© Boardworks Ltd 2007 1 of 22 Business aims and objectives © Boardworks Ltd 2007 Teacher’s notes...

© Boardworks Ltd 20071 of 22

Business aims and objectives

© Boardworks Ltd 2007

Teacher’s notes included in the Notes Page

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1 of 22

Covering Costs Unit 3: Business Finance


Learning objectives

What are the costs involved in setting up a newproduct or service?

What are running costs?

Why is it important to make accurate cost estimations when starting a new business project?

How can ICT reduce costs?



Introduction

When a business launches a new product or service, they need to budget for start-up and running costs. They will need to estimate these costs in advance, to decide whether or not the product or service will be profitable.

Start-up costs are one-off costs paid before a new product is introduced.

Running costs are the costs involved once the new product or service has been launched, in order to continue its production. These are payable for as long as the product or service is available.


Start-up costs


Examples of start-up costs

new buildings for businesses, or extensions to accommodate expanding ones

new machinery, vehicles or equipment (including installation and delivery costs)

researching the target market for the new business

initial advertising for the new business

initial stock for the new business

initial (first premium) payment towards insurance

costs incurred through staff recruitment and training.

Examples of start-up costs include:


Case study: Bonnie’s Ice Cream Café

Bonnie Tate runs Bonnie’s Ice Creams, a small business selling ice creams along Whitstable harbour in Kent. Currently she trades from an ice cream van, but is thinking of expanding her business by setting up a permanent café on the promenade.

Working in small groups, how many different potential start-up costs can you think of that

Bonnie will have to consider?

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How much do you think Bonnie should budget for in order to cover her start-up costs?

Legal costs

Building alterations

Fixtures and fittings

EquipmentAdvertising

Stock supplies

New premises


Running costs


Examples of running costs

Examples of running costs include:

rent

wages/salaries

maintenance

loan repayments

interest on loans

communications (telephone, Internet, etc)

mortgage repayments

advertising

stock

equipment

stationery

insurance payments

utilities(electricity, gas, water, etc)

travel expenses (petrol, MOT, insurance, etc).



Having considered potential start-up costs, Bonnie also knows that once her new business is established, she will incur a number of running costs.

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?

?

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Discuss in your groups what sorts of running costs

Bonnie’s new café will have.



Salaries

Business rates

Tax

StockInsurance

Utility payments

Rent

How much do you think Bonnie should budget for per annum in order to cover her running costs?


Wordsearch!


Start-up or running costs?


Estimating costs

Once you have anticipated the start-up and running costs involved in the production of a new good or service, you will be able to budget for them.

Making accurate estimates about potential expenditure is often essential to the survival of a new business venture. In order to make these estimates, you need to consider every factor which might affect the amount of your identified start-up and running costs.

What sort of considerations should a business take into account when budgeting for start-up and

running costs?


What can go wrong?

Sometimes initial estimates can be inaccurate, which often results in the final costs for a project being much higher than originally predicted. There are a number of reasons for this:

the original estimates were incorrect

the decision-making process took a long time, and/or general delays in the process increased the overall cost

inflation increased the overall cost

the business did not properly monitor their costs.

Can you think of any business projects which have been affected in this way?


What can go wrong? Wembley Stadium

On 11 September 2000, a deal was signed to rebuild Wembley Stadium for a maximum cost of £326.5 million. Originally, the new Wembley was scheduled to open on 13 May 2006, in time for the FA Cup Final that year.However, the completion of Wembley Stadium was delayed by a succession of financial and legal difficulties. It was eventually completed and officially handed over to the FA on 9 March 2007. The total final cost for the project was £757 million, more than double the original estimate.

What specific problems did the developers of Wembley Stadium face?


ICT and start-up costs

E-mail communication facilitates fast decision-making and effective teamwork.Spreadsheets can analyse all costs more easily. In particular, ‘what-if’ calculations can be formulated to predict potential business scenarios.

There are ways that ICT can help decrease the start-up costs of a new project or business:

For example, the opportunity arises for Deep Fried Fred’s to buy a larger premises than planned for their new shop. By formulating a ‘what-if’ scenario on a spreadsheet, they can calculate, quickly and easily, what effect this might have on their start-up costs.


Deep Fried Fred’s

Deep Fried Fred’s have set a maximum budget of £490,500 to cover start-up costs. The premises they originally had in mind for their new shop cost £410,000. The bigger premises are priced at £460,000.

£Premises 410,000Cash registers (x3) 600Brand new delivery vans (x3) 37,500Refurbishment of shop 9,500Initial stock 500Initial advertising 2,000Fryers for cooking (x3) 9,600

Total start-up costs 469,700

Budget 490,500

Spending = OK

Start-up costs

The spreadsheet they have set up allows Deep Fried Fred’s to see quickly and easily the effect on the total start-up costs of buying the larger premises. It also allows them to assess where they might cut costs in order to keep within budget.

How might Deep Fried Fred’s buy the larger premises whilst keeping within their budget?


ICT and running costs

There are ways that ICT can help decrease the runningcosts of a new project or business:

E-mail and video conferencing have reduced the cost of business communications.Bar codes and other stock-check packages reduce the time and cost of completing stock checks and identify any re-ordering needs more efficiently.The just-in-time stock-control system electronically monitors stock, ordering goods as and when needed. This reduces delivery times and increases warehouse space. Staff records are more easily accessed and sorted.Delivery routes with multiple destinations can be planned more efficiently.


Question time!

1. What is a start-up cost? Give four examples.

2. What is a running cost? Give four examples.

3. How has ICT helped reduce start-up costs?

4. How has ICT helped reduce running costs?


Who wants to be an A* student?


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© Boardworks Ltd 2007 1 of 22 Business aims and objectives © Boardworks Ltd 2007 Teacher’s notes...

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