Starting and Running a Business: Introduction to the

Financials Part I

Earning Wealth

• Salary: Fixed amount per month

• Wage: Fixed amount per hour

• Commission: Percentage of every sale made

• Dividend: a share of the company’s profit

• Sale of the company

• Why is It better for an entrepreneur to be paid by salary, dividend, or sale of the company than by wages?

4 Types of Businesses

Manufacturer

4 Types of Businesses

Manufacturer

•Creates products with raw materials

•Sells in bulk to wholesalers

4 Types of Businesses

Manufacturer

•Creates products with raw materials

•Sells in bulk to wholesalers

Wholesaler

4 Types of Businesses

Manufacturer

•Creates products with raw materials

•Sells in bulk to wholesalers

Wholesaler

•Buys products in bulk from manufacturers

•Sells in smaller bundles to retailers

4 Types of Businesses

Manufacturer

•Creates products with raw materials

•Sells in bulk to wholesalers

Wholesaler

•Buys products in bulk from manufacturers

•Sells in smaller bundles to retailers

Retailer

4 Types of Businesses

Manufacturer

•Creates products with raw materials

•Sells in bulk to wholesalers

Wholesaler

•Buys products in bulk from manufacturers

•Sells in smaller bundles to retailers

Retailer

•Buys smaller bundles from wholesalers

•sells single items to consumers

4 Types of Businesses

Manufacturer

•Creates products with raw materials

•Sells in bulk to wholesalers

Wholesaler

•Buys products in bulk from manufacturers

•Sells in smaller bundles to retailers

Retailer

•Buys smaller bundles from wholesalers

•sells single items to consumers

Service

4 Types of Businesses

Manufacturer

•Creates products with raw materials

•Sells in bulk to wholesalers

Wholesaler

•Buys products in bulk from manufacturers

•Sells in smaller bundles to retailers

Retailer

•Buys smaller bundles from wholesalers

•sells single items to consumers

Service

•Offers a unique set of skills or expertise at a fee

4 Types of Businesses

Manufacturer

•Sells in bulk to wholesalers

1 Unit = 1,000 t-shirts

Wholesaler

•Sells in smaller bundles to Retailers

1 Unit = 12 t-shirts

Retailer

•sells single items to consumers

1 Unit = 1 t-shirt

Service

•Offers a unique set of skills or expertise at a fee

1 Unit =4 hours hiking trip

4 Types of Businesses

Create a gift favor, considering a specific type of customer:

1. What’s the name of the gift favor?

2. Who’s the target consumer?

3. How much does it cost to produce the

gift basket (labor and materials)?

4. Based on your costs, what’s your selling

price?

The Gift Shop Activity

If we were to start this business, what would we need to have?

The Gift Shop Activity

Start-up Investment– The initial amount needed to starting your

business• Office Supplies• Your Product• Materials• Equipment• Legal, Incorporation, etc.• 3 months cash (operating) reserve

Costs of Starting and Running a Business

Start-up Investment– The initial amount needed to starting your

business• Office Supplies• Your Product• Materials• Equipment• Legal, Incorporation, etc.• 3 months cash (operating) reserve

Costs of Starting and Running a Business

Ex: John’s Gift Basket ShopBusiness Certificate $100.00Basket Ingredients $275.00250 Business Cards $20.00100 flyers $50.00Office Supplies $45.00

Start-Up Investment

Ex: John’s Gift Basket ShopBusiness Certificate $100.00Basket Ingredients $275.00250 Business Cards $20.00100 flyers $50.00Office Supplies $45.00

3 months fixed costs $120.00

Start-Up Investment

Ex: John’s Gift Basket ShopBusiness Certificate $100.00Basket Ingredients $275.00250 Business Cards $20.00100 flyers $50.00Office Supplies $45.00

3 months fixed costs $120.00Total Start-Up Investment

$610.00

Start-Up Investment

In NFTE’s 10th Edition:Fixed and Variable costs are

defined by how they relate to sales:

Fixed costs: do not fluctuate with sales

Variable Costs: do fluctuate with sales or production

The 2 Costs of Running a BusinessFixed and Variable

Variable Costs: costs that fluctuate with sales

Divided into 2 categories:

The 2 Costs of Running a BusinessFixed and Variable

Variable Costs: costs that fluctuate with sales

Divided into 2 categories:

a) Cost of Goods Sold (COGS)

or

b) Other variable costs

The 2 Costs of Running a BusinessFixed and Variable

Variable Costs: costs that fluctuate with sales

a) Cost of Goods Sold– The cost of producing one additional unit of

the product you sell

Ex: If I’m in the watch business and it costs me $5 to purchase 1 watch that I sell, my cost of goods sold (or COGS) for 1 watch is $5.

The 2 Costs of Running a BusinessFixed and Variable

Cost of Goods Sold for a “Gift Favor”

COGS/= Labor Cost/ + Materials/ Gift Basket Unit Unit

Costs of Starting and Running a Business (continued)

Cost of Goods Sold for a “Gift Basket”

A Manufacturing Business

COGS/= Labor Cost/ + Materials/ Gift Favor Unit Unit

Costs of Starting and Running a Business (continued)

Variable Costs: costs that fluctuate with sales

b) Other Variable costs– Commission– Packaging– Shipping

The 2 Costs of Running a BusinessFixed and Variable

Variable Costs per unitfor a “Gift Basket”

Variable Cost/= COGS/ + other var. costs/ Gift Basket Unit Unit

Also called “Cost of Sales/unit”

Costs of Starting and Running a Business (continued)

Keystoning is doubling your cost of goods sold (COGS) to set your selling price.

Keystone

Manufacturer Wholesaler Retailer Consumer

COGS: $1.00Sell. Price: $2.00

COGS: $2.00Sell. Price: $4.00

COGS: $4.00Sell. Price: $8.00

Prch. Pr.: $8.00

The Production/Distribution Chainor

The Supply Chain

Formula:

Gross Profit = Selling Price – Var. Cost per unit per unit per unit

(COGS/ + other var. costs) per unit per unit

Also called “Cost of Sales/unit”

Economics of One Unit

In order to calculate, we must define our Unit of Sale

Economics of One Unit

Manufacturer

•Sells in bulk to wholesalers

1 Unit = 1,000 t-shirts

Wholesaler

•Sells in smaller bundles to Retailers

1 Unit = 12 t-shirts

Retailer

•sells single items to consumers

1 Unit = 1 t-shirt

Service

•Offers a unique set of skills or expertise at a fee

1 Unit =4 hour hiking trip

4 Types of Businesses

Defining the Unit of Sale

1. What is the unit of sale for our favor?

2. What is our Gross Profit per Unit?

Formula:

Gross Profit = Selling Price – Var. Cost per unit per unit per unit

(COGS/ + other var. costs) per unit per unit

Economics of One Unit