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. 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’’
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3. Types of Business Costs
Drawings Business Costs
Fixed/Overheads Costs
Direct/Variable Costs
Capital Costs
Depreciation
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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.
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5. Fixed Costs/Overheads
Exercise
Fixed Costs Per Month Notes/Calcs
Costs/Overheads £
Business
Travel/Vehicle
running costs
Rent/Rates
Telephone
Insurance
Office Supplies
Advertising
Other
Fixed Salaries of
staff
Total: 5

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
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7. Direct/Variable Costs
Exercise
Cost Per Notes/Calcs
Direct Cost
Month/Unit £
Purchases of
materials/components
Wages
Goods for resale
(stock)
Subcontract costs
Packaging
Transport/Postage
Hire of
equipment/venues
Total:
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8. Capital Costs
Items which will be of long term use in the
business- which will last more than a year.
• Equipment
• Vehicles
• Machinery
• Fixtures & Fittings
• Buildings Owned
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9. Depreciation
Depreciation allows for the wear and
tear of capital items each year .
Reflects the ‘use‘ the business has had
from the asset in a year.
Depreciation goes in Profit and Loss.
Tax rules differ .
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10. Costing your Product or Service
What’s Your Business Type?
• Supplying Your Time?
• Manufacturer?
• Retailer or Trader?
• Renting out?
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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
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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.
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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
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14. What’s Your Unit?
Renting Out
This can be – rental of buildings.
- rental of equipment.
- giving a licence.
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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.
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16. Pricing
Relationship
Price X Unit = Sales
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17. PRICING
Factors that Affect Price
Internal Factors External Factors
• Marketing • Nature of the
objectives market and demand
• Marketing mix • Customers
Pricing
strategy • Competition
Decision
• Costs • Environmental
• Organisational factors
considerations
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18. Pricing
Price Floor and Ceiling
Price Ceiling The most the
customers will pay
Competitors
Market
Prices
Competition
Prices
Break-even Price
Price Floor
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19. Pricing -
Pricing Methods
• Recommended Retail Price.
• Cost Plus.
• Market Led – or Competitors.
• Differential Pricing.
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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.
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21. PRICING
Market – Led Pricing
• Customer needs and wants.
• Customer perception of the value of
your product or service.
• Market demand trends.
• Competitors prices.
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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”.
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23. Sales and Costs
Relationship
Sales _ Costs = Gross Profit
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24. Gross Profit
• There is no ‘’right‘’ Gross Profit %.
• But there are often industry ‘ norms’.
• Helps if you can find that out.
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25. Gross Profit
Unit Price £ % %
Margin Mark-up
Sales 200 £30 6000
Direct Cost 200 £12 2400 150%
Gross Profit £18 3600 60%
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26. Break Even
Unit Price £ % %
Margin Mark-up
Sales 200 £30 6000
Direct Cost 200 £12 2400 150%
Gross Profit £18 3600 60%
Fixed Costs 2600
Drawings 1000
Net 0
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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. Any Questions?
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