Welcome to Module 2 of the Fundamentals of Accounting capstone course. This is really where we get into the nitty gritty of the business that you have chosen based on Module 1. So, let's take a look at expenses and selling prices. First of all, there’s an old saying that you have to spend money to make money. That’s why we’re starting with expenses. We need to know what are you going to spend on a regular basis so that you can determine how much you will sell your product for so you can make estimates about profitability. So this is combining, really, elements of Kevins' course when he was showing you how to present the performance of the entity. But it will help you also integrate what you learned from Gary in terms of what is a cost structure, what is a total cost, a variable, or a fixed. When you look at your expenses, you are going to, of course, look at the cost of the product or the service that you're going to provide. You will look at general selling and/or administrative expenses. And you want to make sure that you're focusing on the relevant expenses. This, as I said, will be a difficult module. Don't try to think of every possible, small expense, that might exist. It is really more important that you focused on the most relevant expenses. Those that would be the part of decision making, and generally, those that are greater in magnitude. So, again, you need to focus on, what are you going to spend in order to create your overall business? In order to get to that goal of having a set of external financial statements? So, this is a tough task. Where are you going to find out this information about expenses? If you are already running your business, then you do have an advantage, because you know what your expenses are. You know what your expenses cost. However, this gives you an opportunity to review that information. And maybe you can see opportunities to reduce costs. So, while maybe you do have a current business, you do still have opportunities to learn from these modules. If you don't have a current business, possible your current work experience or your prior work experience, you had some exposure to the financial information of the entity. Now, that may have been possible, but generally that is private information. You may not have had that in your work experience. So, where else can you go? Ask friends or family to have a similar business. You could even possibly go to a business that exists in your area, as Kevin did with the bakery, okay? Even after you look at all those possibilities, ultimately you're going to have to do some research. And I have provided, in the Resource section for Module 2, different Internet resources. You, again, could also look at what is available in your geographic area from governmental agencies about starting a small business. Or if there's any information on cost data for the type business that you would be interested in. So, this is the tough part. This is difficult to actually determine what those expenses are. Try not to let this overwhelm you. Again, because you want to focus on what really is most relevant, not down to the penny of what your expenses are going to be. So, what type of expenses will be incurred? Well, it depends on if you are selling a product, if you are selling services or if you are dealing with a charitable organization. The expenses, a lot of them will be very similar, but there are some that might be unique to each type of business. And we will look at a template that's provided in the resources that will give you an idea, or examples of expenses you might want to be looking for. And, again, look at what's going to be relevant to you. What is most likely going to affect your decision making process? So if we look at the sales of products template, the items that may not be something that you really need to look at right away, is employee benefit programs. You're a brand new organization. If you have employees, that's probably not something you can afford to do. It's something that you'd want to look for in the future so that you can have a benefit program for yourself. because that's an advantage of running your own business. But probably not something that you would see right away. In the sales of products, you might have sales people that are paid commissions and you would have that commission expense in selling and administrative. But maybe your products are sold without salespeople. So again, think about what would be realistic. Thinks about how you have interacted with that type of business. Did a salesperson contact you? Was it something that you just ordered online? And that will guide you on the expenses that you want to focus on, on that cost of goods sold income statement template provided in the resources. If you are dealing with the sales of a service, again, a template is provided in the resources so that you have an idea of the range of expenses that could be part of your entity. Very similar to those for the sales of products, but when you look at the template, You'll see that there are things that may not apply, okay? You may not pay rent if you actually own the building where you work from. You may not pay rent, because maybe you're working out of your home right now. At the beginning of the process, when you are estimating your expenses, and this really applies to all of the entities, you probably won't have a depreciation expense estimate. That can come later on when we are actually closer to the last module in the course. So, again, focus on what is going to be most relevant for decision makers, not only inside the organization, but what will outside decision makers be focusing on as well? You don't have to have an expense estimate for every item on the template. Now we can look at, what if you were interested in starting a charitable organization? Again, I have provided a template for an income statement for a charitable organization. And, once again, there are expenses listed, that you won't incur, maybe ever. So one of the expenses listed is actually an expense for you, as your entity, to make a charitable contribution. Unless your organization grows very large, that is not likely to occur. Similar to the sales of products, not likely as a start out that you would have employee benefit programs. If you're currently working in a charitable organization, and so you're able to work with that for your overall project in the capstone, and you do have benefit programs, by all means, include that. But if this something you're creating from scratch, that is not likely something that you will see. Another expense that may not be part of charitable organization is vehicle expenses. More likely than not, you will not own vehicles because you're new. Very often the people that are part of the charitable organization donate their time and what it takes for transportation. So, because they are providing that, you won't have it as an expense item. So, again, don't feel like you have to have an estimate for every item on the template. That template is there strictly to guide you. And so, it is there to be a tool, not to be an absolute requirement of the module. Expenses. Pay yourself first. This is the primary mistake that any business owner makes. You have to pay yourself first, otherwise the business enterprise as a whole is not going to sustainable. You have started this business, more than likely, because you want to run a business. And that you may not want to work at a typical job where you're paid hourly wages or even a salary, so don’t forget that in your list of expenses. It may sound unusual to pay yourself first, but you have to pay yourself first. So when you are estimating expenses, make sure you include that. Now, you may not want the amount that you pay yourself to be an extremely high amount. You would probably want it to be moderate. Something similar to what you are currently earning. But you want to make sure that is included in there. You don't want to miss that expense. Now, we've talked about the expenses. We've talked about making sure you pay yourself first. Now, with all that expense information, you can determine the selling price. This seems very different than the way Kevin presented information. Kevin presented the balance sheet because that's a very traditional approach for the order of the presentation of statements. And then the income statement. But what we're working on here is creating some sort of business. So we needed that first portion of the module to have our estimate of expenses so that we can determine our selling price. We certainly don't want to charge a selling price that is less than our total expenses for a period, so we need those expenses first. Some things that you want to think about. If you're working on a business that is a for-profit entity, you have to look at the competitor's pricing. You cannot charge twice as much as your competitor and expect to be successful. So, you want to be sure that you're researching that in your area, or what is being sold on the Internet. You also need to consider your profitability goals. So, your profitability goal, one of them will be so that you do produce cash flow, which you talked about in Kevin's class, to keep that business sustainable. The profitability goal, remember, profit will be after you pay yourself, okay? So those are some of the considerations of a selling price. If you are looking at the selling price of a non-profit, some sort of charitable entity, here you have a much different focus. Because, here, you can't go out and charge a customer a particular selling price. Here, you need to collect donations, you need to possibly apply for grants. Maybe there are programs in your area that provide a certain amount of what's considered seed money. Startup money that may not be repaid. So you have to think about, where are you going to get the money? And you will have to balance this with your expenses. If you don't feel that you can collect the necessary amount to cover those expenses, you have to look at that. Do you decrease the amount of services you offer? Do you re-examine your expenses to be certain that you haven't overestimated something? But in a charitable organization, it is definitely a little bit riskier, in the sense that you never know if you are going to get those donations. And very dependent upon the economy. Obviously, when the economy does well, people will donate more to a charity and vice versa. So, in a charitable organization, you really have to think about, where are you going to get that money? It's not really a selling price. It's a source of where you're going to get your funds. Okay, so now at this point, you have developed your estimated expenses. Again, focusing on relevant. Things that are generally high magnitude. Things that will help internal and external decision making process. And from there, looking at your expenses, determining what is a reasonable selling price so that you can meet your profitability goals. So that you do make sure you pay yourself first. And so that you can continue to provide the charitable service that your organization is set up for. Now I'd like to talk about the peer review for Module 2. And the peer reviews will have a similar format for each module. But one thing that is very important is each module, from Modules 2 through 6, your peer, your fellow student, is going to repost their description. They may have modified it, maybe they didn't. But it's important that you understand what is their business. Because you have to look at the estimates for expenses, the estimate for the selling price, in light of the business that they are working on. So, that is a very important step. Won't take a lot of time, more than likely. But you do have to take the time to reread that description. Now, once you have read the description, you want to check, what has their work been? You want to see if they do have reasonable expense amounts, that they haven't omitted anything that is relevant of high magnitude. And part of the way you're going to know if the expense amounts are reasonable is they're going to provide explanations. So, in your peer review, you will be looking at the overall expenses presented and the explanation of how they were derived. Now at this point, I do not expect students during the peer review to do research to literally fact check what those expenses are. However, you are looking at them, are they reasonable based on everything you've learned so far, your own personal work experience? You are going to do the same thing for the selling price, or for the non-profit, for the collection of the necessary funds. So, in each step for that peer review, you will evaluate the requirements in the module as they are posted on the course website. And also, never forget to provide constructive feedback. This is a learning process from everyone. When I teach, I learn more from my students every single class, no matter how many I've taught it. So, you can provide constructive feedback even if you're not familiar with the business. So, make sure that you take that seriously when you are doing your peer review. Now that wraps up Module 2 on the expenses and the sales. And I do have to repeat that this will be the toughest module. So, prepare yourself to spend some time with this. And, again, post to the forums if you're having troubles estimating expense or getting a reasonable sales price information. Because one of your fellow students may be able to help you out there. So, good luck with Module 2. Take the time because that will improve the quality of your overall project when you get to Module 6. Good luck.
