SLC | S21W1 | Costs for entrepreneurs - Introduction to cost.
Hello 🤗 guys,
I welcome you all to the Steemit Learning Challenge season 21 week 1 on a contest organised by @yolvijrm & @adeljose which talks about Costs for entrepreneurs - Introduction to cost. I'm going to be sharing my understanding on the said topic below as I try to attempt all the questions below.
| What is cost and how important is it for entrepreneurs? |
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The word cost means the sum total monetary expense which every business that is being runned incurs this means that all the expense which may include among others production of the goods, services rendered during and after the production and even the entire operation of the said business.
When talking about cost, we are referring to all resources that are put in place to run a business such as money used for the operation and production, time consumed during the process, the labor implored for the job and also the various equipment or material that are needed to ensure that the business runs well.
There are 4 basic type of cost which include fixed cost, variable cost, direct cost and indirect cost. I will like to discuss them one after the other briefly below for your information and better understanding.
Fixed Costs: As the name implies fixed cost, these are types of cost that doesn't change even when there is change in other things like production. A good example of such cost include salaries and insurance.
Variable Costs: This is the direct opposite of the fixed cost we have discussed above. This means that this type of cost changes with change in production. A good example of such cost is raw materials.
Direct Costs: This type of cost is tied to the amount of goods produced or services rendered by an organisation i.e., if there are more productions, there will be more cost and if there are more services there will be more cost as well. A good example is wages for workers if the work is big they will need more workers.
Indirect Costs: This cost is not tied to production or services rendered but they are needed to keep the affairs of the business going and a good example is the cost of administrative work going on within any establishment.
Important of Cost for Entrepreneurs
The importance of cost for entrepreneurs can never be overemphasized and today I will share a few of these importance with us below.
Profitability Analysis: When you carry out a proper analysis of your business, you will be sure that the cost is kept below the revenue to determine if the business you are going for is a profitable one or not.
Cash Flow Management: With a proper cost management, entrepreneurs always ensure that they focus their spending only essential and important things as they always ensure that the limited resources they have serve for major purposes.
Investment Decisions: Cost also helps entrepreneurs to make informed decision. When they consider the cost involved and the return they will now decide which of the business to go for as the main purpose is to earn good return.
Risk Mitigation: Cost and analysis of the business properly help entrepreneurs determine the risk involve in any business and also they make adjustments based on the risk and the reward ratio. If reward is higher than risk then they can consider taking it.
| Establish the difference between costs and expenses, giving examples of this through a real case. |
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There is no doubt that many people always use costs and expenses interchangeably i.e., using them as though they mean same thing but it is important we learn today that they are two different things especially in the financal sector. So I will be explaining both of them below for your understanding.
Costs: The entire money and other things that a business uses to make their production of goods and services and also run other operations. Production material, labor and others are all part of cost.
Expenses: Here, we can say expenses are portion of cost that are recorded on the income statement. This means that expenses are cost that is generated after production, such as utility cost, maintenance cost etc are all expenses as they are portion of the main cost.
Real-World Case Example: School Building
Let's consider a school building as an example to distinguish between costs and expenses. So below I will talk about the cost and then the expenses.
Costs: Building a school for learning and also putting in place all necessary learning gadgets and machinery as well as manpower. All of these are the first cost of getting the school moving. So all of these functions to get the entire thing moving is termed as cost.
Expenses: After the school has been set and running, you will have to pay teachers which you have employed earlier every month atleast, you have to always buy chalk and other things needed to run the school. If there is need to maintain any of the class you will also have to record it under expenses.
In summary, from the illustrations of school I have shared with us above, you will agree with me that we have school set and working properly from the beginning and later the need to always pay teachers and also maintain the school and get other things like
Chalk and other accessories.
| What are the benefits of performing a good cost determination? |
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A good cost determination is essential in every business because it helps to improve profitability, efficiency and sustainability among many other things within any business. In this question I will like to highlight and also discuss briefly some of the cost benefits.
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Accurate Pricing: The importance of accurate pricing can never be look down upon and they reason is that when you know the cost you can easily set the price where you will be able to make good profit without extortion of your customers as too much of price may drive away your customers and also less price may cause you to loss if your cost of production become higher.
Efficient Resource Allocation: With a good cost determination, entrepreneurs can be able to allocate resources perfectly very well as they will only assign resources to places where they are needed and where they can earn a much better return. So if there are places of investment which doesn't have a good return, they will leave it or withdraw the resources and take it to a place that has better returns.
Enhanced Decision-Making: Cost determination also helps in proper decision making. A good decision is business plays and important role as it will help your business to grow much more higher and stronger as you will earn more profit since your investment is only focused on the needed areas.
Improved Budgeting and Forecasting: Cost determination also helps in improving budgeting in the sense that you will be able to identify the various type of cost such as the fixed cost and the variable cost and how to effectively know where they can be used to obtain a maximum return.
Cost Control and Reduction: With cost determination, you will be able to reduce the cost of running a business as we have money for only things that is necessary so anything that doesn't look too important are not taken into consideration at that point and time.
| 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 cost of my business I will take into consideration all the expenses such as production cost and running cost that is all round cost of the said business and in doing so, I will firstly classify my cost into either Fixed Costs, Variable Costs, Direct Costs or Indirect Costs as explained in question one above.
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Secondly, I will want to identify and consider the startup and capital cost to run the business. Here you take into consideration some fees played before a business start running such as registration and others and also money to purchase all that is needed for the business.
Thirdly I will have to calculate the production cost per unit as this will helpe to know what exactly the price of my product will be. As you recall, too much price will scare customers away and less price may lead me to loses so I must stand on a balance to make a little profit.
In the price, I will also ensure that when given it all my other things such as rent and other utility bills are included in certain percentage so that I will always have the money to settle of those bills when the time to do them comes. Also shipping and packaging cost will be included in all of these and also calculated and joined to the price of the product.
Lastly, administrative cost as well as other Miscellaneous must be taken into consideration when giving the pricing for the said asset. This will help me to have all the expenses covered and my production amount completely taken into consideration.
I want to finally invite @josepha, @solaymann, and @suboohi to join the contest and share their entry if they haven't done so yet.
@tipu curate
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Greetings @simonnwigw
1.- You have given us your perception about costs and how important their good management is for a successful business. You have also explained the classification of costs, which is an aspect that will be addressed in future lessons.
2.- You have established differences between costs and expenses, exemplifying through a school. The cost in this case would be everything associated with the provision of the service, the payment to teachers, the chalk, are indispensable elements for teaching, so they would be part of the cost.
3.- You have shared with us the importance of costs for the profitability of a business, and how a good management of them can help to have a solid business.
4.- You have explained in detail the steps to follow to calculate the cost of production of a good or provision of a service, however we would have liked to see this explained through a calculation table with an example.
Thanks for joining the contest
Thanks for discussing the cost issue in such detail and clarity! This will help many entrepreneurs to determine the right cost. Good luck for the contest.