Lesson 1 Start-up Budget Module G: Entrepreneurship Unit 3: The Business Plan Part 2 – The Financial Plan Standard: Virtual enterprise students will secure appropriate funding to establish/operate a virtual enterprise and create, maintain, and utilize a business accounting system. Responsibility: In part, all virtual enterprises employees; in full, the Accounting Department Timeline: Weeks 3-8 for 10-hour program Weeks 6-12 for 5-hour program
Lesson Objective(s):
Virtual enterprise employees will: 1. Define basic accounting terms introduced in this lesson. 2. Distinguish between start-up costs and operating expenses. 3. Give examples of start-up costs and operating expenses. The Accounting Department will: 1. Create a start-up budget. 2. Develop a three-month operating budget.
What you need to know: Definition of a Budget A budget is a financial planning tool that includes an estimate of the anticipated income (money coming into the business from services provided and/or products sold to customers) and the anticipated expenses (money paid to others to operate the business) for a specific time period, usually 12 months. This 12month accounting period is called the fiscal year. In the virtual environment, the fiscal year begins April 1 and ends March 31. The Start-up Budget The start-up budget is used to determine how much money will be needed to start the company and keep it operating until the company makes a profit. Since businesses do not always make a profit the first year (or more), money is needed to keep the company going until enough money is generated to cover all the expenses. In the virtual environment, the start-up budget will include all of the start-up costs (items needed to start the company) plus three months of the operating expenses. The operating expenses will make up the operating
budget, a financial spending plan for the business. The start-up budget (start-up costs plus three-month operating budget) will be used in the next lesson to determine how much money you will need to borrow from the South Carolina Virtual Enterprise Network Bank to start your business.
Start-up Costs In order to start a business you need to have a facility in which to house the business, equipment and furnishings, utilities (electricity, water, telephone), people to do the work, and merchandise to sell. Start-up costs also include installation of fixtures and equipment, deposits for public utilities, licenses and permits, accounting and legal services, and business insurance. A special start-up cost is the start-up inventory. This is the dollar amount of the products you purchase to sell to your customers. In order to sell a product your company must purchase the product first. It then becomes part of your product inventory. Your business must purchase at least one of every product to start selling. The cost (what your company pays for the product) of each product is then increased to determine the selling price. The difference between the cost and selling price is the profit margin. The profit margin percent is the same profit margin percent for the industry in which the firm resides. The product inventory is purchased at cost (no sales tax and no shipping cost) from the SCVEN Trading Company. Operating Budget The operating budget is usually a twelve-month financial spending plan. The budget lists the type of expense and corresponding amount that will be paid on a monthly basis to keep the business operating. For virtual enterprises, prepare a three-month operating budget to determine how much money the company needs to borrow to start the business. Typical virtual enterprise operating expenses are: Advertising Expense (amount spent on promoting products and services to customers; publicity for grand opening, etc.). Business Insurance Expense (amount of insurance premium paid monthly for property, liability and other necessary business insurance). Electricity Expense Health Insurance
Interest Expense (amount of interest paid to the SCVEN Bank each month on any notes outstanding; interest is calculated at the rate of 8% for five years). Payroll Tax Expenses: Medicare Tax Expense (Employer’s share of Medicare tax equal to 1.45% of gross salaries paid to employees). Social Security Tax Expense (Employer’s share of Social Security tax equal to 6.2% of gross salaries paid to employees). Rent Expense Salary Expense (equal to the total gross salaries earned by employees for the period; if employees are not earning a salary during school breaks like Christmas, Easter, June, July, etc., there is no salary/payroll expense). Supplies Expense (an estimate of the supplies purchased during the month needed to operate the business). Telephone Expense Water Expense Workman’s Compensation Insurance
Note: Corporate federal income tax is paid on the profit a business earns during the period. These expenses will not be part of the operating expenses for start-up, but will be included in other financial reports.
What you need to do and how to do it: Note: This information is needed in the business plan. These tasks need to be completed by the Accounting Department. Task 1 Start-up Costs – Complete the start-up cost section of the Start-up Budget using the template provided. (Required for new businesses; continuing businesses should review the process.) 1. Open the Excel file, Start-up Budget Template, and click the “Start-up Budget” tab. 2. Identify items needed to start the business, research the cost of each item, calculate the total for each category, and enter the cost in the appropriate cell. 3. Save the spreadsheet. Task 2 Operating Budget --Create an operating budget.
1. Move to the “Operating Expenses” section of this worksheet. 2. Review the line items under operating expenses and determine the monthly expense for each line item. Use realistic costs based on information gathered about the business and facility. Realistic costs may be obtained from the Internet or from business partners in the local community. Understand that some expenses will occur for each month of the year (rent) while other expenses may only occur in months of operations (salaries, payroll taxes, etc.). 3. Key in the amount in the appropriate cell under the Operating Expenses section. Your totals for the three-month column should calculate automatically. 4. Save your spreadsheet 5. Print out the Start-up Budget worksheet. Review as a department and present your work to your VE Coordinator for approval. Include this document in the financial plan portion of the business plan.
Assessments: For virtual enterprise employees: Start-up Budget Activity For Accounting Department: Completion of Start-up Budget Virtual Enterprises, International™ Business Plan Written Competition Judges’ Rubric Materials Needed: Calculators Start-up Budget Activity Start-up Budget Template Resources: Eggland, Steven S., Les R. Dlabay, and James L. Burrow. Intro to Business. 5th ed. Cincinnati: South-Western, 2004. Greene, Cynthia L. Entrepreneurship Ideas in Action. 2nd ed. Cincinnati: SouthWestern, 2004. Townsley, Maria. Survivor’s Guide to Small Business. Cincinnati: Thomson SouthWestern, 2003 http://www.businessknowhow.net/hkh/startup.htm http://www.businesstown.com/accounting/projections