Chapter 7: Understanding and Managing Start Up, Fixed and Variable Costs

Question 1

Seed Capital

Answer 1

Aka Start-up Investment: The money Required to start up a business

Question 2

Prototype

Answer 2

A model/pattern that represents how a product would look and operate if produced.

Question 3

How to avoid Start-Up Surprises

Answer 3

1. Try to anticipate every possible cost by analysing all
2. Talk to others in your industry about the start-up costs they failed to anticipate
3. Research industry info and get quotes from potential suppliers

Question 4

Cash Reserve

Answer 4

Emergency funds and a pool of cash resources

Question 5

Pay Back Period

Answer 5

Estimated time required to earn sufficient net cash flow to cover a start up investment

Question 6

Payback Period Formula

Answer 6

= Start-up Investment/ Net Cash Flow per Month

Question 7

Notes on Payback Period Method

Answer 7

1. Time Horizon is known, and timing of funds in clear
2. This method does not consider future earnings, opportunities for alternative investments, or the overall value of the company

Question 8

Net Present Value

Answer 8

-Initial Seed Capital + Annual Cash Flow

If result is positive, go ahead with the investment

Question 9

Variable Costs

Answer 9

Expenses that vary directly with change in output.

Question 10

Categories of Variable Costs

Answer 10

1. Cost of Goods Sold:
   - The cost of materials to make product/ deliver service
   - Cost of Labour to make product/Deliver service
2. Other Variable Costs:
   - Paying Commissions
   - Shipping and Handling

Question 11

Fixed Operating Costs

Answer 11

Expenses that do not vary with change in output

Question 12

I SAID U R + Other Fx’s

Answer 12

Insurance
Salaries (indirect Labour- managers, office staff, salesforce)
Advertising
Interest
Depreciation
Utilities (gas, electricity, telephone, WIFI)
Rent
Other Fixed Expenses

Question 13

Depreciation

Answer 13

The percentage of the value of an asset is subtracted periodically to reflect the declining value.

Question 14

Fixed Cost does not mean that the cost won’t change

Answer 14

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

Question 15

Calculating Critical Costs

Answer 15

This helps you determine the most important factors with respect to costs.

Question 16

Contribution Margin/Gross Profit Per Unit Formula

Answer 16

SP- (TVC and other VC’s)

Question 17

Inventory Costs

Answer 17

Expenses associated with materials and direct labour for production until the product is sold.

Question 18

Net Profit

Answer 18

The remainder of revenues - FC and VC and Taxes

Question 19

Dangers of Fixed Costs

Answer 19

• 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

Question 20

Three Reasons to keep good records EveryDay

Answer 20

1. Show you to make the business more profitable
2. Document profitability and cash position
3. Prove that payments have been made

Question 21

Audit

Answer 21

A review of financial and business records to ascertain integrity and compliance with standards and laws

Question 22

Use Accounting Software to keep records

Answer 22

1. Microsoft
2. QuickBooks
3. Peachfree Software

Question 23

Keep Receipts and Invoices

Answer 23

• 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.

Question 24

What is a Receipt?

Answer 24

A slip of paper or electronic document with the date and amount of the purchase.

Question 25

How many Copies of records should you have?

Answer 25

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

Question 26

Managing business Finds

Answer 26

• Open a checking a/c for ONLY business purposes.
• Avoid using cash for business
• Deposit money from sales right away.

Question 27

Categories of Costs

Answer 27

VC
FC
Capital Equipment
Investment
Loans (debt)
Revenue
Inventory
Other Costs