Center for Educational Center for Educational LeadershipLeadership

Entrepreneurship and Entrepreneurship and Financial Literacy TrainingFinancial Literacy Training

• Pre-tax Profit: Monies left over after you pay all your bills Pre-tax Profit: Monies left over after you pay all your bills and before you pay Uncle Sam.and before you pay Uncle Sam.

• Return on Sales (ROS)Return on Sales (ROS)– Example: Sales $1000 Pre-tax Profit $100Example: Sales $1000 Pre-tax Profit $100– ROS 10%ROS 10%

– ROSROS RangeRange Typical ProductTypical Product– Very lowVery low 2-5 %2-5 % Very High Vol. /PriceVery High Vol. /Price– LowLow 6-10 %6-10 % High Vol./PriceHigh Vol./Price– ModerateModerate 11-20%11-20% Moderate Vol. /PriceModerate Vol. /Price

– HighHigh 20-30 %20-30 % Low Vol. /PriceLow Vol. /Price– Very highVery high 30% - up30% - upVery low Vol. /PriceVery low Vol. /Price

Text Page 185Text Page 185

Costs of Running a Costs of Running a BusinessBusiness

Costs of Running a Costs of Running a BusinessBusiness

• Product/ServiceProduct/Service– Unit of SaleUnit of Sale

• By the pieceBy the piece• Combo of piecesCombo of pieces• By the job/projectBy the job/project• TimeTime

– Text Page 116Text Page 116

Revenue ModelRevenue Model

Product one PieceProduct one Piece

Product two ComboProduct two Combo

Product three jobProduct three job

Costs of Running a Costs of Running a BusinessBusiness

• Costs of GoodsCosts of Goods– Material CostsMaterial Costs

• Raw materialRaw material• Supplies Supplies • Third partsThird parts• PackagingPackaging

– Variable Sales CostsVariable Sales Costs• CommissionsCommissions• AdvertisingAdvertising• LaborLabor• ShippingShipping

• Revenue UnitsRevenue Units• Minus Minus

• Costs of GoodsCosts of Goods– Material CostsMaterial Costs– Variable CostsVariable Costs

• EqualEqual

• Gross ProfitGross Profit

• Operating ExpensesOperating Expenses(Overhead)(Overhead)

– Fixed ExpensesFixed Expenses• UtilitiesUtilities• Fixed SalariesFixed Salaries• AdvertisingAdvertising• InsuranceInsurance• Debt ServiceDebt Service• Office/WarehouseOffice/Warehouse• StorageStorage• PO Box PO Box • Franchise FeeFranchise Fee• DepreciationDepreciation

• Text page 123Text page 123

• Revenue UnitsRevenue Units• Minus Minus

• Costs of GoodsCosts of Goods– Material CostsMaterial Costs– Variable CostsVariable Costs

• EqualEqual• Gross ProfitGross Profit

• MinusMinus• Operating ExpensesOperating Expenses

Costs of Running a Costs of Running a BusinessBusiness

• Operating ExpensesOperating Expenses– Variable ExpensesVariable Expenses

• UtilitiesUtilities• Phone billPhone bill• Sales TaxesSales Taxes• Travel and MileageTravel and Mileage• MaintenanceMaintenance• Professional ServicesProfessional Services• Office SuppliesOffice Supplies• Bank feesBank fees• Consulting ServicesConsulting Services

• Revenue UnitsRevenue Units• Minus Minus

• Costs of GoodsCosts of Goods– Material CostsMaterial Costs– Variable CostsVariable Costs

• EqualEqual• Gross ProfitGross Profit

• MinusMinus• Operating ExpensesOperating Expenses

– Fixed ExpensesFixed Expenses– Variable ExpensesVariable Expenses

• EqualEqual• Pre-tax ProfitPre-tax Profit

Costs of Running a Costs of Running a BusinessBusiness

• Allocating your Fixed CostsAllocating your Fixed Costs– Making sure your unit costs covers all costsMaking sure your unit costs covers all costs

• Make Fixed Costs Variable when PossibleMake Fixed Costs Variable when Possible– Negotiate fixed expenses as a percent of SalesNegotiate fixed expenses as a percent of Sales

• Three Month Reserve for Fixed CostsThree Month Reserve for Fixed Costs– Plan for slow sales or changes in marketPlan for slow sales or changes in market

• Keep expenses low as a percentage of SalesKeep expenses low as a percentage of Sales

Costs of Running a Costs of Running a BusinessBusiness

• Income statements give you a snapshot Income statements give you a snapshot of whether you are meeting your of whether you are meeting your customer needs, creating value in the customer needs, creating value in the company and keeping good records.company and keeping good records.

• Text page 175Text page 175

Income StatementsIncome Statements

• Eight Parts of the Income StatementEight Parts of the Income Statement– RevenueRevenue– Costs of Goods SoldCosts of Goods Sold– Sales expenses (other variable costs)Sales expenses (other variable costs)– Gross ProfitGross Profit– Operating Expenses (Fix Costs)Operating Expenses (Fix Costs)– Pre-tax profitPre-tax profit– TaxesTaxes– After Tax-profit (Loss)After Tax-profit (Loss)

Income StatementsIncome Statements

Income StatementsIncome Statements

• Same Size AnalysisSame Size Analysis– Using ratios to analyze your business Using ratios to analyze your business

performance and measure your success performance and measure your success against industry and competition.against industry and competition.

• Startup CostsStartup Costs

– Text Page 183Text Page 183