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Greetings friends and welcome to my participation in this engagement challenge on the topic for this week, "Cost for entrepreneurs" the introduction to cost. Without talking much, let's get on with it, shall we?

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What is cost and how important is it for entrepreneurs?

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From the lesson, I've come to understand that, Cost is simply the total amount of money a business or an entrepreneur spends to produce goods or services. That is, cost in business includes everything the business spends on materials and labour, including overhead expenses like rent and utilities.

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Hence, understanding costs is very important for any and every business as it helps in knowing how much is needed to sell the product or service to make profit. Therefore knowing the costs of a business is important for some of these reasons;

Better Pricing of Goods and Services:
Business owners need to set their prices to cover for their costs and still attract customers. So if they don’t understand their costs, they might price their products low and lose money or high and scare away costumers.

Budget Planning:
Business owners need budgeting to manage their finances very well and this can only be done by knowing the cost of the business, i.e., by knowing the costs of production, business owners can now allocate the available resources wisely and plan for upcoming expenses.

Decision Making:
When a business owner knows the cost of his/her business, it helps him/her in making informed decisions about the business.

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Establish the difference between costs and expenses, giving examples of this through a real case.

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Costs and expenses are very much related concepts, but in business terms, they have different meanings.

Costs, as I've stated earlier refer to the total amount of money spent in producing goods or services, which includes, the direct costs of production, such as materials and labour for production, as well as the indirect costs, like overhead costs such as wages, rents, bills etc.

For example, Sahmie's bakery spends money on flour, sugar, and wages for bakers to make bread, those are all direct costs tied to producing the breads.

Expenses, on the other hand, are said to be the money spent on items that are not directly linked to the production of goods or services, but then are necessary for running the business even though they are not directly linked to the production of the goods or services.

Going back to the bakery example, expenses would include, rent for the bakery space, utility bills, and the advertising costs, as these are ongoing costs that keep the business operating but are not directly involved in making the bread.

So let's look at an example, let’s say Sahmie's bakery has the following cost for a month:

• Costs of producing bread (direct cost):

  • Flour: 20 Steem
  • Sugar: 5 Steem
  • Labor: 30 Steem
  • Total Costs: 55 Steem

• Expenses for the month (indirect costs):

  • Rent: 100 Steem
  • Utilities: 20 Steem
  • Advertising: 15 Steem
  • Total Expenses: 135 Steem

In this case, Sahmie's bakery’s costs to make bread (direct cost) is 55 Steem, while the expenses to keep the business running (indirect cost) is 135 Steem. Therefore, the total cost of running the bakery is 190 Steem. Since, the total cost of a business is the sum of both direct and indirect.

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What are the benefits of performing a good cost determination?

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Better Pricing Decisions:
When a business knows what it costs to produce it's goods and services, then it can set prices that not only cover those costs but also ensure a profit, which in turn keeps the business running to attract customers.

Increased Profit:
By understanding business costs, an entrepreneur can identify areas where they can save money (cut cost), which in turn helps them to keep more of the money they earn, leading to higher profits.

Effective Budgeting:
Knowing the costs of a business helps businesses create better budgets to help in planning how much money is needed for different areas of the business, like production, marketing, and salaries. Which in turn helps them avoid overspending.

Informed Decision Making:
To make a good decision in business, one has to know what's coming in and going out. Therefore, knowing the costs involved in the business allows entrepreneurs to make better decisions about the business.

Resource Allocation:
If I know the cost of my business, it will help me better to allocate the available resources more effectively as I can invest in areas that bring me more value and cut back on areas with less productivity.

Financial Health Monitoring:
Having a knowledge of the costs of your business helps in keeping track of your business financial health, helping you to spot trends, like rising costs, and take action before it becomes a bigger problem.

Competitive Advantage:
Businesses that manage their costs well tend to offer better prices or higher quality products than their competitors which in return helps to attract more customers.

Risk Management:
Understanding costs helps entrepreneurs prepare for unexpected expenses, and to handle tough times without going into debt.

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How do you determine the costs of your business? If you are not an entrepreneur, how would you do it?

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To determine the costs of a business would require following some steps, which may include:

Listing All Expenses:
I will start by writing down everything my business will spend money on, which includes rent, utilities, salaries, materials, and any other costs that come up regularly.

Categorizing My Costs:
This has to do with grouping my expenses into two main categories, such as fixed costs (those things that stay the same each month, like rent) and variable costs (the things that can change, like supplies based on how much I sell).

Tracking Direct Costs:
This is simply identifying those costs that are directly linked to making my products or for providing my services. Using Sahmie's bakery as my point of business, this would include the cost of flour, sugar, and packaging.

Marking Out Indirect Costs:
These are those costs that support my business but are not directly tied to the production of goods and services, such as marketing expenses, administrative salaries, or office supplies.

Regular Review:
This has to do with me checking my costs regularly and comparing them to previous costs and the budget to see if they are changing, as this will help me spot if I'm spending too much to help me make adjustments.

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I want to take this opportunity to invite @starrchris, @bossj23, @bonaventure24 and @ninapenda.

Thank You for your Time

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NOTE: Always have a smile on your face, as you are never fully dressed without one.