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1. 1. • Explain Drawings and Survival Budget.• Identify the different type of business costs i.e. fixed, direct, and capital.• Depreciation, and how to calculate it.• How to cost a product.• Overview of Sales Pricing.• Break Even. 1
2. 2. OVERVIEW• Aim to make money.• Profit = Your Income.• Cover your costs.• Earn the Income you need.• Set your Sales Price to achieve this.• Separate ‘’You’’ from the ‘’Business’’ 2
4. 4. Fixed Costs/Overheads• Don’t vary with sales (up or down).• They are fixed!• No sales in month – still have fixed costs.• Some costs may start before you even make any sales. 4
6. 6. Direct/Variable Costs Costs which vary with the level of production e.g. :-• Raw Materials/Components• Stock bought for sale• Packaging/Transport of goods• Subcontracting Costs/Labour• Wages for staff paid by units produced 6
7. 7. Direct/Variable Costs Exercise Cost Per Notes/Calcs Direct Cost Month/Unit £Purchases ofmaterials/componentsWagesGoods for resale(stock)Subcontract costsPackagingTransport/PostageHire ofequipment/venuesTotal: 7
8. 8. Capital CostsItems which will be of long term use in thebusiness- which will last more than a year. • Equipment • Vehicles • Machinery • Fixtures & Fittings • Buildings Owned 8
9. 9. DepreciationDepreciation allows for the wear andtear of capital items each year .Reflects the ‘use‘ the business has hadfrom the asset in a year.Depreciation goes in Profit and Loss.Tax rules differ . 9
11. 11. Which Type are You? What’s Your Unit? Supplying Time = Hours BUT- only ( productive hours )Take your total costs + your drawings – divide by your hours = Hourly Cost 11
12. 12. Which Type are You ? What’s Your Unit ? Manufacturer- could be product/process hours Take your costs + Drawings and divide by number of units to get cost = Unit Cost BE CAREFUL WITH FIXED COSTS. 12
13. 13. Which Type are You? What’s Your Unit? Retailer – it is what you sell How many will you sell ?Take your costs and Drawings and divide by the number you sell = Unit Cost 13
14. 14. What’s Your Unit? Renting OutThis can be – rental of buildings. - rental of equipment. - giving a licence. 14
15. 15. Mark Up % or Margin %• Mark up is a % you add to cost to get sale price.• Margin is a % of Sales which shows how much you make on each £ of Sales. 15
16. 16. PricingRelationship Price X Unit = Sales 16
17. 17. PRICING Factors that Affect PriceInternal Factors External Factors• Marketing • Nature of the objectives market and demand• Marketing mix • Customers Pricing strategy • Competition Decision• Costs • Environmental• Organisational factors considerations 17
18. 18. Pricing Price Floor and CeilingPrice Ceiling The most the customers will payCompetitors Market Prices Competition Prices Break-even PricePrice Floor 18
19. 19. Pricing - Pricing Methods• Recommended Retail Price.• Cost Plus.• Market Led – or Competitors.• Differential Pricing. 19
20. 20. PRICING Cost Plus Pricing• Add a % or a set amount to your cost.• Works for hours, units and retail.• BUT - DANGERS !• Need to know your costs.• Need to take market into account. 20
21. 21. PRICING Market – Led Pricing• Customer needs and wants.• Customer perception of the value of your product or service.• Market demand trends.• Competitors prices. 21
22. 22. PRICING Differential Pricing• The change you make to your prices to reflect varying demand for your product. – Seasonal – e.g. Christmas. – Events – e.g. Concerts, sports events. – Out of the ordinary e.g. callouts, urgency. – Sectoral e.g. neighbourhood. – “Special Offers”. 22
23. 23. Sales and CostsRelationship Sales _ Costs = Gross Profit 23
24. 24. Gross Profit• There is no ‘’right‘’ Gross Profit %.• But there are often industry ‘ norms’.• Helps if you can find that out. 24
25. 25. Gross Profit Unit Price £ % % Margin Mark-upSales 200 £30 6000Direct Cost 200 £12 2400 150%Gross Profit £18 3600 60% 25
26. 26. Break Even Unit Price £ % % Margin Mark-upSales 200 £30 6000Direct Cost 200 £12 2400 150%Gross Profit £18 3600 60%Fixed Costs 2600Drawings 1000Net 0 26
27. 27. Break Even• When Revenue = Direct and Fixed Costs plus Drawings.• Need to cover Drawings and Fixed Costs from Revenues – Less Direct Costs.• Look for a non - Financial Indicator. 27
28. 28. Any Questions? 28