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Entrepreneurship

Entrepreneurship. Chapter 6 Tracking Fixed and Variable Costs. Variable Costs. Variable costs vary (change) with sales: 1. Cost of goods sold (COGS) – cost of materials, labor 2. Other variable costs – commisions, shipping, handling etc. Fixed Operating Costs.

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Entrepreneurship

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  1. Entrepreneurship Chapter 6 Tracking Fixed and Variable Costs Mariotti: Entrepreneurship

  2. Variable Costs Variable costs vary (change) with sales: 1. Cost of goods sold (COGS) – cost of materials, labor 2. Other variable costs – commisions, shipping, handling etc. Marriotti: Entrepreneurship

  3. Fixed Operating Costs Fixed operating costs must be paid whether or not the business makes any sales. USAIIRD: • Utilities • Salaries • Advertising • Interest • Insurance • Rent • Depreciation (method used to “expense” expensive pieces of equipment) Marriotti: Entrepreneurship

  4. Contribution Margin Marriotti: Entrepreneurship

  5. Average Contribution Margin A business selling a variety of products can use average COGS to determine an average contribution margin. Marriotti: Entrepreneurship

  6. Economics of One Unit Marriotti: Entrepreneurship

  7. Depreciation Makes Records More Accurate • If you buy a computer that will last 4 years, spread the expense out over 4 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. Marriotti: Entrepreneurship

  8. Insurance Protects Business • Fire and other natural disasters • Theft • Liability (lawsuits) Buy insurance to protect your business from: Marriotti: Entrepreneurship

  9. Basic Coverage for Small Business Required by most states: • Workers’ Compensation • Disability Insurance • Auto Insurance Premium: monthly payment on insurance policy Deductible: amount of loss you agree to cover Lower deductible = higher premium Marriotti: Entrepreneurship

  10. Lying About Your Product Is Fraud • If a customer can prove that you knew your product/service was dangerous, you can be forced by a court to pay damages. • Companies that sell products/services that can cause harm (airlines, for example) must inform customers of dangers and carry sufficient insurance. Marriotti: Entrepreneurship

  11. Fixed Operating Costs can be Dangerous to a Business • Fixed costs must be paid even when a business has no sales. Bills must be paid! • Keep at least 3 months fixed costs as a cash reserve before opening your business. • Change fixed costs to variable costs wherever possible. Marriotti: Entrepreneurship

  12. Start-Up Investment • One-time expense of starting a business • Brainstorm every cost to avoid surprises • Ask advisors to go over your list • Add 10% for emergencies and costs you overlooked Marriotti: Entrepreneurship

  13. Payback Start-Up Investment ($1,000) Net Profit per month ($400) Tells investors how long it will take business to earn enough profit to cover start-up costs. = 5 months Marriotti: Entrepreneurship

  14. Accounting: Keeping Track of Money Inflows and Outflows Financial statements: • Income statement • Cash flow statement • Balance sheet Keep good daily records of cash inflows and outflows in order to create financial statements that will describe your business’s performance at a glance. Marriotti: Entrepreneurship

  15. 3 Reason to Keep Good Daily Records • Good records show you how to make your business more profitable. • Good records will prove your business is profitable. • Good records prove payments have been made. • Good records prove you have paid required taxes. Marriotti: Entrepreneurship

  16. Receipts and Invoices • Receipt: paper with date, amount of purchase • Invoice (bill): paper with date, amount of payment due on purchase Keep a copy of financial records in location away from business office. Back up all computer records. Marriotti: Entrepreneurship

  17. Open Business Checking Account • Avoid using cash for business: Use checks, get receipts. Keep a paper trail. • Deposit money from sales in checking account right away. Marriotti: Entrepreneurship

  18. “Cash Only” Accounting • Only make entry in accounting journal when you receive money or pay out money. • Each entry on left side of journal must have a matching entry/description on the right side. Marriotti: Entrepreneurship

  19. Journal Left Side Right Side Marriotti: Entrepreneurship

  20. Blank Accounting Journal—Left Side Marriotti: Entrepreneurship

  21. Blank Accounting Journal—Right Side Marriotti: Entrepreneurship

  22. Return on Investment (ROI) • Net Profit/Investment = ROI • To express ROI as a percentage, multiply by 100. ROI X 100 = ROI% • ROI tells you the rate of return on your start-up investment in the business. Marriotti: Entrepreneurship

  23. NFTE Journal Marriotti: Entrepreneurship

  24. NFTE Journal Marriotti: Entrepreneurship

  25. Relationship Between Accounting Journal and Financial Statements Marriotti: Entrepreneurship

  26. Summary Ledger with Income Statement and Balance Sheet Marriotti: Entrepreneurship

  27. 3 Rules for Managing Cash • Collect cash as soon as possible. • Delay paying bills as long as possible without damaging relationships with suppliers. • Always know your cash balance. Use accounting journal to calculate it every day. Marriotti: Entrepreneurship

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