This document provides an overview of finance basics for small businesses, including cost calculation, pricing methods, sales forecasting, and budgeting. It discusses the different types of costs (fixed, variable, direct, indirect), principles of cost accounting, and methods of costing (job, process, activity-based). The document also covers various pricing approaches (cost-plus, target return, value-based, psychological) and factors that influence sales forecasting (internal, external). It emphasizes the importance of designing customer profiles, mapping customers and competitors, and creating detailed financial plans to serve as budgets.

1. Finance basics
Microfinance June 2015

2. Finance training
Contents
1. Cost calculation
2. Pricing methods
3. How to make a sales forecast
4. How to make a budget
5. Finance tracking

3. Cost calculation
Types of cost
Principles
Type of costing

4. Financials of a small business
• When running a cost calculation, we offer have to break the costs into three groups:
1. Fixed costs
2. Variable costs
3. Direct costs
4. Indirect costs
Common mistake are often made on Indirect costs. Pay special attention to this part.

5. Types of costs
• Direct costs: Direct costs can be directly traced to the product. Material and labor
costs are good examples.
• Indirect costs: These can’t be directly traced to the product; instead, these costs
are allocated, based on some level of activity. For example, overhead costs are
considered indirect costs.
• Fixed costs: Fixed costs don’t vary with the level of production. A good example is
a lease on a building.
• Variable costs: Unlike fixed costs, variable costs change with the level of
production. For example, material used in production is a variable cost.

6. Principles
• Matching principle: This principle states that your company’s revenue should be
matched with the expenses that relate to that revenue. If you sell lamps in May, you
create revenue for that month. The May revenue should be matched with the
expenses you incurred for the lamps sold in May. So, the cost of the lamp is
matched with the sales proceeds for the lamp’s sale.
• Principle of conservatism: Accountants often need to make
judgments. Conservatism means that the decision should generate the least attractive
financial result. If there’s a decision about revenue, the conservative choice is to
delay recognizing revenue in the financial statements. Expenses should be posted to
the financial statements sooner rather than later. These choices generate financial
statements that are less optimistic, which is why the approach is called conservative.

7. Types of costing
• Job costing: This method of costing assumes that every customer job is different. Plumbers
and carpenters are good examples of businesses that use cost accounting. Because every job
is different, each customer job is assigned material, labor, and overhead costs.
• Process costing: Companies use process costing when partially completed units are moved
from one production area to another. Process costing assumes that the products you
produce are similar or even identical.
• Activity-based costing (ABC): ABC costing can be used for both job costing and process
costing analysis. You use ABC costing to assign costs to your product more specifically. ABC
costing analyzes the activities that cause you to incur costs; you then connect the cost to the
activity.

8. Common pitfalls
• Total fixed costs vs. fixed costs per unit: Some cost accounting questions
provide you with a fixed cost per unit. If you determine that you need fixed
costs to answer the question, pause for a minute. Try to find total fixed costs
in the question and use that number. Fixed costs per unit should be avoided.
That’s because, at some point, you sell enough to cover your costs. As a
result, the additional units you produce don’t have any fixed costs attached to
them. Fixed cost per unit is misleading.

9. Pricing methods
Types of cost
Principles
Type of costing

10. Pricing methods
• Cost-plus pricing - Set the price at your production cost, including both
cost of goods and fixed costs at your current volume, plus a certain profit
margin.
• Target return pricing - Set your price to achieve a target return-on-
investment (ROI)
• Value-based pricing - Price your product based on the value it creates for
the customer. This is usually the most profitable form of pricing, if you can
achieve it.

11. Pricing methods
• Psychological pricing - Ultimately, you must take into consideration the consumer's perception
of your price, figuring things like:
• Positioning - If you want to be the "low-cost leader", you must be priced lower than your competition. If
you want to signal high quality, you should probably be priced higher than most of your competition.
• Popular price points - There are certain "price points" (specific prices) at which people become much more
willing to buy a certain type of product.
• Fair pricing - Sometimes it simply doesn't matter what the value of the product is, even if you don't have any
direct competition. There is simply a limit to what consumers perceive as "fair". If it's obvious that your
product only cost $20 to manufacture, even if it delivered $10,000 in value, you'd have a hard time charging
two or three thousand dollars for it -- people would just feel like they were being gouged. A little market
testing will help you determine the maximum price consumers will perceive as fair.

12. Sales forecast
Definition
Factors
Types of forecasting
Helpful tips

13. Sales forecast
• It is defined as “prediction based on past sales performances and on an
analysis of expected market conditions
• Forces us to look at future objectively

14. Factors affecting sales forecasts
Internal
• Inventory changes
• Working capital shortages
• Price changes
• Change in distribution method
• Production capacity
• New product lines
External
• Seasonality of business
• State of economy
• Competition
• Political events
• Styles or fashion
• Customer earnings
• Weather
• Productivity changes

15. Types of forecasting
• We will go through three main types:
1. Time series forecasting
• Predicts sales of next 12 months based on last 36 months
2. Correlation or regression
• Predict increase due to marketing action
3. Qualitative forecasting
• Changes in sales might be caused by action of company or competitors or economic
conditions

16. Helpful tips
1. Design a customer profile
2. Locate customer that fit your profile in your area. (20% of your customers
will account for 80% of your sales)
3. Determine distance of profiles from your business
4. List of competitors in your area.
5. Create a map of customers and competitors
6. Serve the customers better than competitors

17. Budgeting

18. What is a budget?
• Detailed financial plan
• Given time period
• Revenues and Expenses
• Often – cash flow/Balance sheet

19. Two sides of a budget
1. Cost calculation
2. Sales forecast
Working with the two, you can create your budget. The budget can give a
forecast of how cash flow will change in the future and prepare accordingly.

20. END