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									 UNIT 3 • SHOW ME THE MONEY: FINDING, SECURING, AND MANAGING IT



   UNDERSTANDING AND
 MANAGING START-UP, FIXED,                                         7
   AND VARIABLE COSTS
       ENTREPRENEURSHIP: Starting and Operating a Small Business
                                     Steve Mariotti and Caroline Glackin




Class Name
Instructor Name
Date, Semester
Performance Objectives
After this lecture, you should be able to complete the following Performance Objectives




  1. Identify the investment required for business startup.
  2. Describe the variable costs of starting a business.
  3. Analyze your fixed operating costs and calculate gross profit.
  4. Set up financial record keeping for your business.
7   What Does It Cost to Operate a Business?


To run a successful business, you will need to keep
  track of your costs and have more cash coming in
  than is going out.
Economics of one Unit (EOU)-because everything sold
  has related costs, a business can make a profit only
  if the selling price per unit is greater than the cost
  per unit.
7        Start-Up Investment

Seed Capital: one-time expense     Exhibit 7-2 Start-up Investment Checklist
   of opening a business.
                                   Item                        Cost   Assumptions
Prototype: a model or pattern
   that serves as an example of    Rent Deposit
   how a product would look
   and operate if it were          Signage
   produced.
                                   Utility Deposits

Brainstorm to Avoid Start-Up       Vehicle(s)
   surprises.                      Other 1

                                   Other 2
Research the Costs.
                                   Total Start-Up Assets

Keep a Reserve Equal to One-     Total Start-Up Requirements
   Half of Start-Up Investments.
   Cash Reserves: emergency      Contingency Funds (10%)
   funds and a pool of cash
   resources                     Start-Up with Contingency
7     Predict the Payback Period


 Payback period: estimated time required to earn sufficient
  net cash flow to cover start-up investments.


                    Start-Up Investment
                  Net Cash Flow per Month


 Estimate Value: a tool to determine the current value of
   proposed investments, of which net present value (NPV)
   is widely accepted as the most theoretically sound.
     Variable and Fixed Costs: Essential
7              Building Blocks

Variable Costs – expenses that vary directly with changes in
   production or sales volume.
1. Variable costs fall into two subcategories: Cost of Goods
Sold
   (COGS) or Cost of Services Sold (COSS)
- The cost of materials used to make the product (or deliver the service).
- The cost of labor used to make the product (or deliver the service).
2.   Other variable costs:
- Commissions or other compensation based on sales volume.
- Shipping and handling charges.


Fixed Costs – are expenses that must be paid regardless of
   whether or not sales are being generated.
7   Calculating Critical Costs


Calculating Total Gross Profit (Contribution Margin)-
 gross profit per unit-the selling price minus total
 variable costs plus other variable costs.
Calculating Economics of One Unit (EOU) When You
  Sell Multiple Products - a business selling a variety
  of products has to create a separate EOU for each
  item to determine whether each is profitable.
Inventory Costs-expenses associated with materials
  and direct labor for production until the product is
  sold.
7
    Exhibit 7-4 Manufacturing Business
                       Economics of One Unit (EOU) Analysis
                           Unit = 1 Hand-Painted T-Shirt
7     Average Contribution Margin

A business selling a variety of products can use average
COGS to determine an average contribution margin.
Exhibit 7-5 Retail Business
                 Economics of One Unit Analysis
                        Unit = 1 Candy Bar
7
7      Fixed Operating Costs

    Fixed operating costs -expenses that do not vary
    with changes in the volume of production or
    sales.

    7 Common fixed operating costs: USAIIRD:
•   Utilities
•   Salaries
•   Advertising
•   Interest
•   Insurance
•   Rent
•   Depreciation
7   Depreciation Makes Records More Accurate


Depreciation – the percentage of value of an asset
  subtracted periodically to reflect the declining value.


If you buy a computer that will last 4 years, spread the
   expense out over 4 years.


Subtract 25% of the computer’s cost from gross profit
  each year, instead of subtracting 100% of the cost
  from gross profit the first year.
7    Fixed Operating Costs Do Change over Time



    Fixed costs does not mean that costs never
      changes! For instance:
    Advertising or heating and cooling costs
       Allocate Fixed Operating Costs Where
 7                    Possible


Net Profit – the remainder of revenues minus fixed
 and variable costs and taxes.
For example: for every watch you sell, your total
  cost, fixed and variable, is $6.50. If you receive
  $15 for each watch, therefore, your profit before
  taxes is:

$15.00 Selling Price - $6.50 Total Cost per Unit = $8.50 Profit before
  Taxes
7   The Dangers of Fixed Costs




      If a business does not have
         enough sales to cover its
         fixed costs, it will lose
         money!
    How Inflation Can Hurt Small Business
7                  Owners



Inflation: the gradual, continuous increase in the prices
   of products and services.
    Using Accounting Records to Track Fixed
7             and Variable Costs



The systematic recording, reporting, and analysis of
  the financial transactions of a business (keeping
  statistical records of inflows and outflows) is called
  accounting.
    Three Reasons to Keep Good Records
7               Every Day


1. Will show you how to make your business more
   profitable.
2. Will document your business profitability.
3. Proves that payments have been made.


Audit- a review of financial and business records to
  ascertain integrity and compliance with standards
  and laws, particularly by the U.S. Internal Revenue
  Service (IRS).
7   Suggestions for Keeping Good Records


Accounting Software – There are many excellent
  computer software programs on the market to help
  the small business owner keep good records and
  generate financial statements and analytical reports;
  Intuit QuickBooks, Microsoft Office Accounting, &
  Peachtree Accounting.
7     Receipts and Invoices



    Receipt = document with date a amount of
       purchase. Always get a receipt for every
       purchase you make
    Invoice = a bill or statement, shows the
       product or service sold and the amount
       the customer is to pay.
7   Keep at Least Two Copies of Your Records



   Always keep a copy of your financial records in a
    location away from your business, preferably in a
    fire-retardant safe or concrete-lined file cabinet.
   If you are using software, back up your data and
    keep the media (CD, jump drive, etc…) in a
    different location.
    Use Business Checks for Business
7              Expenses


Avoid using cash for business. Use
 checks, get receipts. Keep a paper trail.


Deposit money from sales right away.
7   Cash versus Accrual Accounting Methods



Cash Accounting Method – the procedure wherein
  transactions are recorded as cash as paid out or
  received.
Accrual Method – Account process wherein
  transactions are recorded at the time of occurrence,
  regardless of the transfer of cash.
7     Recognizing Categories of Costs



Understanding the key categories of accounting data:
-   Variable Costs
-   Fixed Costs
-   Capital Equipment
-   Investment
-   Loans
-   Revenue
-   Inventory
-   Other Costs
                  KEY TERMS

accrual method           inflation
audit                    inventory costs
cash accounting method   net profit
cash reserve             payback period
contribution margin      prototype
depreciation             seed capital
fixed costs              variable costs
fixed operating costs

								
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