Lesson 1

Lesson 1: Owning and Operating a Small Business

Focus

Small businesses play a significant role in the Canadian economy. According to Industry Canada, as of December 2010, there were approximately one million businesses in Canada with at least one employee. Of these one million businesses, 75% had fewer than ten employees, and 55% had only one to four employees.

Would you like to create a small business and be part of that 55%? Operating your own business has many advantages, including the following:

• You get to choose the people with whom you work.
• You can follow your passion and choose what work you take on.
• You can experience the satisfaction of creating something on your own.

In this lesson you will explore the different financial calculations involved in starting and operating a small business.

Lesson Outcomes

At the end of this lesson, you will be able to

• analyze day-to-day expenses and revenue of a small business
• analyze start-up costs of a small business
• analyze the feasibility of a small business

Lesson Question

You will investigate the following question:

• How do financial decisions affect the profitability of a small business?

Assessment

Your assessment may be based on a combination of the following tasks:

• completion of the Lesson 1 Assignment (Download the Lesson 1 Assignment and save it in your course folder now.)
• course folder submissions from Try This and Share activities
• additions to Glossary Terms
• work under Project Connection

Self-Check activities are for your own use. You can compare your answers to suggested answers to see if you are on track. If you have difficulty with concepts or calculations, contact your teacher.

Remember that the questions and activities you will encounter provide you with the practice and feedback you need to successfully complete this course. You should complete all questions and place your responses in your course folder. Your teacher may wish to view your work to check on your progress and to see if you need help.

Discover

Try This 1

Think about a small business that you either know about or would like to start. Perhaps it’s a landscaping company, a bike courier company, or a mountain guiding company. Regardless of your choice, think about the following questions:

1. What products and/or services does the business sell or provide to make money?
2. What expenses would the business have?

Save your responses in your course folder.

Share 1

With a partner or in a group, share your results from Try This 1, and then answer the following questions.

1. Did your partner's or the group's businesses have any expenses in common? If so, which expenses?
2. Did the lists of expenses include any that occurred each month? If so, what were they?

If required, place a summary of your discussion in your course folder.

Explore

What you may have discovered in Share 1 is that regardless of the business, there are commonalities in expenses. To cover the cost of expenses, businesses sell products or services to earn revenue.

In general, businesses earn sales revenue by selling goods or services. In the course of delivering those goods or services, businesses have associated expenses. If their revenue is higher than their expenses, they make a profit; if their revenue is lower than their expenses, they incur a loss. If their revenue is equal to their expenses, they break even.

In Share 1 you had a variety of expenses. These can be categorized as either fixed or variable. Fixed expenses are the same amount and occur at a regular frequency, such as the cost to rent a building per month. Variable expenses are varying amounts that may or may not occur at a regular frequency, such as fuel and repair costs for a vehicle. You may also have fixed and variable revenue. Fixed revenue could come from a long-term contract where you expect the same amount of money each month over an extended period. Variable revenue could come from a one-time contract that you do not expect to be repeated.

In the table, examples are given for these definitions as applied to a small landscaping business.

BananaStock/Thinkstock

The way money is moving into and out of a business can be summarized by a statement of revenue and expense. A sample statement of revenue and expense for a landscaping business is shown in the following table. Notice that all the revenues are totalled and all the expenses are totalled in the statement. These totals are then used to determine the profit.

September 2013
Income ($)		Expenses ($)
Regular Contracts One-time Contracts	8150 1200	Wages Fuel Repairs Insurance Supplies Rent	3200 365 190 110 680 1400
Total	9350		5945
PROFIT

While playing Hot Chocolate Express, you saw that many factors can influence how well a business does. Some of these factors, such as the hot chocolate recipe, are in your control. Some of the factors, like the rent, are not. A real business has many more factors to account for than the simulated Hot Chocolate Express.

Read “Example 2” on pages 290 and 291 of your textbook for a detailed example of analyzing day-to-day expenses and revenue. Consider the calculations that Sylvia must use in her analysis to figure out strategies for breaking even or making a profit. What factors may affect her profitability?

Self-Check 2

When beginning a business, typically you will need to purchase some equipment or services. This start-up cost will often include some large, expensive items. For example, a gasfitter would need to purchase a truck, a pipe cutting and threading machine, and a large number of other tools, such as a pipe bender, drills, wrenches, screwdrivers, levels, a measuring tape, and saws. To purchase all of these things could be expensive. Expenses associated with the business after the start-up costs are called operating expenses.

It is also important to decide whether a new business is feasible. This means deciding whether a business is likely to be profitable. To determine if a business is feasible you should begin by asking questions such as the following:

• Will people purchase my service or products?
• Can I sell my services or products for more than it costs me to provide them?
• How much competition is there in the community in which I plan to set up the business?

Connect

Lesson 1 Assignment

Lesson 1 Summary

Opening a small business can be an exciting endeavour, but you will need more than a good idea. First you will need to determine whether your business will be feasible in a given location. This can involve looking at many different aspects of your business and the community in which you will operate. Planning the expenses and revenues you can realistically expect for your business is also part of a successful business plan.