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M5 L1 Costs Associated with Business

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M5 L1 Costs Associated with Business

  1. 1. Costs Associated with Owning and Operating a Small Business.
  2. 2. Two Types of Costs Associated with Owning and Operating a Small Business <ul><li>Start-up costs which are costs that are required in order to open your business. </li></ul><ul><li>Continuing costs that are required in order to continue in business. </li></ul>
  3. 3. Start-up Costs Associated with Opening a Small Business Expenses that are initially paid to establish a business.
  4. 4. Types of start-up costs <ul><li>Working capital – amount of cash needed to operating your daily operations to maintain a positive cash flow until you begin receiving money from customers. </li></ul><ul><li>Rent or lease space </li></ul><ul><li>Equipment, furniture, and fixtures </li></ul><ul><li>Decorating and remodeling </li></ul><ul><li>Beginning inventory </li></ul><ul><li>Deposits for utilities </li></ul><ul><li>Accountant and lawyer fees </li></ul><ul><li>Licenses and permits </li></ul><ul><li>Advertising and promotion for grand opening </li></ul><ul><li>Contingency funds - Cash that is set aside for unexpected needs of the business. </li></ul>
  5. 5. Factors That Affect Start-up Costs <ul><li>Size of the business can affect start-up costs. </li></ul>Small businesses usually do not require as much money/capital to start as big businesses.
  6. 6. Factors That Affect Start-up Costs <ul><li>Nature of the business </li></ul><ul><ul><li>Manufacturing may require a warehouse, machines to make goods. </li></ul></ul><ul><ul><li>Retail needs a place to sale their goods or services as well as cash registers, check readers, etc. </li></ul></ul><ul><ul><li>Wholesale may need storage space as well as trucks for delivery. </li></ul></ul><ul><ul><li>Service will need operating space. </li></ul></ul>
  7. 7. Factors that affect start-up costs <ul><li>Amount and kind of inventory required </li></ul><ul><ul><li>Businesses such as a retail business would have to have products to sell. In order to open the small business entrepreneur would need money to purchase inventory. </li></ul></ul><ul><li>Customer credit policies </li></ul><ul><ul><li>In order to accept credit card, you must establish an account with a credit card company and have a bank account. A new business owner would need capital to open the account in order to establish credit policies. </li></ul></ul><ul><li>Other unique factors </li></ul><ul><ul><li>There may be cash requirements unique to your business. One example would be purchasing guard dogs if you have a security business. </li></ul></ul>
  8. 8. <ul><li>The estimated time between starting the business and earning income from sales . </li></ul><ul><ul><li>Establishing goals and target dates is beneficial in planning start-up costs. You must estimate how long before you will begin to make a profit and can meet your financial obligations. This provides the small business owner a timeline for establishing credit to obtain the start-up money needed and an expected timeline for paying back the money. </li></ul></ul><ul><li>The operating expenses that must be paid before cash is received from sales. </li></ul><ul><ul><li>You must plan how to cover expenses such as salaries, electric bill, phone service, etc. before you begin making a profit. Bills must be paid to maintain your credit rating. Good planning involves developing a plan to cover expenses and unexpected costs before you being to make money. </li></ul></ul>Factors that affect start-up costs
  9. 9. <ul><li>Continuing costs are the ongoing expenses resulting from the operation of the business. </li></ul><ul><li>Continuing costs include two types: </li></ul><ul><ul><li>Fixed costs </li></ul></ul><ul><ul><li>Variable costs </li></ul></ul>Continuing Costs
  10. 10. Fixed Costs <ul><li>Expenses that remain the same for a period of time. </li></ul><ul><li>Fixed costs include: </li></ul><ul><ul><li>Office salaries </li></ul></ul><ul><ul><li>Insurance </li></ul></ul><ul><ul><li>Rent or lease </li></ul></ul>
  11. 11. <ul><li>Variable costs include: </li></ul><ul><ul><li>Expenses that may change from month to month depending on the needs of the business </li></ul></ul><ul><ul><li>Costs that increase and decrease with the quantity of the good or service produced/sold. </li></ul></ul>Variable Costs
  12. 12. <ul><li>Examples of variable costs include: </li></ul><ul><ul><li>Salaries and wages for employees </li></ul></ul><ul><ul><li>Advertising and promotion </li></ul></ul><ul><ul><li>Supplies and materials </li></ul></ul><ul><ul><li>Utilities </li></ul></ul>Variable Costs
  13. 13. Sample Start-up Costs <ul><li>Office space rent………………………$500 </li></ul><ul><li>Office furniture……..…………………$650 </li></ul><ul><li>Computer/printer ..……………..……$2200 </li></ul><ul><li>Advertising …………...………………$350 </li></ul><ul><li>Office supplies………………………...$100 </li></ul><ul><li>Phone and electrical service…………..$250 </li></ul><ul><li>Fees and licenses……………………… $ 75 </li></ul><ul><li>Total……...$4125 </li></ul>If you determine that it will be 3 months before you make a profit, you will need to multiply the amount needed by 3 to determine the amount needed for start-up costs.
  14. 14. Ways to Control Costs <ul><li>Lease space instead of buying a building. </li></ul><ul><li>Lease equipment or purchase used equipment. </li></ul><ul><li>Monitor and control variable costs. </li></ul><ul><li>Minimize waste. </li></ul>

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