Entrepreneurship Week 11 Costs Estimates

Business Plan – Part 4 Cost List Describe all you will need to start your business – a store, a website, advertising, employees, product, etc. Determine the cost of each item for one year. Be complete. For a store, what is the cost of rent, electricity, cleaning, display racks, etc. How much will employees cost? If you are selling a product, how much will the product cost you?  

Business Plan – Part 4 Cashflow Chart Next, create a cashflow chart. Include startup costs, monthly costs, and marginal costs. Fixed costs include things like rent and salaries. Marginal costs will be related to the number of products you sell. The chart should run for twelve months. Include estimated sales for each month and calculate your profit or loss for each month. Also add up your profit or loss for each month so you have a total for the year.  

Business Plan – Part 4 Break-even Analysis Next, complete a break-even analysis. Given the fixed costs you will have for a year (start up costs plus all your monthly expenses like rent and pay), how many products do you have to sell to cover all those costs (to “break even”)?    

Financing your business Business Plan – Part 4 Financing your business  Then, given your estimated income or loss for the first year of your business, how much money will you need to start your business and support it for one year? Where will you get that money?  

Cost List Labor - programmer 1000 O.R. /month Continual Start up or Continual Labor - programmer 1000 O.R. /month Continual Labor – clerical assistant 500 O.R. /month Office rental 300 O.R. /month Phone service 5 O.R./month Email service Web site creation 20 O.R. Start up Computer 150 O.R. 2 desks 80 O.R. 2 chairs 60 O.R. Web site hosting Advertising brochures 50 O.R./1000 Software manuals 2 0.R. each Cost of good sold Software disks 1 O.R. each Mailing costs for software

Cost categories Start up – An initial purchase for your business – usually equipment, or marketing materials Continual – payments you are usually committed to making every month (“fixed costs”) Cost of good Sold – costs that only occur if you sell a product - food for your restaurant, clothing for your store (“marginal costs’)

Cost Problems Start up – high start up costs require that you have more money to start the business Continual – high fixed costs mean you will lose money quickly if you do not have many sales Cost of good sold – low marginal revenue means you make very little from each sale, so you will need to sell many items to cover your costs.

Cost Responses Start up –Find ways to reduce your startup costs – buy used equipment or sell over a web site rather than through a store Continual – reduce fixed costs by using less labor Cost of good sold – increase marginal revenue by raising your prices. Do NOT complete on low cost, but by better service or some other competitive advantage. DO NOT give things away free!

Cost Responses Example – flower shop Start up –Find a used refrigerator for your flowers. Decorate the store yourself. Continual – reduce fixed costs by doing all the flower arrangements yourself. Do not hire a clerk. Cost of good sold – Use the same price for flowers as other stores. Don’t compete on cost – compete on service. Open your store longer hours, or design special flower arrangements for weddings that are truly unique.

Cost Responses Dress shop example Start up –List all start up expenses. Now find 2 start up costs you can reduce Continual – What continuing costs will you have? List 2 ways to cut your fixed costs Cost of good sold– List one way you can raise the price of your dresses and still be competitive.

Cost Responses For your business Start up –List 2 start up costs you can reduce Continual – List 2 ways to cut your fixed costs Cost of good sold– List one way you can raise the price of your product and still be competitive.

Estimating Income Marginal Income = sales – cost of good sold 1 ice cream cone Income = 500 (customer price) – 160 (my cost for the ice cream) Marginal Income = 340 Baisas

“Real” Income Monthly income = unit income * units sold – fixed costs My store earns (0.340 OMR * number of cones sold) – Fixed costs (store rental, labor, web site, phones, electricity, etc.) If you sell 1000 ice cream cones and your fixed costs are 500 OMR, will your store turn a profit this month? If not, how many do you need to sell?

“Real” Income Monthly income = unit income * units sold – fixed costs My restaurant earns 500 baisas on each meal sold How many meals do I have to sell if my fixed costs are 800 OMR per month? How many meals is that per day?

Fix the problem - restaurant Monthly income = unit income * units sold – fixed costs My restaurant earns 500 baisas on each meal sold My fixed costs are 800 OMR per month Provide 5 ways to raise income from sales, or reduce fix costs

Fix the problem – flower shop Monthly income = unit income * units sold – fixed costs My store earns 200 baisas for each flower sold My fixed costs (rent, labor, electricity) are 600 OMR per month How many flowers do I need to sell each month?

Fix the problem – flower shop Monthly income = unit income * units sold – fixed costs My store earns 200 baisas for each flower sold My fixed costs (rent, labor, electricity) are 600 OMR per month I sell my flowers for 500 baisas each. So does every other flower shop. If I sold my flowers for 400 baisas, how many would I need to sell each month? Is there a way I could sell my flowers for 600 baisas?

Cash Flow -1 Assumes sale of 100 items per month 2 3 4 5 6 7 8 9 10 11 12 Labor costs 1500 Office costs 315 Start up costs  950   C.O.G.S. 200 Total costs Revenue 1000 Profit/(loss) Yearly profit/(loss)

Cash Flow - 2 Assumes sale of 200 items per month COGS = 1 Cash Flow - 2 Assumes sale of 200 items per month COGS = 1.5 OMR, customer price = 4 OMR Month 1 2 3 4 5 6 7 8 9 10 11 12 Labor costs 500 Office costs 315 Start up costs  1250   C.O.G.S.  300 300 Total costs Revenue Profit/(loss) Yearly profit/(loss)

Cash Flow - 3 Assumes sale of 1000 items per month COGS = 3 OMR, customer price = 7 OMR 2 3 4 5 6 7 8 9 10 11 12 Labor costs 400 Store costs 650 Start up costs  2000   C.O.G.S. Total costs Revenue Profit/(loss) Yearly profit/(loss)

Cash Flow - 4 Assumes sale of 400 items per month COGS = 7 OMR, customer price = 15 OMR 2 3 4 5 6 7 8 9 10 11 12 Labor costs 400 Store costs 250 Start up costs  450   C.O.G.S. Total costs Revenue Profit/(loss) Yearly profit/(loss)