Managing Costs

Chapter 12- Entrepreneurship

Resources are limited (Money) • Entrepreneurs look to • Create a viable product or service • Do so within financial boundaries • Must manage costs

Seed Capital- One time cost of starting a business • Want to avoid surprise costs • Must think about equipment, land, buildings, etc.

• Research is the key to keeping costs low

Reserve Fund- Just in Case It is recommended that you have one half your start up costs in reserve. Example: If it costs $100,000 for start up costs for your business, you should have $150,000. $50,000 would be your reserve fund.

Figure out your payback period Payback = Start-up Investment/Net Cash Flow per Month Example $100,000/ $5000 = 20 months

Definitions Variable Costs – expenses that vary directly with changes in the production or sales volume Fixed Costs – costs that do not change with changes in production or sales volume EOU -- economics of one unit Inventory Costs – expenses associated with materials and direct labor for production until the product is sold Net Profit – the remainder of revenues minus fixed and variable costs and taxes

Calculating EOU cost Snow Cone Selling Price Cost of Goods Sold (COGS) Ice .03

Cup Spoon Labor (10.00/hr) Total Costs .05

.02

.33 (2 minutes per cone) .43

Profit 1.00

.57

Calculating net profit Snow Cone COGS Fixed Costs Electricity Rent Advertising Total Fixed Costs Taxes Total Costs Net Profit .01

.06

.03

.10

.04

.57

.71

.29

1.00

Frank’s Hot Dog Stand Frank wants to start a hot dog stand business. A cart will cost him $3000 dollars. The land where he wants to set up his stand is $100 a month to rent. A food license is $35 for a year. The utilities to run the hot dog stand is $50 a month. Inventory (per month) for the cart includes 63 packages of buns (8 in a pkg) at $1.60 per package, 63 packages of hot dogs (8 in pkg) at $1.00 per package, 42 cases of soda (12 in a case) at $4.50 a case. Condiments (ketchup, mustard) and napkins will cost a total of $25.00 for the month. Employees make $8.00 hr and the stand is open 10 hours a day.

Taxes are 7% on sales.

Frank anticipates selling 500 hot dogs a month at $1.50 each.

Answer the following questions.

What are Franks’ start up costs?

What is Frank’s reserve fund?

What is the payback period?

What is the EOU of a hot dog?

What are the variable costs for Frank?

What are the fixed costs?

What is the net profit?

Will Frank make money?