Intro to the Financials Part 2

4 Types of Businesses

4 Types of Businesses Manufacturer Wholesaler Retailer Service Creates products with raw materials Sells in bulk to wholesalers Buys products in bulk from manufacturers Sells in smaller bundles to retailers Buys smaller bundles from wholesalers Sells single items to consumers Offers a unique set of skills or expertise at a fee

4 Types of Businesses: Defining the Unit of Sale – A T-shirt Business Manufacturer Wholesaler Retailer Service Sells in bulk to wholesalers 1 Unit = 1,000 t-shirts Sells in smaller bundles to Retailers 1 Unit = 12 t-shirts Sells single items to consumers 1 Unit = 1 t-shirt Offers a unique set of skills or expertise at a fee 1 Unit = 4 hours of babysitting service

Costs of Starting and Running a Business Start-up Investment The initial amount needed to starting your business Office Supplies Your Product Materials Equipment Legal, Incorporation, etc. 3 months cash (operating) reserve

10th Ed. – Start-Up Investment Ex: Ralph’s Gift Basket Shop Business Certificate $100.00 Gift Basket Components $275.00 250 Business Cards $20.00 100 flyers $50.00 Office Supplies $45.00 3 months fixed costs $120.00 Total Start-Up Investment $610.00

Activity The Gift Basket Shop Create a gift basket, considering a specific type of customer: What’s the name of the sandwich? Who’s the target consumer? How much does it cost to produce the sandwich (labor and materials)? 4. Based on your costs, what’s your selling price?

Fixed and Variable costs are defined by how they relate to sales: The 2 Costs of Running a Business Fixed and Variable In NFTE’s 10th Edition: Fixed and Variable costs are defined by how they relate to sales: Fixed costs: Variable Costs:

Fixed and Variable costs are defined by how they relate to sales: The 2 Costs of Running a Business Fixed and Variable In NFTE’s 10th Edition: Fixed and Variable costs are defined by how they relate to sales: Fixed costs: do not fluctuate with sales Variable Costs: do fluctuate with sales or production

The 2 Costs of Running a Business Fixed and Variable Variable Costs: costs that fluctuate with sales Divided into 2 categories: a) or b)

The 2 Costs of Running a Business Fixed and Variable Variable Costs: costs that fluctuate with sales Divided into 2 categories: a) Cost of Goods Sold (COGS) or b) Other variable costs

The 2 Costs of Running a Business Fixed and Variable Variable Costs: costs that fluctuate with sales Cost of Goods Sold

The 2 Costs of Running a Business Fixed and Variable Variable Costs: costs that fluctuate with sales Cost of Goods Sold The cost of producing one additional unit of the product you sell Ex: If I’m in the watch business and it costs me $5 to purchase 1 watch that I sell, my cost of goods sold (or COGS) for 1 watch is $5.

Costs of Starting and Running a Business Cost of Goods Sold for a “Gift Basket”

Costs of Starting and Running a Business (cont.) Cost of Goods Sold for a “Gift Basket” A Manufacturing Business COGS/= Labor Cost/ + Materials/ Gift Basket Unit Unit

b) Other Variable costs The 2 Costs of Running a Business Fixed and Variable Variable Costs: costs that fluctuate with sales b) Other Variable costs

b) Other Variable costs The 2 Costs of Running a Business Fixed and Variable Variable Costs: costs that fluctuate with sales b) Other Variable costs Commission Packaging Shipping

Also called “Cost of Sales/unit” Costs of Starting and Running a Business (cont.) Variable Costs per unit for a “Gift Basket” Variable Cost/= COGS/ + other var. costs/ Gift Basket Unit Unit Also called “Cost of Sales/unit”

COGS/= Labor Cost/ + Materials/ Costs of Starting and Running a Business (cont.) Cost of Goods Sold for a Service Business A Service Business COGS/= Labor Cost/ + Materials/ Unit Unit Unit

A Baby-Sitting Service Costs of Starting and Running a Business (cont.) Cost of Goods Sold for a Service Business A Baby-Sitting Service COGS/Per Unit = Labor Cost/ + Supplies/ Service Business Unit Unit

Costs of Starting and Running a Business (cont.) Unit of Sale: 4 hours of Babysitting

Costs of Starting and Running a Business (cont.) Unit of Sale: 4 hours of Babysitting Labor: Value of time/hour: $10.00 # hours to perform service x 4 Total value of labor/unit $40.00

Costs of Starting and Running a Business (cont.) Unit of Sale: 4 hours of Babysitting Supplies: Snacks $2.00 Arts & Crafts $2.00 Total $4.00

Costs of Starting and Running a Business (cont.) Unit of Sale: 4 hours of Babysitting Labor: $40.00 + Supplies: $ 4.00 Total COGS for Babysitting Service $44.00

b) Other Variable costs The 2 Costs of Running a Business Fixed and Variable Variable Costs: costs that fluctuate with sales b) Other Variable costs Commission Packaging Shipping

Costs of Starting and Running a Business (cont.) Unit of Sale: 4 hours of Babysitting Other Variable Costs: + Gas: $ 3.00 Other Variable Costs for Babysitting Service $ 3.00

Also called “Cost of Sales/unit” Costs of Starting and Running a Business (cont.) Variable Costs per unit for a Service Business Variable Cost/= COGS/ + other var. costs/ Unit Unit Unit Also called “Cost of Sales/unit”

Costs of Starting and Running a Business (cont.) Unit of Sale: 4 hours of Babysitting COGS: $44.00 + Other V.C: $ 3.00 Variable Cost/unit For Babysitting Service: $47.00

Keystoning

Keystoning Keystoning is doubling your variable cost per unit to set your selling price.

The Production/Distribution Chain or The Supply Chain Var. Cost: $1.00 Sell. Price: $2.00 Var Cost: $2.00 Sell. Price: $4.00 Var. Cost: $4.00 Sell. Price: $8.00 Prch. Pr.: $8.00 Manufacturer Wholesaler Retailer Consumer

The Production/Distribution Chain or The Supply Chain Personal Shopper Broker Broker COGS: $1.00 Sell. Price: $2.00 COGS: $2.00 Sell. Price: $4.00 COGS: $4.00 Sell. Price: $8.00 Prch. Pr.: $8.00 Manufacturer Wholesaler Retailer Consumer or Distributor

Economics of 1 Unit Formula:

Economics of 1 Unit Formula: Gross Profit = Selling Price – Var. Cost per unit per unit per unit (COGS/ + other var. costs) per unit per unit

Calculating Gross Profit: Example If we sold 90 gift baskets in the month of December, what was our total gross profit for the month?

Calculating Total Gross Profit Formula: Total Sales – Total COGS – Total “Other Variable Costs” = Total Gross Profit

Calculating Total Gross Profit Formula: Total Sales – Total COGS – Total “Other Variable Costs = Total Gross Profit Can we use ALL this money towards travel or retirement?

Fixed Costs The 2 Costs of Running a Business Fixed and Variable costs that stay the same whether or not a sale is made Ex: Rent

The 2 Costs of Running a Business Fixed and Variable Fixed Costs U S A I R D O

Fixed Costs Utilities Salaries Advertising Insurance Interest Rent The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance Interest Rent Depreciation Other

Fixed Costs Utilities – The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities –

Utilities – a commodity of service. The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities – a commodity of service. Ex: water, electricity, gas, etc.

Fixed Costs Utilities Salaries – The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries –

Salaries – regular payment for the The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries – regular payment for the services of an employee.

Fixed Costs Utilities Salaries Advertising – The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising –

Advertising – ways used to make the The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising – ways used to make the product and/or business known to the public. Ex: newspaper, television, radio, internet, billboards, brochures, etc.

Fixed Costs Utilities Salaries Advertising Insurance – The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance –

Insurance – protects bus. from things that The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance – protects bus. from things that could go wrong Ex: fire, theft, flood, etc. Premiums: Monthly fees for the use of insurance.

Fixed Costs Utilities Salaries Advertising Insurance Interest – The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance Interest –

Interest – monthly fee paid for borrowing The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance Interest – monthly fee paid for borrowing money.

Fixed Costs Utilities Salaries Advertising Insurance Interest Rent – The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance Interest Rent –

Rent – fixed monthly payments in return for The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance Interest Rent – fixed monthly payments in return for the right to occupy property

Fixed Costs Utilities Salaries Advertising Insurance Interest Rent The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance Interest Rent Depreciation –

Depreciation – the loss in value, or aging, of The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance Interest Rent Depreciation – the loss in value, or aging, of an asset over time.

Fixed Costs Utilities Salaries Advertising Insurance Interest Rent The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance Interest Rent Depreciation Other –

Other – a “catch-all” for items that don’t fit in The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance Interest Rent Depreciation Other – a “catch-all” for items that don’t fit in other categories

Fixed Costs Utilities Salaries Advertising Insurance Interest Rent – The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance Interest Rent –

Rent – fixed monthly payments in return for The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance Interest Rent – fixed monthly payments in return for the right to occupy property

Fixed Costs Utilities Salaries Advertising Insurance Interest Rent The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance Interest Rent Depreciation –

Depreciation – the loss in value, or aging, of The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance Interest Rent Depreciation – the loss in value, or aging, of an asset over time.

Fixed Costs Utilities Salaries Advertising Insurance Interest Rent The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance Interest Rent Depreciation Other –

Other – a “catch-all” for items that don’t fit in The 2 Costs of Running a Business Fixed and Variable Fixed Costs Utilities Salaries Advertising Insurance Interest Rent Depreciation Other – a “catch-all” for items that don’t fit in other categories

The Income Statement: The Scorecard of Business Total Sales Total COGS Total Other Variable Costs = Total Gross Profit - Fixed Costs (USAIIRDO) = Profit before taxes - Taxes (25%) = Net Profit or (Loss)

The Income Statement: The Scorecard of Business Also called The Profit and Loss Statement: Shows the revenues and expenses of a business and the resulting profit or loss over a specific period of time Income statements that forecast future performance are called Pro Forma or Projected Income Statements

The Power of The Income Statement Are you succeeding at meeting customer needs? Are you succeeding at creating value? Are you keeping good records?

The Income Statement: The Scorecard of Business How much Net Profit would we have generated for the month of December if we had $250 in fixed costs? Total Sales Total COGS Total Other Variable Costs = Total Gross Profit - Fixed Costs (USAIIRDO) = Profit before taxes - Taxes (25%) = Net Profit or (Loss)

Calculating Return on Investment (ROI) Gains on an investment usually expressed as a percentage of the original investment

Calculating Return on Investment (ROI) Elements of Investment Risk: The degree of chance that you could lose money on an investment Time: How long it takes to obtain a return on the investment Liquidity: How easy or difficult it is to ontain

Calculating Return on Investment Formula: net profit investment ROI = X 100

Calculating Return on Investment If we invested $2,000 to start this business, what is our return on investment by the end of December? Formula: net profit investment ROI = X 100

Calculating Return on Sales (ROS) Shows net profit as a percentage of total sales. Formula: net profit Total Sales ROS = X 100

Calculating Return on Sales By the end of December, what is our return on sales? Formula: net profit Total Sales ROS = X 100

If We Say:

If We Say: THEN we can say:

for every $1.00 we have in sales, we make $.18 in net profit If We Say: AND, we can say: for every $1.00 we have in sales, we make $.18 in net profit

Business is Basketball Bill Dockerty Providence City Championship Home Away 62 60 Quarter 4 Time 1:52 Possession Time outs 1 Player Pts Fouls 12 46 14 2 22 16 11 13 6 3 8 10

$ 440.00 Mo. of Aug. Mo. of Sept. $2,280.00 = 100% - 960.00 $2,280.00 = 100% - 960.00 $1,320.00 Fixed Costs $ 440.00 $ 880.00 $ 220.00 $ 660.00 = 29%

For every $1.00, we have in sales, made $.29 in net profit $ 440.00 Mo. of Aug. Mo. of Sept. $2,280.00 = 100% - 960.00 $1,320.00 Fixed Costs $ 440.00 $ 880.00 $ 220.00 $ 660.00 = 29% For every $1.00, we have in sales, made $.29 in net profit

Calculating Break Even Units Calculates how many units must be sold to cover fixed costs. Monthly Fixed Costs Gross Profit per Unit Formula: Break Even = Break Even Point = ______ Gift Baskets

Calculating Break Even Units What are our Break Even Units? Monthly Fixed Costs Gross Profit per Unit Formula: Break Even = Break Even Point = ______ Gift Baskets per month Here, we neither make profit nor lose money