Business Manta

Measuring the costs of production

Costs are defined as those expenses faced by a business in the process of supplying goods and services to consumers. In the short run (where there are fixed and variable factors of production) we make a distinction between fixed and variable costs. Examples of each are given below.
SHORT RUN COSTS OF PRODUCTION
TOTAL COSTS (TC) = TOTAL FIXED COST (TFC) + TOTAL VARIABLE COSTS (TVC)
FIXED COSTS
Fixed costs relate to the fixed factors of production and do not vary directly with the level of output. (I.e. they are exogenous of the level of production in the short run).
Good examples to use are rent of buildings, leasing of capital equipment, the annual uniform business rate charged by local authorities, the costs of full-time contracted salaried staff, interest rates on loans, the depreciation of fixed capital (due to age) and the costs of business insurance.
Total fixed costs (TFC) remain constant as output increases. Average fixed cost (AFC) = Total Fixed Costs (TFC) / Output (Q) Average fixed costs will fall continuously with output because the total fixed costs are being spread over a higher level of production causing the average cost to fall.
Examples of fixed costs
Rent of buildings, leasing of plant and equipment, local business rates, the costs of salaried staff, interest rates on loans, depreciation of capital (due to age) and insurance premiums.
Average fixed cost (AFC) =

Total Fixed Costs (TFC)


Output (Q)
An increase in fixed costs has no effect at all on the variable costs of production. This means that only the average total cost curve shifts. There is no change at all on the marginal cost curve leading to no change in the profit maximising price and output of a business.
Average fixed costs will fall continuously with output because the total fixed costs are being spread over a higher level of production causing the average cost to fall
Average fixed costs falls as output increases. A business can "spread their over head costs" by increasing output in the short run. Average fixed cost will never be zero if there are positive total fixed costs.

VARIABLE COSTS
These are costs that vary directly with output since more variable units are required to increase output. Examples are the costs of essential raw materials and components, the wages of part-time staff or employees paid by the hour, the costs of electricity and gas and depreciation of capital inputs due to wear and tear. Total variable cost rises as output increases.
Average variable cost (AVC) = Total Variable Costs (TVC) /Output (Q) AVC depends on the cost of employing variable factors compared to the average productivity of these factors (usually labour productivity). If additional units of labour can be hired at a constant cost there will be an inverse relationship between average product and average variable cost. Therefore, when average product is maximized, AVC will be minimized.
Posted by Anoopdas- Business Consultant at 9:38 PM 0 comments
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Cost effective Business Strategies- Starting a catering business!!!

Starting a catering business from home can be a great opportunity for the people who were experience in cooking and dealing with food industry (not necessary). The catering business is to ensure the quality of meal, appetizers, biryani, fried rice, desserts and drinks etc are customize for the client's event. Catering services are used for conferences, birthdays, anniversaries, and, of course, weddings.
In fact, you can specialize by doing only wedding catering and keep yourself busy and your catering service growing. You need to be creative and have a great deal of knowledge about food. However, this is just the tip of the iceberg. Catering can be hard work.
The first step in starting catering company is to create a catering business plan (Bramma will help you to make the complete business plan). This plan will be needed if you try to get a loan to help your catering business get off the ground. It will also help you organize yourself and your business, by answering questions, and ensuring your services are professional and dependable.
When you start a catering company you will be required to have many licenses and certifications, and must adhere to Health Department regulations. You will need to contact your local Health Department for the specific regulations, certifications, licenses, and insurance information for your area. The Health Department also usually requires an inspection of the area to be used for your catering business.
With your catering business start up, you have to decide what types of food you are going to offer. Once you have decided on the food, you need the equipment to prepare the food and a way to transport it. Some places you will be working will have a kitchen that you can use for final preparation, but the majority of work will be done at your location.
Once you have certifications, insurance, and you have complied with the local Health Department and any other government regulations, you are ready to finalize what catering services you will provide and the associated fees. The best way to get this information is to contact some local caters. Find out what they offer and their fees. Do the same with any restaurants that offer catering services.
Marketing of any business can seem almost impossible. However, you have many options. You can write a press release for local newspapers and radio stations. You can offer your catering services to events. You can invite wedding and event planners to a tasting of some of your food. If they know your work, they are more likely to hire you and try to sign agreement with them. Once you get your catering business name into the community, your best advertisement will be word of mouth.
You should also subscribe to industry magazines to stay ahead of the trends and your competition. The internet is another great place to find information, recipes, trends and other issues of catering services.
The last step is to do it. Whether it is just part time or full immersion, remember that through all the hard work that in the long run it will be worth all the effort. People will always need catering services. The potential for growth in this industry is unlimited.

Posted by Anoopdas- Business Consultant at 3:43 AM 0 comments
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Accounting Basics: An Essential Know How for Entrepreneurs



Entrepreneurs usually spend a vital time developing their product line and fostering their client base. Accounting is also as important as this and without which your business will never reach its full potential. A proper book keeping, is essential to avoid the risks of many tax and legal issues, cash flow crunches, and would even miss out many growth opportunities.
The benefits of accounting are two fold - In the first place, it provides the entrepreneur with a valuable tool for assessing and analysing his business performance. This enables him/her to track the strengths and weaknesses of business, which in turn could improve the bottom line. Secondly, a proper recording of the receipts and expenditures of day to day business is vital for the annual tax filings and other legal compilation. It will also be required by the banks and financial institutions if you are applying for a small business loan.
Even though most of the accountings are carried out by accountants; either staff or hired, an entrepreneur should be aware of accounting basics, at least to keep the scores. This knowledge not only helps him/her to assess the business movements figuratively, but also to talk about accounting needs with employees and bankers authoritatively.
The basics mentioned below will help you to understand some of the confusing jargon you would often encounter in business accounting.
All businesses should maintain their records in a ledger, which is a simple record of sales, receipts and expenses. The transferring of individual receipts and expenditures to a ledger is called posting.
How often you post to your ledger depends on the volume of receipts and expenditures in your business. Many businesses find it necessary to make postings on a daily basis. However, you should plan to update your ledger on a daily, weekly or at least a monthly basis. Drawing up your ledger is fairly simple to do especially if you are using accounting software.
A Ledger Keeping or a Book Keeping is kept with an objective to summarize financial transactions into usable forms which structure the financial information about a business or an individual. Once you have posted your transactions to a ledger, you can begin the compilation of financial reports for your business.
Types of Book Keeping (Book Keeping Systems)
There are two major types of book keeping: Single Entry System and Double Entry System.
Single Entry System: Single-entry system is an "informal" record keeping system. In this system, each income and expenses are noted as entries. It is much like a cheque book register and focuses on the business' profit and loss statement. Cash registers’ receipts are an example of this method of record keeping. It makes more sense to an average entrepreneur due to its sheer simplicity.
While the single entry system may be acceptable for tax purposes, it does not provide the financial information needed to report the financial affairs of a business. Also, this method further requires reconciliation through bank statements.
Double Entry System: The double-entry system is a complete and accurate accounting system. It is a self-balancing entry, works on the principal that a business transaction consists of an exchange of one thing for another. Every time an entry is made on the expense side (debits), another entry called an offsetting entry is made on the income side (credits) of the ledger. In short, for every plus there must be a corresponding minus. The end goal is a balanced or zero sum sheet. This system may appear confusing to a beginner.
These are the two methods of book recording. Following a single entry or a double entry method, books can be maintained by an accrual basis accounting or a cash basis accounting depending on the nature of the business.
Accrual Basis: Here you match the revenue with expenses regardless the cash physically collected or not collected. For example, you sell a product to a customer and he pays you for it after a credit period of 30 days.
The sale will be recorded in the books on the day it is made. When the actual money comes in the "accounts receivable" it is then turned into cash. Or, if you incur an expense today, but you are making the payment next month only, the expense will be recognised today itself. If you're in manufacturing or dealing with inventory, the accrual basis would be suffice. Many large businesses and corporates use this method.
Cash Basis: Cash basis accounting on the contrary records the income at the time of receiving cash and expenses at the time they are actually paid. In short, this model actually records a cheque when it is posted or the date a deposit is made. Most SME’s use this method because it is simpler and is easier to understand.
Consulting with your account is the best option to ensure you are accurately recording your transactions in a way that is simple yet adequately addresses your business requirements.
Now let us have a look into the basic records need to be kept by a small business and further move to the major financial statements involved in a business.
The basic records (ledger ) to be kept in a small business are :
Revenue and Expense Ledger- Revenue and Expense Ledger keeps track of how much money is going out, where it is going, and how much is coming in. This is used by most small businesses and a single entry accounting is usually made to record the receipts and expenditures.
Cash Expenditures Ledger- Cash spent for your business needs are to be accounted, if you want to record all business expenses in a given year. There are at least two ways to do this: writing yourself reimbursable cheques or keeping a petty cash record.
Inventory Records- Inventory records will enable you to prevent pilferage, keep inventory holdings to a minimum, and track the buying trends among the other things.
For example, if you sell a large number of small ticket items as in a stationary store, you might need to use a computer system to track inventory by having a POS (point of sale) inventory system. If you sell larger ticket items you may be able to do it yourself on papers. The important inventory information you need to capture is: date of purchase, number of items purchased, purchase price, date of selling and selling price.
Accounts Receivable Records- If you provide products or services for which people pay for you at a later date, your accounts receivable records keep a track of what is owed to you.
You can monitor accounts receivable using copies of all invoices sent out or by keeping an accounts receivable record. The information you need to capture includes invoice date, invoice number, invoice amount, terms, date paid, amount paid, and the name of the entity being billed.
Many software programs are available to help you which can save hours of time and create professional-looking invoices.
Accounts Payable Records- Accounts payable records are debts owed by your company for goods and services. Keeping a track of what you owe and when it is due will enable you to establish a good credit and a hold onto your money.
Depending on the nature of your business, there may be other areas in which you need to retain supporting documentation like – deposit slips, receipt books, credit card charge slips, cheque book registers, cancelled cheques / bounced cheques register , business information records. Also you need to keep in your office / shop all tax receipts and records, deeds, lease agreements, license, permits, financial statements, insurance records etc and most importantltly- the employee records and asset documentation (for calculating depreciation).
The Three Major Financial Statements
Financial Statements are accounting reports prepared periodically to inform the owner, creditors, and other related people about the financial condition and operating results of the business. They stand as one of the most essential components of business information in communicating to outside agencies.
The three basic financial statements are Balance Sheet, Profit and Loss Account and Cash Flow Statement.

Balance sheet

The balance sheet is an itemisation of a business assets (cash, inventories, accounts receivables, etc.) and liabilities (loans, debts, accounts payable). If done properly, a good balance sheet will provide an accurate snapshot of where you stand.
The order of a balance sheet is from the most liquid to the least liquid. In other words, the first item under “assets” is cash, because cash is the most liquid asset. After cash, comes receivables, representing the money owed you from customers. When you receive the money it is turned into cash. Next in assets comes "inventories." Following current assets are property and equipment that are typically carried at cost.
You may also notice "depreciation" on a balance sheet. Depreciation is a non-cash expense and is an attempt to record that assets go down in value over time.
The reason this particular financial statement is called a "balance sheet" is that assets are always equal to your liabilities and owners’ equity. This is a double entry bookkeeping, and is done in almost every business.
When bankers look at a financial statement, they check the financial ratios. Ratios indicate the financial strength of a business on handling repayment of loans. Your ratio will be your current assets divided by current liabilities. If your current assets are less than your current liabilities, a red flag will be held because it indicates a risk of insolvency during the present year. Different industries will have different levels of ratios. You can compare your ratios with others in your industry to see how your business is performing.

Profit and Loss Account (Income and Expenditure Statement)

This statement unlike the balance sheet covers a period of time, usually a month or a quarter. Usually year-to-date figures are presented in it to show how the business is doing during the current accounting year. The income statement and the balance sheet are often clubbed together. In non profitable organisations such as clubs, societies and charities, Profit and Loss Account is substituted with an Income and Expenditure Statement.

Cash-flow Statement

Cash flow control is a method of projecting the future needs for cash of your business. It is an income statement covering future periods of time that has been changed to show only cash: cash coming in and cash going out and the balance of cash at the end of designated periods of time. This is a great tool because you can predict future needs for cash before the needs arises.
There is also one more important document The Capital Statement, which is a report summarising all the changes occurred in an owner's equity during a specific period.
A company in its development stage must follow generally accepted accounting principles in their preparation of financial statements. Usually accountants have three levels of statements: certified, reviewed and compiled. For most start ups, the compiled type will work, that is, your accountant prepares the financial statement with a letter stating that the numbers are based on the information you have given him.
The general guidelines here outline what you must take care of and ideas on how to keep your books in an orderly manner. But before making any decisions regarding bookkeeping, check with your accountant because bookkeeping needs vary dramatically from business to business.