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#3 - BUDGETING#3 - BUDGETING Starting CostsStarting Costs Operating CostsOperating Costs Cash FlowCash Flow Break Even Break Even

AnalysisAnalysis Gross MarginsGross Margins MarkupsMarkups Lost LeadersLost Leaders Getting ProfitableGetting Profitable Staying PowerStaying Power

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BUDGETINGBUDGETINGBudgeting is the creation of an action plan to outline financial and operational goals, in this

case to help a business allocate resources to

evaluate and forecast performance.

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HAVE A CLEAR HAVE A CLEAR VISION!VISION!

““If you don’t know where If you don’t know where you are going, you will you are going, you will wind up somewhere wind up somewhere else.”else.” Yogi Berra Yogi Berra

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START-UP CAPITALSTART-UP CAPITALThe total amount of money needed The total amount of money needed

to open a businessto open a business“Capital Cost” is the setup cost of a business is the setup cost of a business or entity, after which there will be ongoing or entity, after which there will be ongoing operational costs. operational costs.

“Capital” is net worth in money, property & goods.• Build in a Safety Factor.• Do not underestimate!• Don’t begin behind the !

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START-UP CAPITAL COSTSSTART-UP CAPITAL COSTSExample: Home Daycare

Start-up Worksheet

ExpenseItem 

Renovations $10,000 Toys $2,000 Food $500

Equipment $3,000Furnishings $5,000

Office Supplies $5,000 Utilities - Upgrades $500

Insurance $2,000 Legal Fees $3,000

Accounting Fees $2,000 Licensing $50

Advertising, Promotion & Website $3,000 Bank Charges $300

Operating expenses Fund $10,000    

Start-up Capital required $46,350

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START-UP CAPITAL COSTSSTART-UP CAPITAL COSTS

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Group Childcare Start-up CostsTeaching/Activity Supplies $3,000

Equipment & Musical Instruments $47,000

Telecomm $3,000

Office supplies & Music $4,000

Insurance $12,000

Subscriptions $500

Advertising and promotion $2,600

Accounting fees $3,000

Legal & Licensing fees $4,000

Rent $12,500

Leasehold Improvements $70,000

Bank charges $300

Association Dues $50

Van purchase, maintenance & expenses $45,000

Initial Investment $206,950

OPERATING (WORKING) OPERATING (WORKING) COSTSCOSTS

The amount of money required to keep the business going after

start-up

Many potentially solid businesses fail because they run out of money before they can become established.

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OPERATING COSTSOPERATING COSTS

Plan to Have Enough Reserves!

The rule of thumb is to have enough money to fund at least 3 months (preferably 6) to pay expenses, especially fixed costs – costs that are independent of production or sales, such as rent, property tax, insurance, utility and interest expenses.

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OPERATING COSTSOPERATING COSTSEstimate & Define Costs in Detail

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FIXED OPERATING FIXED OPERATING COSTSCOSTS

Examples of Fixed Costs•Advertising and promotion•Equipment rental•Lease/mortgage•Freight/postage•Insurance/license/fees•Professional fees•Taxes•Personal withdrawals!•Salaries & benefits•Utilities and telecom; website•Vehicles

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Cash Flow is the profit, over a given period of time, after expenses are subtracted from income.

Estimate your Cash Flow as projected monthly income and operating costs for at least the 1st year & as a 3 year summary.

Cash Flow is an important component of the financial tables in your business plan.

Cash Flow is your best window into the future!

OPERATING (WORKING) COSTS OPERATING (WORKING) COSTS CASH FLOWCASH FLOW

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OPERATING (WORKING) OPERATING (WORKING) COSTSCOSTSCash Flow Example – Arts & Crafts Business

Year 1 Year 2 Year 3

Income

Cash Sales $50,000 $70,000 $75,000

Other Income - Teaching

$0 $500 $800

Total Revenue $50,000 $70,500 $75,800

Expenses

Materials & Supplies $8,500 $11,000 $11,500

Wages & Benefits (Owner)

$24,000 $30,000 $35,000

Rent and Storage $960 $1,050 $1,100

Equipment $3,200 $2,000 $3,000

Accounting, Legal, Insurance

$2,700 $2,500 $2,700

Auto Exp, Travel & Shipping

$4,000 $5,000 $5,500

Advertising & Promotion

$1,200 $1,000 $1,000

Utilities $1,200 $1,300 $1,400

Total Expenses $45,760 $53,850 $61,200

Gross Profit $4,240 $16,650 $14,600

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OPERATING (WORKING) COSTSOPERATING (WORKING) COSTSCash Flow Example – Group Childcare

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  FY1 FY2 FY3Income      

BC Childcare Operating Fund $32,509 $33,809 $33,809BC Childcare Subsidy $110/day $137,500 $143,000 $149,500

Parent fees $165,000 $171,600 $180,250Music Academy Lesson Fees $36,281 $41,610 $41,610

Total income $371,290 $390,019 $405,169Expenses      

Salaries & benefits (FY1, 3 jobs) $117,000 $124,080 $129,360Teaching/Activity Supplies $7,000 $6,000 $6,000

Food Supplies $20,000 $20,000 $20,000

Equipment & Musical Instruments $5,000 $3,600 $3,600

Telecomm $2,400 $2,640 $2,640Office supplies & Music $3,000 $3,000 $3,000

Insurance $0 $12,000 $12,000Subscriptions $0 $500 $500

Advertising and promotion $2,400 $2,400 $2,400Accounting fees $4,000 $5,600 $5,600

Legal & Licensing fees $1,000 $2,000 $2,000Rent $68,750 $75,000 $75,000

Leasehold Improvements $0 $2,000 $2,000Utilities $4,800 $5,040 $5,040

Repairs and maintenance $1,500 $3,000 $6,000Bank charges $600 $600 $600

Professional Development $3,000 $3,000 $3,000Association Dues $0 $50 $50Carrying Charges $1,200 $1,200 $1,200

Janitorial $3,600 $3,600 $3,600Van purchase, maint. & expenses $9,600 $16,800 $18,000

Total Expenses $254,850 $292,110 $301,590Gross Profit $116,440 $97,909 $103,579Owner Draw $72,000 $75,000 $78,000Income taxes $15,719 $13,218 $13,983

Net Revenue (Equity) $44,440 $22,909 $25,579

BREAK EVEN BREAK EVEN ANALYSISANALYSIS

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BREAK EVEN BREAK EVEN ANALYSISANALYSIS

Focus on the sales and/or service level at Focus on the sales and/or service level at which your business will break even (costs = which your business will break even (costs = income), rather than just making “pie-in-the-income), rather than just making “pie-in-the-sky” guesses about sale volumes.sky” guesses about sale volumes.

You need to know the break-even point to You need to know the break-even point to determine if you are winning or losing.determine if you are winning or losing.

It’s a simple process, as we will see next. It’s a simple process, as we will see next.

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BREAK EVEN BREAK EVEN ANALYSISANALYSISLemonade Sales by

1,000’s

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GROSS MARGINGROSS MARGINGross margin is the sales revenue, minus the cost of goods sold, divided by the sales revenue - usually expressed as a percentage.

This number represents the percent of each revenue dollar retained as gross profit.Gross Margin = (Revenue – Cost of Goods /

Revenue) x 100%

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GROSS MARGINSGROSS MARGINSThe cost of goods includes only costs directly linked to the sale, (materials, labour, suppliers, shipping etc.). It does not include indirect fixed costs like office expenses, rent, administration, etc.OK – Hold on. This

next bit can be confusing!

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MARK-UPMARK-UPMark-up is the difference between the selling price and the cost of goods or services – again, often expressed as a percentage.

Mark-up = Sale Price – Cost of Goods

% Mark-up = (Mark-up / Cost of Goods) x 100%

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GROSS MARGIN GROSS MARGIN VS.VS. MARK- MARK-UPUP

Gross Margin is the percentage of the selling price that is profit.

Mark-up is the percentage of the cost of goods or services added to determine the sale price.

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GROSS MARGIN GROSS MARGIN VS.VS. MARK- MARK-UPUP

OK, OK – if you really want to know!

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LOST LEADERLOST LEADERA Lost Leader is a product or service sold at a substantial discount to generate sales of other, more profitable items.

Why on earth would anyone

do this?!

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LOST LEADERLOST LEADER

A business often uses a lost leader when they first open their doors, as a strategy to attract buyers and build a customer base to create future ongoing sales.

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LOST LEADERLOST LEADERSome companies use lost leaders routinely.

Hewlett Packard sells its printers dirt cheap knowing that users will need to spend huge dollars on print cartridges.

Gillette practically gives its razors away in order to sell the real product – costly blades!

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GETTING PROFITABLEGETTING PROFITABLE• Make your own decisions!Make your own decisions!• Never stop learningNever stop learning• Keep an eye on competitorsKeep an eye on competitors• Expenses – pay attention to details & Expenses – pay attention to details & discountsdiscounts• Work to keep your receivables downWork to keep your receivables down• Take care with price reductions – a Take care with price reductions – a slippery slopeslippery slope• Review under-performers and time-Review under-performers and time-wasterswasters• Leverage social networking and Leverage social networking and technologytechnology• Use free resources - local, Internet, BDC, Use free resources - local, Internet, BDC, Canada Business Service Centres, etc.Canada Business Service Centres, etc.

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STAYING POWER!STAYING POWER!Staying power is about sticking around is about sticking around when things don’t work out well and the when things don’t work out well and the going gets tough. Being successful going gets tough. Being successful requires persistence, consistency and a requires persistence, consistency and a “never say die" attitude!“never say die" attitude!

If you are serious about making your If you are serious about making your business competitive and sustainable, business competitive and sustainable, start by thinking about strategies and start by thinking about strategies and contingencies so you will be standing contingencies so you will be standing when the dust settles! when the dust settles!

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STAYING POWER!STAYING POWER!

• AwarenessAwareness• ForesightForesight• CreativityCreativity• PersuasivenessPersuasiveness• TenacityTenacity• FlexibilityFlexibility• PatiencePatience• HumourHumour• Tact & DiplomacyTact & Diplomacy• Professionalism & Class Professionalism & Class

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Qualities for Success

CONTACT US, ANYTIMECONTACT US, ANYTIME

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