1. Chapter 6 Tracking Fixed and Variable Costs
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)
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4. Contribution Margin
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5. Average Contribution Margin
A business selling a variety of products can use average COGS to determine an average contribution margin.
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6. Economics of One Unit
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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.
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8. Insurance Protects Business
Buy insurance to protect your business from:
Fire and other natural disasters
Theft
Liability (lawsuits)
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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.
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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
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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.
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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.
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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.
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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.
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19. Journal
Left Side
Right Side
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20. Blank Accounting Journal —Left Side
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21. Blank Accounting Journal —Right Side
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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.
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23. NFTE Journal
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24. NFTE Journal
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25. Relationship Between Accounting Journal and Financial Statements
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26. Summary Ledger with Income Statement and Balance Sheet
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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