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LP Cost Strucutre

What are startup costs? 

Start up costs are all the non-recurring costs and expenses incurred during the process of  setting up a new business. 

It consists of expenses for (a) acquiring assets as well as (b) for acquiring initial raw material  and other related items of initial expenses, till such time the cash flow (i.e. money coming  in and money going out) from the business can provide for these. This part of the start-up  expenses is known as working capital. All these expenses occur from the time you start the  planning and preparation (i.e. many months before the actual operation beginning). Some  of the items that might have to be bought to start your business include land, building,  computers, equipment, machinery, vehicles, legal registration etc.Though different  businesses have different start-up costs, they can usually be categorized into: 

Long-term assets: If you are manufacturing a product or providing a service, then apart  from inventory, long term assets might include land, equipment, machinery and structure to  stock raw materials. If you are starting a brick and mortar store, then site improvements, furniture, utilities and initial supplies could be some assets you would spend on. 

Pre-startup expenses: These are expenses that happen before the first month. Some common  expenses new businesses incur are expenses for legal work such as license or permit fees,  insurance and logo design. Other expenses could be money spent to build a website, design  brochures, pay initial rent deposit and do market research. Employee wages, salaries and  benefits required to be paid to set up must also account for expenses. 

Working Capital and Buffer: Working capital is the cash needed to run the day to day  operations of a business in the initial stage, probably the first few months. 

 Why Calculate Costs? 

• Estimate profits 

• Do a breakeven analysis 

• Secure loans 

• Attract investors 

• Save money with tax deductions


Cost vs. Expense 

"Cost" and "Expense". What is the difference?  

These terms are not clearly defined by the Financial Accounting Standards Board. So, the  explanations given here are derived from common usage. We should keep in mind that many  people use these terms interchangeably and will not make the distinction.  

Expenses are incurred. Technically, an expense is a specific accounting event related to  the outflow of cash. Expense simply records the event and is used to understand what  happened, from an accounting perspective.  

Costs are derived. A cost is a derived value of money consumed to produce a current or  future outcome; hence, costs provide management a decision supporting view to improve  business economics. 

Operational Costs 

As the name suggests, operational costs are for carrying out the day-to-day operations of  the business or enterprise. These can be broadly categorized in to Fixed and Variable Costs.  

Fixed Cost: For example, if you make a t-shirt, then the  cost of printing machine, factory rent, utility bill, business insurance would be some fixed  costs. It is important to remember that these costs are fixed in nature and not necessarily  fixed in amount. For example, telephone bills may vary slightly month to month, depending  on the usage. However, this variation is not linked to the sales volume directly. Rent is fixed  per month, till it is revised by negotiation. Thus, it may be different in different years, but  not because of sales increase or decrease.  

Following is a list of some of the items on which expenses will remain fixed in nature:  

  • Consultancy Charges  

  • Travel  

  • Salary  

  • Wages  

  • Rent  

  • Telephone  

  • Water  

  • Office lighting  

  • Office stationery  

  • Employee welfare  

  • Advertising  

  • Insurance premium


Variable Cost 

An example of a variable cost for a bakery would be the cost of flour, sugar,  baking powder etc. If you make a t-shirt, then money spent on cloth, buttons, printing,  tailoring will be variable costs. They will only be incurred when you make the shirt,  otherwise they would not be. Similarly, the cost of making one shirt will be less than that of  two. 

  

In a service business, there are often fewer variable costs. Often the main variable cost in  providing a service is the cost of wages for an employee working directly in providing the  service. Other variable costs in a service business would be anything directly used up during  the provision of the service. For example: Washing detergent in a laundry or a car wash  unit, polishing material in a polishing unit, hair shampoo in a saloon.  

Following is a list of some of the items for which the costs incurred are variable:  

  • Raw Materials  

  • Packing Material  

  • Freight inward and outbound  

  • Sales Commission  

  • Royalty  

  • Factory Power 

  • Piece rate: Wages paid based on production 

To classify a particular expense/cost as either fixed or variable, it is important to know for  which industry or type of business it is related to. For example, 

  • Telephone bill is generally a fixed expense, except when it relates to a Call Center 

  • Paper bill in an office or shop would be fixed but in a printing business it would be  variable cost (like raw material).  

  • Fodder to the cows is variable, because more cows means more milk 

  • Water in the office is fixed; water in a soft drink factory is variable.  

  • Stationary in a coaching class is variable because more students mean more but  stationary in an office is fixed.  

The most important point to remember is, not to get trapped in classifying an expense  in one or the other category, without knowing which business it refers to.

How to Calculate Costs? 

Step 1: Identify Your Startup Expenses 

• Office space 

• Equipment and supplies 

• Communications 

• Utilities 

• Licenses and permits 

• Insurance 

• Lawyer and accountant 

• Inventory 

• Employee salaries 

• Advertising and marketing 

• Market research 

• Printed marketing materials 

• Making a website 

Step 2: Estimate how much your expenses will cost 

• Well-defined costs  

E.g.: permits and licenses, office furniture, rent etc.  

• Estimated costs  

E.g.: employee salaries, advertising, transport etc. 

Step 3: Add up your expenses for a full financial picture 

• One-time expenses 

E.g.: buying equipment, designing a logo, paying for permits, licenses and fees,  legal work, brochures, site selection etc. 

• Monthly expenses  

E.g.: salaries, rent, utility bills etc. 

Step 4: Fill the Costing Sheet

Start-up Costing for [Business name] – [Year]

START-UP COSTS 

Cost 

EQUIPMENT/CAPITAL COSTS

Cost

Registrations

Business purchase price

Business name 

Franchise fees

Licences 

Start-up capital

Permits 

Plant & equipment

Domain names 

Vehicles

Trade  

marks/designs/patents 

Computer equipment

Vehicle registration 

Computer software

Membership fees 

Phones

Accountant fees 

Fax machine

Solicitor fees 

Security system

Rental lease cost (Rent  advance/deposit) 

Office equipment

Utility connections &  bonds (Electricity, gas,  water)

Furniture

Phone connection 

Shop fitout

Internet connection

Computer software

Training

Wages

Stock/raw materials

Insurance

Building & contents

Vehicle

Public liability

Professional indemnity

Product liability

Workers compensation

Business assets

Business revenue

Printing

Stationery & office supplies

Marketing & advertising

Total start-up costs 

0

Total

equipment/capital costs

0

Using this Start-up Costing Sheet

This start-up costing sheet contains a list of suggested costs a typical business may incur  when starting up. You can edit these items by removing or adding rows and typing in your  own items. Don’t forget to enter the financial year at the top of the sheet.  

Please note: This sheet assumes all figures are GST inclusive.   

This start-up costing sheet is intended as a GUIDE ONLY and DOES NOT constitute  financial advice, please always verify and discuss your financial statements with a  qualified accountant, solicitor or financial advisor

Income Statement

The reason one is in a commercial business is to earn profit. So, what is profit and how is it determined?  

Profit is a financial benefit that is realized when the amount of revenue gained from a  business activity exceeds the expenses, costs and taxes needed to sustain the activity.  

Statement that enables us to determine the profit over a period of time is known as a Profit  and Loss Statement or Income Statement. It is also very often known as the Statement of  Operations. 

This is a statement which shows revenues, expenses, gains, and losses; it does not show cash receipts (money you receive) nor cash disbursements (money you pay out).  

The income statement is important because it shows the profitability of a company during  the time interval specified in its heading. The period of time that the statement covers is  chosen by the business and will vary. For example, the heading may state: "For the Three  Months Ended December 31, 2011" (The period of October 1 through December 31,  2011) or "The Four Weeks Ended December 27, 2011" (The period of November 29  through December 27, 2011.)"The Fiscal Year Ended June 30, 2012" (The period of July  1, 2011 through June 30, 2012). From this it is clear that Income Statement can be prepared for a day, week, month etc. based on the needs of the business owner. 

At a certain stage, start-ups do not have existing assets or sales to make financial statements.  Thus, certain assumptions have to be made to project what the financials of your start-up  are going to look like: 

• What are number of units you plan to sell 

• What is the price 

• How much revenue do you plan to make 

• How much profit will you make after deducting all the costs 

• How much cash would you project to have by the end of each year etc.  

A Pro-forma Income statement is a financial statement that can be used to understand what  the business is going to look like in the future. 

Let us try to build an income statement for Amy’s food truck. 

Example: Amy wants to start a food truck that would sell fresh wood oven pizzas. She has  come up with 10 varieties of pizzas with five vegetarian and five non-vegetarian options.  She has priced all the vegetarian pizzas at Rs. 150 and all the non-vegetarian pizzas at Rs.  200. She is wondering how much money she will be able to make once she starts her business. Let us help Amy get the answer by building her pro-forma statement. 

Look at the following examples: 

To create this statement, first document all your day-to-day expenses. What will be your  specific expenses depending on the activities? Some operating expenses include rent,  payroll, supplies, utilities, marketing and advertising, insurance, taxes etc. These are some  expenses which would be incurred in running your business and might be expensed daily, monthly or yearly.  

Let us look at how Amy goes about figuring out her operating expenses.

Expense

Daily

Monthly

Yearly

Vehicle lease

60,000

Rent 

50,000 

Salary

2,40,000

Hourly Employee

200

72,000

Marketing

5000

60,000

Utilities

3000

36,000

Depreciation

1666.67

20,000

Maintenance

40,000 

Total 

5,78,000

Assumptions: 

  • Lease the truck at Rs.60,000/year rather than buy it 

  • Park the truck near a popular mall and pay rent at Rs.50,000/year 

  • Take a salary of Rs.2, 40,000/year 

  • Truck will run from 11:00 am to 10:00 pm, which makes it 11 hours/day, for 360 days in the  year 

  • Hire an employee from 6:00pm -10:00 pm for an hourly basis at Rs. 50 

  • Actual Price of the truck is Rs.1, 00, 000 depreciated over 5 years, thus Rs. 20,000/year Utilities include fuel, electricity, and water at Rs.3000/month 

  • Vehicle maintenance cost at Rs.40, 000/year 

  • Marketing at 5000/month to be incurred every time a marketing campaign is run

Next, calculate Cost of Goods Sold (COGS).  

Cost of Goods Sold is the direct and total costs used to create the product or the service.  

COGS differ for every type of business. The two important things that contribute to COGS  are direct labour and materials. If you are into manufacturing a product, COGS would  include raw materials, labour, other pre-manufactured components, cost to assemble  different product parts etc. If you are into providing a service, it would include the labour cost  of providing the service and any supplies used in delivering the service. In Accounting,  COGS is also calculated as  

COGS = Beginning Inventory + Purchases made during the Period – Ending Inventory 

This formula can be used for businesses into manufacturing and retail. Though knowing  what will contribute to COGS is important, it is necessary to know how much gross margin  you would want to earn.  

Gross Profit is the difference between revenue and COGS and shows the profitability  calculation of the company.  

After figuring out all the costs, the key part is Revenue or also termed as “Sales” sometimes.  A few things to start with, when projecting how much revenue your business would  generate, is to look at all the sources of revenue, determine all the revenue streams and  understand the revenue drivers.  

The sources of revenue can be understood as the different products and services of your  business will generate different revenue each. The revenue streams would include the  revenue models your business is based on. It could be subscription as well as unit sales.  Revenue drivers refer to variables that influence your revenue. These could be the number of  customers you serve or the number of units they buy or the price or the frequency with  which they buy or the average of some important metrics. The revenue drivers are also  different for different businesses.  

Considering all of these, imagine how much you would make in a day and multiply it for  the month and then for the year.

Product

Price

Unit Sold/ day

Gross Margin

Revenue

COGS

Veg Pizzas

150

20

50%

3000

1500

Non-veg Pizzas

200

20

40%

4000

2400

Total




7000

3900



Assumptions: 

Traffic/Footfall per day= 40 people 

Units sold:  

Vegetarian Orders – 40/2= 20 

Non-Vegetarian Orders – 40/2= 20 

COGS are calculated depending on the gross margin Amy wants to earn. COGS were also  calculated by taking the average total cost of ingredients, cooking gas and disposable cutlery. 

Total Revenue = 7000 

Total COGS = 3900 

Gross Profit = 3100 

Gross Profit Margin = 44%



After understanding the different parts of the income statements, let us try to create one  using Amy’s assumptions and calculations. We know that Amy calculated the total of  annual operating expenses. We know that Amy has calculated the Revenue and COGS for  a day. We will now multiply both the totals by 360 (given that Amy will shut her food truck  at least for 5 days in a year). We will then subtract the total annual COGS and total expenses from the total of annual revenue. This would give us earnings from operations.  

Since Amy will register her business, she will be paying taxes. Depending on the category she would fall into, let us assume Amy will pay 10% as tax. After subtracting the tax from  earnings from operations, we will get net earnings or net income that the business would  earn. This will show the financial projections of Amy’s food truck and will help her reevaluate her expenses as well as costs. This will also serve as evidence that Amy’s business can and will be profitable.



Amy’s Pizzeria 
Pro-forma Income Statement  2017 


In INR 

Revenue: 

Veg. Pizzas


10,80,000 

Non-veg Pizzas       

14,40,000 


Total Revenue 

25,20,000 


Cost Of Goods Sold: 


Veg. Pizzas 

5,40,000

Non-veg Pizzas  

8,64,000

Total Cost Of Goods Sold 

14,04,000 


Operating Expenses: 




Vehicle lease  

60,000   

Rent   

50,000

Salary Hourly 

2,40,000

Employee Wage 

72,000 

Marketing 

60,000 

Utilities

36,000

Depreciation

20,000

Maintenance 

40,000

Total Operating Expenses 

5,78,000 


Earnings from Operations

5,38,000 

Taxes

60,760

Net Income 

4,77,240



Income statement is also called as Profit and Loss statement. It describes the various  expenses, revenues, gains and losses of a particular duration. By looking at the Income  Statement one can find out whether the organization is making profit or running at a loss. Income Statement does not show you the cash transactions or cash flow. 

Cash Flow Projections 

Cash flow refers to the movement of money in and out of a business during a specific  period of time.  


Inflow: Following is a list of some of the ways in which money comes into the business

  • Owners’ Equity: own money invested in the business.  

  • Loan Received: money borrowed from friends, family, relatives, bank etc.  

  • Sales Receipts: money coming in by selling your products or service.  

  • Interest Earned: money coming in the form of interest on the deposits made in the  bank.  

  • Rent Received : Money coming in by renting out a building or room.  

  • Sale of Assets: Money coming in by selling surplus property like furniture,  machinery, old cars etc.  

  • Claims Received: Money coming in the form of insurance claims like accident  claims, fire claims, maturity of insurance policies, etc. 

  • Government Subsidy Received: Money coming in the form of grants paid by the government.  It is a form of financial assistance paid to an individual starting a business. 

  • Sale of Scrap: Money coming in by selling scrap and waste material, selling rejects etc. This  list is not exhaustive. Think of some more ways in which money comes into the business  and enhance this list.  

Note: Please remember that profit is not to be considered as inflow. Nobody gives money  as "profit". Profit is being generated in the business. 

Outflow: Following is a list of some of the ways in which money goes out of the business.

  • Land: Purchasing land to start business.  

  • Building: Constructing a building or purchasing a building to start business.

  • Plant and Machinery: Investing money in Plant and Machinery to start business.  

  • Furniture and Fixtures: Purchasing furniture and fixtures.  

  • Interior Decoration: Investing money in hiring an interior decorator.  

  • Tools: Purchasing tools for the business which will be utilized in the business.  

  • Computers: Purchasing computers.  

  • Raw Material: Buying of raw materials.  

  • Packing Material: Money required to buy packing material for products.

  • Transportation: Purchasing a vehicle to be used for transporting raw materials,  transporting your products to the customer‘s premises.  

  • Salary and Bonus: The money paid to employees. 

  • Employee Benefits: The perks given to employees like travel allowance, medical  benefits etc.  

  • Incentives: Payment of incentives to employees based on their performance.

  • Advertising: Money spent on publicizing the products through newspaper,  television, pamphlets, brochures, public hoardings, etc.  

  • Rent at Premises: Money being spent on paying the rent for the premises used for  the business. 

  • Interest on Loan: Borrowed money on which interest is to be paid.  

  • Insurance Premium: Money paid as premium to the insurance company for covering  various risks.  

  • Travel: Money spent on travelling for the owners and the employees.  

  • Sales Commission: Money given to the employees or agents as commission on sales.  

Note: When items are used with longer life in business (furniture, machinery etc), a part  of its original value is computed as the cost for a given period – say a month, year etc.  This is known as depreciation. However, money is not paid for depreciation. So  depreciation is not a cash outflow. It is a non-cash expenditure

Recording Cash Inflows and Outflows 

Now let‘s take a look at the format in which a cash book or register is written for only cash  transactions. This is a simplified version (compared to what an accountant would use for  cash book) in which we have 6 columns as shown below:  

Date 

Description 

Reference 

No.(Voucher/  Bill)

Cash  

Received (in  Rs.)

Cash Paid(in  Rs.)

Cash Balance  (in Rs.)

1

2

3

4

5

6















In the above format,  

• The first column is the date on which either received cash or paid cash is entered.  

• The second column is the description in which the details for which either received  cash or paid cash is entered. For example: monthly tea expenses paid or purchase of  furniture, etc.  

• The third column is where the bill or voucher details are entered.  

• The fourth column is where the amount of cash received is entered.  

• The fifth column is where the amount of cash paid is entered.  

• The sixth and last column is where the left over balance is entered.

For example:

Opening balance of Rs 40,000/- 

Spent Rs 10,000/- for purchasing furniture, then in the fifth column enter Rs. 10,000/- and  in the sixth column enter Rs. 30,000/- (Rs. 40,000 – Rs. 10,000).  

Sold products on the next day for Rs. 5,000/-. Then in the fourth column enter Rs. 5,000/- and in the sixth column, enter Rs. 35,000/- (Rs. 30,000 + Rs. 5,000).  

Exercise 1 – Cash Transactions Only 

Ratan Singh is an owner of a shop in a three-star hotel at Ranthambore. He sells T-shirts  and mementos to the tourists at that shop. He also takes a stall on rent at crowded places on  a daily basis. Details of daily transactions for the month of July are given below. Let us  suppose that he started his business with an opening balance of Rs. 30,000/- 

(i) On July 01, to start his business, he buys some furniture and basic supplies that cost him  Rs. 15000/- 

(ii) On July 2, he buys 3 dozens of T-shirts at Rs. 1200/- per dozen.  

(iii) On July 6, he decides to sell T-shirts at the temple area on the forthcoming Sundays.  And for that he paid an advance rent of Rs. 100/- per day. Apart from that he spent Rs. 200/- for the banners and Rs. 50/-for handbills.  

(iv) On July 7, he sold all the T-shirts at Rs. 200/- per piece.  

(v) On July 10, he again purchased five dozens of T-shirts at Rs. 1200/- per dozen.  

(vi) On July 14, he sold four dozens of T-shirts at Rs. 200/- per piece and the remaining T Shirts, he sold at Rs.190/- per piece.  

(vii) On July 16, Ratan Singh again purchased five dozens T-shirts for Rs. 1200/- per dozen.  He spent Rs. 500/- on commissions and Rs. 300/- more on pamphlets and Rs. 100/- on  another banner.  

(viii)On July 21 Mr. Singh sells 3 dozens of T-shirts at Rs 200/- per T-shirt.  

(ix) On July 25, he purchased 3 dozens of T-shirts at Rs. 1200/- per dozen and manages to  sell all his T-shirts at Rs. 200/- per piece on that same day.  

(x) He pays the tea expenses of Rs. 300/- for the current month on July 31. 


Cash Book format for Cash only

Date

Description

Ref No.(Voucher/ Bill)

Cash Received (in Rs.)

Cash Paid (in Rs.)

Cash Balance (in Rs.)







July 1 

Opening Balance 




30,000/-

July 1 

Purchase of   Furniture 

No: 3675 and Date:  1/07/2012 


15,000/- 

15,000/-

July 2 

Purchase 3 Dozen  T-shirts 

No: 863 and Date:  2/07/2012 


3,600/- 

11,400/-

July 6 

Rent, Banner and  Handbill 

No:5640 and Date:  6/07/2012 


350/- 

11,050/-

July 7 

Sale of 3 Dozen  T- shirts 

No: 6012 and Date:  7/07/2012 

7,200/- 


18,250/-

July 10 

Purchase 5 Dozen T- shirts 

No: 887 and Date:  10/07/2012 


6,000/- 

12,250/-

July 14 

Sale of 5 Dozen  T- shirts 

No: 6087 and Date:  14/07/2012 

11,880/- 


24,130/-

July 16 

Purchase 5 Dozen T- shirts 

No: 906 and Date:  16/07/2012 


6,000/- 

18,130/-

July 16 

Commission Paid 

No: 1294 and Date:  16/07/2012 


500/- 

17.630/-

July 16 

Banner and   pamphlets 

No: 765 and Date:  16/07/2012 


400/- 

17.230/-

July 21 

Sale of 3 Dozen  T- shirts 

No: 6127 and Date:  21/07/2012 

7,200/- 


24,430/-

July 25 

Purchase 3 Dozen T- shirts 

No: 918 and   Date:25/07/2012 


3,600/- 

20,830/-

July 25 

Sale of 5 Dozen  T- shirts 

No: 6159 and Date:  25/07/2012 

12,000/- 


32,830/-

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July 31 

Monthly Tea  

Expenses paid 

No: 189 and Date:  31/07/2012 


300/- 

32,530/-


TOTAL 


38,280/- 

35,750/-




Note: The balance in the cash register (or the cash box) does not represent the profit. It  only shows the cash balance of the firm.  

It is important to write the cash register regularly (daily or even more frequently) to ensure  no transaction is missed out. Every transaction, however small, must be recorded  immediately. 

In case of bank transactions, money being withdrawn from ATM is like cheque issued and  there will be two entries – cheque issued (hence out flow from bank) and similar amount  received as cash (inflow into the cash box). It is also to be noted that when money is  withdrawn from bank or deposited in the bank – there are two entries; one in cash column  and the other in cheque column. These are known as "contra" entry. It is like taking money  from the left pocket and putting it in the right pocket. Money does not go out to anyone  else; it just changes pocket (cash box or bank account) but still remains with the owner.

Credit Transactions

Sometimes in business, products are sold on credit which means that the buyer does not pay  the money immediately. The buyer will pay at a later date. This is called selling on credit.  Buying on credit means that the buyer will purchase a product from a seller but will not pay  the seller immediately. The buyer makes the payment at a later date. This is called buying  on credit. While credit (whether given or taken) transactions do not get entered in the cash  book, it is very important for the entrepreneur to keep track of these and make appropriate  entries in the cash book. To help achieve this, a simple format like the one below would be  helpful. It will also ensure that tallying or reconciliation becomes easy.  

Also, note that entrepreneurs must try to keep all transactions as cash and not give too much  credit. This is sometimes difficult but must be kept to a very minimal. Otherwise, the  entrepreneur often ends of spending more time in collecting credit and losing money when  the creditors don‘t pay. 

Format for keeping track of credit transactions 

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Sold on Credit 

Bought on Credit

Date

Amount (in   Rs.) 

Description 

Date  money  received 

Date Entry made in Cash Book

Date

Amount (in Rs.)

Description

Date money paid

Date Entry made in Cash Book
























A Cash Flow Projection shows how cash is expected to flow in and out of your business.  

For you, it’s an important tool for cash management, letting you know when your outlays  are too high or when you might want to arrange short term investments to deal with a cash  surplus. A Cash Flow Projection will give a much better idea of how much capital  investment a business idea needs.  

The difference between Cash Flow Projection and Cash Flow Statement is that one is for  the future and another is historical. The historical Cash Flow Statement shows how cash has  flowed in and out of a business. In other words, it describes the cash inflow and outflow that  has occurred in the past. The Cash Flow Projection shows the cash that is anticipated to be  generated or expended over a chosen period of time in the future. 

Activity: Preparing an Income Statement and Cash Flow Projection  

Case: Savitha Sari Shop 

Savitha conducted a survey in her neighborhood and was convinced that there was an  opportunity to start a Sari Shop. She plans to bring saris from Surat and sell it to her clients.  

She has decided on the types of saris that could sell for Rs. 250/- per piece. She will be able to  get these saris at Rs. 125/- per piece. The packing of each sari will cost Rs. 12.50/-.  

She wants to employ two sales staff (shop sale as well as door to door and office sale) at a  salary of Rs. 1,000/- each per month. She will also be working in the business and take salary  of 1,000/- per month. The sales staff will earn commission @ 10% on sales. The freight for  saris from Surat works out to Rs. 12.50/- per sari.  

The front portion of her house, which was rented at Rs. 1,500/- per month is now vacant. She  will do this up with proper lighting, painting etc. She also wants to put proper seating,  cupboards and show –cases to exhibit her products.  

Cost of all the furniture, painting, lighting etc is Rs. 90,000/- (Quotations from vendors).  This expenditure is to be recovered over 5 years. She has Rs. 20,000/- of her savings,  

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which she will invest in this business. Besides, she has convinced her bankers about the  profitability of the business and has been assured of a loan of Rs. 1,00,000/- at 12% interest  per annum. For the first 12 months, only interest will be payable. Repayment will start  thereafter.  

Supplier from Surat sends goods once a month. Savitha has to forecast her sale for the following  month and buy the goods by paying cash.  

Savitha knows very well that cash is the blood in business and hence plans to be very cautious  about credit sales.  

Monthly utility bill is expected to be the average of Rs. 500/-, phone bill Rs. 500/- and various  other office expenses (including publicity) estimated around Rs. 1,000/- per month. 

Projected Sales for six months are as under: 

Month 

Total saris sold 

72 

84 

100 

120 

152 

192 

192

Cash sales of saris 

60 

68 

80 

100 

128 

160 

160

Credit sales of saris 

12 

16 

20 

20 

24 

32 

32

Cash sale rupees 

15,000 

17,000 

20,000 

25,000 

32,000 

40,000


Credit sale rupees 

3,000 

4,000 

5,000 

5,000 

6,000 

8,000




Note: Money from Credit Sales comes in the following month. 

These are the facts (or assumptions as the case may be). 

Please prepare a projected monthly income statement for Savitha Sari Shop in the format shown  here: 


Income Statement


Month  1

Month 2

Month 3

Month 4

Month 5

Month 6

Month 7

Sales/Revenue (in  Rs.)








Cash 








Credit 








Total Sales (A)










Cost of Goods  

Sold (COGS)








Raw Material 








Packing Material 








Sales Commission 








Freight 








Total COGS (B)








Gross Profit (C=A-B)








Fixed Expenses 








Salary 








Rent 








Utilities








Interest 








Phone 








Office exp. 








Depreciation








Total Fixed Expenses (D)








Profit/(loss) before tax (E=C D)








Cumulative Profit/(loss) 










The Cash Flow Projection for the next six months is to be done using the following format. Try  doing it step by step as explained.


Cash Flow Projection


Month 0 

Month 1 

Month 2 

Month 3 

Month 4 

Month 5 

Month 6


Cash in flow 








Owner’s equity 








Loan from friends 








Bank loan 








Cash sale receipt 








Credit sale receipt 








Total inflow 








Cash out flow 








Start-up exp 








Assets (tangible  and intangible) 








Working capital 








Raw material 








Packing material 








Sales commission 








Freight 








Salary 








Rent 








Utilities 








Interest 








Phone 








Office exp. 








Loan repayment 








Total outflow 








Surplus/(deficit) 








Cumulative surplus/(deficitor Closing balance) 








Quiz: 

1) Startup costs are ____________ cost? 

a. Recurring 

b. Non- Recurring 

c. Variable 

d. Fixed 

2) Cost are ________? 

a. Incurred 

b. Derived 

c. Managed 

d. Controlled 

3) Expenses are _____________? 

a. Derived 

b. Reduced 

c. Incurred 

d. Increased 

4) Which of the following is not a Fixed Cost? 

a. Salary 

b. Commission 

c. Rent 

d. Insurance Premium 

5) Income Statement is also called as? 

a. Earning Statement 

b. Balance Statement 

c. Turnover Statement 

d. Profit & Loss Statement