1. What is risk?
Risk is the possibility of your business suffering a loss due to unexpected events. Following are some examples
of unexpected incidents that affected the businesses:
I was injured in a traffic

accident and have been in the The fire last month ruined
hospital for weeks. My business my workshop and all the
is in chaos because my staff equipment. My business
can do nothing without me. will be interrupted for
three months, at least.
PART IV | Managing risk | 37

Government has allowed import of cheap
tomatoes from our neighbouring country. Climate change has
Retailers are cancelling orders. This crop resulted in flooding; our
is likely to go to waste!! crop of maize will be
destroyed!
For us the flooding has blocked

supplies for our retail shops. The
shop will be empty by tomorrow,
unless the rivers subside and we
can cross the bridge.
Risk can arise from within the business or from the external environment. Risks that arise from within the
business are called internal risks. Some examples of internal risks are property damage, fraud, accidents
and employee turnover. Risks that arise from the external environment are called external risks. Some
examples of external risks are supply shortages, exchange rate fluctuation, bad debts, new regulations and
natural disasters.
2. What is Risk Management?
Risk Management is the process of identifying risks to which your business is exposed and developing
strategies for reducing the impact of the risk on your business. Risk Management safeguards should be a
strategic driver of the business and be embedded in the overall day-to-day management.
The objective of Risk Management is not to prevent or prohibit risk taking. It is to ensure that risks are
consciously taken with a complete knowledge and clear understanding of the consequences so that appropriate
responses can be made.

3. Stages in the Risk Management process
Risk Management process includes the following four steps:
Step 1: Identify the risks to which your business is Step 2: Assessing the possibility of the risk occurring
exposed now and in the future
Chris, we list all Then, we look at

possible risks that
can befall us now the following:
and in the future.
Look at my list.
s
RISKS: Likelihood: Will thi
risk occur? Will it
- Fire
occur often?
- Strike
- Theft Impact: If the risk
- Market saturatio
n occurs what is the
- Chemical poisoning likely impact?
Step 3: Prioritizing the risk Step 4: Develop strategies for responding to the risk
Chris, we train our staff

about operational health and
We prioritize the risks that have the safety measures every year.
greatest impact on our business. As We maintain our firefighting
you can see, the impact of a fire is equipment regularly. We also
devastating, as it can ruin the whole buy fire insurance.
business. In my plastics business, the
likelihood ofa fire is high.

To identify internal risks, refer to your Business Analysis. The areas in which your business is not doing well may
carry an element of risk. For example, your business is possibly at risk of losing its reputation if you are unable
to control the quality of the raw materials used in production.
To identify external risks, refer to your forecast of changes in the external environment. Think carefully about
possible threats that are caused by external changes and the possibility of your business suffering loss due to
those threats.
Some risks are common to many businesses. So, you can also look at other businesses of the same type and
size and learn from their experiences identifying common risks. Here are some of the questions you may ask
yourself:
•• What is critical for the survival of my business?
•• How much is my business relying on others to produce goods or provide services?
•• Is my business depending too much on a particular customer or person?
•• Are the internal processes of my business adequate?
•• Did any customer or supplier default on payments?
4. Risk Management strategies
Decide what to do with each risk facing your business. There are four common ways to respond to risk.
I bought car insurance to

transfer financial risks
caused by car accidents.
My car insurance does not

I have a spare wheel in order cover the risk of being
to reduce the negative impact stolen. I accept the risk that
of a flat tyre. someone may steal my car.
I adopt a more defensive

driving to avoid the risk
of hitting somebody.

•• Accepting the risk
You may decide that certain risks are inevitable. The risk that certain products are not popular with your
customers is part of doing business. However, in order to minimize such risks, you could do market research so
that you have a better understanding of your customers’ needs and preferences. Credit risk is often the cost of
doing business. But giving credit may be important for your business in order to increase sales.
•• Transferring the risk
Your business can take out insurance against certain risks to reduce the impact on the business. Insurance
premiums can cover risks such as fire, theft and crop failure. When a loss occurs, the insurance company
compensates your business.
•• Reducing the likelihood or impact of the risk
Your business can come up with ways to reduce the likelihood of the risk occurring or the damage that is caused
by a risk event. For example, you can control credit risk through careful record keeping and monitoring. You
might set aside some funds in a savings account so that you have resources available to react to an unexpected
event as soon as it occurs. Contingency planning is important for natural disaster risks. Your business needs to
plan how it will handle natural disaster related risks to which your business is exposed.
•• Avoid the risk
Your business may wish to avoid risks that have a significant impact and a high probability. For example, you
should not give credit to customers you do not yet know or those who have a bad credit history. This can
protect you from the cost of default, as well as the costs associated with trying to recover a late payment.
ACTIVITY 6
1. List the risks to which your business is exposed now and in the future.
2. Which risks should your business prioritize?
3. How will your business deal with those prioritized risks?
Answer the above questions and fill in the form below:
Risk Likelihood Frequency Impact Priority Actions
It is important to consider a wide range of risks to which your business is exposed. Assess the current and
possible future exposure to specific risks. Take the four Risk Management steps to develop Risk Management
strategies for your business.

SUMMARY
Risk is the possibility of your business suffering loss due to unexpected events. It is important to be aware of
and plan for the possible occurrence of events that would have a negative impact on your business.
Risk Management is the process of identifying risks to which your business is exposed and developing
strategies for reducing the effects of the risk to your business.
There are four stages in the Risk Management process:
•• Identifying risks
•• Assessing the risks
•• Prioritizing the risks
•• Responding to the risks
There are four common ways to respond to risk.
•• Accept
•• Transfer
•• Reduce
•• Avoid
ASSESSMENT 4
You have just completed Part IV of this manual. Do the exercise below to check your understanding. Finish the
True or False
Tick the sentence that is true.
1. If your business is performing well, it is less likely that events will occur that have a negative
impact and therefore, it is not necessary for your business to manage risks.
2. Risk Management helps your business identify all the risks to which it is exposed now and in
the future so that it can avoid or mitigate all the risks.
3. Risks with the greatest impact and the highest likelihood should get the highest priority.
4. Businesses should accept risks that are less likely to occur.
5. To determine the appropriate response to a risk, one must assess its likelihood and impact.

PART V |
Making plans
When you understand your business and the market in which it is operating, you are ready to plan for the
following year.
I know how my business did and why. I

How does your business
know the market. I also know the risks
analysis, a forecast of the
to which my business is exposed. I can
external environment and Risk
now make plans for next year. I will
Management help with planning?
explain them as I make them.
1. Set business objectives
The first thing you must do when making plans is to determine the objectives that your business wants to
achieve. Your business objectives should be financial as well as non-financial.
Different businesses have different objectives. You may want to increase your sales, reduce your costs, increase
profits, penetrate a new market, introduce a new product, reduce air pollution, etc. Whatever your objectives,
make sure that they are based on your business capacity and the market conditions. Be realistic!
After a careful review of the Business Analysis, the changes that are likely to happen in the external environment
and the Risk Management strategies of her business, Juma set the objective for Plastics Solutions next year to
achieve a Net Profit of $5,000 without polluting the environment.
Now Juma is armed with an objective in mind, it is time to get down to the nitty-gritty of making plans.
PART V | Making plans | 43

2. Incorporate Risk Management strategies in planning
All plans of a business should have built in Risk Management strategies. You have identified the risks to which
your business is exposed, assessed them and decided on strategies to deal with them. Now remember to
incorporate those strategies into each of your plans.
Two of the risks to which Plastic Solutions is exposed are fire and the potential for explosions. Their strategies
to deal with these risks are reducing the impact of a loss and transferring the risk. Juma needs to incorporate
these into her plans where appropriate.
3. Make a Sales and Marketing Plan
A Sales and Marketing Plan describes the marketing activities and projects the amount of sales your
business is likely to have next year. The plan helps your business to achieve its objectives, allocate its resources
in the best way and meet customers’ demand. The Sales and Marketing Plan is the most important plan for your
business. All of your other plans will be made based on your Sales and Marketing Plan.
3.1 How to make a Sales and Marketing Plan?
I know why my sales were not as good as I had expected

this year. So, I will now make a plan for my marketing
activities next year and then forecast the amount
of sales based on my marketing activities. I use this
information to make my Sales and Marketing Plan. I do
my calculation using the excel spread sheet. When I put
my projection into the formulas, the computer calculates
the figures for me!

To make your Sales and Marketing Plan, follow a two-step process:
•• Business Analysis
1 Plan for the next year
•• Forecast of changes in the
external environment
2 Make the forecast for

the next year •• Risk Management strategies
FORECAST OF SALES
JAN FEB …..
Sales quantity
Sales price
Sales
Step 1: Make the plan for next year

In this step, you need to make decisions about what your business will do to improve sales and marketing.
Remember to base your decisions on your understanding of your business and the market, not on wishes or
dreams.
Here are some questions to ask yourself:
Product •• What goods or services do our customers want?

•• Can we sell some new services or goods?
•• How can we improve the quality, the design of the goods and the customer
service?

Price •• Do we need to increase our prices?
•• How can I change our prices to increase sales next year?
•• Can we give discounts or special offers to make our prices more attractive?
Place •• Can we find a better place to sell our goods or services?

•• What is the best kind of distribution for our business?
Promotion •• What is the best way to promote our goods or services next year? Is it through
advertising, by making a sales promotion or should we do something else?
•• What can we do to make people praise our products and our business?
People •• How can I improve the productivity of my sales staff?

•• Do I need people with special skills in my sales team?
•• Can I improve my skills as a salesperson?
Physical Evidence •• How can I make it more appealing to customers to do business with us?
•• What are the customers looking for: prestige, budget, efficiency, recognition?
•• Can we improve the premises and the staff appearance?
Process •• How can I improve our sales procedures?
“ Do not forget to refer to your forecast of changes in the external
“
environment when answering the above questions.

I am planning to introduce an
SMS promotional platform
for all my clients to receive an
SMS giving them
information about items we Next year I will create a website
have on special offer. that will provide information about
my products to potential customers.
I will also make it easy for customers
to order online.
Juma looked at her sales and marketing analysis, her forecast for changes in the external environment and the
Risk Management strategies. She then decided to improve her sales and marketing programme as follows:
•• Make sure that we always have goods available to sell.
•• Give credit to some regular customers.
•• Label each product with information about our green business and use recycled plastics.
•• Implement campaigns for our environmentally friendly products in November and December.
•• Given the competitive prices of alternative products, we decided to keep the price of our product
unchanged for the next year ($25). However, we will reconsider this decision when I am able to forecast
our costs.
•• Improve the productivity of the two sales staff by training them about our green business.
ACTIVITY 7
What would you do to improve the sales and marketing of your business next year?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................

Step 2: Make a forecast for next year
Good marketing improves your sales. When you have decided on a plan to improve your sales and marketing,
forecast the sales your business will achieve as a result of the improvements. Use the information from step one
and past sales data to make a forecast of sales for each month of next year.
Use your Basic Record Book to get the monthly sales for this year. As the data for December maybe not available
yet, make your best estimation. If you are a multiple product manufacturer or service operator, you may need
to work out how many of each good or service you sold each month this year.
Below are Plastic Solutions’ monthly sales this year, the figure for December is Juma’s best estimation.
MONTH JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL
Sales 150 203 240 254 265 270 275 280 287 300 346 368 3,238
quantity
If the sales price is unchanged and the sales improvement plan is implemented, Juma estimated that the
sales at Plastic Solutions will increase about 40%.
Chris, I forecast
that next year our
sales will increase
about 40%.
Juma made a sales forecast for next year as follows:
DETAILS JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL
Sale
210 284 336 356 371 378 385 392 402 420 484 515 4,533
quantity
Sale
25 25 25 25 25 25 25 25 25 25 25 25 25
price ($)
Sales ($) 5,250 7,100 8,400 8,900 9,275 9,450 9,625 9,800 10,050 10,500 12,100 12,875 113,325

If you are a multiple product manufacturer or service operator, you will need to make a sales forecast for each
of your goods or services.
So your forecast of
sales for next year
will look like this.
Yes Chris. When you work

out the amounts, you will
know what your business is
likely to sell each month of
the year.
ACTIVITY 8
Get this year’s sales data from your Basic Record Book. Review your answers in Activities 2 (on page 20) and 7
(on page 47). Make a sales forecast for your business next year by filling in the table below. If you need more
space to accommodate more products that your business produces, you can use the table below as a template
and make your forecast of sales on a separate sheet of paper and add as many lines as you need.
FORECAST OF SALES
Sale
quantity
PRODUCT A
Sale
price ($)
Sales ($)
Sale
quantity
PRODUCT B
Sale
price ($)
Sales ($)

3.2 How to use the sales forecast?
To use your Sales and Marketing Plan effectively, you will need to review and revise it frequently. At the end of
each month, compare your actual sales with the amounts you forecast in your plan, by:
•• Analysing the reasons for any shortfall, for example lower sales volumes, flat markets, underperforming
products, ineffective marketing activities, etc.
•• Considering the reasons for a particularly high sales volume. Was your forecast too low, for example?
Analysing these variations will help you to set future plans more accurately and will also allow you to make
timely adjustments where needed.
Look at how Juma uses her Sales Forecast:
1. Compare each month and look for differences
In February my
business did not have
as many sales as I
forecast. Why?
2. Find out why there are differences 3. Work out what to do
We could not make enough I must maintain the

poles to meet our orders. machine better so
One machine broke down. that it does not break
down. Then we can
meet all our orders.

4. Make a Production and Cost Plan
A Production and Cost Plan shows proposed improvements for your production and the costs your business
is likely to have each month next year. It tells you how many products can be made and at what cost.
4.1 How to make a Production and Cost Plan?
To make a Production and Cost Plan, you will follow the same two steps that you followed when making your
Sales and Marketing Plan.
Step 1: Make the plan for next year
In this step, you will decide what to do to improve your production and operation process in order to achieve
your business objectives. Again, remember to base your decisions on your understanding of the business, the
market and your Risk Management strategies; not on wishes or dreams.
Review your Business Analysis; see the reasons for production and operation issues or cost fluctuation. Think
of any way your business can increase productivity, reduce costs or improve good or service quality. Here are
some questions to ask yourself:
Improve productivity •• Can I improve the way I control the production process?
and quality •• Were my production workers adequately trained?
•• Should I replace old equipment?
•• Can I use higher quality raw materials?
•• How can I improve the productivity of my staff?
•• What motivates my employees?
•• Can process improvement increase the productivity of my
production employees?
Reduce Material •• Which materials can be reused?

Costs •• Which materials can be recycled?
•• Can I reduce the consumption of materials?
•• Can the production process be improved?
Reduce Overhead •• Can I improve the way I use the space?

Expenses •• Are there any ways to reduce electricity consumption?
Reducing business costs by reducing Material Costs is a very popular way to improve profitability. If you are
a manufacturer or a service operator, Material Costs are what your business pays for the inputs that become
part of or are directly related to your goods or services. Manufacturers or service operators plan to reduce the
Material Cost per item for each good or service.
If you are a retailer or a wholesaler, Material Costs are the costs of the products you buy to resell. For a retailer
to reduce Material Costs, he must negotiate a better price per item for each good the business sells.

Reducing material consumption
Materials are often major costs. The following three efficiency strategies can significantly bring down their
costs.
•• Housekeeping and behavioural change is the most basic approach for reducing material consumption
as it focuses on a change in mindset that involves very little to no investment.
•• Process improvement or minor change is an approach that enhances existing equipment through
adjustments or modifications.
•• Machine change or major change is an approach that improves efficiency through equipment
replacement. This approach will involve capital investment.
Reducing waste
The three “Rs”; Reduce, Reuse and Recycle is one crucial way in
Reduce
which a green business can manage waste production, improve Reuse
efficiency and ultimately maximize profits.
Recycle
Dispose
Reducing is the most important step; it includes altering your businesses’ consumption. Most businesses
provide excess product packaging that a large majority of customers will throw away. If you choose to create
a green product or position your company as a green industry, you should try to avoid or minimize disposable
packaging. There are many ways to achieve this:
•• Reduce the size and the weight of any packaging you provide. This also reduces unnecessary expense.
•• Try to produce naked products. If you wish to produce an eco-friendly soap, design it in such a way that
it is attractive without packaging.
Reusing also increases efficiency, recycles waste and ultimately increases profits. It includes reusing old or
excess assets and still ensuring that a profit is made. Some ideas for reusing in a green business include:
•• Reusing containers: You may wish to create incentives for customers to return used packaging, offer
discounts on any purchase that refills previously purchased containers or cash back for returned
packaging.
•• You may wish to use the unwanted packaging for another purpose. This may involve turning the
packaging into an entirely different product, reselling it and creating another form of income for the
business.
Recycling is the third priority in the three ‘Rs’ efficiency strategy. Recycling might be done when reduction
and reuse are not possible. Recycling can provide new raw materials from waste materials. Therefore, recycling
prevents waste disposal and reduces the amount of raw materials that need to be extracted from the
environment. The benefits of recycling to your business are:
•• It is a good way to handle the waste your business produces.
•• It can provide cheaper raw materials, which reduces costs and the environmental impact.

ACTIVITY 9
Now think of your green business and the waste it is likely to produce.
Materials Reduce Reuse Recycle Repurpose
Your Production and Cost Plan for the next year should also take into account possible changes in the
external environment, the Risk Management strategies of your business, as well as the Sales and Marketing
Plan you have just developed. Therefore, according to the information you have gathered, estimate what will
happen to your production and operation next year. Here are examples of questions you may want to ask:
•• Is there any model of production that suits my business type and size?
•• Can I use higher quality raw materials?
•• Will the price of materials increase?
•• Can I use cheaper materials?
•• Can I get discounts for materials?
•• How much may it cost to give credit to customers?
•• Will my rent change next year?
•• Is there a better place or a cheaper place for my business?
•• Will I need more space?
•• Will I need more staff?
•• Should I increase wages? When and how much?
Make sure your answers to these questions are based on facts. Search for different models of production, ask
your suppliers about available raw materials in the market, work out the demand for labour in your business
next year and so on.
Juma’s Production and Cost Plan for Plastic Solutions next year took into account necessary improvements,
possible changes in the external market, Risk Management strategies, as well as the Sales and Marketing Plan:
•• We will maintain our machine more frequently so that it will not break down so often. This can reduce
the down time by 50% and therefore the productivity of the workers will increase 5%.
•• To ensure that we will not run out of goods, we will maintain a stable production level and keep a stock
of finished goods. We will produce at an average level for the whole year.
•• This year we used a part-time mechanic to do all the repair and maintenance work. We want to improve

performance of our machines this year, so we will have one mechanic work full time.
•• We will increase the wages for the owner, our production workers, the sales staff and the mechanic by
10% to encourage them to maintain productivity as high as this year.
•• We had three workers in production. Our sales next year will increase 40%, but our productivity will
increase 5%, so we will recruit one more worker.
•• We will implement a waste reduction programme that can help us lower the consumption of crushed
plastic by 10%.
•• We will buy crushed plastic from another supplier who sells it 2% cheaper than the first supplier and
he will give us one month credit.
•• We will buy chemicals in bulk which will cost 7% less than the current price.
•• Sales will increase significantly next year, but I estimate that the two sales staff will be able to manage
all the sales tasks.
•• My space is big enough for my business; I will not need more space next year. However, I know that
my rent will go down because of the government scheme. I have negotiated with my landlord and he
agreed to reduce my rent to $370 beginning in March next year.
•• I will run a promotional campaign in November and December next year. This will cost us $1,300 per
month.
•• I will buy fire insurance. This will cost us $480 per year.
•• The cost of stationery, transport, electricity and water will increase 30% as a result of the increase in
production and sales.
ACTIVITY 10
What will you do to improve the production and lower the cost of your business next year?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
Step 2: Make the forecast for next year

To complete your Production and Cost Plan, you need to make:
•• A forecast of the production quantity
•• A forecast of Overhead Expenses
•• A forecast of Material Costs
•• A forecast of Labour Costs

Forecast of Production Quantity
Businesses make decisions on how many items to produce based on their sales forecast. For service
operators and manufacturers who always produce just enough for sales and do not keep a stock of finished
goods, the forecast of the production quantity is the same number as that of the sales projection. For other
manufacturers, who want to stock finished goods, the forecast of monthly production quantity for the following
year should be made based on the Production and Cost Plan for next year (step one) and the forecast of sales.
Plastic Solutions wants to keep stock, so, its sales and production quantity are different. This is how Juma makes
her forecast of production quantity for the following year:
The forecast of sales for Plastic Solutions (page 48) projects that the total number of poles they will sell next
year is 4,533. They want to maintain a stable production level. Therefore, by dividing the year’s total sales by 12,
Juma forecasts that the company will produce an average of 380 poles per month.
1. FORECAST OF PRODUCTION QUANTITY

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL
380 380 380 380 380 380 380 380 380 380 380 380 4,560
ACTIVITY 11
Review your forecast of sales quantity (Activity 8 on page 49) and your plan for production and cost (Activity
10 on page 54). Make a forecast of the production quantity of your business for the following year by filling in
the table below. If you need more space to accommodate more products that your business produces, you can
use the table below as a template and make your forecast of production quantity on a separate sheet of paper
and add as many lines as you need.
1. FORECAST OF PRODUCTION QUANTITY

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL
PRODUCT PRODUCT
B A

Forecast of Overhead Expenses
Businesses have many different kinds of Overhead Expenses. Here are some examples:
•• Rent •• Licences
•• Transport •• Insurance
•• Stationery •• Maintenance of equipment
•• Electricity and water •• Depreciation
•• Non-Production Labour •• Advertising and promotion
Read more about Overhead Expenses in the IYB Costing MANUAL.
Make a list of the different kinds of Overhead Expenses you have in your business. For your Cost Forecast, make
a forecast for each different Overhead Expense. Make sure that you include all the Overhead Expenses of
your business. Some Overhead Expenses, such as licence fees and insurance, will not be paid each month. You
often pay for your business licence once a year. Therefore, remember to allocate these costs to each month in
order to accurately estimate the business costs and profit for each month.
Use all the information you have from step one and previous cost data. Make a forecast of how much each
Overhead Expense is likely to be each month next year.
Use your records to find out how much your business paid for each type of Overhead Expense each month this
year.
Here are Plastic Solutions’ Overhead Expenses this year:
OVERHEAD EXPENSES (Unit: US$)

Rent 360 360 400 400 400 400 400 400 400 400 400 400 4,720
Electricity 90 90 90 90 90 90 90 90 100 100 110 110 1,140
Water 20 20 20 20 20 20 20 20 20 20 20 20 240
Labour 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 14,400
Depreciation 200 200 200 200 200 200 200 200 200 200 200 200 2,400
Transport 140 140 150 150 150 150 150 150 150 150 160 180 1,820
Stationery 50 50 50 50 50 50 50 50 50 50 50 50 600
Licence 10 10 10 10 10 10 10 10 10 10 10 10 120

Look at how Juma makes her forecast for next year’s rent:
My rent this year has been $400 per

month. My lease agreement expires in
I now know that my
February; I have an agreement with
rental will be $400
my Estate Agent to reduce the rent to
from January to
$370 beginning next March.
February and it will
be reduced to $370 in
March! I will write my
forecast like this.
2. FORECAST OF OVERHEAD EXPENSES (Unit: US$)

Rent 400 400 370 370 370 370 370 370 370 370 370 370 4,500
Electricity 117 117 117 117 117 117 117 117 130 130 143 143 1,482
Water 26 26 26 26 26 26 26 26 26 26 26 26 312
Labour 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 15,840
Depreciation 200 200 200 200 200 200 200 200 200 200 200 200 2,400
Transport 182 182 195 195 195 195 195 195 195 195 208 234 2,366
Stationery 65 65 65 65 65 65 65 65 65 65 65 65 780
Licence 10 10 10 10 10 10 10 10 10 10 10 10 120
Insurance 40 40 40 40 40 40 40 40 40 40 40 40 480
Marketing - - - - - - - - - - 1,300 1,300 2,600
Total 2,360 2,360 2,343 2,343 2,343 2,343 2,343 2,343 2,356 2,356 3,682 3,708 30,880
Juma adds up all the monthly forecasts to get a total forecast of Overhead Expenses for the following year.
Plastic Solutions’ forecast of total Overhead Expenses for next year is $30,880.

ACTIVITY 12
Here are the records and information of Chris’ business. Make a forecast of his company’s Overhead Expenses
for the first six months of next year on the blank form below.
•• Rent this year was $300 per month.

•• Electricity this year was $100 per month.
•• Stationery this year was $20 per month.
•• Water this year was $18 per month.
•• Depreciation was $30 per month this year.
•• Electricity charges will go up by $20 in May next year.
•• Rent will go up by $15 in April next year.
•• Stationery and water costs will be the same next year.
•• In January, Chris will buy a new shelf. This will increase his depreciation by $5 per month next year.
2. FORECAST OF OVERHEAD EXPENSES

(Unit: US$)
DETAILS JAN FEB MAR APR MAY JUN
Total
You can compare your result with the answer on page 86.

ACTIVITY 13
Get this year’s Overhead Expense data from your Basic Record Book. Review your plan for production and costs
from Activity 10 (on page 54). Make a forecast of Overhead Expenses for your business next year by filling in the
table below. If you need more space to accommodate more Overhead Expense items that your business has,
you can use the table below as a template and make your forecast of Overhead Expenses on a separate sheet of
paper and add as many lines as you need.

(Unit: )
Total
Forecast of Material Costs

Use the information in step one (the Production and Cost Plan for next year) and the data of previous Material
Costs. Make a forecast of the Material Cost per item for next year. You must forecast the Material Cost for every
product you sell in your business.
Use your records to get the amount your business spent on materials this year. Look at how Juma works out the
Material Cost per item for her business:
My business makes plastic This year the cost of

poles out of recycled plastics. crushed plastic to make
I have to work out the one pole was $10.
Material Cost for one pole.

This year the cost of paint
This year the Material
and chemicals for one pole was
Cost to make one pole
$1.1 and $3.9 respectively.
was $15.
So, Juma my Material Costs Yes. Look Chris, you can find
are the amount I pay to buy your Material Cost per item in
goods to sell in my store. your supliers’ invoices.

Look at how Juma makes her forecast of the Material Cost per item:
Next year our crushed plastic consumption

will be reduced by 10%. We can buy plastic
for 2% less than we paid this year. Therefore, My forecast of Material
the cost of plastic for one pole will be $8.80. Cost per item looks like this:
Price of chemicals will also reduce by 7%
Retailers and wholesalers sell many products. Their forecast of cost per item may be very long, but it is
important that they know the Material Cost of all their goods if they expect to project how well the business
will do in the future.
Yes Chris. But you must ask your

My forecast of the Material Cost suppliers about increases and
per item looks like this: discounts for next year, and then you
can work out the correct amounts.

When you have the forecasted the Material Cost per item, calculate the total Material Cost for each month next
year for each of the goods or services your business sells.
Multiply the amount you have calculated in your forecast of the Material Cost per item by the total amount of
each product you forecast your business is likely to produce each month next year.
Get the total Material Cost for each month by adding the total of all your products.
Forecast of the Forecast of the quantity Forecast of the total

Material Cost x of each product = Material Cost per
per item produced each month product per month
Here is the forecast of the total Material Cost for Plastic Solutions next year:
3. FORECAST OF THE TOTAL Material Cost

Production 380 380 380 380 380 380 380 380 380 380 380 380 4,560
quantity
Material Cost 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5
per item ($)
Total
Material 5,130 5,130 5,130 5,130 5,130 5,130 5,130 5,130 5,130 5,130 5,130 5,130 61,560
Cost ($)

ACTIVITY 14
Get the Material Cost data for this year from your Basic Record Book. Review your plan for production and costs
in Activity 10 (on page 54) and your forecast of the production quantity for next year in Activity 11 (on page
55). Make a forecast of the total Material Cost for your business next year by filling in the table below. If you
need more space to accommodate more products that your business produces, you can use the table below
as a template and make your forecast of total material cost on a separate sheet of paper and add as many lines
as you need.
3. FORECAST OF THE TOTAL Material Cost

Production
quantity
PRODUCT A
Material
Cost per
item ($)
Material
Cost (1)
Production
quantity
PRODUCT B
Material
Cost per
item ($)
Material
Cost (2)
Total
Material
Cost ($)
(3) = (1) + (2)
Forecast of Labour Costs

If you are a manufacturer or a service operator, Labour Costs are all the money your business spends on wages,
salaries and benefits for the employees or owners who are directly involved in the production or provision of
your goods or services.
If you are a retailer or wholesaler, you do not record Labour Costs because you record your wages and salaries
as an Overhead Expense.
Read more about Labour Costs in the IYB COSTING MANUAL.

Use the information in your Production and Cost Plan for next year (see step one) and this year’s data to make
a forecast of your total Labour Cost for each month of the following year.
This is how Juma makes her forecast of Labour Cost for next year:
Here is the forecast of the total Labour Costs for Plastic Solutions next year:
4. FORECAST OF THE TOTAL Labour Cost

Total Labour 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 15,840
Cost ($)
ACTIVITY 15
Get this year’s Labour Cost data from your Basic Record Book or Salary Register. Review your plan for production
and costs in Activity 10 (on page 54) and your forecast of production quantity next year in Activity 11 (on page
55). Make a forecast of the total Labour Cost for your business next year by filling in the table below.

Total Labour
Cost ($)

Complete the costs forecast
Now that you have made all the cost forecasts you can fill in your Forecast of Costs.
Plastic Solutions’ Forecast of Costs shows all the costs the business is likely to have each month next year.
FORECAST OF COSTS (Unit: US$)

Material 5,130 5,130 5,130 5,130 5,130 5,130 5,130 5,130 5,130 5,130 5,130 5,130 61,560
Costs
Labour Costs 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 15,840
Overhead 2,360 2,360 2,343 2,343 2,343 2,343 2,343 2,343 2,356 2,356 3,682 3,708 30,880
Expenses
“ Remember, if you are a retailer or wholesaler you calculate the

wages and salaries as an Overhead Expense. Therefore, leave
the line on Labour Costs in your Forecast of Costs blank.
“
ACTIVITY 16
Review your answer for Activities 13 (on page 59), 14 (on page 63) and 15 (on page 64). Complete the forecast
of costs for your business next year by filling in the blank form next page.

FORECAST OF COSTS (Unit: )
Material
Costs
Labour Costs
Overhead
Expenses
4.2 How to use the cost forecast?
Your costs represent the outflow of cash from your business. If your costs are too high, your business will lose
money. Your cost forecast is a vital tool to ensure that you are in control of your expenditures.
At the end of each month, compare the amount in your Cost Forecast with your actual expenditures. Use your
Cost Forecast to check whether or not your business has too many expenditures:
•• Look at how your Overhead Expenses and Labour Costs differed from your plan.
•• Check to see if your Material Cost was the same as in your plan. Normally this cost fluctuates
according to your production volume.
•• Analyse any reason for changes in the relationship between Material Costs and production.
•• If there is a change in that relationship, take appropriate action to bring your costs back in line.
5. Make a Profit Plan
Use your forecast of sales and costs to calculate what the Gross Profit and Net Profit are likely to be for your
business next year.
See the IYB Record Keeping Manual to learn how to calculate profit.

PROFIT PLAN (Unit: US$)
Sales 5,250 7,100 8,400 8,900 9,275 9,450 9,625 9,800 10,050 10,500 12,100 12,875 113,325
Material Costs 5,130 5,130 5,130 5,130 5,130 5,130 5,130 5,130 5,130 5,130 5,130 5,130 61,560
Labour Costs 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 1,320 15,840
Gross Profit (1,200) 650 1,950 2,450 2,825 3,000 3,175 3,350 3,600 4,050 5,650 6,425 35,925
Overhead
2,360 2,360 2,343 2,343 2,343 2,343 2,343 2,343 2,356 2,356 3,682 3,708 30,880
Expenses
Net Profit (3,560) (1,710) (393) 107 482 657 832 1,007 1,244 1,694 1,968 2,717 5,045
Juma’s Profit Plan shows her that her business can expect to make a Net Profit next year and her total Net Profit
meets the objectives of the business. If not, Juma should consider the following:
•• Is there any way to lower costs?
•• Is there any way to increase sales?
•• Is the objective realistic?
When you have done your forecast of Net Profit or loss, you have completed your Profit Plan for next year. The
plan must show that your business can expect to make a profit. The forecasted profit must be high enough to
allow for unpredictable internal or external problems or accidents. For example:
•• Your sales might be lower than you expect.
•• A machine might break down.
•• You might run out of materials.
•• You might have a fire or natural disaster.
•• Your business must have enough money to cope with problems that might arise.
Just as you would do with your Forecast of Sales and Costs, use your Profit Plan to check if your monthly profit
is in accordance with your forecast, or if it is lower than the profit you forecast. Once you have compared your
actual monthly or quarterly profit with the forecasted amount, try to find out why there are any differences.

ACTIVITY 17
Use your forecast of sales and costs from Activities 8 (on page 49) and 16 (on page 66) to calculate the projected
profit of your business next year by filling in the blank form below.
PROFIT PLAN (Unit: )

Sales
Material Costs
Labour Costs
Gross Profit
Overhead
Expenses
Net Profit
6. Make a Cash Flow Plan
A Cash Flow Plan is a forecast of how much cash you expect to come into your business and how much
cash you expect to go out of your business each month. A Cash Flow Plan helps you to make sure that your
business does not run out of cash at any time.
Look at what happened to these businesses:

I make a good profit I bought a new
every month but I am drill last week. Now
always running out there is not enough
of cash. cash to pay the
rent this month.
6.1 Does your business run out of cash?
Use your Cash Flow Plan to make sure that your business always has enough cash. There are many reasons why
your business may run out of cash. For example:
•• You have to buy goods or raw materials before you sell anything. This means that cash goes out before
cash comes in.
I paid cash for sugar today.

Some of this sugar will not be
used until next several months.

•• If you give credit to your customers you do not get paid immediately. You often have to buy more goods or
materials before these credit customers pay you.
I have an account to buy

groceries worth up to $40 a
month. I then pay at least $30
at the end of each month.
•• You need cash to buy equipment. The equipment will help the business to make a profit in the future. But
you usually have to pay cash for the equipment before you have earned that profit.
Now we can take orders.

Here is the cash for That means we will increase
the new machine. our sales next month.

When you plan your cash flow:
•• You know in advance about possible cash shortages.
•• You have more control over the flow of cash.
•• You can solve problems before they occur.
•• You can have cash ready when you need it.
6.2 How to make a Cash Flow Plan?
To make a Cash Flow Plan, you forecast:
•• How much cash will come into your business each month?
•• How much cash will go out of your business each month?
To be able to make these forecasts, you need to review your Sales and Marketing Plan and Production and Cost
Plan to see how they will affect the cash that will come in or go out of your business.
You should forecast your cash flow for a quarter, six months or a year, depending upon how quickly things
change in your type of business.
Juma reviewed her plans and found that the following decisions will definitely impact the amount of cash that
is available:
•• We will give credit to regular customers.

•• We will make sure that we always have products to sell to customers.
•• We will buy crushed plastic from a new supplier who will give us one month credit.
•• We will buy fire insurance.
Juma estimated the impact of the above changes on her business cash flow as follows:
•• Our sales to regular customers account for 20% of the total sales, so each month the money we
receive from cash sales will be only 80% of our total sales. From the second month, we will start
receiving cash from credit sales, which is 20% of the previous month’s sales.
•• The supplier of crushed plastic will give us one month credit, so we will not have to pay for crushed
plastic in January.
•• We have to pay the $480 annual fee for fire insurance in January.

Here is the Cash Flow Plan for Plastic Solutions for the first three months of next year:
Chris, this is how we forecast how

much cash we expect to receive and
how much cash we expect to
spend each month.
CASH FLOW PLAN (US$) JAN FEB MAR

1. Cash at the start of the month 10,000 7,884 6,202
2. Cash in from sales 4,200 5,680 6,720
CASH IN
3. Cash in from credit sales 1,050 1,420

4. Any other cash in 420 568 672
5. TOTAL CASH IN 4,620 7,298 8,812
6. Cash out for Material Costs 1,786 5,130 5,130
7. Cash out for Labour Costs 1,320 1,320 1,320
CASH OUT
8. Cash out for Overhead Expenses 2,710 2,110 2,093

9. Cash out for planned investment in equipment 0 0 10,000
10. Any other cash out 920 420 568
11. TOTAL CASH OUT 6,736 8,980 19,111
12. CASH AT THE END OF THE MONTH 7,884 6,202 (4,097)

To make your Cash Flow Plan, follow the 12 steps in the plan. Steps 2 to 5 are for “CASH IN”. Steps 6 to 11 are for
“CASH OUT”. Look at each step for January.
Step 1 Cash at the start of the month: This is the amount of cash you expect to have in the cash box
plus the amount of cash in your bank account at the beginning of January. Write this total
amount next to number one in your Cash Flow Plan. This year Plastic Solutions expect to have
$10,000 left at the end of December.
Step 2 Cash in from sales: Look at your forecast of sales in January. Write this amount next to
number two on your Cash Flow Plan. If your business sells on credit, you must estimate the
amount of cash you will actually get from sales. Juma’s sales forecast for January is $5,250, but
she will receive only $4,200 (80%).
Step 3 Cash in from credit sales: Estimate how much your credit customers will pay in January and
write this amount next to number three on your Cash Flow Plan. If your business does not sell on
credit, leave this line blank. Juma did not sell on credit this year, so she will not expect to receive
any cash from credit sales in January.
Step 4 Any other cash in: This is the amount of cash you forecast your business will receive during
January from any source other than sales, such as a loan from a bank, interest from your
bank account or the amount of Value Added Tax (VAT) associated with each sale you make. If
your business is required to collect VAT, estimate the VAT you will pay by multiplying the VAT
percentage by your cash sales for the month. You may also get cash from a donation or grant
to help run your business. Write the total amount next to number four on your Cash Flow Plan.
Plastic Solutions is a VAT registered business. They have to collect 10% of VAT from their sales. For
January, Juma forecasted that her business will receive $420 VAT as other cash in.
Step 5 TOTAL CASH IN: Add up all the cash in amounts from steps 2, 3 and 4. This is the total cash
amount you expect to come into your business in January.
Step 6 Cash out for Material Costs: This is the amount of cash you forecast your business will pay out
in January to buy goods and materials. Using your Forecast of Costs, estimate the cash you will
actually need to pay for materials and write the amount next to number six.
From her Forecast of Costs, Juma noted that the amount of Material Costs she forecasted for
January is $5,130. However, this is not the amount that her business will pay out because the
money for the crushed plastic that she will purchase in January ($3,344) will be paid in February.
So, the money her business will actually pay for Material Costs in January is $1,786 ($3.6 x 380 +
$1.1 x 380). From February, Juma will pay $5,130 of Material Costs each month.

Step 7 Cash out for Labour Costs: This is the amount of cash you forecast your business can expect
to pay out in January for the wages of the employees working in production. Use your Forecast
of Costs. Write the amount you forecast for Labour Costs for January next to number seven on
your Cash Flow Plan. Remember that retailers and wholesalers record their Labour Costs as an
Overhead Expense. They leave line seven blank.
Step 8 Cash out for Overhead Expenses: Overhead Expenses are things like rent, electricity,
transport, salaries for sales and administration, stationery, etc. Find the amount you forecasted
for Overhead Expenses in January in your Forecast of Costs. Some of these costs, such as
its licence fees and insurance, will not be paid each month. You often pay for your business
licence once a year. Therefore, you need to identify these expenses, remove them from your
monthly Overhead Expense section and add the annual amount to the month you will make
the payment. Forecast the amount of cash you will pay for Overhead Expenses in January
and write this amount next to number eight on your Cash Flow Plan. Juma will need to pay
$2,710 for Overhead Expenses in January next year. This amount includes the $120 licence
fee and $480 for fire insurance for the whole year. Here is the calculation: Cash payment for
Overhead Expenses in January ($2,710) = Overhead Expenses in January ($2,360) – monthly
licence fee, insurance and depreciation ($10 + $40 + 200) + yearly licence fee and insurance
($120 + $480).
Step 9 Cash out for planned investment in equipment: Will you buy any equipment during
January? Write the amount next to number nine.
Step 10 Any other cash out: This is any other amount of cash you forecast your business will pay
out during January, such as a loan repayment, income tax payment or VAT payment. If your
business is required to collect VAT, subtract the VAT percentage from your monthly sales
amount and add that amount to the cash out in whichever month you make the payment
to the government. Forecast all the other cash out and write the amount next to number ten
on your Cash Flow Plan. In January, Juma must pay $920 VAT collected in December this year.
Step 11 TOTAL CASH OUT: Add up all the cash out amounts from steps 6, 7, 8, 9 and 10. This is the total
cash amount that you expect to go out of your business during January.
Step 12 CASH AT THE END OF THE MONTH: Calculate the net amount of cash by subtracting
the “TOTAL CASH OUT” amount in number eleven from the “TOTAL CASH IN” amount in
number five. This is the net amount of cash that your business will use during the month
of January. Subtract the net amount of cash from the cash at the start of the month on line
number one. This is the amount that will be left in your cash box and bank account at the end
of January. The entry amount of cash at the end of the month will be the same as the cash
entry amount at the beginning of the next month.

Plastic Solutions’ Cash Flow Plan on page 72 shows that at the end of January next year they expect
to have:
Cash at the start + Total cash in - Total cash out = Cash remaining
$10,000 $4,620 $6,736 $7,884
Make a Cash Flow Plan for your business in the same way as Plastic Solutions. Do the same twelve steps for each
month.
When you have filled in the amounts for each month, your Cash Flow Plan shows how much cash your business
expects to have at the end of each month. A negative amount (shown by writing the figures within brackets)
means your business will be short of cash.
ACTIVITY 18
Make a Cash Flow Plan for your business during the first three months of next year using all the forecasts you
have made for your business next year. Below is the form to fill in.
CASH FLOW PLAN (Unit: ) JAN FEB MAR

1. Cash at the start of the month
2. Cash in from sales
CASH IN
3. Cash in from credit sales

4. Any other cash in
5. TOTAL CASH IN
6. Cash out for Material Costs
7. Cash out for Labour Costs
CASH OUT
8. Cash out for Overhead Expenses

9. Cash out for planned investment in equipment
10. Any other cash out
11. TOTAL CASH OUT
12. CASH AT THE END OF THE MONTH

6.3 Use your Cash Flow Plan to improve your business
If the plan shows that there

is no money left at the end
of a month I have a problem.
Then I must do something to
change the Cash Flow Plan.
How do you use your

Cash Flow Plan?
Use your Cash Flow Plan to make sure that your business has enough cash all the time. If the plan shows that
there is no cash in your business at the end of a month, you are likely to run out of cash that month. Look at
the amounts you expect to get in and pay out during that month and think how you can solve the problem.
Look what happened at Plastic Solutions:
I will run out of cash in

March. What can I do?

ACTIVITY 19
Use information from Plastic Solutions’ Cash Flow Plan on page 72 and answer the questions below.
Which amount of cash out is larger in March than in February for Plastic Solutions? Why?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
What advice can you give Plastic Solutions to help them improve their cash flow in March?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
How does the Cash Flow Plan help Plastic Solutions?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
See page 86 for the answers.
If your Cash Flow Plan shows that your business is likely to run out of cash during one month, think about these
questions:
•• Can you increase cash in from sales during that month? For example, are you giving too much credit?
•• If you sell on credit, do your credit customers pay on time? Can you give less credit or give credit for a
shorter period? Do you have to give credit at all?
•• Can you reduce your Material Costs for the month by reducing your level of production?
•• If you buy on credit, can your supplier give you more time to pay?
•• Can you postpone the payment of any of your expenses, for example the payment of telephone or
electricity bills or the payment of your own salary?
•• Can the bank extend your loan period or reduce the amount you have to pay each month?
•• Is it necessary to buy the new equipment immediately? Can you buy equipment on credit or get a
loan?

6.4 How often should you make a Cash Flow Plan?
You can make your Cash Flow Plan for three months or for a longer or shorter period if it suits your business.
Make a new Cash Flow Plan before the old one runs out. Then your business can always see how much cash is
likely to come in and go out and you can make decisions about spending or reducing the outflow.
I will make the next Cash Yes I see. Your next Cash Flow Plan
Flow Plan before the will be for April, May and June.
end of March.
7. Make a Loan Access Plan
7.1 Is a loan necessary for business?
Chris, the new equipment is There are many places that issue
necessary for my business. It business loans. You need to take
will help us improve product your records to show the bank how
quality. I need to find well your business is performing.
funding for it. You also need to work out how much
money will come into your business.

If your Cash Flow Plan shows that your business will run out of cash and you think that you will not be able
to postpone or reduce any expenditure, you will need to consider getting a loan.
Your Cash Flow Plan will help you determine how much money your business will need, why the money is
needed and when it can be paid back. Look at Plastic Solutions’ Cash Flow Plan for the first three months
of next year, cash at the end of March is -$4,097. So, Juma will need at least $4,097 more to purchase new
equipment.
7.2 Choosing a financial institution
Different financial institutions provide loans but attach various conditions to the loans, such as:
•• When the amount should be paid

•• Interest you should pay on the loan
•• The type of security or collateral
•• Penalties for failure to repay the loan
Choose a financial institution that offers conditions that your business is able to fulfil. Also consider the amount
of interest your business will pay.
7.3 Calculating interest on your loan
Juma needs to know how the interest is calculated on her loan. Interest rates change every time and financial
institutions use different methods of calculating the interest rate. They use a flat rate method and a reduced
balance method. For instance, if Juma borrows $4,000 at an interest of 12% per annum and pays back the
same amount within eight months, her total interest using a flat rate method will be $320 as shown in the
table below:
Interest Interest Principal Total Loan

Month Calculation Payment Payment Payment Balance
($) ($) ($) ($) ($)
0 4,000
1 4,000 x 0.12 x 1/12 40 500 540 3,500
2 4,000 x 0.12 x 1/12 40 500 540 3,000
3 4,000 x 0.12 x 1/12 40 500 540 2,500
4 4,000 x 0.12 x 1/12 40 500 540 2,000
5 4,000 x 0.12 x 1/12 40 500 540 1,500
6 4,000 x 0.12 x 1/12 40 500 540 1,000
7 4,000 x 0.12 x 1/12 40 500 540 500
8 4,000 x 0.12 x 1/12 40 500 540 0
TOTAL 320 4,000 4,320

On the other hand if Juma’s interest is calculated using the reduced balance method, she will pay a total
interest of $180. In this instance, the amount of interest is based on the balance due at the end of each month
and not on the initial amount of the loan. See the example in the following table:
Interest Interest Principal Total Loan

Month Calculation Payment Payment Payment Balance
($) ($) ($) ($) ($)
0 4,000
1 4,000 x 0.12 x 1/12 40 500 540 3,500
2 3,500 x 0.12 x 1/12 35 500 535 3,000
3 3,000 x 0.12 x 1/12 30 500 530 2,500
4 2,500 x 0.12 x 1/12 25 500 525 2,000
5 2,000 x 0.12 x 1/12 20 500 520 1,500
6 1,500 x 0.12 x 1/12 15 500 515 1,000
7 1,000 x 0.12 x 1/12 10 500 510 500
8 500 x 0.12 x 1/12 5 500 505 -
TOTAL 180 4,000 4,180
“ It is very important to find out whether the interest will be

charged based on a flat rate or a reduced balance rate when
applying for a loan. Your business pays less interest on a
reduced balance method of interest calculation. Make sure you
borrow at the lowest interest possible. Find out what method
“
your financing institution is using.

7.4 Preparing to qualify for the loan
To qualify for a loan from a financial institution, you have to first show the loan officers that your current
business is performing well. You can do this by showing them the records of your previous sales, costs and
profits.
Then, you have to show the loan officers the purpose of the loan. Your plans for the following year should make
it clear why your business will need to borrow the money.
Finally, they will want to see how the business will be able to make enough profit to pay back the loan. Your
plans will provide them with that information as well.
Some financial institutions may require collateral in addition to seeing your plans and records. Collateral is the
asset or item that acts as a guarantee to the lenders that they will be able to recover the amount they are
loaning. If you are unable or unwilling to repay the amount of the loan, the financial institution will sell the
asset to recover the loan amount and interest. The loan officers at the financial institution will require that the
value of the collateral is greater than the amount you owe.
7.5 Planning for loan management
It is important to repay your loan when instalments are due. Late payments will hurt your company’s
credit rating, which may make it difficult to borrow in the future. Default on the repayment would result in
additional charges for the default and a bad credit rating. The company assets which are used for collateral
could also be sold. This could seriously disrupt the business and may even cause it to fail.
“ Make sure that you fully understand the financial institution’s

terms and conditions for the loan.
“
The cash to make the monthly loan payments should be generated from the business itself. If repayment
of the loan would be sought from another source, the business gets deeper in debt, which would be a
major concern.
To ensure that your business can repay the loan when instalments are due, remember to include the
instalment amount in your Cash Flow Plan, under “any other cash out”. The timely loan repayment is possible
if your business has a positive cash balance at the end of every month. Before you request a loan, it is
important to determine whether your business will generate enough Gross Profit to make the monthly
payments. Remember that the repayment of the loan is a priority.

ACTIVITY 20
When should you consider taking out a loan from a financial Institution?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
What are the important questions a business owner must answer before he decides to borrow money?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
What is the difference between loan repayment calculated on a flat interest and a loan repayment calculated
on a reduced monthly balance?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
How do you determine that you can repay the loan plus the interest?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
What is collateral on the loan and what is the purpose of collateral?
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
...........................................................................................................................................................................................................................
See page 87 for the answers

SUMMARY
The first thing you must do when making your business plans is to determine your goal. You must be clear
about the objectives that you want your business to achieve.
Every business operates under a lot of uncertainty, so businesses should have strategies incorporated in their
business plans describing how to cope with unexpected events. All business plans should have a built-in Risk
Management plan. Therefore, you should make your Risk Management plan first, then incorporate it into the
other plans.
To make a plan, you should follow a two-step process:
•• Make the plan for the next year

•• Make the forecast for the next year
To make a Sales and Marketing Plan for your business:
•• Propose marketing activities

•• Forecast the amount of sales you expect your business to make
•• Calculate your sales forecast by multiplying the forecasted sales price by the quantity of items you
think you will sell
To make a Production and Cost Plan for your business:
•• Propose actions to improve your production and operation process in order to achieve your business
objectives
•• Forecast the production quantity

•• Forecast the Overhead Expenses
•• Forecast the Material Costs
•• Forecast the Labour Costs
Use your forecast of sales and costs to calculate what the Gross Profit and the Net Profit are likely to be for your
business next year.
To make a Cash Flow Plan, forecast:
•• How much cash will come into your business each month
•• How much cash will go out of your business each month
If your Cash Flow Plan shows a shortage of cash next year, you may need to consider taking out a loan. To make
a Loan Access Plan for financing your business, you should:
•• Choose a financial institution

•• Calculate the interest on your loan
•• Prepare to qualify for the loan
•• Plan to manage repayment of the loan

ASSESSMENT 5
You have just completed Part V of this manual. Do the exercise below to check your understanding. Finish the
1. When making plans for your business, you should start with...
a. past business records.

b. the objectives your business wants to achieve.
c. forecasts for the next year.
2. All plans for a business should have built-in...
a. Sales and Marketing Plan.

b. Cash Flow Plan.
c. Risk Management strategies.
3. When you make a Sales and Marketing Plan for your business, you think about...
a. improving your marketing activities.

b. reducing your Overhead Expenses.
c. increasing wages for your employees.
4. When you forecast your monthly Overhead Expenses,...
a. you guess the amount for next year.

b. you use the same amounts as this year.
c. you make the forecast based on changes that may affect the costs next year.
5. To forecast your monthly Material Costs for the next year, you...
a. forecast the Material Cost per item and the amount of monthly production.
b. forecast the total Material Cost for next year and divide it by 12 months.
c. make an estimation based on your sales forecast because your costs are directly proportional to the
amount of sales you will make.

6. To make a cost plan, retailers and wholesalers forecast...
a. Material Costs and Overhead Expenses.

b. the cost of labour and material.
c. the cost of labour and the Overhead Expenses.
7. A Cash Flow Plan will help you to...
a. increase sales.
b. know how much cash will come into and go out of your business in the future.
c. know how much cash you owe your suppliers.
8. A Loan Access Plan shows you...
a. the different ways to get additional money for your business.

b. how financial institutions calculate interest.
c. the amount of interest your business will have to pay for the loan.

ANSWERS TO ACTIVITIES
Activity 12

(Unit: US$)
Rent 300 300 300 315 315 315
Electricity 100 100 100 100 120 120
Stationery 20 20 20 20 20 20
Water 18 18 18 18 18 18
Depreciation 35 35 35 35 35 35
Total 473 473 473 488 508 508
Activity 19
1. Cash out for the planned investment in equipment is larger for Plastic Solutions in March. Juma at Plastic
Solutions is going to buy some new equipment.
2. Juma should not think about buying the new equipment in March. She should buy the equipment when
the business will have enough cash. If the purchase of the new equipment is necessary in March, Juma
should find a way to get additional funding to make the purchase. She can also find if she can purchase a
second hand equipment at a cheaper rate.
3. The Cash Flow Plan helps Juma at Plastic Solutions by showing her that the company will have no cash left
at the end of March if she buys the equipment. She can then plan to either buy the new equipment at a
later date or to get enough cash to make the investment in March.

Activity 20
1. If your Cash Flow Plan shows that your business will run out of cash and you cannot increase sales and
reduce expenditures sufficiently to close the gap, you will need to find an additional source of capital to
finance the investments you wish to make or postpone the investments until you accumulate enough
profit from your business to finance them yourself.
2. The important questions necessary to answer before applying for a loan are:
•• How much do I really need and for what specific purpose?

•• Will the business generate sufficient income every month to pay the business expenses and also make
the loan payments?
•• Will the added cost of taking a loan for the business bring an equivalent or higher increase in profits
for my business?
•• How long do I need to extend the loan repayments and will I have sufficient cash from sales after I have
paid for my other expenses?
3. Interest charged on a flat rate means that the interest rate is calculated based on the original amount of
the loan and does not change as the loan is repaid. Interest charged on a reduced monthly balance means
that the amount of interest that you must pay is recalculated each month, based on the actual outstanding
balance; this method is less expensive than the flat rate method.
4. The way to calculate whether you can repay the loan plus interest on time is to make a Cash Flow Plan to
determine whether your business will have enough cash every month.
5. Collateral is the asset or item that acts as a guarantee to the lenders that they will be able to recover the
amount they are loaning. If you are unwilling or unable to repay the amount of the loan, the financial
institution will sell the asset to recover the loan amount and interest. The loan officers at the financial
institution will require that the value of the collateral is greater than the amount that you owe.

WHAT DID YOU LEARN IN
THIS MANUAL?
Now that you have studied this manual, try these practical exercises. The exercises will reinforce what you
have learnt and will help you to improve your business by using financial plans.
The exercises will help you to:

•• Use what you have learnt to solve practical problems (Can You Help?).
•• Take action to improve your business by using what you have learned (Action Plan).
Compare your answers with the Answers at the end of the exercises on pages 97 - 100. If it is difficult for you to
work out an answer, read that part of the manual again. The best way to learn is to finish each exercise before
you look at the answers.
Check the list of Useful Business Words on page 101 to quickly find the meaning of a terminology.
“ You have learned about planning in this manual. But what you
have learnt does not help until you use this new knowledge in
your business. Remember to do the Action Plan on page 96 to
“
improve your business planning.
What did you learn in this manual? | 89

1. Can You Help?
1.1 Cash flow problems at Reliable Tailors
The owners of Reliable Tailors have decided to make a Cash Flow Plan to help control the cash in their
business. Here are their Forecasts of Sales and Costs for the first three months of next year, which shows how
much cash in they forecast from sales and how much cash out they forecast to pay expenses each month:
FORECAST OF SALES
DETAILS JAN FEB MAR
Sales ($) 5,000 6,000 7,000
FORECAST OF COSTS
DETAILS JAN FEB MAR
Material Costs ($) 2,200 2,720 3,230
Labour Costs ($) 800 1,080 1,220
Overhead Expenses ($) 1,100 1,200 1,200
•• Reliable Tailors must collect 5% VAT on its sales.

•• Reliable Tailors must pay the tax authority the VAT they collect one month after they collect it. In
December, Reliable Tailors collected $350 VAT on sales.
•• 50% of Reliable Tailors’ sales are on credit. They allow their credit customers to pay the following month.
•• Their sales in December were $8,000.
Reliable Tailors have also forecasted that:
•• They will get a loan of $500 from the bank on 1st January to buy a new cutting machine. Loan
payments will be $50 per month starting on 15th January.
•• Cash in the cash box at the beginning of January will be $600.

•• Their bank account will have $2,000 in it at the beginning of January.
•• They will buy the new cutting machine for $500 in January.

Here is a blank form for you to fill in to make a Cash Flow Plan for Reliable Tailors for three months.
Cash Flow Plan
DETAILS (US$) JAN FEB MAR

1. Cash at the start of the month
2. Cash in from sales
CASH IN
3. Cash in from credit sales

4. Any other cash in
5. TOTAL CASH IN
6. Cash out for Material Costs
7. Cash out for Labour Costs
CASH OUT
8. Cash out for Overhead Expenses

9. Cash out for planned investment in equipment
10. Any other cash out
11. TOTAL CASH OUT
12. CASH AT THE END OF THE MONTH
1.2 Planning at Chimba Carpentry
Chimba works alone at his carpentry shop, where he makes tables and chairs. He is now planning for next year.
He has all the information he needs. Use the information below to help Chimba complete his Forecast of Sales
and his Cost and Profit Plans for January next year.
•• This year Chimba sold an average of twenty chairs

and ten tables per month. He forecasts that he will
sell the same amount next year.
•• A chair sold for $40 this year. After checking his
competitors’ prices, Chimba has decided to keep
this price next year too.
•• Chimba sold each table for $60 this year. But from
doing market research he found that customers
are willing to pay $80. He will sell tables at $80
each next year.

Here is the blank Sales Forecast for Chimba Carpentry. Help Chimba to work out the total sales he is likely to
make in January.
FORECAST OF SALES
DETAILS JAN FEB MAR

Sales quantity
CHAIR
Sales price ($)

Sales ($)
Sales quantity
TABLE
Sales price ($)

Sales ($)
TOTAL SALES ($)
•• This year, Chimba paid $140 per month for rent. His landlord says that the rent will go up by $10 per
month at the beginning of next year.
•• Chimba paid $50 per month for electricity this year. There will be no increase in the cost of electricity
next year. Chimba thinks he will use the same amount of electricity next year.
•• Transport cost $40 per month this year. Chimba thinks he can reduce this cost through better
planning to $32 per month next year.
•• Chimba will pay himself $500 per month next year. 70% of his time will be spent on making tables and
chairs, while 30% of his time will be used for talking to customers and keeping records.
•• Chimba spent $25 per month to maintain his machines this year. Some machines are old and will need
more maintenance next year. Chimba thinks that the cost of maintaining his machines next year will
be $40.
Make the forecast of Overhead Expenses and Labour Costs for Chimba Carpentry by filling in the blank
forms below:
1. FORECAST OF OVERHEAD EXPENSE PER MONTH

(Unit: US$)
DETAILS AMOUNT
Rent
Electricity
Transport
Wages
Machinery maintenance
Total

(Unit: US$)
DETAILS JAN FEB MAR
Wages - Chimba
Total
•• Chimba Carpentry does not want to stock finished goods, so Chimba decides that the production
quantity will be the same as the sales quantity. He will produce twenty chairs and ten tables each
month.
•• The cost of materials to make one chair was $9 this year. The supplier tells Chimba that next year, the
cost of timber will increase about 20%, while other Material Costs are unchanged. Chimba estimates
that the Material Cost to make one chair will go up to $10.
•• The cost of materials to make one table was $20 this year. If timber price increase 20% and other
Material Costs are unchanged, the Material Cost to make one table will go up to $22.
Make a forecast of the total Material Cost for Chimba Carpentry in January.
3. FORECAST OF TOTAL Material Cost

DETAILS JAN FEB MAR
Material Cost per item - chair ($)
Number of chairs produced
Material Cost for making chairs ($)
Material Cost per item –table ($)
Number of tables produced
Material Cost for making tables ($)
Total ($)
Use your forecasts from one to three and help Chimba fill in the Forecast of Costs in January.
FORECAST OF COSTS
(Unit: US$)
DETAILS JAN FEB MAR
Material Costs
Labour Costs
Overhead Expenses
Total

Finally, work out the Gross Profit and Net Profit Chimba Carpentry is likely to have in January.
PROFIT PLAN
(Unit: US$)
DETAILS JAN FEB MAR
Total Sales
Total Material Costs
Total Labour Costs
Gross Profit
Overhead Expenses
Net Profit
In January, Chimba Carpentry’s

•• Gross Profit is likely to be $. …………………
•• Net Profit is likely to be $. …………………
2. Action plan
This is my Action
Plan to improve
the planning in my
business.
HOW WHO WHEN

WHAT
do you solve the will solve the will the problem
is the problem?
problem? problem? be solved?
It is March now.
I need to buy a When I make my I must do the
The Cash Flow
new extruding next Cash Flow Cash Flow Plan
Plan I have ends in
machine. But I Plan I can see myself.
March. I must do
do not know when when my business
the new Cash Flow
my business will is likely to have
Plan for April,
have enough cash enough cash.
May and June
to pay for the
now.
machine.

How can your business get better at planning? Start by making an Action Plan like Juma did. In your plan, write
down:
1. What problems does your business have in terms of planning?
2. How will you solve each problem?
3. Who will solve each problem (you or someone else)?
4. When do you plan to solve each problem?
Write down your Action Plan on the next page. Remember these suggestions:
•• Make a plan for a three or six month period
•• Be realistic. Only write down what you think is possible to do
•• Try to solve the most urgent problem first
•• Keep this manual at your business so that you and others in your business can use it when you need it
•• Check regularly to make sure that you are following your action plan. It is a good idea to check every
week
•• Consider putting your action plan on the wall so it is easy to see and check

Plan to improve your business planning
Use this page to write down your own plan to improve the way you develop and use plans in your business.
WHAT HOW WHO WHEN
is the problem? do you solve the problem? will solve the problem? will the problem be solved?

ANSWERS
Assessment 1
1.
1. Planning
2. Loan Access Plan
3. Production and Cost Plan
4. Profit Plan
5. Cash Flow Plan
6. Sales and Marketing Plan
2.
1b; 2a; 3c; 4a; 5c
Assessment 2
1c; 2b; 3a; 4c; 5c
Assessment 3
1a; 2b; 3c
Assessment 4
1. False: Managing risk is always necessary because unfavourable events can occur at any time in any
business.
2. False: The purpose of Risk Management is not to avoid all risks but to ensure that risks are consciously
taken with a complete knowledge and clear understanding of the appropriate responses to take.
3. True: You should prioritize the risks that are most dangerous to your business.
4. False: It is not a good idea to accept risks which have a significant impact on your business even if the
possibility of occurrence is low. Reducing or transferring will be a more appropriate response.
5. True: Remember to follow the four steps of the Risk Management process and do not rush to respond to a
risk before making an assessment.
Assessment 5
1b; 2c; 3a; 4c; 5a; 6a; 7b; 8c

Can you help?
Cash flow problems at Reliable Tailors
Cash Flow Plan
DETAILS (US$) JAN FEB MAR

1. Cash at the start of the month 2,600 4,925 5,325
2. Cash in from sales 2,500 3,000 3,500
CASH IN
3. Cash in from credit sales 4,000 2,500 3,000

4. Any other cash in 825 275 325
5. TOTAL CASH IN 7,325 5,775 6,825
6. Cash out for Material Costs 2,200 2,720 3,230
7. Cash out for Labour Costs 800 1,080 1,220
CASH OUT
8. Cash out for Overhead Expenses 1,100 1,200 1,200

9. Cash out for planned investment in equipment 500 -
10. Any other cash out 400 375 325
11. TOTAL CASH OUT 5,000 5,375 5,975
12. CASH AT THE END OF THE MONTH 4,925 5,325 6,175
Please note:
•• “Any other cash in” includes VAT collected and loans received during the month. VAT collected is
5% of sales (Including cash sales for the month and cash received from credit sales from the previous
month.) For example, in January, the VAT collected will be $325 (5% x (2,500 + 4,000)) and the amount
received from the loan will be $500.
•• “Any other cash out” includes the payment of the VAT amount collected during the previous
month and the monthly loan payment. For example, Reliable Tailors collected $350 in VAT during
December and will make a $50 loan payment in January. In February, VAT collected during January
will be $325 so “Any other cash out” for February will be $325 + $50 = $375.

Planning at Chimba Carpentry
Here are the forecasts for Chimba Carpentry for January:
FORECAST OF SALES
DETAILS JAN FEB MAR

Sales quantity 20
CHAIR
Sales price ($) 40
Sales ($) 800
Sales quantity 10
TABLE
Sales price ($) 80
Sales ($) 800
TOTAL SALES ($) 1,600
1. FORECAST OF OVERHEAD EXPENSE PER MONTH

(Unit: US$)
DETAILS AMOUNT
Rent 150
Electricity 50
Transport 32
Wages 150
Machinery maintenance 40
Total 422

(Unit: US$)
DETAILS JAN FEB MAR
Wages - Chimba 350
Total 350

3. FORECAST OF TOTAL Material Cost
DETAILS JAN FEB MAR
Material Cost per item - chair ($) 10
Number of chairs produced 20
Material Cost for making chairs ($) 200
Material Cost per item –table ($) 22
Number of tables produced 10
Material Cost for making tables ($) 220
Total ($) 420
FORECAST OF COSTS
(Unit: US$)
DETAILS JAN FEB MAR
Material Costs 420
Labour Costs 350
Overhead Expenses 422

Total 1,192
PROFIT PLAN
(Unit: US$)
DETAILS JAN FEB MAR
Total Sales 1,600
Total Material Costs 420
Total Labour Costs 350
Gross Profit 830
Overhead Expenses 422
Net Profit 408

USEFUL BUSINESS WORDS
MORE
WORD THE WORD MEANS
ON PAGE
Business Study how your business has been performing in the past to find out 15-25
Analysis if there was a change. For example, by analysing your Profit and Loss
Statement, you can find out if your profit is decreasing.
Cash Flow Plan A plan which shows what money is likely to come into and go out of a 8, 68-78
business during a specific period of time in the future; for example the next
three months.
Forecast When you forecast something, you are predicting what you think is likely to 29
happen in the future.
Loan Access Plan A plan which shows the amount of money a business is likely to borrow, 8, 78-82
where it will get the money, how much it will cost to borrow the money and
the source of money to repay the loan.
Planning Thinking about and then deciding what to do about things that are likely to 1, 8-11
occur in the future.
Production and A plan which shows proposed improvements in your production and a 8, 51-66
Cost Plan forecast of costs your business is likely to have in a future period; for
example a month.
Profit Plan A plan which shows what Gross and Net Profit a business is likely to earn in a 8, 66-68
future period; for example a year.
Risk Risk is the possibility of your business suffering loss due to 37

unexpected events.
Risk A process of identifying risks to which your business is exposed and de- 38-41, 44
Management veloping strategies for reducing the effects of the risk to your business if it
occurs.
Sales and A plan which describes the marketing activities in which your business is 7, 44-50
Marketing Plan going to participate and a forecast of the sales your business is likely to
make in a future period; for example a year.
Useful business words | 101

Planning For Your Business
Started your business already, but have troubles in some aspects of business management?
Improve Your Business (IYB) is the existing entrepreneurs’ guide to good principles of business
management. The IYB Planning For Your Business manual will guide small businesses through
the process of making the right plans for their business to boost business performance.
IYB is part of the ‘Start and Improve Your Business’ family of management training courses for
start-ups and small entrepreneurs. The programme builds on 25 years of experience working
in 100 countries, partnering with 2500 local institutions, 200 certified Master Trainers and a
network of over 17,000 Trainers. It has reached 6 million clients to date and these numbers
are only increasing!
The IYB training is supported by a set of six manuals:

IYB Costing
IYB Marketing
IYB Record Keeping
IYB Buying and Stock Control
IYB Planning For Your Business
IYB People and Productivity

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Planning For Your Business

International Labour Office

International Labour Office

ISBN: 9789221287483; 9789221287490 (web pdf ); 9789221287414 (set)

International Labour Office Enterprises Dept.

enterprise development / business strategy / management development / small enterprise / business

ILO Cataloguing in Publication Data

About Improve Your Business (IYB)

PART I - planNing for the future 01

PART III - ForecastING changes in THE external environment 29

PART IV - MANAGING RISK 37

PART V - Making plans 43

WHAT DID YOU LEARN IN THIS MANUAL? 89

Useful business words 101

1. What is this manual about?

2. Who should read this manual?

3. Objectives of this manual

4. How to use this manual?

In this manual you will find:

ii | Planning For Your Business

planning for the future

I need to analyse the

PART I | Planning for the future | 01

I did not make a profit

Sorry Fatuma. To give your business

02 | Planning For Your Business

How could planning have helped Danda?

Did Convenient Grocery get a loan from the bank?

How could planning have helped Fatuma?

Your answers may be similar to the answers below:

PART I | Planning for the future | 03

I do not buy from

I bought a new laptop last

04 | Planning For Your Business

How could planning have helped Murray at Tasty Bread?

What went wrong at Plastic Solutions?

How could planning have helped Juma at Plastic Solutions?

You may agree that:

PART I | Planning for the future | 05

If my costs are After talking to my

06 | Planning For Your Business

What is your business?

Does your business have any problems?

4.1 Sales and Marketing Plan

PART I | Planning for the future | 07

4.3 Profit Plan

4.4 Cash Flow Plan

4.5 Loan Access Plan

5. Tips for making a plan

When you make plans for your business, remember:

I was worried about my I learn a lot about my business when

08 | Planning For Your Business

I make my Sales and

I planned to sell $5,000

PART I | Planning for the future | 09

I always make my plans in

I am sure I will make

10 | Planning For Your Business

PART I | Planning for the future | 11