Analyse the tools and techniques for Planning

Managers apply various tools and techniques in their planning activities;

1. Forecasting
2. Break even analysis
3. Linear programming
4. Depth techniques

1. Forecasting

It is the systematic development of predictions about the future e.g. revenue forecasting, weather forecasting economic, raw materials etc. Revenue forecasting is a projection of how much money the organization intends to generate in future. It involves statistical projections based on the past happenings. All organizations depend of revenues in order to remain in operation. Business revenue comes from the sales of products and services. Revenues for banks come from the interest paid by the customers. The government derives its revenue from taxes. Other institutions revenue comes from government e.g. schools.

Managers need to know what their future revenues will be before they can plan effectively based on accurate predictions. They will need to know whether funds will be available if they intend to invest in new projects. One of the first pieces of information most managers seek when developing plans is a projection of future revenues. This is development through revenue forecasts e.g. statistical projections based on the past.

Managers should also be able to develop forecasts in other areas apart from revenue
e.g. technological forecasting which involves predicting breakthroughs and innovations before
they happen. Environmental forecasting is a process of determining what conditions will exist within the organization?s environment at some future time which is critical in ensuring the organization's future success. Forecasting involves translating environmental observations into forecasts.

Managers can use various quantitative techniques to assist them in developing forecasts e.g. Time series/trend extrapolation forecasting technique: It involves plotting subject of the forecast. For instance sales demand against time for a period of several years. After this is done, the best fit line is then determined and in order to know the probable items or products which are likely to be sold in future, the best fit line is extended or it is extrapolated into the future
Assumptions
The sales must always be proportional to time. The consumers taste/preferences will be determined by time/purchasing/ affordability. The method is based on the collection of historical and present data regarding a subject or a product which is then projected into the future. It is a useful exploratory approach even though there is a high degree of uncertainty that surrounds the range of parameters that can be chosen and the interpretation of the resulting trends.

2.Break Even Analysis

It is a simple method of investigating the potential value of a proposed investment and it is used in the analysis of certain strategic management decision like when an investor is making new product decisions, it can be used to determine how large the sales of a new product must be for the company to achieve profitability. BEP is the point where the company covers all the cost of investing in a project. It is the point in which the total sales equal total costs necessary to achieve these sales. It's a technique that helps managers to determine the point at which revenues and costs will be equal. There are two types of costs associated with the product especially where a company is involved in the production of a product. Fixed costs are the costs incurred by the business regardless of the level of the output e.g. salaries, rent and mortgage payment, taxes and rates, operational costs. Variable costs are costs that results from the production of the products such as raw materials, or direct labour.

Total costs=Fixed costs + Variable costs

The total cost line never begins at zero because the FC is always there even if nothing has been sold. Total cost is directly proportional to the volume of the output. The point at which R=C is determined by plotting the total revenue line and the total cost line on the same graph and Break Even Point is the point where the two lines meet. The total revenue is calculated by multiplying the projected selling price by volume of the output.
To determine the break-even point a manager plots the total revenue and the total cost on the same graph. Breakeven point is the point at which the company is neither making a profit nor making a loss. The total cost line crosses the total revenue line. To calculate BEP, a manager requires to have ;the selling price per unit of the product, level of fixed costs and variable costs.

TOTAL REVENUE (TR) = unit price x sales

TOTAL COST (TC) = FIXED COSTS (FC) + VARIABLE COSTS(VC)

If a company produces and sells less than the break-even point it makes a loss and vice versa. If the BEP is too high managers should be able to; Increase the income by raising the selling price of the product and making the product more competitive or Combine the two.

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marto answered the question on March 4, 2019 at 07:53