Entrepreneurship and small business management chapter 12

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 Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 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 Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Predict the Payback Period Start-up investment = no of Net cash flow per mo months This estimate tells investors how long it will take your business to bring in enough cash to cover the start-up investment Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 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 Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 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 Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Finding the Contribution Margin Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Average Contribution Margin A business selling a variety of products can use an average COGS to determine an average contribution margin Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 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 Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 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 Entrepreneurship and Small Business Management, 1/e 10 © 2012 Pearson Education, Upper Saddle River, NJ 07458 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 Entrepreneurship and Small Business Management, 1/e 11 © 2012 Pearson Education, Upper Saddle River, NJ 07458 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 Entrepreneurship and Small Business Management, 1/e 12 © 2012 Pearson Education, Upper Saddle River, NJ 07458 Good Accounting Practices  Use computerized accounting software  Get a receipt for every purchase  Create an invoice for every sale  Backup computer records regularly Entrepreneurship and Small Business Management, 1/e 13 © 2012 Pearson Education, Upper Saddle River, NJ 07458 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 Entrepreneurship and Small Business Management, 1/e 14 © 2012 Pearson Education, Upper Saddle River, NJ 07458 Cash Versus Accrual Methods  Cash accounting—transactions are recorded when cash is paid or received  Accrual accounting— transactions are recorded at the time they occur, regardless of the payment date Entrepreneurship and Small Business Management, 1/e 15 © 2012 Pearson Education, Upper Saddle River, NJ 07458 Categories of Accounting Data  Variable costs—any costs that change based on the number of units sold  Fixed costs—business expenses that must be paid whether or not any sales are made  Capital equipment—money spent on equipment expected to last a year or more  Investment—money invested in exchange for part ownership (equity) Entrepreneurship and Small Business Management, 1/e 16 © 2012 Pearson Education, Upper Saddle River, NJ 07458 Categories of Accounting Data (continued)  Loans—funds borrowed to start or operate the business  Revenue—money received from sales  Inventory—items purchased for resale, including suppliers’ shipping costs  Other costs—anything that does not fit into the other expense categories Entrepreneurship and Small Business Management, 1/e 17 © 2012 Pearson Education, Upper Saddle River, NJ 07458  ... Shipping and handling Entrepreneurship and Small Business Management, 1/e © 2 012 Pearson Education, Upper Saddle River, NJ 07458 Finding the Contribution Margin Entrepreneurship and Small Business Management, ... surprises  Consult advisors and research industry business plan models  Include a cash reserve for emergencies Entrepreneurship and Small Business Management, 1/e © 2 012 Pearson Education, Upper... business Entrepreneurship and Small Business Management, 1/e © 2 012 Pearson Education, Upper Saddle River, NJ 07458 Start-Up Investment  Seed capital is the one-time expense of starting a business