1. Entrepreneurship Chapter 7 Understanding and Managing
Start-Up, Fixed, and Variable Costs

2. 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

3. Payback Start-Up Investment ($2,000) Net Profit per month ($400)
Tells investors how long it will take business to earn enough profit to cover start-up costs.
= 5 months

4. Fixed & Variable Costs
Variable Costs - change based upon the volume sold
Fixed Costs - paid regardless of whether or not sales are being generated

5. Economics of One Unit

6. Variable Costs Change with sales
Cost of goods sold (COGS) or Cost of services sold (COSS)
Cost of materials & direct labor
Other variable costs
Commissions, shipping, handling, & the like

7. Contribution Margin

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

9. 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

10. 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.

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.

12. 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.

13. Good Daily Records Show ways to make your business more profitable
Document your business profitability
Prove payments have been made
Record that taxes are paid

14. Receipts and Invoices Receipt = document with date, amount of purchase
Invoice (bill) = document 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.

15. 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.

16. “Cash Only” Accounting
Only make entry in accounting journal or your accounting software 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.
Reconcile your accounting monthly.

17. Income Statement Tracks sales & costs
Shows whether a business is profitable
Covers a range of dates
Can be used to determine opportunities for cost reductions or revenue increases

18. 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.

19. Balance Sheet
Shows performance with respect to paying off debt & increasing equity
Snapshot of what is owned & owed
Must balance (Assets = Liabilities + Equity)

20. 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

21. Accounting Tips Keep your accounting current
Maintain at least 3 months fixed operating costs in reserve
Use accounting software systems if possible