Entrepreneurship and Small Business Management
Chapter 12 Understanding and ManagingStart-up, Fixed, and Variable
Costs
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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.
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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.
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Predict the Payback Period
Start-up investmentNet 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
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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.
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Finding the Contribution Margin
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Average Contribution MarginA business selling a variety of products can use an average COGS to determine an average contribution margin.
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Depreciation Makes RecordsMore 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.
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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.
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
Good Accounting Practices
Use computerized accounting software.
Get a receipt for every purchase.
Create an invoice for every sale.
Backup computer records regularly.
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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.
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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)
© 2012 Pearson Education, Upper Saddle River, NJ 07458.
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Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin
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