Organizations apply the analysis of break-even to make price decisions of their products, understand the costs that are involved in the production, and make a decision on the volume of sales achieved that can make the business profitable. In this plan of activities, Mission Hill Wine made total sales of its wine at $12, 500 in 2015 and incurred a variable cost per unit of $700 and a fixed cost of $ 8million. Therefore, the break-even would be determined as:
In terms of units, BEP = 8,000,000/ (12,500-700) = 678 units.
In terms of sales, BEP =678 units*12,500= $8,475,000.
Therefore, Mission Hill Wine made a break even analysis and realized that it needs to sell over 678 units (expectation) to generate profits.
If this wine company feels that it cannot make a sale of many units above the expectation, the management should make a decision of considering the following actions to ensure that there is profitability:
They should try to limit the fixed costs such as the overhead expenses, rent among others.
Reduce the variable costs such as wages, and cost of raw materials
Lastly, they should increase the selling price of the wines
Through the adjustment of the above values, the break-even point will be reduced to ensure that enough sales are attained to cover all expenses. Consequently, this situation of decision making that is arising as a result of break-even analysis will benefit the Mission Hill Wine in taking appropriate corrective action to ensure that there is the viability of the wine business in China.
Planning is a continuous process in everyday business activities. Therefore, the owners of the Mission Hill Wine need to create and adjust both short term and long term plans. In this scenario, short terms are tactical in nature and should be designed to fit the normal operational changes and opportunities. Since the long term plans were found to be more strategic in nature based on whether to make the expansion on business operations and purchase of new equipment, decisions are required for critical financial implications for the Mission Hill Company. Therefore, financial forecasting is always necessary to make smart business decisions for the exportation of wines to China. The financial forecasting for this plan is based on some assumptions and estimates such as sales forecasts, production, and cash forecasts. That is these are the commonly used financial tools that were used for financial planning. Additionally, the aim of the business plan is to analyze the historical information of the company, market research for making major assumptions.
Sales Forecast
It was noticed that sales are the key driver of the exporting company. This implies that minus sales, there could have no exportation of wines to China. It predicted the overall sales revenues so that other operational requirements such as production forecasts can be determined. During sales estimation, I considered the historical records of sales and other familiar factors that could have influenced future sales. For instance, the market research showed me that many competitors dropped out of the marketplace. Thus, making the possibility of the sales increase. Additionally, the Mission Hill Wine may have made a decision of dropping the underperforming product line while anticipating that sales will increase in the short run. Sales revenues are the best estimates for future activity of the company. Therefore, it serves as a goal for the firm. Despite the fact that it does not need some guess works, minus the sales forecast, there will be no real alternative for creating an estimate for other operational requirements such as production.
Production Forecast
It is based majorly on the assumptions that were made in the sales forecast. Firstly, the production plan was created based on the anticipated sales, and it appeared to be simple since the sales forecast predicts the volume of sales volume every month or per week. However, the sales volume is an assumption, and estimates on the production are created to meet the demand of the company. In this case, the capacity was flat, but sales volume was inclusive of the spikes. Consequently, I developed a plan that created an excess inventory to meet the seasonal swings regarding volume. Similarly, the organization also planned to apply overtime to outsource some services to meet the business demand. After developing the production forecast, other operational procedures such as the timing of raw materials and supplies followed. Costs were determined as well as the evaluation of profitability based on fundamental assumptions.
Cash Forecast
This is the estimation of future cash inflows and outflows (Jury, 2012). After the completion of the sales and production forecasts, it was possible to know the timing of several expenses like wages, the cost of supplies, and utility costs. That is it provided a prediction of sales revenues. Moreover, it created the breakdown of income and expenses during the period to indicate whether the Mission Hill Company will have enough funds on hand to meet its operational needs. As a result of the projected volume swings, the organization may require a ramp up production to make a greater purchase than the normal levels of raw materials and supplies by working heavily on overtime. In the event of problems with the cash flows, the company should outsource capital to cover the operating costs. It can also withdraw money from cash on hand.
In financial forecasting, without sales, production, and cash forecasts, both financial and operational planning may be impossible, and the Mission Hill Wine Company may not have enough money to fulfil its sales demand. As a reminder, financial forecasting should be based on historical data and calculated guesses. This is because if there is a change in the market, the accumulated records will be of no use in predicting the future events. It should also be constructed on assumptions by developing several forecasts upon different scenarios by creating likelihood plans for every situation. Lastly, the longer term of the forecasts the more it becomes inaccurate.
References
Jury, T. (2012). Cash Flow Analysis and Forecasting: The Definitive Guide to Understanding and Using Published Cash Flow Data. West Sussex United Kingdom: John Wiley & Sons.
