What is Break-Even-Point?

Break-even point refers to an optimal level of business activities of any firm where cost of production and price match each other. It is a stage where there is no profit or loss in the business. Total revenue matches with total costs.From this point, you can reach towards profit by improving your operations efficiently or, on the other hand, may incur losses due to mismanagement and defective planning.

Definition of Break Even Point
Break-Even-Point can be defined as a point in business scale where the value of total costs equal to total sales or revenue at any point of time. It is a point where expenses equal to income and there is neither profit nor loss in the operations of business. The operations of sales and production of the business break even at this point in a curve or lines joining the costs and revenues.

Importance of Break-even point

• Break-even point is very helpful in calculating the minimum level of output that is to be crossed to make profits in business. Or, in other words, you can know about the minimum sales that are required to be made to meet out all expenses and make an extra unit of profit.
• The business man is able to know the minimum number of units required to be produced and sold to level both his fixed costs and variable costs so that with an extra unit sold he can start making profit.
• So, break-even point calculation can be used by management in setting the prices of products and in determining the minimum sales target to be achieved by them.
• Further, it is very useful in controlling your fixed costs as you are able to know the impact of fixed costs on your performance level.

Calculation of Break-even Point

Break-even point is calculate with the assumption that Total Cost= Total Revenue or income.
Now, total cost includes both Total Fixed Cost and Total Variable Cost.

Total Fixed Cost is your fixed expense which more or less remains the same. But Variable Cost is related to number of units produced. So Total Variable Cost depends upon your production and sales quantity. So, let us assume that Variable Cost multiplied by the number of units gives you the Total Variable Cost. If Variable Cost is V and number of units is X, then Total Variable Cost = V*X (Variable cost multiplied by X units).

Let Total Fixed Cost be TFC. and Total Revenue be TR. But TR is Price of product multiplied by number of units produced or sold. So, let TR be equal to P*X (Price multiplied by X units)

Now, Break even point or BEP will be equal to TFC + VX = PX or to change the position,
TFC= PX- VX  = X (P-V)

To deduce the number of units required to be produced or sold, the equation will be
X = TFC divided by P-V

If we give values to above concepts:- Suppose TFC = 1,000,000 and P is 100 and V is 60.

From above formula of X = TFC/ (P-V), so, 1000000 divided by (100- 60) ie. 1000000 divided by 40.

So, the number of units required to produce and sell is 25,000 units. This is the Break-even production or Break-even sales to be achieved in order to realize the full expenses incurred by the business.

Benefits of using Break-Even-Point concept

• By using this method, you are able to know the production and sales targets to be achieved by your business during any period of business.
• You can control the costs and production levels according to your available options to achieve maximum benefits and to reap profits.
• In the above example, if you feel it is difficult to achieve the production of 25,000 units, then you may consider other options like reducing your Total Fixed Cost or reduce the Variable Cost or you may even consider of increasing the selling price of your product to meet the expenses.
• You can plan your future plans and build budgets and projects with the help of this break-even method of concept.

Limitations to application of Break-Even-Point
There are some limitations in applying this method as it is based on some pre-assumptions.

• Break-even concept assumes that Fixed Costs are constant. But in actual cases, fixed costs also change when there is large scale increase in production or sales as you require to employ more staff and hire more space for increased activities and many other expenses also increase.
• This concept again assumes that variable cost is constant during the entire period of application of this concept. If there is any slight variation in the variable cost during the period of application, then also, the entire calculation will become useless and all predictions will go wrong.
• This method does not take into account the stock of inventory as it assumes that production quantity is equal to sales quantity.
• It further assumes that in multiple product companies, the mix ratios of production are equal to the mix ratios of sales. It considers that the relative ratios between different products are maintained same as that of sales.

Marketing strategy & techniques -Three stages of Marketing Strategy

Need for strategies
As I discussed earlier in another chapter, marketing applies both scientific and artistic approaches towards creating customer base and selling your products. Selling your product requires a great deal of wooing your customers. Gone are the days, when the businessmen used to simply keep their shops open and wait for the customers to come and exchange your goods for their money. There is much competition now and nobody will approach on his own to buy your product unless you attract him with your Marketing Strategy.

So, selling your product requires use of alluring and effective strategies so as to attract buyers and establish your market. Marketing Strategy is aimed at increasing your sales and promotion of your business. It is a package of the plans and techniques employed for establishing and promoting your business. It involves use of many different techniques at different levels of business. Before starting business,you need to find out the tastes of buyers and locate your prospective buyers and the areas for your market. Then, you need to advertise your products and services, give discounts and incentives to create market for your goods and establish your strong hold in your area.

Apply strategy according to your business
Different types of products or different areas of market require different marketing strategies typical of their own markets. So strategies can differ from product to product or from area to area. Agricultural product requires its own typical strategy and electronic product requires its own strategy for marketing. Similarly, more advanced cultures need their own typical strategies whereas rural culture has its own strategy for marketing. So, each strategy applies its own marketing technique to promote its business. But overall, the principles are the same. We need to find out our market and prospective buyers. Then we establish our business choosing the products and areas of operation according to the requirements. Then it involves in retaining the customers with incentives so that they may not shift to other products and sellers.

Three stages of applying Marketing Techniques 
Any type of business involves three stages of your Marketing Strategy for setting up the business and its market. These stages are as follows:

• Locating business opportunities and areas before starting business through study and research.
• Promotion of business after setting up your product and market.
• Retaining the market base and customer confidence through good quality, after sale service and support.

All these three stages of business require employment of appropriate and efficient marketing techniques. Let us study the techniques employed at each of these stages of business.

Techniques employed before establishing business

1. Conduct research to study the culture and tastes of the area where you want to establish your business. This will let you know what options are available for you to trade in and you can choose one that is most suitable to you. For example, if the people are more cultured and like fashionable dresses, advanced electronic items or continental foods, you can choose one of these items as your business.
2. Know about the resources available for procuring or producing your goods and about available transportation facilities for conducting your business.
3. You need to keep knowledge of the local laws and restrictions that are in effect in your business area to protect yourself from any later complications. 

Marketing Techniques to be employed after business commencement

1. Ensure good quality of your products. Your product should be preferred by customers as a better one in comparison with other sellers. Then only will they come to you.
2. Pricing to be done reasonably. Fix your product price at a reasonable level which can be a bit lesser than other traders so that customers get attracted by the low price. The difference need not be much. Even a fraction of 1% can attract more customers to your product.  
3. Ensure continuously ready availability of your products. If customers do not get whatever they want readily available at your store, they will look for other shops and you can lose your customer base.
4. Promote your business through various methods like distributing pamphlets, erecting posters and banners at different places of your area so that people come to know of your business. You can advertise through TV channels and by placing advertisements in news papers also. Showing a celebrity using your product can be a more effective tool of publicity for your product. Sometimes using sex appeal also works out to great extent. These are all publicity stunts for growing your business.
5. Make your on-line presence felt by maintaining a website and posting the salient features of your business and all your products there on the website. This will facilitate the prospective buyers to find out the sellers of their products easily.

Marketing Techniques for retaining, evaluating and improving your customer base

1. Best technique to retain customers or attract more customers is to offer some value added services and discounts to regular customers. Offer some discount, or a coupon or a reward points card to allure and satisfy the regular customers. They get pleased to know that they get points or discount coupons every time they shop with you and they turn around more frequently to enjoy this satisfaction.
2. Offer free appraisal and usage/maintenance tips on your products. Let the customers know some important features and facts of your product which they do not know. Also instruct them how to use and maintain the product for yielding longer life benefits. This will make them more confident about your products.
3. Another most important technique to be employed in business is packaging and brand image of your product. A nice package with good design and appealing colours will enhance your product. They get associated with your brand image as an identity for good quality. 
4. Ask for feed back from customers to know their opinions about your products and services. Thereby you can know about the likes and dislikes of customers, why they are choosing your product instead of others and how you can improve your quality to satisfy them. This will always help you in improving your business and growing your customer base.
5. One more technique is to interact with customers in a cool manner when they come to you or are on-line. Applying gentle manners and sweet voice enhance your image in their minds and creates a great image of your business and goodwill among customers.
6. Sometimes adding new items to your business can keep customer base intact and also create new customers.
7. Finally, be prepared to adopt yourself to the changes in tastes, culture and technology.

What is Marketing? Differences between Selling and Marketing

Marketing is the process of creating market for your products through selling and business promotional activities. It is a kind of creating communication between prospective buyers and sellers/ producers of goods and services.

But selling is very limited in scope. It aims at simply selling the product without caring for the quality assessment and customer care.

Definition of Marketing
Marketing can be defined as the process of communicating the value of a product or service through promotional activities and brand building, thereby creating a customer base for the business.

It is a set of activities employed by a company associated with the buying and selling of goods and services including consumer research, advertising and selling till the point of delivery of goods to the ultimate consumers.

Marketing process employs both scientific and artistic approaches for selling of these products. Scientific approach because it indulges in the study of market conditions and research of customer tastes and product quality. Artistic because it needs to be appealing to the senses of customers. It employs the 4 P's of marketing - Product, Price, Place and Promotion. These 4 P's determine their marketing activities. The ultimate goal of marketing is to reach to the customers with an aim to satisfy their needs and maintain a long term relationship with them.

Why Selling is Different from Marketing?
Now, coming to the discussion of differences between selling and marketing concept, let us look at the salient features of selling activity and marketing activity by comparing them through this below table.

Differences between Selling and Marketing

SELLING	MARKETING
Narrow minded	Broad-minded
Limited in scope	Unlimited scope
Engaged in simple selling activities	Involves customer creation, selling and business promotional activities also
Sole purpose is profit making	Thinks about customer care, social cause and product quality also
Operates in a limited area	Engages in widespread areas
Limited staff engagement with a sole proprietor as owner	Employs huge staff of marketing and sales managers and selling agents and sales staff
Proprietor himself oversees sales	Marketing manager is head for marketing activities
Selling is done simply by sitting in the shop	Marketing involves field study and field work
Customers come on their own needs	Customer base is created by wooing them

The above are some of the major differences between Selling and Marketing activities.

So you are able to distinguish now the differences between selling and marketing concept and thereby understand that selling is a component of the wider field of marketing.

Inventory Management Techniques

What is Inventory Management?
Inventory management is a process of managing and supervising the procurement, usage and maintenance of inventory (purchases and stocks) for benefit of the business. It is not a simple observance but includes efficient control and streamlining of the purchases, issues and storage of the goods with prudence and smart decision making skills.

Inventory management involves application of some efficient tools and techniques for a better control of the inventory.

So let us have a look at some of the most important tools and techniques employed in inventory management.

Employing Economic Order Quantity technique
I have already discussed about this method- what is the definition and method of applying this technique through the calculation of Economic order quantity as an equation of EOQ= square root of [{2DS} / H ] 
So, you can refer to that article for detailed understanding of this technique.

Applying ABC Analysis of Inventory technique
This is another popular method of inventory management. It is a kind of Pareto analysis applied in any type of business or studies conducted to categorise suppliers, customers, staff, places or activities into different groups of importance for dealing with them accordingly. ABC analysis of inventory implies the following steps and features.

• In this technique, all items of inventory are categorized into 3 major groups of A, B and C according to their importance and significance for the business.
• "A" group items are of most important significance as they constitute mostly costly and critical items for the running of business. 
• C group of items are of least important and of very low cost items. 
• B group consists of medium importance of items for running the business.
• Once all items are categorized into these three groups, the top management can concentrate more on the A group of inventory and other groups of inventory can be managed at lower levels of supervisors.
• This will enable more efficient control of inventory and thus minimise the costs and losses.
• Generally "A" group items may constitute 10% to 20% of total number of items in quantity or to identify in value they may be about 60% to 70% of the total value of inventory.
• "C" group items can be of 70% in number to the total quantity of items and may value less than 10% of the total inventory value.

Fixed Order Quantity technique
This fixed order quantity model technique can be applied mostly for high costly items like most important spares for plant and machinery without which your plant will stop running. So, you need to keep some stock of these items for emergency purpose. You may study the past trend of consumption for such items and estimate your requirement for a particular period, say one year. Then you will place order for these items irrespective of immediate requirement and keep them in stock.

Fixed Time Order technique 
When fixed time period inventory model is applied, you will be periodically placing orders at given intervals of time without waiting for requirement indents placed from departments. You will be fixing the intervals according to the consumption levels per week or month of these items, which mostly constitute general regular usage items of small values. These items will constitute mostly of tear and wear or use and throw items.

Cycle Counting technique
This is one more popular technique applied for better management of inventory. Popularly known as cycle counting in inventory management, this method employs physical counting of inventory items in small groups at various places of a ware house or stores of the business establishment instead of counting all inventory on a single day so as to facilitate normal running of the business activities.

In this process, goods are stored in small groups at different places with proper records maintained of receipts and issues. Periodical checking are done by counting the items and tallying with records. This will ensure efficient management of inventory without hindering production or business functions.

When to place purchase orders?
Placing purchase orders for replenishment of goods is one of the key factors of inventory management which needs to be prudently applied by inventory management. The inventory managers should be mostly efficient in calculating the correct time of when to place purchase orders.

• A deep analysis of the consumption and purchase statistics of your business during a period of last 2 or 3 years can give you a correct picture of what are the requirements during a certain month or period for running the business. You can estimate how much is consumed during a certain interval of time.
• So, you can frame up the quantity required of each item for a certain week or fortnight or a month as the case may be.
• Now, you may enquire about the delivery period of these items and the time taken by the consignments in reaching your place. These details can be easily obtained from your suppliers and transporters or from your previous experiences.
• Further, you must be able to calculate some extra grace period required in case of failures in systems of transportation or due to weather conditions and other factors that may occur. 
• You may have to provide for sudden spurt in demand for your products thereby increasing your consumption of inventory.
• You may have to think of shortages in stocks with suppliers or any other problems of suppliers that can affect your purchases being delayed.
• So, when you will have to place an order depends on all these circumstances. You should add all these points to calculate your ordering times.

To sum up, an efficient inventory management involves great abilities of the inventory managers in foreseeing all factors that can affect your procurements and stocks and needs prudent and smart decision makings. So, efficient inventory manager will employ and consider combining all good points of all of the above mentioned techniques of inventory management to obtain maximum benefits.

What is Economic Order Quantity and its application in Finance management

What is Economic Order Quantity?
Economic Order Quantity or EOQ is that quantity of any purchase order that is placed at each indent so as to add optimum units to the inventory at minimum overall costs. It is that ordering quantity which reduces the over all costs of inventory like ordering costs, holding costs and shortages or losses. 

What are the Inventory Costs?
Before studying How to calculate EOQ, let us know about the Inventory cost components. Inventory cost is made up of these following components.

• Unit cost: This is the purchase price per unit of the item purchased.
• Order Cost: This is the cost incurred in placing an order. It includes the transportation or shipment cost, handling charges and any other payments like octroi and toll tax, etc. incurred per each order.
• Holding Cost: This is the storage cost incurred in keeping the stock like rent of the building or godown, insurance, interest paid or lost due to capital invested, salaries paid to stores staff and any other costs like refrigeration, maintenance, etc. incurred in storing the inventory.
• Losses: This element of cost is due to shortages, damages to items during handling, or loss due to tear and wear of stocks. All these losses are to be borne by the business. So, they are included to the cost of stocks by increasing their unit cost.

How to calculate Economic Order Quantity?

EOQ is calculated using a formula EOQ = square root of {(2*D*S)/H}

Q is the Economic Order Quantity

D is the annual demand for quantity

S is the cost for placing an order known as order cost (some put is as K also)

H is the holding cost per unit and losses can be added to this holding cost

Let us consider an example.

Suppose, your business enjoys an annual demand of 1,000,000 bags of cement
Placing one order, say, costs $10 and let holding cost be $2 per 1000 bags or .002 per bag

Now, according to above formula, EOQ = the square root of {2*1000000*10 / .002}= square root of 

20,000,000/0.002 = square root of 20,000,000*1000/2 = square root of 10000, 000,000 = 100,000 bags

So EOQ is 100, 000 bags. You need to place orders for 100, 000 bags each time to maintain your inventory costs at lowest levels. So you will place total 10 orders in a year each being of 100,000 bags. 

The above is a sample for calculating Economic Order Quantity in a more or less reasonable sense. But there are some factors that may affect the accurate calculations in actual circumstances.

Factors affecting EOQ calculation

• Employing EOQ formula assumes that prices are constant at a given period during the gap between calculation and its application.
• It is assumed that orders are placed at exhaust of present inventory and it gets replenished immediately through immediate deliveries from suppliers.
• It also assumes that interest rates and rentals do not change during the period.
• It further assumes that demands are constant and there is no variation in the demanded quantity for that goods during that period.

A more prudent way of applying this EOQ method for better management

As we can not guarantee or get assured of changes in tastes and prices or any of the factors governing EOQ calculation, it will be more advisable for a good finance manager to check the calculations at frequent intervals to ensure its efficient application to manage inventories. If the initial calculations prove to be wrong or of no more feasible, you can change the calculations according to present circumstances and modify your orders to achieve minimal negative impacts due to the variations in factors controlling your Economic Order Quantity calculations.

Inventory Control and its Importance

To know about inventory control, first let us know what is or what constitutes inventory.

What is Inventory?
Inventory is the stock of goods or resources at your disposal as on any time.It can be any raw materials, finished goods or products under process and at an incomplete stage and all the spares and accessories and store items that are at your disposal as at the time of your counting or valuation.

So, virtually whatever you held in stock for your consumption or reuse for production or for any purpose constitutes the stock. Inventory is this stock in terms of money value as at a particular date or time.

Now let us discuss about Inventory Control.

What is Inventory Control?
Inventory control is the process of supervising and controlling the procurement or supply,  storage and consumption of goods to bring efficiency in its utilization. It is a process of tracking the purchases, their maintenance and optimum usage so as to reduce costs, wastage and excess utilization.
                                            
Why the need for Inventory Control?
Inventory Control and inventory management is necessary for following reasons:

• To ascertain that quality is maintained and utmost utilisation is done of each stock. 
• To control unnecessary purchases thereby locking up your working capital unnecessarily.
• To workout when to purchase, where to purchase and how much to purchase.
• To avoid wastage due to wear and tear of stocks.
• To facilitate proper and easy identification of stocks so as to avoid undue delays in production due to lack of knowledge of items or prevent wrong inputs and issues done.
• To facilitate accurate stock valuation and disposal of obsolete items.

How Inventory Control is done?

A good inventory control system involves the following steps.

1. First step in inventory control is proper identification of stocks item wise by allotting some number or nomenclature to each item. This is to be done by the technical department who have full knowledge of the usage of each item. They will inform the inventory staff how to identify and group items under different categories according to their usages. 
2. Second step is to classify and group the items under different groups so that items required for a particular process or machine are stored at one place in various categories and sub categories. This will facilitate the issue of these items when that particular process or department places requirements.
3. So each item is stored in a shelf or container labelled with its sub-category and all the subcategories of a particular main category are stored in a separate rack, cabin or room allotted for it with their name plates bearing the main category. This facilitates each location and identification at the time of storage and also at the time of issuance of items.
4. Valuations can be easily done with this method. As you have to simply count the number of objects and multiply with its unit rate.
5. Periodical checkings should be done by both technical and inventory control staff to ascertain that no errors are committed.
6. Any destroyed or obsolete items should be disposed off during these checkings so that quality and standards are maintained and your books show correct values of usable items only. 

What is Management Information System and its need in Finance Management

Management Information System (shortly known as MIS) is a process which involves an organised and systematic approach to the study of data required by an organisation's management for making strategic decisions in order to facilitate an efficient control of the organisation at all levels.

The aim of MIS is to discover and implement smart processes and procedures for providing accurate and timely reports in suitable and required formats, periodically, to the management for a better management and control of the business.

This process involves in collection and analysis of various data in the form of statements and surveys. These statements are known as managerial information statements (or MIS in short). They are prepared through the mutual coordination of finance, accounts and all other departments.

Normally, most of the MIS statements are derived from preset formats of the computer software programmes. But some reports may also be prepared manually in their fixed formats. These formats are designed by the management with the consultation of all departmental heads.

Some of the kind of information provided to management can include the following reports which can be provided on Daily, Weekly and Monthly basis:-

• Production Report (product-wise)
• Labour Report (plant-wise engagement & total strength & cost of labour)
• Stock Report (item-wise)
• Sales Report (product-wise)
• Debtors Report
• Creditors Report
• Process wise Cost Report
• Cash Flow
• Fund Flow
• Budget & Actual expenditure comparison Report
• Break Even Point statement

There can be many more reports and statements as per requirements of the management to control the business efficiently.

MIS for Financial Management

Finance Management involves efficient handling and management of finances of the company through constant vigilance and regular analysis of the inflow and outflow of funds.

The main aim of Finance Manager should be to minimise cost and maximise profit for the company. This is done through collection and comparison of various data related to the production processes of the company including sales, stock and funds utilisation.

• Data relating to current period is compared with previous years' figures and deviations in results are to be explained with proper reasons.
• Each item of deviation in performance needs to be located in the process and it is to be reported to the management and also to the related departments.
• In this process, product wise cost sheets may also require to be prepared and deviation charts are to be performed.
• Budget planning is also a part of MIS. Budgets are prepared by comparing past achievements and fixing a reasonable target for the current year on those results.
• Fund management is done through analysis of Cash Flow and Fund Flow statements and through efficient Inventory Control methods.