Chapter 7: Understanding and Managing Start Up, Fixed and Variable Costs Flashcards
Seed Capital
Aka Start-up Investment: The money Required to start up a business
Prototype
A model/pattern that represents how a product would look and operate if produced.
How to avoid Start-Up Surprises
- Try to anticipate every possible cost by analysing all
- Talk to others in your industry about the start-up costs they failed to anticipate
- Research industry info and get quotes from potential suppliers
Cash Reserve
Emergency funds and a pool of cash resources
Pay Back Period
Estimated time required to earn sufficient net cash flow to cover a start up investment
Payback Period Formula
= Start-up Investment/ Net Cash Flow per Month
Notes on Payback Period Method
- Time Horizon is known, and timing of funds in clear
- This method does not consider future earnings, opportunities for alternative investments, or the overall value of the company
Net Present Value
-Initial Seed Capital + Annual Cash Flow
If result is positive, go ahead with the investment
Variable Costs
Expenses that vary directly with change in output.
Categories of Variable Costs
- Cost of Goods Sold:
- The cost of materials to make product/ deliver service
- Cost of Labour to make product/Deliver service - Other Variable Costs:
- Paying Commissions
- Shipping and Handling
Fixed Operating Costs
Expenses that do not vary with change in output
I SAID U R + Other Fx’s
Insurance Salaries (indirect Labour- managers, office staff, salesforce) Advertising Interest Depreciation Utilities (gas, electricity, telephone, WIFI) Rent Other Fixed Expenses
Depreciation
The percentage of the value of an asset is subtracted periodically to reflect the declining value.
Fixed Cost does not mean that the cost won’t change
Advertising- This cost changes based on management’s decisions (although low sales may cause a push up advertising costs)
Heating and Cooling Costs- The price of heating and cooling changes by weather and utility prices
Calculating Critical Costs
This helps you determine the most important factors with respect to costs.
Contribution Margin/Gross Profit Per Unit Formula
SP- (TVC and other VC’s)
Inventory Costs
Expenses associated with materials and direct labour for production until the product is sold.
Net Profit
The remainder of revenues - FC and VC and Taxes
Dangers of Fixed Costs
- Must be paid whether or not the business makes a profit
- If Sales< Fixed Costs, business will lose money
- If losses are prolonged, the business will have to close
Three Reasons to keep good records EveryDay
- Show you to make the business more profitable
- Document profitability and cash position
- Prove that payments have been made
Audit
A review of financial and business records to ascertain integrity and compliance with standards and laws
Use Accounting Software to keep records
- Microsoft
- QuickBooks
- Peachfree Software
Keep Receipts and Invoices
- For small businesses, work with a manual system, including a journal and files for staring records of your transactions
- As the business grows, you can add organizational tools
- If the company is intended to be big- use computer software from the start.
What is a Receipt?
A slip of paper or electronic document with the date and amount of the purchase.
How many Copies of records should you have?
At least 2
- Have Offsite storage, in case something should happen to business place
- If using software, back up data, and keep media (CD, external drive etc.) in a different location or back up to cloud storage
Managing business Finds
- Open a checking a/c for ONLY business purposes.
- Avoid using cash for business
- Deposit money from sales right away.
Categories of Costs
VC FC Capital Equipment Investment Loans (debt) Revenue Inventory Other Costs
