Finance

1
Finance
2
Finance

• This is a double session , during which you will
  learn to
• Identify the costs of starting up your business
• Work out a selling price per unit and profit per
  unit
• Identify how you will finance your business
• Calculate your break-even point
• Present a profit and loss statement

3
Start-up costs

• Brainstorm
• What should you think about when figuring the
  cost of starting up and then operating a
  business?

4
Three kinds of costs

• Start-up Costs (also called original investment,
  or seed money) the one-time purchases needed to
  open the business.
• Running Costs (also called operating costs) are
  usually monthly payments. Can be divided into 2
  types
• . Fixed costs stay the same however much you
  sell of your product or service (e.g.
  Advertising, Insurance, Rent,,)
• . Variable costs vary according to how much you
  sell (e.g. electricity if related to production)
• 3. Direct Costs (Costs of Goods/Services sold)
  Costs directly relating to producing your product
  or providing your service (e.g. stock, raw
  materials)

5
Sams start up costs

• Work out what are Sams start up costs
• (Work-sheet)

6
Sams start up costs

• Sandwich cart 1,500
• Licence from the borough 200
• Starting supplies bread, turkey,
• mayo, lettuce, tomatoes etc 300
• Business cards and flyers
• (advertising) 50
• Telephone answering machine
• and toaster 100
• Total start-up costs 2,150

7
Sources of Finance

• Where do you think Sam can find the money to
  start his business?
• Think of different options. What are the pros and
  cons of each option?
• (Brainstorm)

8
Sources of Finance

• Own savings (small amount)
• Family and friends (small to medium size amounts,
  low or no interest, flexibility to repay)
• Banks (larger amounts, may need collaterals,
  higher interests rates, less flexible, could risk
  repossession if does not pay back, can offer
  technical support to manage business)
• Venture capitalists, people who put up their own
  money but want equity (ownership) in return for
  cash investment, will want six times their money
  back over five year period (45ROI)
• Institutions providing grants or loans such as
  the Princess Trust (must be over 18, provides
  support to manage business)
• For large well developed businesses, extra
  funding can be found by selling shares on the
  stock market (PLC)

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The Unit of Sale

• The unit of sale is the building block of your
  business. Entrepreneurs commonly define the unit
  of sale as
• One example of the product (e.g. one sandwich in
  Sam's case)
• One hour of service time
• The average sale per customer (if the business
  sells more than one product)

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Cost of goods sold per unit

• How much does it cost Sam to make one turkey
  sandwich?
• How much profit does he make on one sandwich?
• (see worksheet)

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Analysis of the cost of goods sold for a turkey
sandwichFill in the blanks
12
Analysis of the cost of goods sold for a turkey
sandwich
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Gross profit per unit

• How much profit is Sam making?
• Selling price of one unit 3.00
• (or average sale per customer)
• Cost of one unit sold - _______
• Gross profit per unit _______
• Price of sandwich 3.00

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Gross profit per unit

• How much profit is Sam making?
• Selling price of one unit 3.00
• (or average sale per customer)
• Cost of one unit sold - 1.25
• Gross profit per unit 1.75
• Price of sandwich 3.00
• Cost to make sandwich - 1.25
• Gross profit per sandwich 1.75

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Break-Even AnalysisFill in the blanks

• How much does Sam need to sell to cover his costs
  every month (break-even)?
• Selling price per unit 3.00
• Cost per unit
• Gross profit per unit
• Monthly running costs
• (rent, services..)
• Break-Even Units Running cost
  Units
• Gross profit per
  unit

16
Break-Even Analysis

• How much does Sam need to sell to cover his costs
  every month (break-even)?
• Selling price per unit 3.00
• Cost per unit 1.25
• Gross profit per unit 1.75
• Monthly running costs 700
• (rent, services..)
• Break-Even Units Running cost 700 400 Units
• Gross profit per
  unit 1.75

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Break-Even

• If Sams Snack Bar is open 20 days per month, how
  many Sandwiches does the store have to serve each
  day to break even?

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Answer

• 400 units 20 20

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Net Profit Per Unit

• Net profit Gross profit minus operating costs
• Net profit per unit Net profit divided by units
  sold
• Example
• Sandwiches sold 10
• Gross profit per sandwich
• Total gross profit (for 10 units)
• minus
  -
• Running costs 7.00
• Net profit
• Therefore..Net profit per unit

20
Net Profit Per Unit

• Net profit Gross profit minus operating costs
• Net profit per unit Net profit divided by units
  sold
• Example
• Sandwiches sold 10
• Gross profit per sandwich 1.75
• Total gross profit 17.50 (10x1.75)
• Running costs 7.00
• Net profit 10.50 (17.50 -7.00)
• Therefore..Net profit per unit 1.05
  (10.5010)

21
Sams Income Statement

• Fill in Sams Income Statement for a month when
  he has sold 1,000 sandwiches. His operating costs
  include rental of a kitchen (500/month) and
  electricity for toasting the sandwiches (200),
  in addition he will have to pay 200 tax.
• Sales 1000units
• Income
• Less total cost of goods sold
• Gross profit
• Less running costs
• Fixed costs (rent)
• Variable costs (electricity)
• Net Profit Before Taxes
• Taxes 200
• Net Profit/Loss
• Has Sam made a profit or a loss?

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Sams Income Statement

• Sales 1000units
• Income 3000
• Less total cost of goods sold 1250
• Gross profit 1750
• Less operating costs
• Fixed costs (rent) 500
• Variable costs (electricity) 200
• Net Profit Before Taxes 1050
• Taxes 200
• Net Profit/(Loss) 850