Essential Business Formulas and Management Processes

Posted on Oct 30, 2025 in Economy

Core Financial Formulas

Revenue, Profit, and Tax Calculations

Revenue (R(x)): R(x) = FC + VC(x) + PBT

Profit After Tax (PAT): PAT = PBT – CT

Corporate Tax (CT): CT = PBT × CTR / 100

Profit Before Tax (PBT): PBT = PAT / (1 – CTR)

The Purchasing Cycle

Requisition: Defining the type and number of items needed.
Value Analysis: Determining the lowest cost way to satisfy the request.
Supplier Selection: Evaluating prices, delivery times, quality, and other factors.
Order Placement: Issuing a formal purchase order.
Order Monitoring: Scheduling and tracking the order.
Order Delivery: Managing transportation, quality control, and payment processing.

Production Planning Steps

Routing: Defining the movement of a mechanical part or other piece of work from one operation to the next.
Loading: Determining the time required to perform a particular operation.
Scheduling: Specifying when an operation is to be performed at a machine.
Dispatching: Preparing and issuing work orders.
Follow-up: Keeping track of work completed.
Corrective Action: Implementing measures like scheduling overtime or shifting work to other machines.
Re-planning: Adjusting plans in response to changing market conditions, manufacturing methods, or labor force availability.

Inventory Management Systems

Periodic System 1 (Ideal/Automatic): An ideal, automatic system requiring frequent contact with the supplier. Abnormal situations include overstocking or stock-outs.
Periodic System 2: Stock-taking is required before placing an order, leading to potential stock-out situations.
Perpetual System: Continuous (perpetual) stock-taking is needed. Risk of stock-out during the lead time.

Functions of Pricing

Comparison: The price of a product allows the buyer to estimate its value or worth relative to other products.
Stimulation: Price acts as a signal, informing producers whether they should produce more goods, and consumers whether they should buy more goods.
Rationing: Determining who purchases a particular good based on the price of the good, the income of the buyer, and the expected utility of the purchase.

Key Pricing Formulas

Markup Pricing: Buying Price / (1 – Markup Percentage) = Selling Price
Break-Even Units: FC / (Price – VC) = Units to Break Even
Backward Calculation (Profit): (Price – VC) = Contribution Margin; Contribution Margin – FC = Profit

Pricing Strategies

Price Skimming

Involves setting a high initial price before competitors enter the market. This strategy is suitable when:

The product is high quality or the newest in the market.
Price elasticity is low.
The product is difficult to copy, allowing competitors to enter only later.
Consumers are perceived as status-conscious.

Note: Competitors may want to enter due to high profit but are prevented by technological advantages, legal protection (e.g., patents), or high investment needs.

Penetration Pricing

Involves setting a low initial price to quickly gain market share and discourage competitors. This strategy is suitable when:

Price elasticity is high (low price leads to high demand).
The product is easy to copy.
Consumers do not associate the low price with low quality.

Aim: To increase market share and discourage competitors from entering the market due to low profit margins.

Essential Budgeting Formulas

Production Budget

Sales (Units) + Planned Ending Inventory of Finished Goods – Beginning Inventory of Finished Goods = Units to be Produced

Purchasing Budget (Raw Materials)

Quantity to be Produced (Units) + Planned Ending Inventory of Raw Material – Beginning Inventory of Raw Material = Units to be Purchased

Cash Budget Structure

Beginning Cash Balance + Receipts (Collections) = Cash Available for Disbursements
Cash Available for Disbursements – Disbursements (Payment of Invoices, Wages, Other General Costs) = Surplus (Shortage)
Surplus (Shortage) – Minimum Desired Cash Balance = Cash Available for Investment (or Cash Needed)
Cash Available for Investment (Needed) ± Financing (Borrowings/Repayments) = Ending Cash Balance

Margin of Safety Calculations

Margin of Safety (in Units): Actual Units – Break-Even Units
Margin of Safety Ratio (Percentage): Margin of Safety (Units or Dollars) / Actual Sales (Units or Dollars)

Small Business Enterprise (SBE)

Advantages of SBEs

The owner is the boss and enjoys taking risks and making decisions.
The owner retains all profit.
Generally requires less initial investment and is easy to establish.
Quick response to changing market environments.

Disadvantages of SBEs

Often characterized by low capital.
Credit access may be difficult or expensive.
The responsibility of running an SBE cannot easily be delegated to someone else.

12 Steps to Establish a Small or Medium Enterprise (SME)

Set Objectives: The initial objective is usually profitability. Define other strategic goals.
Evaluate the Market: Conduct thorough market research (note the possibility of failure).
Determine the Cost of Required Assets: Identify and cost necessary operating assets.
Analyze Personnel Requirements: Determine staffing needs (full-time vs. part-time), associated costs, training, and employee promotion plans.
Prepare a Pro Forma Income Statement: Create a general financial outline and compare it against the profit objectives set in Step 1.
Choose the Right Legal Form: Select the optimal structure (e.g., partnership, sole proprietorship, corporation).
Raise the Needed Capital.
Pick a Good Location: This is especially crucial for retailers.
Prepare the Accounting System: Hire an accountant to set up proper bookkeeping procedures for tracking profit and taxes.
Draw Up the Marketing Plan: Formulate a marketing strategy to reach the target market, including selecting a pricing strategy (e.g., skimming or penetration pricing).
Obtain the Needed Permits: Secure necessary certification, tax identification numbers, and other legal requirements.
Begin the Business and Match Objectives with Performance: Monitor performance and change objectives if necessary.