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  • One of the most common reasons startups fail is --

  • Because they didn't talk to customers?

  • There's no market for their product and no one wants what they're selling?

  • They didn't research the competition and someone's already offering their service?

  • Okay... so we've learned a lot of strategies to fight off failure.

  • But we could be doing all this right and still fail if we straight-up run out of money.

  • Expenses can pop-up, supplies can suddenly be hard to find, or delivering the most value

  • to customers can involve some expensive choices.

  • Businesses can run out of money -- it happens.

  • But it doesn't have to happen to us.

  • I'm Anna Akana, and this is Crash Course Business: Entrepreneurship.

  • [Theme Music Plays]

  • There's a common saying that you have tospend money to make money.”

  • Well, when you're just starting out, there are lots of opportunities to spend money,

  • and lots of different terms to describe it all.

  • We better pull out theFinance to EnglishDictionary again.

  • First, let's establish that all of these things we're going to talk about fall under

  • the broad category of operating costs or expenses.

  • These are all the things you pay for to do business on a day-to-day basis.

  • But you COULD NOT POSSIBLY use the same word to refer to product costs as you do administrative

  • costs.

  • That would just be madness!

  • So underneath the umbrella of operating costs are two smaller groups: cost of goods sold

  • and selling, general, and administration costs or SG&A.

  • Cost of goods sold, also called direct costs, refers to all the expenses that are directly

  • tied to producing a product or service.

  • So if we want to print an irreverent lit magazine, what we pay writers to create satirical content

  • would fall under cost of goods sold, and so would the printing costs of the magazine.

  • And SG&A, also known as indirect costs, are basically everything else we need to run the

  • business.

  • This could include salaries for people in management, or even rent, utilities and supplies

  • that aren't part of manufacturing.

  • So the distribution costs of getting our magazine out to people, the marketing budget, and the

  • salary of the head editor (since she's an administrator) would fall under SG&A.

  • And also the cupcakes we bought to celebrate Dave's birthday last week.

  • Breaking expenses down with these two categories helps us figure out where our money is being

  • spent in broad strokes -- on our product or service, or on everything else.

  • But there's another way to split up expenses that can help us pay attention to what expenses

  • will change as we grow.

  • There are fixed costs, which don't change in the short term based on the number of goods

  • or services we produce.

  • So, for example, the rent for our co-working space where we create and edit the magazine

  • layout is a fixed cost.

  • No matter how many copies we sell, the rent isn't changing.

  • And there are variable costs, which are expenses that fluctuate based on how our output changes.

  • The amount of ink and paper we need, or the shipping costs change based on how many magazines

  • we want printed.

  • And we're going to need a lot.

  • Who wouldn't want to read our hot take on goat yoga?

  • This is a very basic overview of some ideas and vocabulary to get started.

  • After all, jargon can be one of the most intimidating barriers to overcome in entrepreneurship.

  • So now that we know about different kinds of costs, we can decide what roles they're

  • going to play in our business.

  • At this point, we've thought a lot about our business and know our customers pretty

  • well.

  • We know what they value and where their pains are.

  • So we want to make sure our business model reflects that, even in how we handle expenses.

  • And we can choose to prioritize minimum costs or maximum value.

  • In a cost-driven structure, we try to minimize costs wherever and whenever possible.

  • This will show up in our value proposition -- if we're working to deliver something

  • to customers at the lowest possible price, keeping costs lean will be a key part of our

  • business.

  • We might maximize automation, outsource expensive tasks, or devote lots of resources to optimize

  • every step of the process.

  • If you live in Canada, you've probably seen the in-your-face yellow signs with NO FRILLS

  • in giant block lettering.

  • And they mean it.

  • For 30 years, the No Frills grocery chain has allowed customers to tradefrills

  • for savings.

  • Store displays?

  • That's a frill.

  • Someone to bag your groceries for you?

  • Frill.

  • Taking products out of their cardboard shipping boxes instead of just cutting the sides and

  • stacking them?

  • You guessed it -- frill.

  • They work incredibly hard to keep their SG&A costs low.

  • And customers love it.

  • Losing all the frills means saving money, and they know the low prices aren't coming

  • from low quality, but low frill count.

  • And they haven't stopped with de-frilling the stores, they've even de-frilled products

  • to keep down the cost of goods.

  • No Frills' parent company created a generic brand calledno name.”

  • It's literally yellow labels with a basic description of the product in bold sans serif

  • font.

  • They've leaned in hard to their cost-driven identity, show that priority to customers,

  • and they've managed to take that success across Canada.

  • You can see lots of other examples across industries.

  • Airlines like Southwest or Ryanair, big box stores like Walmart, or giant thrift stores

  • like Goodwill or the Dollar Store all have cost-driven structures.

  • Maybe not with the sense of humor of No Frills... but still.

  • On the flip side is a value-driven structure, where companies are less concerned with how

  • much a particular business model costs and more with how much value it creates for customers.

  • Don't get me wrong, they're not handing out iPads like candy.

  • Everyone has to be conscious of expenses in order to turn a profit, but value-driven companies

  • often splurge on pricier things like very personalized service.

  • The Ritz-Carlton Hotel company has won awards for its customer service.

  • The tales of employees going to extravagant lengths in the name of The Customer are the

  • stuff of legends or viral tweets.

  • There are elaborate photo shoots of stuffed animals before they're mailed back to their

  • owners with handwritten notes, and employees who flew cross-country to deliver lost laptops

  • before important presentations.

  • And these aren't one-off stories.

  • Every employee, from the highest level of the company to the kid who's been there

  • a week, is given up to $2,000 to delight a customer with service.

  • While The Ritz still probably does work to keep costs down (that's why it's $2000

  • and not 2 million) they're willing to spend money if it creates more customer value.

  • The value-driven end of the spectrum is full of luxury car brands, clothing lines, or even

  • watchmakers who sell $500,000 watches that pro tennis players casually advertise as they

  • sweat all over the court...

  • wat?

  • Most businesses, including your business, will probably fall somewhere in between the

  • cost-driven and value-driven range.

  • The balance is up to you, but there are certain ways to be more cost-driven without sacrificing

  • value.

  • As we discussed when we talked about key partners, an economy of scale is a cost advantage a

  • business can have if it produces larger quantities and spreads fixed costs around more products.

  • Or an economy of scope is a cost advantage a business can have by sticking its hand in

  • multiple metaphorical cookie jars.

  • With several product lines or services, one set of marketing techniques and distribution

  • channels can support multiple key activities.

  • Even though the total bill might be bigger, with an economy of scale or scope, bigger

  • really is better.

  • You can do more with the expenses you've already invested in to make sure your profits

  • -- your revenue minus your expenses -- are bigger too.

  • To see an example, let's go to the Thought Bubble.

  • [start Thought Bubble]

  • Piper couldn't find reasonable professional painter options in her town, so she painted

  • her own house inside and out, and the neighbors showered her with compliments.

  • So Piper decided it'd be worth the risk to start her own LLC: “Big P's Small House

  • Painting.”

  • At first, Piper buys the materials necessary for each job -- the paint, primer, drop cloths,

  • tape, brushes, rollersyou get the idea.

  • She rents extra equipment on a case-by-case basis, like a pressurized paint sprayer, and

  • pays contractors by the hour when she needs to do a rush job.

  • Together, these go into the cost of goods sold because they're specific to her house

  • painting.

  • Once Piper has some revenue, she'll set up a website and marketing budget which count

  • as selling, general, and administration expenses.

  • Word is starting to get out and she has a steady flow of customers, but somehow she's

  • not making ends meet.

  • At the end of the week, she barely has enough in her bank account for frozen pizza.

  • What happened?!

  • Luckily, she kept diligent records and realized she forgot some things in the chaos of starting

  • a new business, like the gas for hauling supplies and driving from house to house, or paying

  • to store her equipment in a local facility.

  • She even overlooked a pretty major direct cost -- the time it takes to plan each house-painting

  • project.

  • If Piper is going to make this work, she's going to need a much better system.

  • There's still time to turn things around with some accounting software and cost structure

  • changes.

  • Maybe instead of buying everything for each job, she can work out an economy of scale

  • to buy paint and rollers in bulk.

  • But she'll need to move fast -- not sit around watching paint dry -- to be successful!

  • Thanks, Thought Bubble!

  • Understanding where your money is going (to fixed costs, direct costs, all that stuff)

  • will help us plan strategies that keep us profitable rather than spiraling and going

  • bankrupt.

  • Our money is pulled in a lot of different directions when we're getting a business

  • into the world, so planning is absolutely essential.

  • Entrepreneurs also pay close attention to expenses because we care about where our money

  • is going.

  • For example, social entrepreneurs mix for-profit goals with creating a positive return for

  • society.

  • These are nonprofits or B-corps that make choices that may be less profitable to maximize

  • their impact on social, cultural, or environmental goals.

  • Businesses like Warby Parker, who donate one pair of glasses for every pair sold, were

  • started by social entrepreneurs.

  • And tracking expenses is really important to make sure they're budgeting effectively

  • so they can make those less profitable decisions.

  • They don't just want to maybe donate profits later on -- the higher purpose is infused

  • directly into the fabric of their business.

  • So sales drive any business, but careful expense-tracking drives a profitable and responsible business.

  • The bottom line is: Pay attention and plan.

  • Be cost-driven, be value-driven, or be somewhere in between, but know where your money is going

  • so you can keep delivering value to customers.

  • You have to spend money wisely to make money effectively.

  • Since we've finished filling out the Business Model Canvas yay!, the next three episodes

  • will be all about money and growth.

  • Next time, we'll delve into the exciting underbelly of any business -- the accounting

  • department.

  • Thanks for watching Crash Course Business, which is sponsored by Google.

  • And thanks to Thought Cafe for these beautiful graphics.

  • If you want to help keep Crash Course free for everybody, forever, you can join our community

  • on Patreon.

  • And if you want to learn more about ideas behind social responsibility, check out this

  • Crash Course Philosophy video:

One of the most common reasons startups fail is --

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

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    林宜悉 posted on 2020/04/23
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