Operating Expenses

(1)

(2)

FastTrac® | Planning the Entrepreneurial V

Operating Expenses, Sales & Inventory

12

(3)

12_A

Net Income

Sales

– Cost of Product/Service = Gross Income

– Operating Costs = Net Income

(4)

12_B

Operating Expenses

 Selling expenses

 Administrative expenses

 General overhead expenses

(5)

12_C

Operating Expenses

 Do not straight-line expenses (divide annual expenses by 12)

 Document in the month they are paid

 Critical to accurate cash flow

(6)

12_D

Projecting Sales

1. Comparative sales approach: Develop sales by estimates based on industry and competitor’s data 2. Average sale per customer: Multiply average sale

per customer by number of expected customers.

3. Bottom-up method: Determine how much revenue must be received to cover costs.

(7)

12_E

Inventory

 Manufacturing inventory

– Raw materials – Work-in-progress

– Finished goods ready for sale

 Merchandising inventory

– Stock of goods ready to be resold

(8)

12_F

Managing Inventory Costs

 Planning is critical to cash flow.

 Streamlining the production process can free up inventory to be sold more quickly.

(9)

12_G

Production Expenses

 Part of the total cost of goods sold.

 Examples:

– Freight-in and trucking/shipping costs – Insurance

– Payroll expenses – Rent and utilities

– Repairs and maintenance – Rework

– Subcontracting

(10)

12_H

Cost of Goods Sold

 Cost of product/service is often called cost of goods sold.

 Cost of product/service includes labor,

supplies, materials, and parts directly used to make the product/service available to the

customer.

 Gross income is also called gross profit or gross margin.

(11)

12_I

Net Income

Sales

– Cost of Product/Service = Gross Income

– Operating Costs = Net Income

(12)

12_J

Break-Even Analysis

 Entrepreneurs use to determine how much of their product/service must sell at a specific price to cover all costs (break-even)

(13)

Fixed Costs = $174,000 Variable Costs = $730 per shed Total Cost

12_K

 Identify Costs

(14)

Break-even is 305 sheds at $1,300 per shed

Sales @

$1,300 per shed

Fixed Costs = $174,000 Variable Costs = $730 per shed Total Cost

12_L

 Determine Sales

(15)

Total Cost

Break-even is 305 sheds at $1,300 per shed

Sales @

$1,300 per shed

Fixed Costs = $174,000 Variable Costs = $730 per shed

Break-even is 163 sheds at $1,800 per shed Sales @

$1,800 per shed

12_M

 Adjust Sales for Comparison

(16)

12_N

Break-Even Formula

Fixed Expense

Sales per Unit – Variable Costs per Unit = ^Break-Even

Per Unit

(17)

Run KC

Based on the Income Statement:

 According to Tim’s projections,

will the sock business be profitable?

 If you were Tim, how would you feel about the outlook for the business?

12_O