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Pass 4 – Financial Aspects •Produce a list of your start-up and running costs •Produce and explain the start-up budget which includes details of the predicted costs and revenues Start-Up Costs When a business launches a new product or service, they need to budget for start-up and running costs. They will need to estimate these costs in advance, to decide whether or not the product or service will be profitable. Start-up costs are one-off costs paid before a new business is set up. Running costs are the costs involved once the service has been launched, in order for it to continue. These are payable for as long as the service is available. Examples of start-up costs Examples of start-up costs include: new buildings for businesses, or extensions to accommodate expanding ones new machinery, vehicles or equipment (including installation and delivery costs) researching the target market for the new business initial advertising for the new business initial stock for the new business initial (first premium) payment towards insurance costs incurred through staff recruitment and training. Examples of running costs Examples of running costs include: rent advertising wages/salaries stock maintenance equipment loan repayments stationery interest on loans insurance payments communications utilities (telephone, Internet, etc) (electricity, gas, water, etc) mortgage repayments travel expenses (petrol, MOT, insurance, etc). Start-up or running costs? Deep Fried Fred’s Start-up costs £ Deep Fried Fred’s have Premises 410,000 set a maximum budget of Cash registers (x3) 600 Brand new delivery vans (x3) 37,500 £490,500 to cover start-up Refurbishment of shop 9,500 costs. The premises they Initial stock 500 Initial advertising 2,000 originally had in mind for Fryers for cooking (x3) 9,600 their new shop cost Total start-up costs 469,700 £410,000. The bigger Budget 490,500 premises are priced at Spending = OK £460,000. The spreadsheet they have set up allows Deep Fried Fred’s to see quickly and easily the effect on the total start-up costs of buying the larger premises. It also allows them to assess where they might cut costs in order to keep within budget. How might Deep Fried Fred’s buy the larger premises whilst keeping within their budget? My Start-Up Costs Start-up Stock I will have to buy … £1,000 - £5,000 Property Rent I will be renting my property in … (name £1,000 – the street and town). I will have to make £2,000 a “down payment”. Equipment I will have to buy fixtures and fittings £4,000 – such as … £8,000 Advertising I will need to inform local people that my £500 – …… shop is opening £1,500 Decoration of new I will need to decorate the interior £800 – shop £2,000 Any other costs I need some spare money available for £500 – unforeseen payments £2,000 TOTAL START-UP COSTS BUDGETED Are you under or over your budget? AMOUNT My Running Costs Stock I will have to top up my stock each £100 - £750 month depending on demand. I intend to spend £….. Each month Property Rent I will be renting my property in … (name £500-1000 the street and town). I will have to make monthly/weekly payments of £…. Utilities Each month I will need to pay for Gas, £50-150 Electric and Water. Advertising Each month I will need to spend an £50 – amount on advertising to tell people £500 about my products and services. Communication I will have to pay for a phone line and an £20 – internet connection. £60 Insurance I need to pay a monthly amount to cover £50 – my insurance for my business. £150 TOTAL RUNNING COSTS What can go wrong? Sometimes initial estimates can be inaccurate, which often results in the final costs for a project being much higher than originally predicted. There are a number of reasons for this: the original estimates were incorrect the decision-making process took a long time, and/or general delays in the process increased the overall cost inflation increased the overall cost the business did not properly monitor their costs. Reducing my start Benefits Drawbacks up budget option Spend less on stock Can still buy stock but at a cheaper Cheap stock might be of a worse quality and by finding a price therefore customers might not be happy with cheaper supplier product and might not come back therefore lose customers and money Spend less on rent This is a big expense as it is a The property might not be in as good a by finding a running cost as well as a start up location so people won’t come = no money, cheaper property cost therefore reducing the property might not be big enough therefore can’t store cost will have a big impact on costs enough products therefore customers can’t buy what they want and wont come back= no money Spending less on Could easily do it yourself and If you do it yourself might look tacky therefore decorations easily find cheaper suppliers of customers might not come = no money. If you paint etc use poor quality materials they might not last as long therefore you have to redo it costing you more money Spending less on Could easily find a cheaper supplier Might look tacky therefore your business equipment or buy second hand might get a bad reputation and people won’t come = no money Spend less on Could use cheaper methods that The method might not be as effective = fewer advertising could be just as effective e.g. having customers = less income black and white leaflets rather than colour Pass / Merit Write up your report under your start-up and running cost tables. • What can go wrong with your budget? • Are you over or under budget? How can you save money? • How does doing a start up budget help you with your business planning? • What will you do if you have a high unexpected cost? – Loan or Overdraft?
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