Basics of Costing for a startup company.

1. Calculate how much
your product/service will cost you?
~ by Ratnesh A Desai
For Jai Hind E-Cell

2. 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

3. 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”

4. 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

5. Why Is Costing So Important?
Tighter
Controls
Higher
Profit
Margin
Quick
Startup Process
Standardization
Cost
Savings
Improved
Reporting
More Flexibility
&
Focus on Core
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.

6. Why Is Costing So Important?
Cash
Flow
Balance
Sheet
Financial
Statements
Profit
& Loss
A/c
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

7. Balance
Sheet
Balance Sheet as on 31st March 2013
ABC Company
Liabilities Assets
Owner’s Equity
Capital
5,00,000
Balance from P&L A/c 6,64,800
(retained earnings/Net Profit)
Creditors 2,50,000
Loans
5,00,000
Interests on Loans 50,000
Taxes 5,200
Land/Building
10,00,000
Machineries/Equipments
6,50,000
Stationaries
20,000
Goodwill 1,00,000
Debtors 20,000
Investments 30,000
Cash-in-hand/Bank 45,000
Stock of Goods 5,000
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.
Total 18,70,000 Total 18,70,000

8. Profit &
Loss
P&L statement as on 31st March 2013
ABC Company
Revenue Expenses
Sales
11,80,000
Payments Received 10,000
Balance(Net Profit) 6,64,800
Indirect Income:
Sale of Old Assets 1,40,000
Dividend on Investments 3,000
Interest on loan given 2,200
Purchase (Raw Materials)
3,30,000
Wages/Salaries 5,20,000
Rent
30,000
Advertising 12,000
Accounting/Legal 5,000
Depreciation 3,000
Insurance
80,000 Cost of Production
10,00,000
It is a statement of revenues and expenses of a company.
Total Revenues are inflow 20,00,000 or money Total received by a company.
20,00,000
Expenses are outflow or money spent by a company.
P&L shows “profit-related” inflow & outflow.

9. Cash
Flow
Cash Flow statement as on 31st March 2013
ABC Company
Startup
Month
Month
1
Month
2
Month
3
Starting Cash 20,000 28,000 (3,000) 15,000
 In
– Cash Sales
– New Loans
– New Investment
– Payments Received
TOTAL IN
3,50,000
2,50,000
5,000
4,000
6,33,000
2,75,000
- -
7,000
3,500
3,13,500
1,78,000
50,000
2,000
--
2,70,000
3,77,000
1,00,000
3,000
2,500
4,95,000
 Out
– Bill Payments
– Repay Loans
– Purchase Assets
TOTAL OUT
1,50,000
50,000
4,20,000
6,20,000
90,000
1,18,000
1,00,000
3,08,500
1,32,000
1,27,000
--
2,59,000
1,00,000
2,05,000
77,000
3,82,000
• Cash Balance* 13,000 8,000 11,000 13,000
* (“Starting Cash” plus “In” minus “Out”)

10. Cash
Flow
Usually inflows and outflows refer to sales revenue and
cost of production.
But...

11. Cash
Flow
But... cash flow also includes other inflows that generate
any revenue and other outflows that incur any cost.

12. Cash
Flow
Profit Related P&L statement
Profit Related Cash flow Non-Profit Related
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.

13. “If you can measure it,
you can improve it.”
Measuring
Value
Business valuation means what a business is worth.
There are three fundamental approaches for valuation:
1.Asset Approach – Net Worth = Total Assets – Total Liabilities
2.Market Approach – value of shares in stock market & assets
3.Income Approach – discounting future cash flow projections

14. “ROI helps estimate
the attractiveness of
an investment opportunity.”
ROI

15. “ROI helps estimate
the attractiveness of
an investment opportunity.”
ROI

16. Types of Costs...
Other Costs
Finance
Costs
Operating
Costs
Capital
Goods
Legal
Compliance
Initial
Costs
Development
Costs

17. 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)

18. 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

19. 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.

20. 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.

21. 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

22. Let’s Calculate...

23. Let’s Calculate...

24. Let’s Calculate...

25. Let’s Calculate...

26. Let’s Calculate...

27. Let’s Calculate...
Costs

28. Costing – all the smart kids
are doing it...

29. Thank You!