The goals for today’s lesson are:
1. Understanding a business budget
2. Identifying different kinds of businesses: Product, Service, Information
A Business Budget
Businesses are an important part of an economy because businesses create jobs that generate income for families and for the government. (The government gets money when we pay taxes.) Nearly all new jobs come from local businesses. When people buy fruit from a nearby farm, they are supporting a local business.
You may think that someday you will go to work for some major corporation- like Boeing, Microsoft or Starbucks– because you see ads for these corporations on TV all the time. However, you are actually more likely to get a job with a small local business or to even create your own job... by creating your own business. One of the first things you have to think about when you start a business is the budget.
Businesses need a budget in order to make sure that their income each month is higher than their expenses. Business income is typically in the form of sales – with customers buying products or services from the business owner. Some business expenses are similar to expenses faced by families like rent and insurance. But businesses have other expenses that families do not have: the Cost of Goods, the Cost of Employees and the Cost of Marketing. We are going to look at each of these costs by looking at a lemonade stand business.
Cost of Goods
The cost of goods is the cost that it takes to make a product. For example, to make a Gallon of Lemonade, you will need six lemons and one cup of sugar. If the lemons cost $1 each and the cup of sugar costs $1, then you might think that the cost of a gallon of lemonade is $7. But you also need to consider the cost of the cups. There are 16 cups in a gallon of lemonade. If a package of 16 cups costs one dollar, then the total cost of a gallon of lemonade is $8. The Cost of Goods for one gallon of lemonade is $8.
Fixed Costs
In addition to the cost of goods, many businesses also have fixed costs. Fixed costs means the price doesn’t change. For example, with a lemonade stand, you need a table and a lemonade pitcher. If your table costs $20 and the pitcher costs $4, then your initial fixed cost is $24.
Cost of Employees
You will pay yourself when you have a business and maybe you will need to pay employees too. How do you figure out how much you can pay people?
You pay people after you pay your expenses. Think about the lemonade stand. It costs you $8 to make a gallon of lemonade. After you sell the gallon you have $16 because you sold 16 cups of lemonade for $1 each. Your profit is $8.
You can pay yourself $8 for making and selling the lemonade, or you might share some of the money with an employee. Maybe you make $5 and pay your employee $3… or you could each make $4. How much you can pay your employee is determined by wage laws and you.
Analyze the budget and fill in the blanks. You are a business owner!
|
Amount of lemonade sold. |
Cost to make that much lemonade and for the cups |
Amount of money you make from selling that lemonade. |
Amount of money you earn- your profit |
|
16 cups |
$8 |
$16 |
$8 |
|
20 cups |
$10 |
$20 |
$10 |
|
30 cups |
$15 |
|
|
|
40 cups |
|
|
|
Cost of Marketing
Marketing means advertising, so that people can learn about your business. You can set up your lemonade stand on a busy street and hope cars driving by will stop to buy a cup. Also, you can set up a website online for free and you can advertise your business through free places such as Facebook AND... You will have a business website by the end of our course. Much of your marketing costs will be zero!
Questions to Think About:
How much is your time worth?
How will you let people know about your business?
Where will you get money to start your business?
Start-Up Costs
You need to have money to start a business. Where are you going to get that money? To start our lemonade stand we’ll need $40 for the table, jar, cups and two gallons of lemonade. Who will give us this $40 we need to start our business?
The most reliable source for any business investment is you own personal savings. Maybe you can mow lawns for your neighbors for $4 per lawn. You will have to mow 10 lawns. Other investors might include your parents, aunts, uncles and grandparents.
To encourage people to give you money, you will need to pay interest (extra money) to your investors, people who loan you money. For example, if an investor gives you $40, you give them back $44. (10% of $40 is $4.) You usually have to pay interest when you borrow money. This interest you pay to people who lend you money is called Return on Investment or ROI. You pay your investor a ROI out of the money you pay to yourself, from your profit.
Questions to Think About:
Why is it usually easier for people to get money from a bank than from their friends and family?
Why is it sometimes risky to loan people things?
When you have a business you have to think about how to get the money to start your business, how much money you’ll make and what your expenses are…including your pay. Also, remember if you borrow money, you have to pay it back to your investors...with interest.
Different Types of Businesses- A Service Business
A service business is when you do something for someone like walk their dog or cut their hair. You are not selling them lemonade or cookies. The biggest advantage of a service business is that you do not need to worry about paying for the Cost of Goods.
Put another way, you do not need to buy lemons, sugar or cups. The Unit of Sales is no longer the number of cups of lemonade you sell, but the number of services you sell. You decide how much your service costs. You use the law of supply and demand when you set your prices. Let’s say you want to start a hair cutting business.
If you charge too much money for a haircut, you might not get any customers. If you charge a low cost for a haircut you will get a lot of customers, but you won’t be able to handle the number of customers.
Analyze the budget and fill in the blanks. You are a business owner!
|
Number of haircuts in 1 day |
Cost of a hair cut |
Amount of money you make |
|
4 |
$20 |
$80 |
|
6 |
$15 |
$90 |
|
8 |
$12 |
|
|
10 |
$15 |
Questions to Think About:
How much do haircuts cost in this community?
Why would you want to do 10 haircuts a day?
How much would you charge customers for a haircut?
Advantages of an Online Business
A third model of business is the online E-commerce business.
The advantage of an online business is that there are almost no cost of goods and because websites can be built for almost nothing, the startup cost of an online business is mostly the time you spend creating it. Therefore there is no need to pay back investors. This is the power of starting an online business. The only limit is your own imagination.
Could you do each business mostly online?
Q1. Sell lemonade? Yes No
Q2. Give haircuts? Yes No
Q3. Help people connect to babysitters? Yes No
Q4. Help people find nursing homes? Yes No
Q5. Fix cars? Yes No
Q6. Write for other people. Yes No
Think about each business and fill in the blanks with your ideas.
|
Business |
How can you use the internet to start and/or market your business? |
|
Lemonade stand
|
|
|
Haircuts
|
|
|
Connecting people to babysitters |
|
|
A dog-walking business |
|
|
Fixing cars
|
|
There are 3 different kinds of businesses: product, service and online. Each business requires planning. You have to think a lot about costs and profit potential when you have your own business.
Questions to Think About:
Q1. What are the 3 kinds of businesses we talked about?
Q2. Why do some businesses grow while other businesses fail?
Q3. How is a business budget similar to a family home budget?
Q4. What are start up costs?
Q5. How does the government interact with the economy?
Important Business Terms
Read through these terms and do the exercise that follows.
Entrepreneur – A French term meaning a person who starts a business and is the primary operator of a business.
Goal – A specific task or target a person wants to achieve.
Business Plan – A summary explaining how a proposed business can be established and how the business will make a profit. The plan includes products and services offered, a budget estimating costs and expenses, a sales forecast showing how the business will grow over time and a marketing plan of steps that will be taken to promote the business products and services.
Business Partner - A person who helps you to take care of the physical needs of the business often by supplying the capital for the startup and ongoing expenses.
Investor - A person who lends money to a business in order to earn a financial return typically in the form of interest on the investment.
Business Loan – Money provided by an investor to a business owner in return for interest on the loan. Also called the Loan Principal.
Interest – The amount of money paid back for a business loan in addition to the pay back of the loan principal.
Interest Rate – An annual percentage of the loan that must be paid back in addition to the principal.
Investment - Anything that is purchased with the hope that it will generate income or be more valuable at a future date.
Risky Investment – An investment that might be worth less over time or even be worth nothing in the future. Investing in a business is risky because most businesses do not make a profit and therefore eventually go broke (also known as bankrupt).
Safe Investment – An investment, such as a savings bond, that will definitely be worth more in the future, because it is guaranteed by the government.
Elevator Speech - Your prepared speech given to potential investors or partners that quickly describes your business and its unique selling features in less than two minutes.
Budget – A plan by a family or business to make sure that expenses do not exceed income.
Business Checklist – A list of tasks you will do and or products you need to start your business.
Customer - Someone who buys goods or services from a business.
Customer Service - how businesses interact with their customers and take care of their needs
Marketing – The process of promoting your business products and services.
Advertising - Everything you do to tell customers about your business or product.
Brand - The name and image a business builds for itself over time in the eyes of customers. A brand is created by Images such as a logo, by messaging, such as taglines, and through people’s experiences with the business and its staff.
Business Expenses – All costs related to starting and running your business.
Key Questions
What is a business?
Why do some businesses grow while other businesses fail?
What factors influence the long term success of a business?
How is a business budget similar to or different from a family home budget?
What role does government play in the happiness of people, the functioning of the community and or in the success of businesses?
What’s Next?
Now that we understand some business basics, in the next section, we will build the framework for our new small business plan.