entrepreneurship and small business management chapter 12 understanding and managing start-up,...

Entrepreneurship and Small Business Management

Chapter 12 Understanding and ManagingStart-up, Fixed, and Variable

Costs

© 2012 Pearson Education, Upper Saddle River, NJ 07458.

All Rights Reserved.2

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.




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 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




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 MarginA 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 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.




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

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




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)




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 chapter 12 understanding and managing start-up,...

Documents

pearson education

upper saddle river

business startup

steve mariotti

rent slide

contribution margin

initial investment

investment net cash