SLC | S21W4 | Costs for entrepreneurs - Budgets

I am here to take part in this week's budget program SLC-S21/W4 | Costs for entrepreneurs - Budgetsby @yolvijrm & @adeljose and I invite @simonnwigwe @suboohi and @wirngo if not already posted.

  

What is budgeting and how does it relate to costing?

A well-structured budget provides a clear picture of income and expense sources, which helps in tracking expenses to maintain financial stability. Also, it helps in identifying cost areas and making potential investments in the future.

Let me put it in straight words: "A proper budgeting of cost is the process of planning the accurate or near accurate cost of your products, or your project, or whatever you have on offer for your clients."

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The budget definition is an economic concept that reflects the trade-offs made in terms of the exchange of goods. Budget in financial terms means making a plan for spending our money, so how to spend our money properly is the budget. Creating a spending plan allows you to determine if you will have enough money to spend on your work expenses and prioritize accordingly. Budgeting is related to managing your monthly expenses and planning for unexpected events.

Financial planning prepares for any unexpected situation. Having a proper financial plan can help us focus and be ambitious in our business. This is important for any financial planning to achieve our financial goals, having a well-planned budget in place to stay away from stresses about a worrisome financial situation.

When we discuss or study costing, it's all about proper planning of all costs involved, whether direct or indirect in production or a project. That gives us an idea beforehand about the near-perfect cost that we have to spend to get the product/project. Let's keep in mind that the budget is a blueprint of all expenses for a product or project that includes the cost of labor, overheads, planning, materials, unforeseen expenses, and the expenses which have nothing to do directly with the product or project but you have to spend them.

Explain the importance of budgeting in determining costs.

Budgeting is a stepping stone to our financial goals. It allows us to stay within our funds and get maximum benefit from the available resources. Let us understand the importance of budgeting in this way:

Financial Awareness: Budgeting helps us understand our relationship with money. With a budget, we remain aware of our income, spending patterns, and future funding opportunities. A regular tracking of our budgeting plan helps us find patterns and make changes when needed. Proper budgeting helps us avoid unwanted expenses and manage to inculcate financial discipline.

Emergencies: We can set an ideal budget for emergencies and plans for our project/product. A flexible budget allows us to organize allocations based on our immediate needs as well as keeps us prepared for future plans.

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Budgeting helps us manage expenses and reduce spending. A proper budget effectively limits or eliminates exposure to debt or credit.

Reduces stresses: Creating and following a budget ensures financial freedom. Making a budget is not enough, but following it helps us manage financial decisions and stay prepared for challenges, which are part and parcel of any business.

Prepare the budget as explained, for the preparation of cakes. Consider a 4% adjustment.

If I have to make 1000 vanilla-flavored cakes in 8 hours, then I will calculate the cost including material, labor, and overheads, and then add the inflation or sudden cost hike of 4%.

All the raw materials I use in my cake, which are the basic ingredients of the cake

Flour
Eggs
Fat
Sugar
Salt
Milk
Baking Soda
Toppings
Flavors
Overheads
Labor

Since I buy these in bulk and their price keeps fluctuating, in this case I have to take into account the sudden hike of 4% in the total manufacturing cost.

To make 1000 cakes, I usually spend around:

So my total cost is $490.

Now if this is a temporary situation, we can plan according to the market condition.

For 4% Adjustment

Adjustment = $490 @ 4% = $19.60
Revised Total Cost = $490 + $19.60 = $509.90

Now the budget stands at

Finally, after the 4% adjustment, we reached the adjusted cost, including all expenses. I always insist that we should keep a portion of our profit for emergency funds, which comes in handy at such an occasion; otherwise, the inflation will force us to reduce the production or reduce the weight of the finished goods.

Note: There are two ways of covering this increased cost-

1. Reduce the weight of the cake by 4%
2. Increase the price of the cake by 4% (I will do this)

Prepare the budget as explained, for the hairdressing service. Consider a 3% adjustment.

Let me start with the assets required for hairdressing service. In this service, we need different assets like:

Fixed assets

Furniture: chairs, mirrors, shampoo bowls, storage space for products and tools.
Other items: Capes and neck straps, color mixing bowls and brushes, hair color removers, and stain protectors.

Hairstylist professional tools:

Blow dryer
Hair straightener
Hair curler tools: scissors, clippers, trimmers, blow dryers, curling irons, flat irons, razors, sectioning clips, combs, brushes, and water bottles.

Items used for serving the customers:

Products: shampoos, spray bottles, acetone, barricade, and disinfectant jars.

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Let's presume we serve 30 customers on average in a day of 8 hours, so the cost per customer comes to $110 divided by $30 = $3.66.

Now we adjust the 3% increased cost to $110, which comes to $3.30, hence the total cost comes to 113.30.
Finally, if we divide 113.30 by 30 services, the average price per service will come to $3.77 which increases the cost per service by 11 cents.

Note- I will bear the increased cost of 11 cents to keep my clients intact until the prices go further up and force me to increase the hairdressing charges.

Cc:-
@yolvijrm