Starting and Running a Business: Introduction to the Financials Part I

1. Starting and Running a Business: Introduction to the Financials Part I

2. Earning Wealth • Salary: Fixed amount per month • Wage: Fixed amount per hour • Commission: Percentage of every sale made • Dividend: a share of the company’s profit • Sale of the company

3. Why is It better for an entrepreneur to be paid by salary, dividend, or sale of the company than by wages?

4. 4 Types of Businesses

5. 4 Types of Businesses Manufacturer

6. 4 Types of Businesses Manufacturer • Creates products with raw materials • Sells in bulk to wholesalers

7. 4 Types of Businesses Manufacturer Wholesaler • Creates products with raw materials • Sells in bulk to wholesalers

8. 4 Types of Businesses Manufacturer Wholesaler • Creates products with raw materials • Sells in bulk to wholesalers • Buys products in bulk from manufacturers • Sells in smaller bundles to • retailers

9. 4 Types of Businesses Manufacturer Wholesaler Retailer • Creates products with raw materials • Sells in bulk to wholesalers • Buys products in bulk from manufacturers • Sells in smaller bundles to • retailers

10. 4 Types of Businesses Manufacturer Wholesaler Retailer • 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

11. 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

12. 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

13. 4 Types of Businesses Manufacturer Wholesaler Retailer Service • Sells in bulk to wholesalers • 1 Unit = • 1,000 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 hiking trip • Sells in smaller bundles to • Retailers • 1 Unit = • 12 t-shirts

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

15. The Gift Shop Activity If we were to start this business, what would we need to have?

16. 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

17. 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

18. Start-UpInvestment Ex: John’s Gift Basket Shop Business Certificate $100.00 Basket Ingredients $275.00 250 Business Cards $20.00 100 flyers $50.00 Office Supplies $45.00

19. Start-UpInvestment Ex: John’s Gift Basket Shop Business Certificate $100.00 Basket Ingredients $275.00 250 Business Cards $20.00 100 flyers $50.00 Office Supplies $45.00 3 months fixed costs $120.00

20. Start-UpInvestment Ex: John’s Gift Basket Shop Business Certificate $100.00 Basket Ingredients $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

21. The 2 Costs of Running a BusinessFixed 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:dofluctuate with sales or production

22. The 2 Costs of Running a BusinessFixed and Variable Variable Costs:costs that fluctuate with sales Divided into 2 categories:

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

24. The 2 Costs of Running a BusinessFixed 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.

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

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

27. The 2 Costs of Running a BusinessFixed and Variable Variable Costs:costs that fluctuate with sales b) Other Variable costs • Commission • Packaging • Shipping

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

29. Keystone Keystoning is doubling your cost of goods sold (COGS) to set your selling price.

30. The Production/Distribution ChainorThe Supply Chain 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

31. Economics of One Unit Formula: Gross Profit = Selling Price – Var. Cost per unit per unit per unit (COGS/ + other var. costs) per unit per unit Also called “Cost of Sales/unit”

32. Economics of One Unit In order to calculate, we must define our Unit of Sale

33. 4 Types of Businesses Defining the Unit of Sale Manufacturer Wholesaler Retailer Service • Sells in bulk to wholesalers • 1 Unit = • 1,000 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 hour hiking trip • Sells in smaller bundles to • Retailers • 1 Unit = • 12 t-shirts

34. Economics of One Unit • What is the unit of sale for our favor? • What is our Gross Profit per Unit? Formula: Gross Profit = Selling Price – Var. Cost per unit per unit per unit (COGS/ + other var. costs) per unit per unit