intro to accounting

1. BASICS UNDERSATING OF
ACCOUNTING & BUSINESS

2. Table of Contents
-Branches of Accounting
-Understanding of Retail Supply Chain
-Difference between Cost & Price
-Understating Product & Landed Cost
-Pricing Strategies
-Budgets

3. Branches of Accounting
Financial accounting
Managerial accounting
Cost accounting
Tax accounting
Auditing
Forensic accounting

5. Cost:
Cost is typically the expense incurred for creating a
product or service a company sells. The cost to
manufacture a product might include the cost of raw
materials used. The amount of cost that goes into
producing a product can directly impact its price and
profit earned from each sale.
Price:
Price is the amount a customer is willing to pay for a
product or service.
Profit/Margin
The difference between price paid and costs incurred is
profit. If a customer pays $10 for a product that costs $6
to make and sell, the company earns $4 in profit. The
margin would be (4/10)x100% = 40%
DIFFERENCE BETWEEN COST & PRICE

6. DIFFERENCE BETWEEN COST & PRICE

7. Landed Cost:
Landed cost refers to the total cost of a product to a business,
including not only the purchase price, but also all additional
costs incurred in getting the product from the supplier to the
business' location, such as import duties, freight charges,
insurance, and handling fees.
Landed cost = product + shipping + customs + risk
Product Cost:
Product cost can be calculated by adding together all the costs
associated with producing a product, including materials, labor,
and overhead expenses.
Product Cost = Direct Materials + Direct Labor +
Manufacturing Overhead
UNDERSTANDING PRODUCT & LANDED COST

8. RETAIL BUSINESS MODEL

9. Pricing Strategies

10. Pricing strategies are plans or methods that companies use to determine the prices of their products or services. These
strategies take into account factors such as production costs, target customers, market competition, and perceived
value of the product or service.
Common pricing strategies
1.Cost-plus
pricing
1.Value-
based pricing
1.Penetration
pricing
Skimming
pricing
PRICING STRATEGIES

11. COST-PLUS PRICING
Cost-plus pricing is a pricing strategy in which a company sets the price of a product or service by adding a
markup to the cost of producing it. The markup is the profit the company wants to make on the sale of the
product or service.
To calculate cost-plus pricing, a company first determines the total cost of producing a product or providing a
service, including all direct and indirect costs. This total cost is then multiplied by a markup percentage, which is
determined by the company's desired profit margin. The result is the price at which the product or service will be
sold.
For example
if a company's total cost of producing a product is $100, and it wants a markup of 50%, the price of the product
would be $100 + ($100 x 0.50) = $150.
Cost-plus pricing is simple to calculate and easy to understand, but it does not take into account market
conditions, competition, or perceived value to the customer. It also not suitable for companies that operate in
highly competitive market or when the product or service is not unique.
In these cases, companies may need to consider other pricing strategies that take into account market conditions
and customer preferences.

12. 1. A construction company that builds houses. The company calculates the total cost of materials, labor, and
overhead, and then adds a markup of 15% to determine the price of each house.
2. A manufacturing company that produces a specialized piece of equipment. The company calculates the cost
of materials, labor, and overhead, and then adds a markup of 25% to determine the price of the equipment.
3. A government procurement department that purchases goods and services from contractors. The
department calculates the cost of the goods or services and then adds a markup of 10% to determine the
price the government will pay for the goods or services.
4. A restaurant that prepare a dish, the restaurant calculates the cost of ingredients, labor, and overhead, and
then adds a markup of 30% to determine the price of the dish.
5. A Service company that provides IT support, the company calculates the cost of labor and overhead, and
then adds a markup of 20% to determine the price of their services.
It is important to note that cost-plus pricing is not always the best pricing strategy for companies, especially in
highly competitive markets where other pricing strategies may be more effective.
EXAMPLES COST-PLUS PRICING

13. Value-based pricing is a pricing strategy in which a company sets the price of a product or service based on the
perceived value it provides to the customer, rather than on the cost of production or market competition.
Value-based pricing is a customer-centric approach that takes into account factors such as the:
• customer's willingness to pay,
• the benefits provided by the product or service,
• and the competition in the market.
By focusing on the value provided to the customer, companies can charge a premium price for a product or
service that is perceived as being high-quality or providing unique benefits.
To determine the price for a product or service using value-based pricing, companies conduct market research to
understand how customers perceive the value of their offering and what they are willing to pay for it. Companies
also compare their product or service to similar offerings in the market to understand the competitive landscape.
VALUE BASED PRICING

14. 1. A premium fashion brand that sets high prices for its clothing based on the quality of the materials,
craftsmanship, and perceived exclusivity of the brand.
2. A healthcare provider that charges higher fees for specialized treatment and procedures.
3. A luxury hotel that charges high room rates based on the amenities, location, and service provided.
4. A high-end restaurant that charges more for dishes made with rare or high-quality ingredients.
5. An exclusive spa that charges more for their services because of the luxurious environment and experience
they provide.
6. A professional consulting firm that charges more for its services because of the level of expertise and
experience of its consultants.
7. A software company that charges more for a subscription to its enterprise version with advanced features
and support.
8. A college or university that charges more for its courses or degree programs because of the reputation of the
institution and the quality of the education provided.
9. A law firm that charges more for their legal services because of the level of expertise and experience of their
attorneys.
Value-based pricing is based on the perceived value of the product or service to the customer and can be
effective in creating a perception of quality and exclusivity for the company's offering.
EXAMPLES OF VALUE BASED PRICING

15. Penetration pricing is a pricing strategy in which a company sets a low price for a new product or service in order
to attract customers and gain market share.
The goal of penetration pricing is to quickly capture a large share of the market, by making the product or service
more affordable and accessible to customers. Once the company has established a significant market share, it can
then gradually raise prices to increase profits.
Companies such as new startups, small businesses, and new entrants in a market use this strategy to gain a
foothold in the market by offering a lower price than their competitors. Also, companies that have a significant
advantage in production costs or distribution can use this strategy to undercut the competitors prices and gain
market share.
It is also used by companies that are looking to increase their market share by targeting price-sensitive customers
or by creating a new market segment. Companies that have a large amount of resources or a high fixed cost in
their business can also use this strategy to cover their costs and build market share.
Large companies can also use penetration pricing as a way to enter a new market or launch a new product line,
using their established reputation and resources to quickly gain market share.
PENETRATION PRICING

16. 1. A new smartphone company that sets a low price for its first product to attract customers and gain market
share.
2. A new airline that sets lower prices to attract customers away from established competitors.
3. A new e-commerce company that offers low prices to attract customers and compete with established players
in the market.
4. A new fast food chain that offers low prices to attract customers and compete with established players in the
market.
5. A new subscription-based service that offers a free trial or discounted pricing for a limited time to attract new
customers.
Penetration pricing can be an effective way for companies to gain market share and establish themselves in new
markets, but it can also be risky if the company is unable to raise prices or maintain profitability in the long-term.
EXAMPLES OF PENETRATION PRICING

17. Skimming pricing is a pricing strategy in which a company sets a high price for a new product or service and then
gradually lowers the price over time. The goal of skimming pricing is to maximize profits during the early stages
of a product's lifecycle, when demand is high and the product or service is new and unique.
Skimming pricing is often used by companies introducing new, innovative products or services that have. no
direct competitors. These companies can charge a high price because customers are willing to pay for the new
and unique features. As the product or service becomes less new and other competitors enter the market, the
company gradually lowers the price to remain competitive.
SKIMMING PRICING

18. 1. The launch of a new, high-end technology product such as a tablet or a laptop, at a premium price point
which is gradually lowered as newer models are released and competition enters the market.
2. The release of a new blockbuster movie at a high price point for the first few weeks, then gradually lowering
the price as the movie becomes less new and unique.
3. The launch of a new pharmaceutical drug at a high price point, which is gradually lowered over time as
generic alternatives become available.
4. The release of a new fashion line, where luxury items are sold at a premium price, then gradually lowering
the prices as the items become less new and unique.
5. The launch of a new video game at a high price point, then gradually lowering the price as it becomes less
new and as new games are released.
6. A new service such as a software-as-a-service (SaaS) product, which initially charges a premium price and
gradually lowers the price as competition enters the market.
Skimming pricing can be an effective way for companies to maximize profits during the early stages of a product's
lifecycle, but it can also be risky if the company is unable to maintain demand or if competitors enter the market
with similar products at lower prices.
EXAMPLES OF SKIMMING PRICING

19. OTHER PRICING STRATEGIES
1.Bundle Pricing
2. Offering multiple
products or services as a
package at a discounted
price.
1.Psychological pricing
2. Using specific prices to
influence consumer
perceptions and behavior.
1.Dynamic pricing
2. Setting prices based on
real-time market conditions
and customer demand.
1.Freemium pricing
2.Offering basic version of
the product/service for free
and charge for advanced
features/functionality.

20. BUDGETS

21. BUDGETS

22. A company budget is a financial plan that outlines a company's projected income and expenses for a specific
period, usually a fiscal year.
• Helps prioritize spending: A budget helps a company allocate its resources to the areas that are most
important to its success.
• Facilitates decision-making: A budget provides a clear picture of a company's financial situation, which can
help management make informed decisions about future investments, expansions, and other financial
commitments.
• Improves financial forecasting: A budget allows a company to project future income and expenses, which can
help the company plan for future growth and identify potential financial problems before they occur.
• Facilitates cost control: A budget helps a company identify areas where it can cut costs, which can lead to
increased profitability.
• Provides a benchmark for performance: A budget can be used as a benchmark for evaluating a company's
performance over time.
• Helps to identify potential risks: A budget can help identify potential risks, such as a downturn in the economy
or a new competitor entering the market, that could impact the company's financial performance.
• Facilitates communication: A budget helps to communicate the company's financial goals and objectives to all
stakeholders.
• Encourages accountability: A budget helps to hold employees and departments accountable for achieving their
financial goals.
IMPORATANCE OF BUDGETS

23. REVENUE
OTHER INCOME
INFLOWS
COST/EXPENSES
(Sales & Marketing,
General & Admin,
R&D etc.)
OUTFLOWS
WHEN PREPARING BUDGETS

24. Estimate your sales volumes.
Sales volumes are how much of
your product you sell. You will
therefore need to estimate how
much of your good/service you
will sell over the course of the
year.
Remember that revenue forecasts
are rarely accurate. The point is to
provide the best possible estimate
using the knowledge you have.
If you are a new startup with no
business experience, you will need
to estimate your total sales, price
per product, and do market
research to see what a business of
your size can expect to earn.
Consider your current position. If
you are a business with a few
years of operations, your revenue
forecasting process will involve
examining previous years'
revenues and making adjustments
for the upcoming year.
GENERAL STEPS TO CREATE BUDGETS
Forecasting Revenue

25. Forecasting Revenue:
Forecasting sales is an important part of creating a budget, as it helps a company estimate the revenue it will
generate in the upcoming period. Here are a few methods that can be used to forecast sales:
• Historical analysis: Look at past sales data, such as revenue and unit sales, to identify trends and patterns. This
can help to identify factors that have influenced sales in the past and can be used to make projections for the
future.
• Market research: Analyze market trends and industry data to identify opportunities for growth and potential
threats to sales. This can help to identify new markets, target customers, and products or services that may be
in high demand.
• Sales team input: Engage with sales team members to gather their input on future sales. Sales team members
are on the front line and have a good idea of what is happening in the market and what customers are looking
for.
• Econometric and statistical methods: Use statistical and econometric methods such as trend analysis,
regression, and time series analysis to forecast future sales. These methods use historical data and
mathematical models to make predictions about future sales.
GENERAL STEPS TO CREATE BUDGETS

26. COSTS/EXPENSES:
Determine your fixed costs.
Fixed costs are costs that generally remain the same throughout the year, and they include things like rent,
insurance, and property taxes.
If you have past financial data, use these fixed costs and adjust them for any rent increases, bill increases, or new
costs.
Estimate your variable costs.
The cost of raw materials and inventory to make your sales is the key variable cost.
Add All Costs Together:
Add these costs together and make adjustments. Once you have a total for each type of cost, add them together.
This will be your total cost base for the year. You can then ask yourself some key questions.
• Are your total costs less than your revenues?
• Do your total costs provide a profit margin greater than or equal to your target?
• If the answer to either of these questions are no, you will need to look into making cuts. To do this, look at all
your costs, and examine what you can do without. For example, you can investigate finding a location with
lower rents or reducing utilities costs.
GENERAL STEPS TO CREATE BUDGETS

27. Check Excel Workings for Simple Budget Example

28. 1. Gather historical financial information: Collect past income statements, balance sheets, and cash flow
statements to use as a starting point.
2. Identify key drivers of revenue and expense: Analyze the past financial data to identify the key drivers of
revenue and expenses for the company.
3. Project future revenue and expenses: Use the information from step 2 to project future revenue and
expenses. This may involve forecasting sales, projecting costs, and estimating future expenses.
4. Develop a budget by department or cost center: Break down the budget by department or cost center, so
you can see how much each part of the company will be spending or earning.
5. Set financial goals and targets: Establish specific financial goals and targets for the upcoming year, such as
revenue growth or cost reduction.
6. Review and update the budget regularly: Monitor the budget throughout the year and make adjustments as
needed.
7. Communicate the budget to all stakeholders: Share the budget with all relevant stakeholders, such as
employees, investors, and board members, so that everyone understands the financial plan for the year.
8. Implement budget controls: Develop systems and processes to ensure that the budget is being followed, and
that expenses are kept within the allocated limits.
SUMMARY OF CREATING BUDGETS
Keep in mind that the specifics of budgeting process may vary depending on the size and complexity of the
company and the industry it operates in.

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