Expenses & Costs - How to Spend Money Wisely: Crash Course Entrepreneurship #14

Summary

In this Crash Course Business video, Anna Akana explores the importance of managing costs for startups to avoid failure. She explains operating costs, including cost of goods sold and SG&A, and differentiates between fixed and variable costs. The video also discusses business models, emphasizing the balance between cost-driven and value-driven structures, using examples like No Frills and The Ritz-Carlton. It stresses the significance of tracking expenses for profitability and social entrepreneurship, encouraging businesses to spend money wisely.

Takeaways

• 💡 Startups often fail due to not talking to customers, not having a market for their product, or not researching competition.
• 💸 Running out of money is a common reason for business failure, even if other strategies are executed correctly.
• 📚 Operating costs or expenses are categorized into cost of goods sold (direct costs) and selling, general, and administration costs (SG&A or indirect costs).
• 🖨️ Cost of goods sold includes expenses directly tied to producing a product or service, like paying writers or printing costs.
• 🏢 SG&A covers everything else needed to run the business, such as salaries, rent, utilities, and non-manufacturing supplies.
• 🏠 Fixed costs remain unchanged in the short term regardless of the number of goods or services produced, like rent.
• 🔄 Variable costs fluctuate based on output changes, such as the amount of ink and paper needed or shipping costs.
• 🚀 A cost-driven structure focuses on minimizing costs to deliver products or services at the lowest possible price.
• 🌟 A value-driven structure prioritizes creating value for customers, often investing in personalized service and high-quality offerings.
• 💼 Social entrepreneurs blend for-profit goals with creating a positive social, cultural, or environmental impact, carefully tracking expenses to ensure effective budgeting.

Q & A

What are the common reasons startups fail according to the script?

The script mentions that startups often fail because they don't talk to customers, there's no market for their product, they didn't research the competition, or they run out of money.

What is the importance of understanding operating costs or expenses in a business?

Understanding operating costs or expenses is crucial as it helps in managing day-to-day business activities and identifying areas where costs can be reduced or managed more effectively.

What is the difference between cost of goods sold (COGS) and selling, general, and administration costs (SG&A)?

COGS, also known as direct costs, refers to expenses directly tied to producing a product or service. SG&A, or indirect costs, includes all other expenses needed to run the business, such as salaries, rent, and utilities.

How do fixed costs differ from variable costs?

Fixed costs do not change in the short term regardless of the number of goods or services produced, such as rent. Variable costs fluctuate based on output, like the amount of ink and paper needed for printing magazines.

What is a cost-driven structure in a business?

A cost-driven structure is a business model where the focus is on minimizing costs as much as possible to deliver products or services at the lowest possible price to customers.

Can you provide an example of a business with a cost-driven structure mentioned in the script?

The script gives the example of the No Frills grocery chain in Canada, which focuses on keeping costs low by reducing 'frills' and passing the savings onto customers.

What is a value-driven structure and how does it differ from a cost-driven structure?

A value-driven structure focuses less on the cost of the business model and more on the value it creates for customers. It may involve spending more on personalized service or high-quality products to enhance customer value.

How does The Ritz-Carlton Hotel company exemplify a value-driven structure?

The Ritz-Carlton Hotel company is mentioned as an example of a value-driven structure because it prioritizes exceptional customer service, even to the extent of spending up to $2,000 per employee to ensure customer delight.

What is the significance of economies of scale and scope in managing business expenses?

Economies of scale allow businesses to spread fixed costs over more products by producing larger quantities, while economies of scope enable businesses to use the same resources across multiple product lines or services, thereby reducing overall costs.

Why is expense tracking important for social entrepreneurs?

Expense tracking is important for social entrepreneurs because it allows them to budget effectively and make decisions that may be less profitable but maximize their impact on social, cultural, or environmental goals.

What is the main takeaway from the script regarding managing a business's finances?

The main takeaway is that businesses should pay close attention to expenses, plan wisely, and understand where their money is going to ensure profitability and sustainability, whether they are cost-driven, value-driven, or somewhere in between.