~ by Ratnesh A DesaiFor Jai Hind E-Cell
Calculate how much your product/service will cost you?
Introduction...My Company – SABKAVIKAS
It stands for Slums And Backward Area Villages Knowledge Association
What it does? It provides training & consultancy on:
¡ English Language
¡ Memory & Study Techniques
¡ Entrepreneurship
¡ Health & Hygiene
¡ Safety and Security
¡ Mind, Meditation & Leadership
Introduction (contd)...Type of Venture – Social Entrepreneurship
Target Audience – Anyone deprived of knowledge
USP – Cost Plus Hundred Model
Minimum Fee – One Hundred/Person
Median Fee – Six Hundred and Fifty/Person
Maximum Fee – One Thousand/Person
Our Catchphrase – “Kindly Experience and Donate”
Current Project– “Make Indians to Make in India”
Agenda for Workshop...Why is Costing Important?
Measuring Value
ROI – Return of Investment
Life Cycle Costs
Fixed Costs & Variable Costs
Computation of Costs
Break-even Point and Viability Test
Why Is Costing So Important?
Helps make better decisions.
Provides key information for planning & controlling.
Helps determine costs & prices for goods or services.
Helps reduce & manage costs.
Helps measure & improve performance.
Quick Startup Process
Standardization
Tighter Controls
HigherProfit
MarginCost
Savings
Improved Reporting
More Flexibility&
Focus on Core
Cash
Flow
Why Is Costing So Important?
It helps us prepare the three principal financial statements required from all firms. These are:
Balance Sheet
Income Statement or Profit & Loss Account (P&L A/c)
Statement of Cash Flow
Financial Statements
Balance Sheet
Profit
& Loss
A/c
It is a statement of assets and liabilities of a company.
Assets are things of value that a company owns.
Liabilities are obligations of a company to pay back.
Balance Sheet
Liabilities Assets
Owner’s EquityCapital 5,00,000Balance from P&L A/c 6,64,800(retained earnings/Net Profit)
Creditors 2,50,000
Loans 5,00,000Interests on Loans 50,000Taxes 5,200
Land/Building 10,00,000Machineries/Equipments 6,50,000Stationaries 20,000Goodwill 1,00,000Debtors 20,000Investments 30,000Cash-in-hand/Bank 45,000Stock of Goods 5,000
Total 18,70,000 Total 18,70,000
Balance Sheet as on 31st March 2013ABC Company
It is a statement of revenues and expenses of a company.
Revenues are inflow or money received by a company.
Expenses are outflow or money spent by a company.
P&L shows “profit-related” inflow & outflow.
Profit &
Loss
Revenue Expenses
Sales 11,80,000Payments Received 10,000Balance(Net Profit) 6,64,800
Indirect Income: Sale of Old Assets 1,40,000
Dividend on Investments 3,000Interest on loan given 2,200
Purchase (Raw Materials) 3,30,000Wages/Salaries 5,20,000Rent 30,000Advertising 12,000Accounting/Legal 5,000Depreciation 3,000Insurance 80,000 Cost of Production 10,00,000
Total 20,00,000 Total 20,00,000
P&L statement as on 31st March 2013ABC Company
Cash
Flow
StartupMonth
Month1
Month2
Month3
Starting Cash 20,000 28,000 (3,000) 15,000
In – Cash Sales – New Loans – New Investment – Payments Received
TOTAL IN
3,50,0002,50,000
5,0004,000
6,33,000
2,75,000 - -7,0003,500
3,13,500
1,78,00050,0002,000
--2,70,000
3,77,0001,00,000
3,0002,500
4,95,000
Out – Bill Payments – Repay Loans – Purchase Assets
TOTAL OUT
1,50,000 50,000
4,20,0006,20,000
90,000
1,18,0001,00,0003,08,500
1,32,0001,27,000
--2,59,000
1,00,0002,05,000 77,0003,82,000
• Cash Balance* 13,000 8,000 11,000 13,000
* (“Starting Cash” plus “In” minus “Out”)
Cash Flow statement as on 31st March 2013ABC Company
Cash
Flow
Usually inflows and outflows refer to sales revenue and cost of production.
But...
Cash
Flow
But... cash flow also includes other inflows that generate any revenue and other outflows that incur any cost.
Cash
Flow
Cash Flow shows “profit-related” as well as “non-profit-related” inflow & outflow.
A cash flow statement functions in conjunction with both the profit & loss statement (performance dimension) and the balance sheet (financial position).
The time of cash flows into and out of projects are used as inputs to measure value and determine rate-of-return and break-even point.
Profit Related P&L statement
Profit Related Cash flow Non-Profit Related
“If you can measure it, you can improve it.”
Business valuation means what a business is worth. There are three fundamental approaches for valuation:
1.Asset Approach – Net Worth = Total Assets – Total Liabilities2.Market Approach – value of shares in stock market & assets3.Income Approach – discounting future cash flow projections
Measuring
Value
“ROI helps estimate the attractiveness of
an investment opportunity.”
ROI
“ROI helps estimate the attractiveness of
an investment opportunity.”
ROI
Types of Costs...
Other Costs
Finance Costs
OperatingCosts
Capital Goods
LegalCompliance
Initial Costs
Development Costs
Initial Costs...Capital Goods Legal Compliance
A high value, durable asset of life ≥ 3 year
•Computers (Desktops/Laptops)•Projector•Furniture•White Board•Software
•Machinery•Equipments•Tools•Buildings•Trucks
Any legal document required by law to operate a business
and any tax/duties to be paid as per the law
•Trademark (Rs. 4,000)•Domain + Hosting (Rs. 3000)•DIN (Rs. 1000)•Digital Signature (Rs. 6000)•Stamp Duty (Rs. 1300)•Company Forms (Rs. 2800)•Public Notice (Rs.10,000)•Company PAN (Rs. 105)•Professional Fees (Rs.15,000)•Taxes (Rs. 8,000)
Operating Costs...
Variable Costs Fixed Costs
A variable cost changes in relation to variations in
an activity.
•Conveyance•Transportation•Stationaries
•Production Supplies•Labour Rate•Advertising•Income Tax•Custom/Excise Duties
A fixed cost does not change over short term.
•Rent•Salaries•Insurance•Interest Expense
•Depreciation•Property Tax
Development Costs...
Upgrading Costs Expansion Costs
New Capital Goods purchased for existing
line of activities in same location
•Computers•Software
•Equipments•Machineries•Tools
New Capital Goods purchased for new line of
activities in same or different location
•Buildings•Land•Vehicles•Machineries etc.
Finance Costs...Opportunity Costs Cost of Credit
The difference in return between a chosen investment and one that is
necessarily passed up.
•The opportunity cost of going to college is the money you would have earned if you worked instead.
•On the one hand, you lose four years of salary while getting your degree; on the other hand, you hope to earn more during your career, thanks to your education, to offset the lost wages.
Cost of credit is the amount of interest charged apart from the
borrowed money one has to return.
•A higher interest rate means higher cost of credit.
•A lower interest rate means lower cost of credit.
•If you don't pay off your credit card balance every month, the interest is compounded which means you end up paying more than expected.
Other Costs...
Contingency Costs Miscellaneous Costs
Contingent costs might or might not be incurred at some point in the future.
•Emergency•Accidents
Any other cost incurred apart from the “main” or “regular” cost of startup,
operations and financing.
• External Faculty•Cleaners hired
Let’s Calculate...
Let’s Calculate...
Let’s Calculate...
Let’s Calculate...
Let’s Calculate...
Let’s Calculate...
Costs
Costing – all the smart kids are doing it...
Thank You!