Task
4
Financial Planning
Explain
the importance of financial planning within the game development process.
Financial
Planning
Financial planning (setting up a budget) a business is
extremely important. It helps a business become more profitable, checking how
much money they actually need to spend for workers (labour, rent etc.) and
equipment (insurance etc.). This information can help a business to not spend
more than they have to. There are three concepts needed to make a budget.
Fixed Costs:
Fixed costs, rent, utilities, labour, insurance etc., will
not increase or decrease due to any change in sales, regardless of the sales
increasing or decreasing. This means that if there are more sales then the
fixed costs have less effect on the net profit.
Net profit= gross profit – fixed cost
Variable Costs:
Unlike fixed costs, variable costs increase and decrease depending
on sales. For example, if you sell hotdogs, your variable costs would include
the cost of the hotdog sausage, the buns, condiments as well as packaging.
Your variable costs can always be expressed as a percentage
of your sales. E.g. if the cost of buns, hotdog sausage, etc. for a hotdog that
sells for £1 is 60p or 60%, then you can assume that if you sell ten hotdogs or
£10 in sales that your variable costs will be 60% of that or £6.
With this data you can figure your gross profit and gross
profit percentage.
Sales - Variable Costs = Gross Profit
£1 – 60p = 40p
Gross Profit ÷ Sales = Gross Profit Percentage
40p ÷ 100p = 40%
This allows us to determine the net effect of increases and
decreases in sales.
Break Even Point:
The break-even point is the level of sales where you neither
make money nor lose money.
It is the level of sales where the gross profit is the same
as the fixed costs. For example, if your business’ fixed costs are £400, we
have £1,000 in sales and our gross profit percentage is still 40%.
If we sell hotdogs for a £1 each, we must sell 1000
hamburgers to break even. The break-even point is important because it lets us
know what volume we must sell to keep from losing money. And, with a little
modification, it will also tell us how much we must sell to produce a given
amount of net profit.
Monitoring:
Once a budget is set up, it needs to be compared to the
actual figures every month, and you need to look for differences and establish
why they are there.
Adjust expenditure or sales efforts as you go along to bring
the next group of numbers in line with the budget.
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