SLC | S21W1 | Costs for entrepreneurs - Introduction to cost.
In every business cost is involved which is either the cost of purchasing raw materials, cost of production, cost of paying wages/salaries, and so on. Let's get to know more about cost in this post.
What is cost and how important is it for entrepreneurs?
Cost In the concept of business, cost means the amount of money that is spent to produce goods, operate a business or deliver a service. Like for example, if I want to start a business today I will need to have a store and stock it with goods, and whatever amount of money that I use in stocking my store and paying for services is referred to as cost. Cost includes both direct and indirect expenses which material, overhead, and Labor are known as direct costs.
Marketing, researching, and adminstrative costs, are known as indirect cost. For entrepreneurs, the cost is very important and it is something that entrepreneurs don't joke with as it is what directly affects the cash flow, long-term viability, and profitability of entrepreneurs' business.
| How Important Cost is For Entrepreneurs |
|---|
What most entrepreneurs do is hire of cost accountant who would help keep a record of all expenses of their business to determine profit, and prices, make decisions, and so on. With that being said for entrepreneurs cost is important and includes the following:
Profitability:
What determines profitability is when the cost of production (direct and indirect) is subtracted from revenue to entrepreneurs lowering costs without compromising quality can help to increase profit margins which are important for the growth of the business.Pricing Strategy:
Cost is important for entrepreneurs as it is with the help of cost that entrepreneurs get to set prices that attract cost customers while trying to cover up expenses to make profits.Investment Decisions:
Cost is important for entrepreneurs as cost helps entrepreneurs to make an informed decision that would be more profitable for their business.
Establish the difference between costs and expenses, giving examples of this through a real case.
 |
|---|
Costs and expenses are two terms that are often used interchangeably many things the terms are the same thing but they are different. In accounting both words are different and I will be using my accounting knowledge to simplify them for you.
Costs
As we have read earlier, costs refer to the amount of money that is paid to acquire or produce something. The amount of money can be the money that is paid for materials or equipment. Costs are usually associated with assets, i.e. something that has future value for a business. A good example of cost is when a business (company, firm, industry) buys machinery for ₦1,000,000. This amount of money is considered a cost because the machinery will be used in the company to provide long-term benefits for the company.
Expenses
In accounting, expenses are seen as the outflows of resources that are used in the operation of a business within a period. Well as an entrepreneur, expenses are seen as the outflows of resources that are used up in the normal operations of a business within a period. The reason why it is referred to as the outflow of resources is because it is the money that a business spends daily. A good example of expenses is paying ₦200,000 daily or monthly for utilities. This is an expense because it is used to support the ongoing operations of the business but doesn't generate long-term value for a business.
Real Case Examples
Cost
Example I have a bakery, and I buy an oven for ₦2,000,000. This is a cost to my business as the oven is a capital asset that is expected to bring benefits to my business for several years to come.
In my bakery I bought a new generator for ₦800,000. This is a cost to me because it is a capital asset that will be used for the long term.
Expenses
As a bakery owner who produces bread, I am paying ₦500,000 monthly rent for using the land, ingredients purchases, and utility bills. These are expenses to my business. These are classified as expenses as there are payments within a specific period to keep the bakery running.
I paid ₦5,000 for the supply of water, and ₦2,000 for the supply of petrol (fuel) off-loading of bread from the vehicle. These are expenses because there are regular payments for the smooth running of my bakery. In summary, expenses are regular payments.
What are the benefits of performing a good cost determination?
 |
|---|
In terms of performing a good cost determination, I can tell you that the benefits are huge when making critical, financial, and strategic decisions in a business. Well, some of these benefits I have shared them below.
Accurate Pricing:
An entrepreneur who knows the true costs of the production of goods or services is an entrepreneur who can be able to set a price for the goods produced or services that will help cover expenses and achieve high profit. To this performing a good cost determination helps entrepreneurs to set prices.Profitability and Forecasting:
With good cost determination, entrepreneurs can be able to identify the products or services that more profitable to their business which will enable entrepreneurs to focus more on high-margin offerings or minimize low-margin products or services.Const Control:
Performing a good cost determination can help entrepreneurs identify the areas where spending can be reduced affecting production and other areas of the bust.
How do you determine the costs of your business? If you are not an entrepreneur, how would you do it?
Well, I am not yet an entrepreneur, and how I would determine the cost of my business if I become an entrepreneur would be based on the following:
I will start with market research to know the average cost within the industry will venture into. While doing my research I will contact potential supplies, and customers to get estimates for equipment, inventory cost, rent, labor, materials, equipment, and others
I will estimate Fixed costs like permits, insurance, rent, and all other costs that are relatively stable and predictable, so I won't be cheated.
I will consider the costs that change with sales volume or production and reduce them if they are too high.
I will maintain an account for general expenses such as office supplies, and utilities all daily expenses will be recorded.
I will ensure that I prepare financial statements such as statements of profit or loss, statements of financial position, and statements of changes in equity to determine my cost.
I am inviting: @dove11, @simonnwigwe, and @ruthjoe
Cc:-
@yolvijrm
Greetings @josepha
1.- You have shared a concept and the importance of cost. Every company must have the trained personnel to manage costs and expenses, in such a way, that allows them to see the return on their investment.
2.- You have shared the differences between costs and expenses, and presented an example about it. It is important to be clear about the difference between product and asset. Suppose we are a PC manufacturing company, the computers we produce are products; whereas, the PCs that are used by the staff are assets.
3.- You have presented some benefits of good costing, this allows entrepreneurs to have control of the information, and from there, to make the corresponding decisions.
4.- You have shared your ideas in case you are an entrepreneur, it is good to do a market study and see if the business you want to start is viable. On the other hand, it is important to know the capital you have at the moment.
Thanks for joining the contest.
Thank you for your review.
You have accurately done perfect job on this I must confess. How I wish every entrepreneurs are able to read this
Thank you for your support
How costing and planning can make an entrepreneur successful, is beautifully described here. Good luck for the contest.