Costing of Business

1
Costing of Business

• ELE 4EMT

George Alexander G.Alexander_at_latrobe.edu.au www.la
trobe.edu.au/eemanage
3 April, 2007
2
Todays Lecture

• More presentations?
• Interest rate/reward/risk
• Todays topic Costing of Business

3
Factors affecting interest rates

• In Australia, set by Reserve Bank (monetary
  policy)
• Based on current economic issues trade balance,
  economic activity, international rates
• Inflation (notion of real and nominal interest
  rate)
• Risk
• Security

4
(No Transcript)
5
(No Transcript)
6
Last lecture -Developing the Plan

• Section 6 Cost and Pricing
• Section 7 - Cash Flow Forecasting
• Section 8 Profit and Loss Statement

7
Starting a Business
Starting and successfully operating a business
requires

• A good business idea
• Courage, risk taking
• Strong desire to succeed
• Knowledge of the business
• Funding
• Time and energy
• Planning
• Patience/perseverance

8
The Viable Business
Costs
Revenue
9
How Viable?
Revenue gt Costs
Revenue K Costs
10
How big should K be?
K ? ROI
Net Profit
ROI
Net Worth
ROI Return On Investment
11
Return On Investment (ROI)
ROI is defined as the ratio of net profit to net
worth of an organisational segment (company,
division, business unit, or the like).
ROI is a measure of financial efficiency that is
often used to set marketing objectives.
12
Opportunity Cost

• Opportunity cost is what you give up as a
  consequence of your decision to use a resource in
  a particular way.
• Because of scarcity, use of a resource for one
  purpose means that some other use of that
  resource is lost.
• Opportunity cost of using a resource in a
  particular way is the satisfaction that would
  have been provided by its most preferred
  alternative and thus foregone use.

13
Resources

• Time owner, hired staff, casual staff,
  contractors, consultants, etc.
• Money own money, bank loan, venture capital,
  shares, etc.
• Knowledge management, marketing, finance,
  technical, etc.
• Assets land, buildings, machinery, vehicles, etc.

14
Costs of operating a business

• Trading
• Finance
• Premises
• Employees
• Selling
• Administration

15
Identify all costs

• Failure to identify all costs at the planning
  stage results in nasty surprises.
• Projected profit is reduced.
• Its similar to preparing a budget only you
  have no past history to use as a base.
• This demands a thorough knowledge of the proposed
  business and how it will operate.

16
Trading

• Purchase of trading stock
• Inward freight, duty, handling and insurance
  costs
• Maintenance of plant, machinery, vehicles, etc.
• Depreciation of plant, machinery, vehicles, etc.
• Amortisation of plant, machine tools, etc.
• Vehicle registration, insurance, running costs,
  licences, etc.

17

• Insurance - plant, stock, etc.
• Travelling expenses, including dealer conventions
  etc.
• Stock losses and wastage

18
Finance

• Bank charges and interest
• Hire purchase interest
• leasing costs
• Interest on borrowings
• Factoring charges
• Discounts
• Return on invested capital

19
Premises

• Rent / Lease
• Rates and taxes (municipal, land, water, etc.)
• Mortgage interest
• Registration of premises fees
• Maintenance of buildings
• Security patrol services

20

• Burglar alarm - depreciation and maintenance
• Fire fighting equipment - depreciation and
  maintenance
• Insurance - building and public liability
• Cleaning, gardens, trees and plants, etc.

21
Employees

• Wages, salaries, bonuses, overtime, etc.
• Holiday pay - annual, award or public holidays
• Long service leave provision
• Sick leave pay
• Fringe benefits
• Workers compensation insurance
• Additional public risk insurance
• Superannuation contributions

22
Employees (Continued)

• Apprentices - trade school time and other
  training
• Staff training
• Staff welfare and recreational expenses, social
  clubs
• Clothing - uniforms, overalls, gloves, cleaning
  etc.
• Safety precautions
• Staff amenities - canteen, radio licences, etc.

23
Selling

• Salaries and commissions
• Warehousing / Storage
• Packing
• Delivery
• Insurance

24
Administration

• Directors fees
• Telephone, facsimile, Internet, and postage
  charges
• Tax administration
• Stationary and printing offices supplies
• Salaries and wages
• Staff amenities - canteen services etc.
• Accountancy charges etc.

25
Administration (Continued)

• Consultants fees
• Solicitors fees and legal expenses
• Audit, internal and external
• Office equipment etc. - depreciation,
  maintenance, service charges
• Payroll tax
• Entertainment expenses

26
Administration (Continued)

• Trade association subscriptions
• Donations to charities, local bodies etc.
• Electrical, gas, and other light and power
  charges
• Technical books, references, magazines etc.
• Market research
• Storage of files and records
• Advertising, including promotional gifts etc.

27
Special Costs

• Insurance on goods held in trust, equipment,
  tools of the trade etc.
• Factory or shop registration, business name
• Licences for storage of inflammable liquids
• Purchase of hand tools
• Contractors wet time and location claim
• Scales or test equipment calibration fees
• Cranes - inspection fees and maintenance

28
Cash Flow Forecasting

• Cash flow is a function of time.
• Inflow (revenue and other receivables)
• Outflow (materials, accounts payable, etc.)
• Buffer (cash in bank)

29
Cash Flow Model
Your Business


Money in Bank
30
Cash Flow Chart
Jan
Feb
Jul
Aug
Sep
Oct
Nov
Dec
Mar
Apr
May
Jun
Revenue Salaries Office Rent Insurance Telephone
Vehicle Light Power Stationery Advertising etc.
Total
31
Profit and Loss Statement

• Similar in many ways to the Cash Flow Statement
  but there are some important differences.
• Well cover these next week.

32
Useful References

• The Small business handbook how to start and
  successfully operate a small business, ISBN
  1-86350-004-9, Small Business Corporation (Vic.)
• How companies work, ISBN 0-725-10689-1, Nicholas
  Brash, Timothy Lindsey
• The Australian Taxation Office website
  http//www.ato.gov.au
• Business in Victoria http//www.business.vic.go
  v.au/
• Business Victoria is a comprehensive online
  resource designed to help you start, run and grow
  your business

Note Please search for newer editions for the
above references
33
Thanks for your attention