Entrepreneurship

1. Entrepreneurship Chapter 7 Understanding and Managing Start-Up, Fixed, and Variable Costs

2. Start-Up Investment • One-time expense of starting a business • Brainstorm every cost to avoid surprises • Ask advisors to go over your list • Add 10% for emergencies and costs you overlooked

3. Payback Start-Up Investment ($2,000) Net Profit per month ($400) Tells investors how long it will take business to earn enough profit to cover start-up costs. = 5 months

4. Fixed & Variable Costs • Variable Costs - change based upon the volume sold • Fixed Costs - paid regardless of whether or not sales are being generated

5. Economics of One Unit

6. Variable Costs • Change with sales • Cost of goods sold (COGS) or Cost of services sold (COSS) • Cost of materials & direct labor • Other variable costs • Commissions, shipping, handling, & the like

7. Contribution Margin

8. Average Contribution Margin A business selling a variety of products can use average COGS to determine an average contribution margin.

9. Fixed Operating Costs Fixed operating costs must be paid whether or not the business makes any sales. USAIIRD: • Utilities • Salaries • Advertising • Interest • Insurance • Rent • Depreciation

10. Depreciation Makes Records More Accurate • 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.

11. Fixed Operating Costs Can Be Dangerous to a Business • Fixed costs must be paid even when a business has no sales. Bills must be paid! • Keep at least 3 months fixed costs as a cash reserve before opening your business. • Change fixed costs to variable costs wherever possible.

12. Accounting: Keeping Track of Money Inflows and Outflows Financial statements: • Income statement • Cash flow statement • Balance sheet Keep good daily records of cash inflows and outflows in order to create financial statements that will describe your business’s performance at a glance.

13. Good Daily Records • Show ways to make your business more profitable • Document your business profitability • Prove payments have been made • Record that taxes are paid

14. Receipts and Invoices • Receipt = document with date, amount of purchase • Invoice (bill) = document with date, amount of payment due on purchase • Keep a copy of financial records in location away from business office. • Back up all computer records.

15. Business Checking Account • Avoid using cash for business: Use checks, get receipts. Keep a paper trail. • Deposit money from sales in checking account right away.

16. “Cash Only” Accounting • Only make entry in accounting journal or your accounting software when you receive money or pay out money. • Each entry on left side of journal must have a matching entry/description on the right side. • Reconcile your accounting monthly.

17. Income Statement • Tracks sales & costs • Shows whether a business is profitable • Covers a range of dates • Can be used to determine opportunities for cost reductions or revenue increases

18. Return on Investment (ROI) • Net Profit/Investment = ROI • To express ROI as a percentage, multiply by 100. ROI x 100 = ROI% • ROI tells you the rate of return on your start-up investment in the business.

19. Balance Sheet • Shows performance with respect to paying off debt & increasing equity • Snapshot of what is owned & owed • Must balance (Assets = Liabilities + Equity)

20. Rules for Managing Cash • Collect cash as soon as possible • Delay paying bills as long as possible without damaging relationships with suppliers • Always know your cash balance

21. Accounting Tips • Keep your accounting current • Maintain at least 3 months fixed operating costs in reserve • Use accounting software systems if possible