Question

You have decided to start your own small business selling SkatePlates—mini skateboards which clip on to users’ shoes. You think you have a good product, but know there is lots of competition for the target market you hope will buy your product.

You hope to quickly develop a solid customer base before consolidating in years 2–4 of your business. In five years you hope to enter a growth phase.

You recognise the importance of developing profit goals/ targets and have decided to document the various methods so they remain at the forefront of your mind.

1. Describe at least four methods you could use to help you set appropriate profit goals/ targets.

Answer 1

Methods for setting profit goals/ target:-

1.Determination of targeted rate of return on invested capital:- This method is the basic method of setting profit goals of an organisation as first of all we should know that how much we are invested in our business and how much return it will give . hence by determining return of invested capital one can projected that, this much amount of profit should be earned from this business in relevant year.To calculate this number, divide forecasted net profit by total capital (long-term debt plus shareholder equity).

2. Calculation of projected gross profit margin :-This method is also an another important way by whic one estimate their profit they want from their business after take into account all direct expenses.Take your projected net profit and add forecasted selling, and administrative expenses. This will give you a forecasted gross profit margin. In coming up with your expense projection, plan to keep a tight rein on costs, but remember you might want to beef up selling and marketing spending to deliver more revenue and help achieve your goals.

3. Forecast cost of good sold and other relevant expense :-Estimation of cost of any product and other expenses which are relevant for starting up a new business is very important for setting their goals. Once expenses is calculated than we can estimate our profit easily.

4.Preparation of  sale forecasting by month and product line:-Use the exercise as an opportunity to contact your customers to ask about their purchasing intentions. Then, estimate the sales you expect to receive from customers and the sales you will need to generate through a marketing and sales program.