NCV 2 Entrepreneurship Hands-On Support Slide Show - Module 3

Entrepreneurship

Entrepreneurship - Level 2 1Future Managers

Module 3: Basic finances

Entrepreneurship - Level 2 2Future Managers

Module 3: Basic finances

• After completing this module, you should be able to:– Outline basic financial terminology

– Outline processes and principles for pricing of product/service

– Outline process and principles of financial management, record keeping and stock control

Entrepreneurship - Level 2 Future Managers 3

1. Basic financial terminology

• At the end of this outcome, you should be able to:– Define the terminology associated with the

financing of a new venture such as product costing and pricing, fixed and variable costs, mark-up, profit, cash flow, break-even and forecasting

– Explain the principles and procedures for compiling the cost price of a product or service

– Assess the costs of a product– Calculate the total cost of a products from given

examples


1. Basic financial terminology

• Important questions you should be able to answer– What are all the costs involved in my proposed new

business?– What is the break-even point of this new business?– In which way(s) can I finance my proposed new

business?– What is profit, how is it calculated and will I make

a profit?– How much do my products actually cost?– How much do my competitors charge for the same

product?


1.1 Financial terminology

1. Sales2. Costs3. Selling price4. Profit5. Gross profit percentage6. Net profit percentage7. Weighted average gross profit percentage8. Sales forecast9. Assets10. Liabilities11. Owners’ equity


1.1.1 Sales

• What are sales?– The products or services that the business sell

in order to make a profit– Represents the total amount of products or

services you sell to your customers for a particular period of time

– Other names are:• Turnover• Income • Sales revenue


1.1.2 Costs

• There are two main categories of costs:– Fixed costs

• Stay the same from month to month

• Also known as expenses

– Variable costs• Vary directly with sales

• Also known as ‘cost of sales’

• Think of some examples of fixed and variable costs


Business plan activity


1. Make a list of all the potential fixed costs for your new business

2. Ask around or speak to someone in business to help you to estimate how much you will have to pay for each of these costs every month

• Example - One of your costs will possibly be the telephone account. Speak to someone with experience and ask him/her how much you could expect your telephone account to be. You need to do estimates for all your fixed costs.



3. Make a list of all the variable costs for your particular business

4. Call potential suppliers and ask them for the prices of these items

• Example If you plan to manufacture T-shirts you will have to find out what the costs of the following items are:– T-shirt fabric– Cotton– Ribbing– Plastic bags– Labour costs (people who will do the work)

1.1.3 Selling price

• Selling price is the price your customers will pay you for your product or service

• The selling price is affected by 2 important factors:– How much your product or service costs you

– How much your customers are prepared to pay for your particular product or service


1.1.4 Profit

• Gross Profit– Money left over after variable costs have been

deducted.

• Net profit– Money left over after all variable and fixed costs

have been taken into account

• Net profit after tax– Money left over after all variable and fixed costs

have been accounted for and tax has been deducted.


1.1.4 Profit

Sales 1000

Less: Cost of Sales 600

Gross Profit 400

Less Expenses 300

Net Profit 100

Less: Taxation 30

Net profit after tax 70


1.1.5 Gross Profit Percentage

• Gross profit percentage =


Gross ProfitSales

x 100

4001000

x 100=

= 40%

1.1.6 Net Profit Percentage

• Net profit percentage =


Gross ProfitSales

x 100

1001000

x 100=

= 10%

1.1.7 Weighted average gross profit percentage

• Used when there are many products for sale, and the mark-up varies from product to product


1.1.7 Weighted average gross profit percentage

Steps to calculate WAGPP1. Determine the percentage of total sales for

each product (or group)2. Calculate the gross profit % for each

product (or group)3. Multiply the sales % with the gross profit

% for each product4. Add the answers together to arrive at the

WAGPP


Activity 1


• Calculate the gross profit% for bread and round it off. You need to show all your calculations to show how you arrived at the answer below:

• Weighted average gross profit percentage is:

19% (milk) + 12% (bread) = 31%

Sales % (1) Gross profit (2)

Weighted gross profit

(1) x (2)

Milk 65% 29% 19%

Bread 35% 33% 12%

Activity 1 (Solution)


Gross Profit% for bread is:GP X 100Sales

= R1 X 100

R3 = 33,33%

Activity 2


• The owner of the corner shop (pg 108) decides to sell eggs as well. He buys a tray of eggs for R3.50 and sells it for R5.50. He estimates that eggs will capture 25% of his total sales. Milk’s share of the total sales will drop to 50%

• Calculate– The gross profit% of eggs– The weighted average gross profit percentage of all three

products– Milk’s share of the total sales dropped to 50%. Does this

mean that the corner shop is now selling less milk? Explain your answer.

Activity 2 (Solutions)


Question 1: Calculate the gross profit percentage of eggs

GP X 100Sales

= R2 X 100R5.50

= 36.36%



Question 2:Calculate the weighted averagegross profit percentage of all three products



Question 3: Milk’s share of the total sales dropped to 50%. Does this mean that the corner shop is selling less milk? Explain your answer– No, the actual sales did not drop– Total sales increased since more products were

introduced– As a result each individual product’s contribution

dropped as a percentage, but not in real terms. (The cake got bigger; the slices did not get smaller.)

1.1.8 Sales forecast

• Key questions to determine a sales forecast:– How big is the potential market? (market size)– How many people are likely to buy my product

or service? (market research)– How many, and what type of products do my

competitors sell and at what price? (competitor analysis)

– How many do I need to sell to make neither a profit nor a loss? The answer will quickly tell you what your minimum sales need to be


1.1.8 Sales forecast

• The importance of a sales forecast– Not enough stock

• Loss of sales income

• Unhappy customers

– Too much stock• More cash needed

• Higher risk

• Extra space needed


1.1.9 Assets

• Assets are everything that the business owns• Two categories of assets

– Fixed Assets• Everything that the business doesn’t want to sell for

cash• Depreciate (lose value) over time

– Current Assets• Stock • Debtors• Cash


1.1.10 Liabilities

• Everything that the business owes– Current liabilities

• Creditors

• Bank overdraft

• Tax

– Long-term liabilities• Long term loans

• Bonds


1.1.11 Owners’ Equity

• Owners’ Equity– The owners’ claim to the assets of the business

– Assets = Liabilities + Owners’ Equity

– Therefore: Owners’ Equity = Assets – Liabilities

– Owner’s equity therefore is the total value of assets once the liabilities have been paid off


1.2 Calculating the size of your market

1. Determine the average income per customer in this market (1)

2. Determine the total number of potential customers (2)3. Calculate the ‘total income’ for the market (1 x 2 = 3)4. Determine what percentage of customer income is

likely to be spent on your product or service (4)5. Given this, calculate the total amount of money

available to be spent on your product or service. (3 x 4 = 5)

6. Keeping your competition in mind, determine the percentage of the market you could realistically capture (6)

7. Calculate your expected market share (5 x 6)


1.2 Calculating the size of your market

Example• Simon plans to buy a cold drink vending machine to be placed at his

college. There are 1200 (2) students in the college and after asking a few questions he determines that the average income (spending money) per student is about R400 (1) per month. He reckons that a student will probably spend 10% (4) of his income on drinks. There is no cafeteria at the college, but Simon knows that students will spend at least 80% (5) of their drink money for cold drinks elsewhere (after college or on weekends). Calculate Simon’s market share.

1. Total income for the market is:1 200 students × R400 = R480 000 per month

2. Percentage spent on drinks =10%3. Percentage spent on drinks at college is: R480 000 × 10% = R48 000 per month4. Percentage spent on vending machine drinks

= 20% (80% elsewhere)5. Expected market share is 20% × R48 000 = R9 600 per month


Activity 3


• Blondie intends offering a hairdressing service to clients in Parktown. There are 2800 families in the area. The average income per annum per family amounts to R6 500. Blondie estimates that each family spends 1.5% of its yearly income on hairdressing services. Blondie believes that she will enjoy a market share of 15% of the total market.

• Calculate, showing all your calculations, Blondie’s potential market share



Total income for market:2 800 families x R6 500 = R18 200 000 Percentage spent on hair: 1.5% Amount spent on hair:R18 200 000 x 1.5% = R273 000 Expected market share: 15% of R273 000 = R40 950

Activity 4


• You are in the position to open a small supermarket in an area with 20 000 people from a lower income group. There are two competitors approximately 3 km apart from each other as well as from your intended site. However, there is a large Pick ‘n Pay Hypermarket approximately 2 km from your site and 5 km from your competitors’. Your intended site is right opposite a large block of flats, a cinema and a petrol station. Using the information and making any assumptions you like, answer the following questions:

1. What is your total market potential in Rand?2. What is the Rand value of your target market?3. What is your expected market share in Rand?4. What is your expected annual turnover?• You must be able to justify your assumptions. How does your

answer compare with the answers of other groups?

1.3 The principles and procedures for compiling cost price of a product /

serviceThe following are the steps to follow when you want to determine the cost

price of your product or service1. Determine all potential variable costs per product2. Add up all the potential fixed costs of your business for a specific

month3. Add all the start-up costs. If you need to loan this money, calculate the

monthly repayment amount4. Add the loan repayment amount to your monthly fixed costs5. Compile a sales forecast to determine how many products you will be

able to sell in a month6. Multiply your variable cost per product with your sales forecast (the

number of products you think you will be able to sell)7. Add your variable costs and fixed costs to determine your total

monthly costs



serviceExample• You sell live chickens. You buy each chicken for R9 (variable

cost). Another variable cost is the transportation of the chickens. You buy 200 chickens at a time and pay R200 for the transport. Thus your variable transport cost is R1 per chicken and your total variable costs are R10 (R9 + R1).

• Your fixed costs per month are:– Telephone R 200– Rent of shop R 300– Salaries R1500– Total R2000

• For each chicken you sell, you have to deduct R10 to cover your variable costs (purchase and transport) leaving you the rest or ‘gross profit’ to contribute towards filling your fixed cost ‘hole’. For the moment assume that you would be able to sell each chicken for R20.



serviceThe following are the steps to follow when you want to

determine the cost price of your product or service1. Determine all potential variable costs per product

(R9 + R1)2. Add up all the potential fixed costs of your business

for a specific monthR2000

3. Add all the start-up costs. If you need to loan this money, calculate the monthly repayment amountNothing



service4. Add the loan repayment amount to your monthly fixed

costsR2000 + R0 = R2000

5. Compile a sales forecast to determine how many products you will be able to sell in a month600 Chickens

6. Multiply your variable cost per product with your sales forecastR600 x 10 = R6000

7. Add your variable costs and fixed costs to determine your total monthly costsR6000 + R2000 = R8000


1.4 Break-even point

• The break even point is where the business is neither making a profit nor a loss.

• To calculate the break even point in units– Calculate the gross profit per unit

– Divide total fixed costs by gross profit per table

– Check your calculation


1.4.1 Steps to calculate break even sales (R)

1. Calculate the gross profit percentage per table

2. Divide total fixed costs by the gross profit percentage

3. Check your calculation



Example• Steely Sam manufactures steel tables. He knows that his

fixed costs are R2000 per month. Furthermore, the cost associated with manufacturing one table is R30 (variable costs). He is currently selling the tables at R50 each. He would like to know how many tables he should manufacture to break even.

• At the break-even point, his profits will be zero. Therefore the break-even point can be calculated by finding that point where sales equal total costs, i.e. variable costs plus fixed costs.



1. Calculate the gross profit per table

selling price R50

Less: cost price R30

= gross profit R20



2. Divide total fixed costs by the gross profit per table to calculate the break-even point

R2000 (fixed costs)

R20 gross profit / unit

= 100 tables per month



3. Check to see if your calculation is correctSales of 100 tables at R50 each = R5000Less cost of sales of 100 tables at R30 each R3000Gross profit of 100 tables = R2000

Fixed costs per month = R2000 Gross profit of R2000 Less: fixed costs of R2000 = Net profit of R 0


Activity 5


The Bat Company Budgeted sales R500 000

20 000 bats @ R25Budgeted costs: Fixed VariableMaterials R90 000Sales commission R100 000Factory rent R30 000Admin expenses R60 000Distribution R50 000Salaries R70 000Office rent R50 000 Totals: ? ?

Question:What is your break-even point in Rand?(Hint: You must first calculate your gross profit.)



Sales – COS = GPR500 000 – R270 000 = R230 000GP% = 46% Breakeven Sales = Fixed Costs

GP%

R180 00046%

= R391 304.34

1.4.2 Break-even with a profit motive

1. Calculate the gross profit percentage per table

2. Divide total fixed costs + desired profit by the gross profit percentage

3. Check your calculation


Activity 6


Fatimah plans to open a fresh pineapple den selling sliced pineapples dipped in different types of masala. She worked out that a pineapple slice including the spices and the sticks will cost her R1.50.

Her fixed costs (monthly) are the following:• Stall rental R200• Salary R2000• Transport R100• Miscellaneous R100

She plans to sell the pineapple slices for R5.

Calculate1. Break-even turnover (R)2. Break-even units3. Break-even point (R) if she increases her salary to R3000 per month?



Gross Profit: R5 – R1.50 = R3.50GP% = 70%

1. Break even turnover: R240070%

= R3428.57 2. Break even Units: R2400

R3.50

= 686 slices

1.4.3 Calculate the break even point for one product

1. Calculate your gross profit per unit

2. Calculate the gross profit percentage

3. Calculate the break even point



Example

• CD’s4Africa sells CDs at R150 each. The cost price is R90 per CD and the business’ fixed costs amount to R12 000 per month. Calculate the break-even point of CD’s4Africa.



Step 1Calculate your gross profit (contribution) per unit:Selling price (R150) – Cost price per unit (R90) = Gross profit per CD

(R60) Step 2Calculate the gross profit percentage:

= gross profit × 100selling price 1

= R60 × 100

R150 1

= 40%



Step 3Break even units:

= fixed costs gross profit per unit

= R12 000R60

= 200 CDs



Step 3Break even sales:

= fixed costs gross profit %

= R12 00040%

= R30 000


1.4.4 Calculate the break even point for multiple products

1. Calculate the gross profit of each product or group of products

2. Calculate the gross profit percentage of each product or group of products separately

3. Determine the percentage of sales for which the specific product accounts

4. Calculate the WAGPP5. Calculate the break even point



Example

• CD’s4Africa decided to sell DVDs as well as CDs. The selling price for each DVD is R250 and the cost price R170.

• The owner expects DVDs to make up 40% of total sales and CDs 60%. Introducing DVDs will increase the fixed costs of the business to R15 000.



1. Calculate the gross profit of each product or group of products

For CDs:

R150 – R90 = R60

For DVDs:

R250 – R170 = R80



2. Calculate the gross profit percentage for each product or group of products separatelyFor CDs:Gross profit x 100Sales

= R60 x 100R150=40%For DVDs:R80 x 100R250=32%



3. Determine the percentage of total sales for which each product accounts

How would you do this?

CDs:60%

DVDs: 40%



4. Calculate the weighted average gross profit percentage

For CDsSales (60%) x Gross profit (40%) = 24%For DVDsSales (40%) x Gross profit (32%) = 12,8%Total=24 + 12,8 = 36,8%



5. Calculate the break even point

Break even sales = total fixed costsWAGPP

= 1500036.8%

= R40761


1.5 Start-up costs

• Start-up costs can be divided into two categories:– Fixed assets

– Pre-operating costs

• Think of some examples of each




• Make a list of all the fixed asset requirements for your business



• Make a list of all the start-up requirements for your business.

• It is realistic not to expect your business to break even within the first few months. You will need money to keep your business going during this period, especially to pay for your fixed costs, such as salaries. A cash-flow statement which will be covered later will assist you to determine how much money (cash) you will need. Most businesses include three months’ worth of fixed costs as part of their start-up requirements. This is to make sure that there is enough cash until the business breaks even.

2. Processes and principles for pricing a product

• At the end of this outcome, you should be able to:– Explain pricing principles and processes for

pricing of product

– Assess the pricing of product

– Calculate the selling price of products/services of given examples


2.1 Factors influencing pricing

• Your target market

• Competitors

• Convenience

• Costing

• Break-even point


2.2 Pricing concepts

• Skimming

• Competitive pricing

• Cost-plus pricing

• Odd pricing

• “Loss-leader” pricing

• Discounts


Activity 7


• Refer back to Simon’s vending machine business. • Simon determined the size of his market. He did a sales forecast and

considered a number of pricing factors. However, he did not do a proper costing and did not calculate a break-even point.

1. Make a number of assumptions, which you must be able to explain, and calculate the following:– Variable costs – Fixed costs– Total costs (keep Simon’s sales forecast in mind)– Break-even point.

2. Do you think that Simon’s price of R8 per tin is reasonable given all your calculations? If not how much should he charge per tin? Give reasons for your answer

2.4 Mark-up percentage

• Mark-up % = gross profit x 100

cost of sales

• Your mark-up should always be enough to cover your fixed costs


3. Financial management, record keeping and stock control

At the end of this outcome, you should be able to:

• determine the cash flow of a business and how it affects the business over a period of time

• keep record in a small business

• understand the requirements of managing a business

• discuss some banking facilities

• explain how stock is managed and controlled


3.1 Forecast cash flow statement

• What is a cash flow statement?

• Why do we need a cash flow statement?

• Can a business operate without cash?– even if it is recording a profit?


3.1.1 Cash flow calculations

• To compile your forecast cash flow statement, you will have to determine the approximate figures of the following:– Your expected monthly sales volume (how many

products you expect to sell)– The percentage of cash sales and the payment

patterns of debtors (people who owe you money)– The cash payments you will need to make to your

suppliers– Your fixed monthly costs, all those monthly

payments such as rent and electricity


3.1.1 Cash flow calculations

Feb Mar Apr May Jun Jul

Money in bank 1000 1 800 2 600 -1 600 12 000 19 600

CD sales (R) 30 000 30 000 30 000 60 000 45 000 45 000

DVD sales (R) 2 500 2 500 2 500 5 000 5000 7 500

Total Cash in 33 500 34 300 35 100 63 400 62 000 72 100

CD costs 18 000 18 000 18 000 36 000 27 000 27 000

DVD costs 1 700 1 700 1 700 3 400 3 400 5 100

Other costs 5 000

Fixed costs 12 000 12 000 12 000 12 000 12 000 12 000

Total cash out 31 700 31 700 36 700 51 400 42 400 44 100

Closing bal 1 800 2 600 -1 600 12 000 R19 600 R28 100


3.1.2 Steps in compiling a cash flow

1. Determine all your fixed monthly costs2. Identify payments you can schedule and are

not due every month3. Use your sales forecast to determine your cash

inflow4. Fill in your purchases in accordance with

your projected sales pattern5. Include other payments6. Work out your cash flow for the entire first

year


Activity 8: Blondie


Months Estimated income Estimated purchases

March R8 000 R 3 000

April R3 000 R5 000

May R5 000 R2 000

June R6 500 R4 000

Activity 8


1. Blondie bought a new tumble-drier in March. She paid R700 deposit and her monthly payments thereafter will be R250 for the next six months

2. Her average expenses per month are: – Rental R1 200– Wages R1 000– Telephone R180– Electricity R250– Water R120

3. Blondie’s terms are strictly cash for both suppliers and customers

4. In April she will sell her old hair drier for R800 cash5. In May she will buy a new hair-drier. The deposit will be R450

and the monthly payment thereafter will be R120 for the next six months.



Mar Apr May Jun

Money in bank 0 1 550 -2 650 -3 100

Sales 8 000 3 000 5 000 6 500

Total Cash in 8 000 8 000 2 350 3 400

Purchases 3 000 5 000 2 000 4 000

Other costs 700 250 250 250

Other costs 450 120

Fixed costs 2 750 2 750 2 750 2 750

Total cash out 6 450 8 000 5 450 7 129

Closing bal 1 550 -2 650 -3 100 -3 720

Activity 9: Pie in the sky


• Pie-in-the-Sky is a one-person business selling pies at an outlet close to a railway station. Use the following information to draw up a cash flow statement for the period March to May 1998.

Months Estimated income

Estimated purchases

February R 4 000 R3 000

March R3 000 R4 000

April R2 500 R1 500

May R5 500 R200

Activity 9: Pie in the sky


Additional Information1. All purchases and sales are cash2. Pie-in-the-Sky expects to receive R1500 in March from an old debtor3. A new pie machine will be delivered in April. A deposit of R800 is

payable on delivery. Monthly installments thereafter will amount to R300

4. The business’ average expenses per month are:– Rent R200– Electricity R350– Wages R1500– Telephone R50

5. The bank balance at the beginning was R2500.

Required1. Draw up the forecast cash flow statement2. Should Pie-in-the-Sky arrange for an overdraft facility? Explain

your answer.



• Pie in the Sky will need an additional loan of R2100 in April to avoid a negative cash-flow. A negative cash-flow means that this business will not have the money to pay its fixed costs for the month.

Mar Apr May Jun

Money in bank 2 500 1 400 -200 -2 100

Sales 4 000 3 000 2 500 5 500

Other 1 500

Total Cash in 6 500 5 900 2 300 3 400

Purchases 3 000 4 000 1 500 200

Other costs 800 300

Fixed costs 2 100 2 100 2 100 2 100

Total cash out 5 100 6 100 4 400 2 600

Closing bal 1 400 -200 -2 100 800

3.2 Keeping financial records

• What are the 3 key financial statements?– The income statement

– The balance sheet

– The cash flow statement


3.2 Keeping financial records• These financial statements are compiled from source

documents:– Receipts– Sales invoices– Delivery notes– Cash register slips– Bank deposit slips– Petrol slips– Bank statements– Cheques

• These need to be kept and filed to comply with the following Acts:– The Income Tax Act– The Value Added Tax Act– The Workmen’s Compensation Act


Activity 10: Self reading


• Read the extract on page 136 regarding tax registrations

Activity 11: Self reading


• Read the advertisement on page 137. It is aimed at trying to convince entrepreneurs to buy a proper bookkeeping system. It will give a better idea about all the challenges that entrepreneurs face when it comes to keeping records.

3.3 Filing methods and systems

• Source documents should be filed

• Filing starts with a temporary storage location

• From the temporary location, they should be moved to the file.

• Files are generally arranged alphabetically and monthly



• Staff related documents include:– Letter of appointment

– Job description

– UIF documentation

– Medical reports

– Workmen’s compensation details

– Staff evaluations

– Any other staff-related documents



• Other document needing filing:– Business registration certificates

– Tax certificates

– Lease documents

– Warranties

– Insurance

– Loan agreements


3.4 Financial assistance for small businesses

• Financial assistance is available from:– Banks

– Other financial institutions• Khula

• Business Partners

• Chambers of commerce

• Trade credit

• Micro-lenders


3.4.1 Banks• Typical questions asked by banks:

– How much money do you need and how much of this will come from your own resources? The more you contribute yourself the easier a bank will make up the difference

– On what specifically are you going to spend the money?– How are you planning to repay the bank and do you

have a Plan B if the business does not do as well as you expect?

– What “surety” can you provide? Surety is when someone else is prepared to repay the bank if you fail. Normally only a family member will be prepared to do that. You can also provide surety in the form of an asset to the value of the money you want to borrow from the bank


Different forms of bank assistance


• Bank loan– Fixed amount borrowed over time

– Charge depends on amount lend

• Bank overdraft– Expensive form of borrowing

– Used as a short-term supplement for cash flow



Using the banking system

• Current account

• Savings account

• Internet banking

• Telephone banking

• Auto-banking (ATMs)


3.4.2 Other financial institutions

• Khula– Established by the DTI to facilitate finance for

SMMEs

– Also provides mentorship and advice

– Offers a credit guarantee scheme

• Business Partners– Focuses on medium size businesses

– Becomes a shareholder of the enterprise


Activity 12: Internet

• Visit www.khula.org for more information about Khula


3.4.2 Other financial institutions• Trade Credit

– Buy now and pay later– Easy to secure

• Micro-lenders– Charge very large interest rates– Loans must obey the following conditions:

• Loans may not exceed R10 000• The repayment period may not be longer than 36 months• A loan may not be repaid from a credit card or cheque account• You may not hand out your confidential information to anyone

else• You have a 3-day cooling-off period to change your mind after

the loan has been granted to you• The contract must be in writing• Interest may only be charged once you have received the

moneyEntrepreneurship - Level 2 Future Managers 95

3.4.2 Other financial institutions• Tips when borrowing money

– Check to make sure that your micro-lender is registered with MFRC. Ask to see the registration certificate

– Never work with a lender who insists on keeping your ID document or bank card, or who demands your bank account PIN number

– Never sign blank documents when applying for a loan. This means that the lender could add conditions to which you have not agreed

– Compare interest rates from several different lenders before deciding where to borrow

– You are entitled to statements showing the costs of the loans, any payment made, and the remaining balance

– You should be aware of any penalties that might be applied if you miss a payment

– Never borrow money from one lender to pay another. This means that you have too much debt


3.5 Inventory control

• Inventory includes the following:– Raw materials

– Finished goods

– Work-in-progress



• What is the purpose of inventory control?– To determine when and how much should be

ordered– Maintain independence of operations, meaning that

manufacturing will not come to a standstill because of an out-of-stock situation

– Meet variations in product demand– Allow flexibility in the production schedule– Provide a safeguard for variations in the raw

material delivery time– Take advantage of the Economical Order Quantity

benefits (EOQ).



• Inventory costs include:– Carrying costs

– Set-up costs

– Ordering costs

– Shortage costs


3.5.1Managing and controlling stock

• What is the aim of stock management?– To keep the right goods– At the right time– In the right place– And displayed in the right way

• Tips on stock management– Keep simple stock records– Check your stock regularly– Store stock so that all items are visible and easy to

count– Stock should be grouped by type, model and size.


3.5.2 Keeping accurate records

• Stock cards in non-computerised systems

• In a computerised system, bar codes and scanners are used

• Both systems allow you to know exactly how much stock is left and whether an order needs to be placed


3.5.3 Stock-taking as a method of control

• Differences between actual and recorded stock could mean– Theft

– Short deliveries

– Mistakes in counting


3.5.4 Managing the store

• You can have good stock records, but if your products are not properly stored and handled, your shrinkage cost will jump. This in turn will affect your business profits.1. Staff must know which products are easily breakable.

Such products should not be stored in a busy area2. Security devices must be installed and regularly

checked3. Fast-selling products should be toward the front of the

storeroom for easy access4. Store room should be well lit to prevent staff from

searching unnecessarily


Activity 13: Quiz


• What is the importance of stock control?• Why is it bad to run out of stock and why is

it bad to carry too much stock?• What is stock-taking?• What is the purpose of the five columns on a

stock card?• Does a service business carry inventory? If

so give examples

Summative assessment


• Springbok Silencers is a small silencer-fitting business operating from a garage next to a busy road in Alexandra.

• They made a few enquiries and came up with the following sales forecast for the months March to June.

Months Estimated sales Estimated purchases

March R30 000 R15 000

April R15 000 R7 500

May R21 000 R10 500

June R27 000 R13 500



Other information1. Springbok bought a new welding machine in March. They paid R8000

deposit and the monthly payments thereafter are R800 for six months . 2. Their average expenses per month are:

– Wages R1700– Rental R1200– Telephone R550– Electricity R180– Fuel R500

3. All Springbok’s sales are strictly cash4. In April they plan to sell an old grinder and drill for R2000 cash5. In May they plan to buy a new computer. The deposit will be R1500

and monthly installments of R500 thereafter for one year6. Springbok Silencers sells fitted silencers at R600 each7. At the end of February the business had a favourable

bank balance of R4000



Other costs:• Springbok Silencers calculated that the following costs will be

incurred for every 10 silencers being fitted.• Welding rods R200• Electricity for the welding machine R200Calculate the following:1. How many silencers Springbok expect to fit each month 2. Variable and fixed costs of Springbok3. Gross profit percentage4. Break-even point in sales5. Break-even units.6. Draw up a cash-flow statement for four months (March - June).



• The owners of Springbok Silencers got the shock of their lives when they saw all the calculations and realised that they would never make a decent profit if they did not grow and expand their business. One of the owners came up with the idea to start servicing vehicles

• They identified the following three categories of service:1. “Checking” of:2. “Topping Up” of:3. “Replacement” of:

• The all-inclusive price for this service is R450.• The owners estimated that 40% of the business would come from

this service side of the business. Market research has shown that they can expect to service 40 vehicles per month. Variable costs including labour and parts will amount on average to R200 per service. Half of these costs are labour.



Calculate1. The hours of labour they budgeted per service,

if the labour costs per hour are R502. The gross profit per service3. The weighted average gross profit percentage4. The mark-up percentage per service5. The net profit percentage of Springbok

Silencers.

Answers


1. Calculate how many silencers Springbok expect to fit each month

March April May June

50 25 35 45

Answers


2. Calculate the fixed and variable costs of Springbok

Fixed Costs: Wages (1700) + Rental (R1200) + Telephone (R500) + Electricity (R180) + Fuel (500) = R4130

Variable Costs: Welding rods (R20) + Electricity (R20) + Silencer (R300) = R340

Answers


3. Calculate gross profit percentage

GP X 100Sales 1

= R260 X 100R600 1

= 43,33%

Answers


4. Calculate break even sales

Break-even sales = Fixed CostsGP%

= R4130 43.33%

= R9531.50

Answers


5. Calculate break even units

Break-even units: = R4130

R260

= 15.88 Silencers

Answers


6. Draw up a cash-flow statement for four months

Mar Apr May Jun

Money in bank 4 000 4 870 8 440 11 100

Sales 30 000 15 000 21 000 27 000

Other 2 000

Total Cash in 34 000 21 870 29 440 38 110

Purchases 15 000 7 500 10 500 13 500

Variable costs 2 000 1 000 1 400 1 800

Other costs 8 000 800 1 400 1 800

Fixed costs 4 130 4 130 4 130 4 130

Total cash out 29 130 13 430 18 330 20 730

Closing bal 4 870 8 440 11 110 17 380

Answers


1. Calculate the hours of labour they budgeted per service, if the labour costs are R50

2 hours

Total labour costs = R100 per service@ R50 per hour = 2hours

Answers


2. Calculate the gross profit per service

Gross Profit = Sales – Costs

R450 – R200

= R250 / service

Or R250 X 40 vehicles/ month

= R10 000

Answers


3. Calculate the weighted average gross profit percentage

Silencers: 43.33%x 60% = 26%

Services: 56% x 40% = 22.40%= 48.40%

Answers


4. Calculate the mark-up percentage per serviceSilencers MA% = Gross Profit X 100

CoS 1

= R260 X 100R340 1

= 76.47%

Service MA% = Gross Profit X 100 CoS 1

= R250 X 100

R200 1

= 125%

Answers


5. Calculate the net profit percentage Total Sales (4 months)• Silencers R93 000• Services R450 X R400

= R18 000 X 4 months = R72 000

R165 000

Answers


Total costs

• For silencers (including fixed costs)

• For services = R200 x 40 vehicles x 4 months

= R32 000

• Total costs = R81 620 + R113 620 = 51 380

Purchases 15 000 7 500 10 500 13 500

Variable costs 2 000 1 000 1 400 1 800

Other costs 8 000 800 1 400 1 800

Fixed costs 4 130 4 130 4 130 4 130

Total cash out 29 130 13 430 18 330 20 730

Answers


Net Profit%= Net Profit X 100

Sales 1

= R51 380 X 100

R165 000 1

= 31.14%

Recap

• Can you outline basic financial terminology?– Define the terminology associated with the

financing of a new venture such as product costing and pricing, fixed and variable costs, mark-up, profit, cash flow, break-even and forecasting?

– Explain the principles and procedures for compiling the cost price of a product or service?

– Assess the costs of a product?

– Calculate the total cost of a products from given examples?


Recap

• Can you outline processes and principles for pricing a product? – Explain pricing principles and processes for

pricing of product?

– Assess the pricing of product?

– Calculate the selling price of products/services of given examples?


Recap

• Can you outline financial management, record keeping and stock control determine the cash flow of a business and how it affects the business over a period of time– keep record in a small business– understand the requirements of managing a

business– discuss some banking facilities– explain how stock is managed and controlled

• If you can, congratulations, you are ready to move onto the next module


NCV 2 Entrepreneurship Hands-On Support Slide Show - Module 3

Education

Transcript of NCV 2 Entrepreneurship Hands-On Support Slide Show - Module 3