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Financial Fitness

Step 1

From Fun to Cash
by Garrett Bryce

Emily Manassero and her horse, Kisses Emily Manassero mills wheat and bakes bread to support her horse Kisses.
E mily Manassero, age 14, from Oceanside, CA loves to be outdoors riding her horse Kisses. Keith Peiris, age 13, in London, Ontario spends most of his after-school hours on the computer. What could they possibly have in common? Both are supporting their hobbies by running their own businesses.

Mixing Pleasure and Business
For Emily, it all started when she needed to earn money to pay stabling fees for Kisses. Taking her mother's suggestion to sell homemade bread, Emily started a company called The Bread Barn, where she mixes, bakes, and butters up bread and sells it to pay Kisses' living expenses. Keith is president and CEO of Cyberteks Design, a studio that offers professional layout and graphic services to companies that want to grab Web surfers' attention.

To help their businesses stay successful, both Emily and Keith constantly keep tabs on the sales revenue coming in and expenses taking money out. Their goals are always to have enough cash on hand to pay the bills and enough profit left over to reinvest in the company or spend on their hobbies.

Delivering the Goods
The Bread Barn is considered a product-based business, meaning Emily makes and sells goods or wares that can be physically touched (things that are tangible). While she has few operating costs, Emily invests quite a bit of cash in product costs - the ingredients for her bread. When she first started the business, Emily added up all the costs to make a loaf of bread and determined that each loaf costs 50 cents. To keep sales up at The Bread Barn, she buys a particular brand of wheat that costs more but makes higher quality bread. "It costs more than what you'd buy in a regular store, but if I didn't buy it, the bread wouldn't sell as well," says Emily.

After she figured her product costs and took into account what her competition was charging, Emily decided to sell the bread for $3 a loaf for plain bread, and $3.50 for others such as cheese-onion or cinnamon-raisin. She sells about eight loaves each week, bringing in around $80 a month gross profit. This money covers Emily's other operating expenses and provides the cash she wants to spend on Kisses.

Keith Peiris meets Chinese Primier Zhu Rongji Keith Peiris meets Chinese Primier Zhu Rongji at a trade conference in Beijing, China.
At Your Service
Keith's business is service-based, meaning he sells items that cannot be physically touched - his time, talent, and technical knowledge to create Websites. When Keith got his first client, the 2000 Canada-Wide Science Fair, he already owned the equipment to do the job. "At that point, I had the necessary software, like Flash and Fireworks, and I was thinking of starting a business," says Keith.

After completing his first site, Keith incorporated Cyberteks in June of 1999, and started working up a price list of services. "Some of the prices in the initial stages were to cover my software," Keith says. He knows he will need to upgrade software each time a new version comes out and replace hardware about every two to three years.

The company's biggest expense is paying employees, including Keith, for labor on the Websites. Depending on the complexity of the design projects and the number of demands on his time, Keith's prices can vary. "My time is a bit more costly when I have more clients," says Keith.

No Time to Waste
Like Keith, Emily finds that running a business can be very time consuming. She doesn't have any problem getting customers, but she does find it hard to make time every day to bake bread. "It takes two hours every day, and I am in theater. I also groom my horse, and I have school," she explains.

The Bread Barn and Cyberteks are two very different companies, separated by many miles. Emily's customers are mostly family and friends, but Keith hopes to take his business worldwide with the opening of a production facility in China. He already has sales offices in seven U.S. states. You can be sure they're both watching the market for signs of change, and like true entrepreneurs, they'll be prepared to take advantage of the next opportunity that heads their way.

Counting the Costs

Do you have a great idea for a new business? Before you start investing money in production, it is important to research all the expenses. Most businesses face two main types of ongoing expenses:

Product costs (or cost of goods sold) are the expenses for the materials and labor used to produce the tangible products you sell. These costs vary, depending on the amount of goods you produce.

Operating expenses (or overhead) are the costs for the ongoing operation of your business, no matter how many sales you make.

While most businesses have some operating expenses, companies like The Bread Barn that primarily sell tangible goods are also very concerned with product costs. Smart entrepreneurs like Emily and Keith carefully consider the costs associated with every good or service they offer.

Product Costs for Tangible Goods
1. Make a list of all raw materials, supplies, or ingredients needed to create your product.
2. Research the cost of each type of material, noting quantities as well as prices. (Example: 32 ounces of cooking oil - $2.79)
3. Define one unit of your product (one birthday cake, one pair of earrings)
4. Figure the exact amount of each type of material needed to produce one unit.
5. Figure the exact cost for each type of material in one unit of your product.
6. Add the costs of all the materials (and the cost of the labor to produce the unit, when appropriate) to determine the total cost for one unit.
7. Compare the cost to produce the product to its estimated sales price and assess the product's potential to cover operating expenses and still make a profit.

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