Transcript Covering Costs

Business aims and objectives
Covering Costs
Unit 3: Business Finance
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Extension activities
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Accompanying worksheet
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Learning objectives
What are the costs involved in setting up a new
product or service?
What are running costs?
Why is it important to make accurate cost
estimations when starting a new business project?
How can ICT reduce costs?
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Introduction
When a business launches a new product or service, they
need to budget for start-up and running costs. They will
need to estimate these costs in advance, to decide whether
or not the product or service will be profitable.
Start-up costs are one-off costs paid before a new
product is introduced.
Running costs are the costs
involved once the new product or
service has been launched, in
order to continue its production.
These are payable for as long as
the product or service is available.
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Start-up costs
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Examples of start-up costs
Examples of start-up costs include:
new buildings for businesses,
or extensions to accommodate
expanding ones
new machinery, vehicles or
equipment (including installation and delivery costs)
researching the target market for the new business
initial advertising for the new business
initial stock for the new business
initial (first premium) payment towards insurance
costs incurred through staff recruitment and training.
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Case study: Bonnie’s Ice Cream Café
Bonnie Tate runs Bonnie’s Ice Creams, a
small business selling ice creams along
Whitstable harbour in Kent. Currently she
trades from an ice cream van, but is thinking
of expanding her business by setting up a
permanent café on the promenade.
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?
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?
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Working in small
groups, how many
different potential
start-up costs can
you think of that
Bonnie will have to
consider?
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Case study: Bonnie’s Ice Cream Café
Legal
costs
New
premises
Stock
supplies
Building
alterations
Advertising
Equipment
Fixtures and
fittings
How much do you think Bonnie should budget for
in order to cover her start-up costs?
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Running costs
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Examples of running costs
Examples of running costs include:
rent
advertising
wages/salaries
stock
maintenance
equipment
loan repayments
stationery
interest on loans
insurance payments
communications
(telephone, Internet, etc)
utilities
(electricity, gas, water, etc)
mortgage repayments
travel expenses
(petrol, MOT, insurance, etc).
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Case study: Bonnie’s Ice Cream Café
Having considered potential start-up
costs, Bonnie also knows that once
her new business is established, she
will incur a number of running costs.
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Discuss in your
groups what sorts
of running costs
Bonnie’s new café
will have.
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Case study: Bonnie’s Ice Cream Café
Salaries
Rent
Utility
payments
Business
rates
Insurance
Stock
Tax
How much do you think Bonnie should budget for
per annum in order to cover her running costs?
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Wordsearch!
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Start-up or running costs?
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Estimating costs
Once you have anticipated the start-up and running costs
involved in the production of a new good or service, you will
be able to budget for them.
Making accurate estimates about
potential expenditure is often
essential to the survival of a new
business venture. In order to make
these estimates, you need to
consider every factor which might
affect the amount of your identified
start-up and running costs.
What sort of considerations should a business
take into account when budgeting for start-up and
running costs?
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What can go wrong?
Sometimes initial estimates can be inaccurate, which often
results in the final costs for a project being much higher than
originally predicted. There are a number of reasons for this:
the original estimates were incorrect
the decision-making process took a
long time, and/or general delays in the
process increased the overall cost
inflation increased the overall cost
the business did not properly monitor
their costs.
Can you think of any business projects
which have been affected in this way?
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What can go wrong? Wembley Stadium
On 11 September 2000, a deal
was signed to rebuild Wembley
Stadium for a maximum cost of
£326.5 million. Originally, the
new Wembley was scheduled to
open on 13 May 2006, in time
for the FA Cup Final that year.
However, the completion of Wembley Stadium was delayed
by a succession of financial and legal difficulties. It was
eventually completed and officially handed over to the FA
on 9 March 2007. The total final cost for the project was
£757 million, more than double the original estimate.
What specific problems did the developers of
Wembley Stadium face?
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ICT and start-up costs
There are ways that ICT can help decrease the start-up costs
of a new project or business:
E-mail communication facilitates fast
decision-making and effective teamwork.
Spreadsheets can analyse all costs more
easily. In particular, ‘what-if’ calculations
can be formulated to predict potential
business scenarios.
For example, the opportunity arises for Deep
Fried Fred’s to buy a larger premises than
planned for their new shop. By formulating a
‘what-if’ scenario on a spreadsheet, they can
calculate, quickly and easily, what effect this
might have on their start-up costs.
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Deep Fried Fred’s
Start-up costs
Premises
Cash registers (x3)
Brand new delivery vans (x3)
Refurbishment of shop
Initial stock
Initial advertising
Fryers for cooking (x3)
£
410,000
600
37,500
9,500
500
2,000
9,600
Total start-up costs
469,700
Budget
490,500
Spending = OK
Deep Fried Fred’s have
set a maximum budget
of £490,500 to cover
start-up costs. The
premises they originally
had in mind for their new
shop cost £410,000.
The bigger premises are
priced at £460,000.
The spreadsheet they have set up allows Deep Fried Fred’s to
see quickly and easily the effect on the total start-up costs of
buying the larger premises. It also allows them to assess
where they might cut costs in order to keep within budget.
How might Deep Fried Fred’s buy the larger
premises whilst keeping within their budget?
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ICT and running costs
There are ways that ICT can help decrease the running
costs of a new project or business:
E-mail and video conferencing have reduced the cost of
business communications.
Bar codes and other stock-check packages reduce the
time and cost of completing stock checks and identify any
re-ordering needs more efficiently.
The just-in-time stock-control system electronically
monitors stock, ordering goods as and when needed. This
reduces delivery times and increases warehouse space.
Staff records are more easily accessed and sorted.
Delivery routes with multiple destinations can be planned
more efficiently.
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Question time!
1. What is a start-up cost? Give four examples.
2. What is a running cost? Give four examples.
3. How has ICT helped reduce start-up costs?
4. How has ICT helped reduce running costs?
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Who wants to be an A* student?
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Glossary
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