Entrepreneurship and small business management chapter 12

Entrepreneurship and Small Business Management Chapter 12 Understanding and Managing Start-up, Fixed, and Variable Costs...  Analyze your fixed operating costs and calculate gross prof

Entrepreneurship and Small

Business Management

Chapter 12

Understanding and Managing

Start-up, Fixed, and Variable Costs

Ch 12 Performance Objectives

 Identify the investment required for

business startup.

 Describe the variable costs of starting

a business.

 Analyze your fixed operating costs and

calculate gross profit.

 Set up financial record keeping for

your business.

Start-Up Investment

 Seed capital is the

one-time expense of

starting a business.

 Brainstorm every cost

to avoid surprises.

 Consult advisors and

research industry

business plan models.

 Include a cash

reserve for

emergencies.

Predict the Payback Period

Start-up investment

Net cash flow per mo.

This estimate tells investors how long

it will take your business to bring in

enough cash to cover the start-up

investment.

= no of months

Estimate Net Present Value

 NPV—technique used to determine the

current value of a proposed investment

 Information used to calculate NPV:

 Initial investment

 Required rate of return (%)

 Annual net cash flows

 If NPV is a positive value, the investment will have a positive return.

Variable Costs

 Change based on sales and production

 Cost of goods sold (COGS) or Cost of

services sold (COSS)

 Cost of materials

 Cost of labor

 Other variable costs

 Sales commissions

 Shipping and handling

Finding the Contribution Margin

Average Contribution Margin

A business selling a variety of products can

use an average COGS to determine an

average contribution margin.

Fixed Operating Costs

 Do not change based on sales/production

 USAIDIR (common fixed operating costs)

 Utilities (gas, electric, telephone, Internet)

 Salaries (indirect labor)

 Advertising

 Insurance

 Depreciation

 Interest

 Rent

Depreciation Makes Records

More Accurate

 If you buy a computer that will last

four years, spread the expense out

over four 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.

Fixed Operating Costs Can be

Dangerous to a Business

 Fixed costs must be paid whether or not

your business has a gross profit.

 Be careful about taking on additional

fixed costs.

 Change fixed costs to variable costs

wherever possible.

 Keep a cash reserve as a cushion of

protection in case of emergencies.

Keeping Good Records

 Accounting—tracking the inflows and

outflows of your business

 Good records enable you to…

 Create financial statements

 Determine how to improve business profits

 Show investors the firm’s performance

 Prove that payments have been made

 Make audits go more smoothly

Good Accounting Practices

 Use computerized accounting software.

 Get a receipt for every purchase.

 Create an invoice for every sale.

 Backup computer records regularly.

Good Accounting Practices

(continued)

 Keep a copy of financial records in a

location away from the business office.

 Get a checking account for business

use only.

 Use checks instead of cash to pay business expenses.

 Deposit money from sales right away.

Cash Versus Accrual Methods

recorded when cash is paid or received

are recorded at the time they occur,

regardless of the payment date

Categories of Accounting Data

based on the number of units sold

be paid whether or not any sales are made

equipment expected to last a year or more

for part ownership (equity)

Categories of Accounting Data

(continued)

the business

including suppliers’ shipping costs

into the other expense categories