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What is cost and how important is it for entrepreneurs?

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Whatever money an entrepreneur or business spends on things like buying raw materials, services, and Labor is known as cost. This simply means that cost is the amount of money that an entrepreneur spends to produce goods or services which is so important for entrepreneurs. In the concept of finance, cost is seen as the financial valuation of resources, time, and utilities that are consumed to buy (purchase) raw materials (goods) or pay for services.

Important of Cost For Entrepreneurs

What most entrepreneurs do with the information of cost, is use it to manage risks, and as well making sound decisions about the pricing of goods (products) produced, control, and as well minimize cost. Let's break them down for better understanding.

• Manage Risk: Entrepreneurs use cost to identify potential risks which is very important for the success of business. Entrepreneurs spend much of their time studying costs so they can be able to identify potential risks and develop the best strategies to mitigate risks in the future.

• Make Pricing decisions: Entrepreneurs who purchase raw materials usually calculate the cost of the raw materials to determine the cost of his or her products and services to make good pricing decisions. This means the cost is important for determining the cost of purchase and fixing the price that would yield profits.

• Control and minimize cost: Entrepreneurs use cost calculation to control and minimize costs, such as by making huge purchases of goods (raw materials).

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Establish the difference between costs and expenses, giving examples of this through a real case.

Cost and expenses are two different words that are both used interchangeably but they are not supposed to be used interchangeably because both words stand for different meanings.

Cost: This refers to the price that a business pays to acquire an asset for long-term use. On the other hand Expenses is whatever money that is paid regularly (frequently) for running a business. Money that is paid for employees' salary, wages, rent, utilities, etc is classified and treated as an expense.

Cost is typically a one-time payment for something that provides future benefits for the business, while expenses are a recurring payment that is important (necessary) for running the business daily.

Real case

Cost

Let's say, I am a fashion designer, and the money that I spend on purchasing the under-listed items for the future benefits of my business would all be recorded as cost for my business.

• Sewing machine
• Generator
• Table
• Sewing pins
• Scissors
• Measuring tape etc

All these are classified as costs because they are one-time purchases that can be used for several years.

Expenses

Expenses as we have said earlier a regular payments for the smooth operation of running a business daily, as a fashion designer if I spend money on the under-listed for the operation of my business would be recorded as expenses.

• Employee's salary
• Rent For space
• Utilities for light and maritime
• Buying of fuel etc

All these are expenses because they are frequent payments that are necessary for running my business daily.

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What are the benefits of performing a good cost determination?

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There are so many benefits to performing a good cost determination some of these benefits are:

• Profitability: It helps businesses to design and produce products (goods) or services that are attractive to customers rather than producing what is not attractive to customers. Producing goods that are attractive to customers helps entrepreneurs sell the goods at a price that customers can buy.

• Customer Satisfaction: It helps businesses measure (determine) customer satisfaction for the improvement of brand reputation and revenue.

• Efficiency: By performing good cost determination businesses can measure their efficiency in terms of time, cost, and expenses.

• Pricing: A lot of businesses set their prices on their estimate of the highest for a unit. The key factor in a business is setting prices which with the help of good cost determination business can set a price that would increase its revenue.

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How do you determine the costs of your business? If you are not an entrepreneur, how would you do it?

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I would do the following to determine the costs of my business:

• I Identify expenses: I will consider all the costs in my business that are needed to run my business, including monthly, and one-time expenses.

• I will identify one-time costs: I will identify expenses that only happen once, like permits, licenses, logo creation, website development, legal fees, equipment purchases, and inventory.

• I would identify monthly expenses: I will ensure that all recurring expenses, like salaries, office supplies, insurance, marketing, rent, and utilities are recorded.

• I will calculate the total: I will add up all the monthly and one-time expenses to know my estimated start-up cost.

• I will create a report:** I will put together a clear and simple-to-understand report of my expected startup costs.

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I am inviting my friends; @dave-hanny, @ruthjoe, and @vickyson to also join me.

Cc:-
@yolvijrm