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Autocratic leadership – What is autocratic leadership & its importance [with examples]

Marketing

Leaders can choose from different styles to lead and influence their team. In this post we cover what is autocratic leadership, its characteristics, examples & more.

Autocratic leadership

Leaders strive to bring out the best from their team. Leaders can choose different styles of leadership. There are over eight leadership styles popularly used in business – autocratic, democratic, Laissez-Faire leaderships, transactional, charismatic, servant, and bureaucratic leaderships are just some of the leadership styles followed by companies around the world. But, what is autocratic leadership? Autocratic leadership makes it apparent who is the boss and who will have control of the distribution of workload and responsibility.

Lewin’s leadership styles

Psychologist Kurt Lewin and his team identified different styles of leadership. The research was the basis for further analysis on leadership. He conducted the study in 1939 and identified three leadership styles are –

  1. Authoritarian or autocratic leaders set a clear expectation for what needs to be done, when and how will it be done. The leadership style focuses on the command of the leader and control of the followers. They make decisions independently.
  2. Participative or democratic leaders are said to be the most effective form of leadership. The leader offers guidance to their staff and takes inputs from them. The leader has the final say in the decision-making process. 
  3. Delegative or Laissez-Faire leadership is the least productive form of leaders. The staff are demanding and are uncooperative. The leaders offer little or no guidance to their group members. 

Autocratic leadership definition

Autocratic leadership definition is as follows, it is the management style wherein one person controls all the decisions and takes little inputs from their team. They make decisions based on their own beliefs. 

We see autocratic leadership in small firms.

The leadership style is effective in companies that require quick decisions. Leaders take responsibility for decisions and consequences that follow. They have a clear vision that can motivate their team. Some consider autocratic leadership as flexible, while others consider it to be outdated.

Characteristics of autocratic leadership

The purpose of autocratic leadership is to establish centralized control to achieve the desired results. Leaders who follow the approach are called bossy or dictatorial. The level of control can be beneficial in certain situations. There are instances when authoritarian leadership traits are good for business. Characteristics of autocratic leadership are-

1. Autocratic leaders take limited inputs from stakeholders

Autocratic leaders make most of the decisions themselves. They rarely consult others or take feedback. It can boost productivity with decisions being taken faster but may lower team morale. Employees may feel they are not trusted and question if they add any value to the team.

2. Authoritarian leadership style demands a structured environment

Authoritarian leadership style requires a structured environment. Some detractors may call the environment rigid. When there is a clear command structure, work gets completed faster. Some people may find the work setting too stringent. However, employees may feel stressed if they think they are being monitored and evaluated constantly.

3. Authoritative leadership has clearly defined rules and processes

There are no questions on who is the boss in authoritative leadership. The leader has the final say on critical business decisions and how the business will run. They define roles, rules, and processes clearly, and things run smoothly. The leadership style may stifle creativity and inputs for improvement.

4. Lower creativity and morale in directive leadership

In directive leadership form, the power structure is centralized. Employees are dependent on the leadership for inputs, and they do not feel empowered. There is no creativity or innovation. The workplace environment is stressful and fearful.

5. Power and authority in autocratic leaders

Autocratic leaders have all power and authority to make decisions. Leaders assign tasks without consulting their team. They believe in a carrot and stick approach, rather than motivating their team. The leader takes both responsibility and credit for all tasks. The leader has no confidence in their team’s ability and exercises strict control.

Also read: 21 irrefutable laws of leadership

Pros and cons of autocracy

The pros and cons of autocracy are as follows –

Pros 

  • Leads to quick decision-making – Autocratic leaders are driven by time urgency. They usually avoid procrastination and make quick decisions. They do not take inputs from others leading to faster decisions.
  • Newcomers benefit – When a new employee may be unsure about their role and require inputs. Entry-level employees or employees who have low self-esteem do not know who to approach for help. An authoritarian leader can help by giving them directions. 
  • Effective during stressful periods – During stressful or escalated situations, organizational and workplace communication can be counterproductive. Authoritative leadership is required.

Cons

  • Increase stress and lower satisfaction – Employees dislike the authoritarian style of leadership. They experience higher stress levels. It is associated with lower job satisfaction. 
  • Increase employee turnover – Autocratic leadership results in higher employee turnover. Staff quit even if the team is performing well. They feel undervalued. 
  • Create a toxic atmosphere – The middle management starts mimicking the autocratic style. It can increase hierarchy in the organization and lead to ineffective culture. Ideas flow less freely, stemming innovation and creativity in this environment.

Also read: 5 levels of leadership | All you need to know

Autocratic leadership examples

Autocratic leaders exhibit total control over company policy, goals, and procedures. They control the direction the company is taking, work-related activities, and targets of the company. This extreme form of leadership can be difficult to implement. Here are some autocratic leadership examples in business-

1. Autocracy examples of Leona Helmsley

Leona Helmsley was the owner of Helmsley Hotels. She is one of the best autocracy examples in the business. Her management style was harsh and exacting. She strictly controlled the 23 hotels in the chain. She dismissed employees who carried out sub-standard work. Her autocratic management style helped create a culture of excellence and expand the chain.

2. Eon Musk’s authoritative leadership style

Eon Musk is an entrepreneur and the founder of SpaceX and is CEO of Tesla. The innovative genius has an authoritative leadership style. He sets exceptionally high standards for his staff. He is known to carefully examine the products they create and can change his mind and discard the idea after months of investing resources on the plan.

3. Bill Gates authoritarian leadership examples

Bill Gates is the founder of Microsoft. Microsoft produces software products, consumer electronics, personal electronics, and a variety of services. Bill Gates adopted an authoritative leadership style in the early years so that Microsoft grew at a brisk pace. He was the master delegator of tasks, and employees had to adhere to the schedule.

4. Autocratic leadership in nursing

Autocratic leadership in nursing is generally a hands-on approach. Nursing leaders are comfortable deciding without consulting the team. They do not tolerate mistakes. This leadership approach is helpful in an emergency. However, they may not be able to utilize the insights and knowledge of their team.

5. Felix Magnath autocratic coaching style

Felix Magnath was a German football manager and player, had an autocratic coaching style. He had an impressive record as a coach. He had a goal to improve the fitness levels of the teams he coached. His players called him a hard taskmaster, and his approach alienated the team. Analysts feel his approach got immediate results but did not work in the long run.

Also read: startup consulting | A complete guide

How to implement authoritarian leadership in your team?

Autocratic leadership can be beneficial in certain situations but is not appropriate for all settings and every group. If this is a style of leadership you want to use. You need to be aware of the advantages and pitfalls. Here are some tips on how to implement authoritarian leadership in your team.

1. Authoritarian leaders define their purposes

As a leader, you need to know what qualities you bring to the table. Identify your strengths, weaknesses, and assess your overall ability. Practice these exercises will help you define your purposes as a leader. Having perspective will help you define your purpose. 

2. Autocratic management style requires set parameters

Autocratic management style requires you to set boundaries and accountability. Evaluate how far you will go to help an employee and to ensure they are effective at work. Examine your answers and make sure they are aligned with your organizational goals. If your parameters are not in sync with the goals, address them before you move forward.

3. Autocratic managers should engage with their staff

Autocratic leaders may have to push themselves to communicate and engage with their staff. Observe them and get involved if necessary. Ask your employees, how you can improve processes within your firm. Try to become part of your team and understand what occurs in your team daily.

4. Autocratic style of leadership should explain decisions

Try to be transparent and explain your reasoning when there is an issue with your employee. The autocratic style of leadership should involve calmly addressing the issue. Explain how the issue was identified and help your team understand how the situation will be solved in the future.

5. An authoritative leader should reflect

After the problem has been addressed an authoritative leader should spend some time reflecting on the situation. You need to identify what went wrong, and how the situation can be prevented in the future. You need to consider how you will address the problem with your staff.

Also read: 5 step guide to become a successful independent consultant

Authoritative vs authoritarian

The difference between authoritative and authoritarian leadership is as follows

Authoritarian

Authoritative 
Authoritarian leaders make choices by themselves and rarely accept inputs from others. Authoritative leaders uses the energy of individuals to meet organizational goals.. 
They may feel their experience and expertise are undervalued.  They readily admit they do not have all the answers.
The style of leadership is beneficial when decisions need to made quickly. Leader is experienced. They work well in crises mode. Research show authoritative leaders are effective in the long run. 
They do not feel the need to communicate but give orders. The leader motivates their team by showing how their work contributes to the final product.

Also Read: Remote Meetings | A comprehensive guide

Autocracy vs dictatorship

The difference between autocracy vs dictatorship is as follows

Autocracy Leadership

Dictatorship
Autocracy is a system where one person rules the entire nation.  Dictatorial leadership has one person ruling the entire country
Autocratic leaders refrain from extreme decisions. Dictator leaders  does not worry about the consequences of his decisions.
Characteristic of autocracy is considered less evil Characteristic of dictatorship has negative implacations
It is rule by individual person in the system of governance.  It could be a rule of a particular party of class or a single party.

Also Read: Leadership skills at workplace | Everything you must know

Authoritarian vs. democratic

The difference between authoritarian vs. democratic can be summarized as

Authoritarian Leadership

Democratic Leadership
We can define authoritarian leadership as leader having complete control. The leader tells the group what to do and the team members execute it. We can define democratic leadership as a balance of decision making responsibility between the group and leader. 
This model works well  in the crises mode, when there is a time crunch. It is more time consuming as leaders participate in the discussion.
The leader presents a clear vision and can motivate a divided group.  It leads to the positive, inclusive, and collaborative work environment. 

Also Read: Remote Work Policy | Everything you must know

Famous autocratic leaders

Some famous autocratic leaders were-

  • Ridley Scott is a famous Hollywood director who made several blockbusters. He began his career as a graphic designer. He expects his actors to know their lines, positions, and cues before the shooting starts.
  • Lorne Michaels’s influence on TV culture and American culture is extraordinary. He was the creative producer of NBC’s Saturday Night Live. He was demanding. He was demanding but instinctively knew how to tap into America’s pulse and get the most out of the actors. 
  • Roger Ailes was the president of Fox News Channel and was an advisor to President Nixon. He started tv consulting before shifting his focus to political consulting. He redefined news broadcasting through his autocratic style.

21 irrefutable laws of leadership – John Maxwell’s 21 leadership laws explained with examples

Uncategorized

Have you come across any of John Maxwell’s works? ’21 irrefutable laws of leadership’ is considered to be the best book on leadership. This post takes you through the book in short.

21 Irrefutable laws of leadership

John Maxwell wrote 21 irrefutable laws of leadership in 1998. John Maxwell’s leadership books are bestsellers. He has written some of the best books on leadership. The book details his insights learned from 31 years of leadership. The highs and lows from the world of politics, sports, religion, and military conflict. John Maxwell’s rule of 5 states the heart of leadership should include reading every day, filing, thinking, ask questions, and write.

Who is John Maxwell?

John Maxwell is a well-known author, speaker, leadership guru, and pastor. He has written several books on leadership. He has several bestsellers to his credit like – The 21 Irrefutable Laws of Leadership and The 21 Indispensable Qualities of a Leader. John Maxwell is the founder of The John Maxwell Company, the John Maxwell Team, and the John Maxwell Leadership Foundation. He has trained more than 6 million leaders.

Also Read: Deep work summary | An ultimate read for best results

John Maxwell’s definition of leadership

John Maxwell’s definition of leadership is as follows – Leadership is influence nothing more, nothing less. Influence can be positive or negative. It is vital for leadership should show a positive attitude. A positive attitude is contagious. A great leader should be willing and committed to lead others to meet your organizational vision and goals. 

The 21 irrefutable laws of leadership

In his book 21 irrefutable laws of leadership, John Maxwell precedes to decipher the subjects. He uses these laws to train several leaders like executives, government officials, and students and faculty at universities. Experts consider The 21 irrefutable laws of leadership to be the best John Maxwell book. The companion book 21 irrefutable laws of leadership workbook is companion book – with case studies, leadership insights and reflections, take action, and group discussion.

1. The Law of the Lid

John Maxwell’s Law of the Lid states that the lid or limit to your potential is determined by your leadership ability. As your leadership ability improves, the prospects of your company improve. If you stay stagnant, you hold your company back. Some ways you can raise the lid of your business are:-

  • Rate of leadership scale of 1 (poor) to 10 (excellent)
  • Rate the leadership of your core team members. 
  • Ask everyone in your organization to rate your team.
  • Plan to improve the score of your team.

Also Read: How to prioritize task | Everything you must know

2. The Law of Influence

Influence is a vital part of leadership. The influence you wield may or may not match with your title. Your colleagues may choose to follow you after judging your character, experience, and knowledge. Insecure leaders exert their influence by keeping others down. The best leaders enjoy grooming leaders of the future. Influencers are people in your company that team members look for direction. They may not be managers or supervisors but are individuals invested in the success of any program.

3. The Law of Process

According to Maxwell’s leadership books, becoming a capable leader is a lifelong learning process. Books and seminars can inspire you, but you become a leader through daily action. You need discipline and perseverance to become a leader. Companies make a mistake when they try to hasten the process. You cannot groom a leader overnight. Instead, instill methods of providing weekly guidance and support. Remember, there is no shortcut to the process.

4. The Law of Navigation

Leaders are navigators, and they need to look at the larger picture. They should spot opportunities and identify what needs to be done and guide the team toward the vision. They need to have the ability to navigate their team through obstacles that may occur. Leaders learn from past experiences, successes, and failures. They use these lessons to problems that may arise and preemptively respond to these challenges. According to 21 irrefutable laws of leadership quotes – If the leader can’t navigate the people through rough waters, he is liable to sink the ship.

5. The Law of Addition

John Maxwell’s book emphasis looking for methods you can add value to others. If you see someone struggling with a task that you excel at, help them complete it. You need to ask yourself, are you improving the lives of your team. How can I help? Start by showing interest in their lives and the work they do. You should know what motivates and demotivates your team members. This knowledge will help guide your team to meeting the organizational goals.

6. The Law of Solid Ground

The 21 laws of leadership underline the importance of trust within your organization. Team members become disillusioned when they see leaders become self-serving or abuse their power. John Maxwell’s book’s leadership emphasis it is dangerous to rely on talent alone. Good leaders rely on trust. Earning the trust of your colleagues can be challenging. You can earn trust by demonstrating character, integrity, and competence. Once trust is lost, it is difficult to regain it.

Also Read: Office management | A complete guide

7. The Law of Respect

As per the irrefutable laws of leadership, respect is an integral component of leadership. People respect leaders who make decisions in the best interest of the company, and who are dependable. Stakeholders of your company will be respectful when they see your decisions help them rather than you. You need to follow through on your intentions. People naturally follow leaders with traits they admire and respect. If you find people not committing to a project or goal, examine if they respect the leader.

8. The Law of Intuition

The 21 irrefutable laws of leadership book have an interesting take on intuition. Intuition can give you a head start. Maxwell states your intuition is in their area of strength. You generally have intuition in your area of strength. You may be gifted recognizing trends and opportunities, or spotting talents. Like any other leadership skill, you can develop intuition. Leadership intuition is the perception to make a change in an organization.

9. The Law of Magnetism

The 21 laws of leadership list magnetism as a key principle of leadership. It states you attract people similar to you. In case you want to attract better leaders to your organization, practise becoming a better leader. Leaders shape the culture of their organization. You need to identify the values and culture of your organization, take action to attract what you need. If you want your organization to grow, you need to grow as a leader.

10. The Law of Connection

The 21 irrefutable laws stress the importance of a leader connecting with another person. John C Maxwell’s 21 irrefutable laws of leadership states the following on connection- Leaders touch a heart before they ask for a hand. It means people will not follow you until they are emotionally invested in you. To truly connect with people you have to show them you care. This will develop credibility and show you genuinely care.

11. The Law of the Inner Circle

Maxwell 21 laws of leadership state that the closest to us will determine our potential as leaders. According to the law of the inner circle, people in your circle, should have your best interest at heart and want to see you succeed. The laws of leadership emphasize to become a successful leader you should surround yourself with good people. Train and groom them so that they can achieve their potential. You should evaluate the performance of your leadership team and hold them accountable.

Also Read: How to measure productivity | A how-to guide for everyone

12. The Law of Empowerment

Maxwell’s laws of leadership state you should give your resources and the freedom they need to succeed. Empowerment gives the means, power, or opportunity to others. Sometimes leaders avoid empowering their staff due to ego or insecurity. Leaders may be afraid to become redundant. Maxwell says “the truth of empowerment is not only for the person being developed but also for the mentor.” As you develop leaders around yourself, you will become a better leader. Empowerment will benefit your organization.

13. The Law of the Picture

John Maxwell’s book says people do what they see. This may be one of the significant laws that help you understand the success and failure in leadership. The law of the Picture states you should be leading by example. Corrupt leaders will turn everything around them corrupt. Leaders aspire to create a picture that will inspire others to lead.

14. The Law of Buy-In

According to the book on 21 rules of leadership, the Law of Buy-In states that people buy into the leader and then the vision. Others will support your ideas, vision, and strategy if they believe you. When you first started your company you looked for people to make your dream into reality. Employees will accept the vision only if they like the person sharing it. If your staff does not have a connection with you, they will not empathize with your vision. 

15. The Law of Victory

According to Maxwell’s leadership laws, leaders find a way for the team to win. True leaders have a passion for victory. They never give up. To become victorious you need to have a strong vision and have reason to motivate yourself and your team. You need to have various skills in your arsenals. It is difficult to become successful if your team does not have skillsets. Look for team members with skills that complement your skills.

16. The Law of Big Mo

John Maxwell’s laws of leadership state that momentum is a leader’s best friend. This law is significant when an organization starts. In the beginning, everything is a challenge. Once things get moving, there is no stopping your organization. This phenomenon is also called the law of inertia. You need to find out what motivates and demotivates your team. Use these inputs to motivate your team. Remove factors that lower employees morale. You need to be project enthusiasm and hope, put losses and move on. Focus on what you want to achieve next.

Also Read: Time blocking | An ultimate read for best results

17. The Law of Priorities

Many people are so busy, that they can get nothing done. They tend to be unfocused and it can lead to failure. A focused attitude is more important than being busy. A laser focus on the vision helps you become more successful and faster. The 80/20 states you get 80% of returns from 20% of your activity. You can use this rule to your advantage. John Maxwell focuses on four activities – leading, communication, writing, and networks. He hires teams for other tasks.

18. The Law of Sacrifice

Leaders trade freedom for responsibility. Leaders need to be prepared to sacrifice more as their organizations grow larger. You may have to sacrifice security, acceptance, or financial gain. According to the 21 laws of leadership books, you need to be willing to sacrifice security, acceptance, and financial gain. John Maxwell emphasizes “It is easier to go from failure to success than it is to go from excuses to success.” You cannot improve yourself without success.

19. The Law of Timing

The 21 irrefutable laws for timing say a leader should know what to do and where to go. Not all moments are created equal, effective leaders are adept at seizing the opportunity. As a leader, you should identify the big picture and be decisive and confident. You need to know when to proceed and when you should stall. Learning to identify the perfect time can be difficult but experience, intuition, and preparation will help.

20. The Law of Explosive Growth

The 21 irrefutable laws of leadership summary for explosive growth explains that strong leaders realize the developing leaders will exponentially create a larger pool of leaders. As a leader, if you attract followers grow by addition, and leaders who develop leaders grow by multiplication. The book advises you to concentrate on developing the top 20% of people around you, focus on strengths rather than weaknesses. When you develop leaders, you impact the next generation and the future of your company.

21. The law of Legacy

21 irrefutable laws of leadership summary, that a leader wants to build a successful business, and leave a legacy. To that, you need to ensure to groom your people so that they can achieve things without you. Your biggest joy should not be getting to the top, but grooming other to become leaders. The rare leaders who practice the law of legacy, groom leaders of tomorrow and create a leadership culture.

Also Read: Culture index survey | A comprehensive guide

21 irrefutable laws of leadership summary

  • Law of the Lid states your level of effectiveness and accomplishments is determined by the level of effectiveness. According to Maxwell says leadership is influence, nothing more and nothing less. 
  • A person who can influence others has the potential of leadership.
  • Law of Process says that leadership develops daily, not in a day.
  • Law of Navigation states that good leaders are navigators and set the direction for the team.
  • Law of Addition says effective leaders must add value to the firm. Many people contribute to building a smart organization. 
  • Law of Solid Ground says that without trust, there can be no influence. 
  • The Law of Respect says that people naturally follow leaders stronger than themselves.
  • According to the Law of Intuition, leaders should evaluate everything with a leader bias.
  • The Law of Magnetism states you are who you attract.
  • Law of the Intuition says that leaders evaluate everything with a leadership bias. 
  • The Law of Empowerment says that only secure leaders give power to others.
  • The Law of the Picture says that people do what people see.
  • The Law of Buy-In states that people buy into the leader and then the vision. 
  • Law of Victory says that leaders find a way for the team to win. 
  • Law of Big Mo states momentum is a leader’s best friend. 
  • Law of Priorities elaborates on leaders understand activities is not necessarily accomplishment.

Also Read: Remote team building activities | Critical items that you must know!

  • The Law of Sacrifice states that leaders must give up to go up. 
  • Law of Timing states when to lead is as important as what to do and where to go?
  • Law of Explosive Growth says to add growth lead followers to multiply lead leaders.
  • Law of Legacy states a leader’s lasting value is measured by succession. 

Total cost formula – How to calculate total cost [with examples]

Finance

Want to learn what is total cost formula? In this post, we deep dive into this accounting concept. We will look at total cost formula and examples.

Total cost formula

Total cost is the economic cost of production. It is the cost required to produce goods of some quantity. The total economic costs have two components the fixed costs and variable costs. The variable costs vary with the number of goods produced, includes raw material and labour. The fixed costs include costs that are unchanged in the short term like machinery and building costs. The total cost formula

TC = FC + VC

Also read: Mark to market accounting | A beginner’s guide

Costs definitions

Cost is the most significant factor to determine success when you are operating a business. You need to understand different cost factors and how it affects profitability. We define costs as the value of money required to produce a product or deliver goods. In this section, we have explained different cost definitions.

Average variable cost

The average variable cost is the variable cost per unit. Analyze use the cost to determine if production should be temporarily shut. If you sell the products at a higher price than average variable cost and fixed costs, then your business can continue with the production.

If goods are sold at price lower than average variable costs, then you should shut down production, since the business is unable to meet the recovery costs. The average variable cost formula

Average variable cost AVC = Total Variable Cost / Quantity of goods

Average fixed cost

Average fixed cost is the fixed cost of production divided by the number of goods produced. Fixed costs are the costs incurred regardless of the volume of goods produced.

The average fixed cost formula

Average Fixed Cost (AFC) = FC/Q = ATC – AVC

Also read: What is materiality accounting & 5 practical examples

Total cost

Total costs are the cost incurred by a company to produce a certain quantity of goods. It is the sum of all fixed costs (cost of machinery, lease) and variable costs (cost of raw material and labor). Fixed costs are costs that are independent of goods produced. Variable costs changes with production. Total cost TC = AVC + AFC) X Quantity of goods

Total variable cost

Total variable cost is the aggregate of all the variable costs associated with the cost of selling in the period. We use total variable costs while analyzing profitability. The components of total variable costs are the costs related to production or sales volumes. In the service industry, labor costs are the biggest component of total variable costs. The total variable cost formula

Total Variable Cost = Variable cost per unit X Quantity of goods

Total fixed cost

 Total fixed costs are an integral part of fixed costs. Total costs are the opportunity cost incurred in the short-run production that is not dependent on volume. You need to pay fixed costs as long as the business operates. Fixed costs are costs associated with capital. The total fixed cost formula

Total fixed cost = TC-TVS

Average total cost

The average total cost is the total fixed and variable cost divided by the total units produced. The average total cost is typically U-shaped, the graph decreases, bottoms out rises again. Average total cost is an important parameter to make business decisions related to pricing. The average total cost formula

TC = VC + FC

TC/Q = VC/Q+ FC/Q

Also read: What is public accounting & what are the important services offered?

How to calculate the average variable cost?

Average variable cost will help you determine if you should temporarily stop your production. If the price received is greater than the average variable cost and fixed costs, production should continue. But you should shut down production when the price is lower than the sum of average variable costs and fixed costs. In this section, we discuss how to calculate average variable costs.

The average variable cost formula

The average variable cost formula is represented by

AVC = VC/Q

Where 

AVC = Average variable cost

VC = Variable Costs

Q = quantity

We can calculate the average variable cost, from the total cost formula 

AVC = ATC – AFC

Where

AVC = Average variable cost

ATC = Average total cost

AFC = Average fixed cost

Also read: 10 Best accounting calculators and how to use of them

How to find average variable cost?

We obtain the average variable cost when we divide the variable costs by output. Average variable cost can be calculated from your company’s cost function. A cost function is a relationship between cost and quantity. We need to deduct fixed costs and divide them by Q. Here are how to find average variable costs.

Consider a company whose total cost formula is represented by

TC = 0.1Q3 – 2Q+60Q +200

We can convert the total cost function to function for average variable cost by

AVC = (TC –FC)/Q

AVC =0.1Q3 – 2Q+60Q +200 -200

AVC = 0.1Q2 – 2Q +60

The average variable cost curve is U-shaped. It declines initially but eventually rises.

How to calculate the average fixed cost? 

Average fixed cost is the fixed costs to produce one unit of the product. Fixed costs remain unchanged with productions levels. Typical fixed costs are the salary of permanent employees, rent, mortgage payments, etc. We calculate average fixed costs by dividing the total fixed costs by the output level. In this section, we find out how to calculate the average fixed costs.

Average fixed cost formula

The average fixed cost remains unchanged with the number of goods or services produced. Companies recalculate their fixed costs periodically to ensure profitability. The average fixed cost formula 

AFC = FC/Q

Where

FC = fixed costs

Q = Quantity

How to find average fixed cost?

Here is you find how to find the average fixed cost. There are two methods of average fixed costs are

Division method – To get the average costs of a product, we divided the total fixed costs by the production unit over a fixed period. 

  • We compute the fixed costs over a set period. Using a set period allows you to analyze when you are breaking even and earning a profit.
  • Add all individual fixed costs to get total fixed costs.
  • Obtain a quantity of goods period over the period.
  • Divide total fixed costs by quantity.

Subtraction method – this method requires average total costs and average variable costs. 

  • The total cost of a business is adding costs involved in the production of a certain quality. The average total costs are the total cost divided by the quantity produced. 
  • Find average variable costs are calculating by dividing the total variable cost by the quantity produced.
  • Subtract the average variable cost from average total costs.

Also read: What is fund accounting, key principles, & responsibilities

How to calculate the total cost?

The total cost is the combined fixed and variable costs for a batch of goods or services. The total cost is the cost of producing the specific level of output factoring in all the costs of production. It helps to determine business profitability. It helps you determine if you need to adjust pricing, reduce cost, and helps you identify diversifying opportunities. In this section, we discuss how to calculate total costs. 

Total cost formula

The total cost formula is as follows –

Total Cost = Total Fixed Cost + Total Variable Cost

Where 

Total Variable Cost = Average Variable Cost Per Unit * Quantity of Units Produced

Total cost = Total fixed cost + Average Variable Cost Per Unit * Quantity of Units Produced

How to find the total cost? 

Here is how to find total costs. We need to find out the following.

  • Fixed costs are also called overhead costs or the money required to operate. Fixed costs for business include rent, utilities, building lease, equipment, insurance premium, and salary of permanent employees. 
  • Variable costs are costs that change with the volume of goods produced. If the business manufacturers a high quantity of goods and services, the variable costs will be higher. Typical variable costs associated with the business are raw materials, shipping expenses, and labor costs. 
  • Add fixed and variable costs to find the total cost.

Also read: Expanded accounting equation | Key principles

How to calculate the total variable cost? 

 Total variable costs change with production volumes during any period. These costs are connected with business volume and will increase or decrease depending on how much is produced. To find total variable costs we add different components of variable costs or expenses related to production. In this section, we show how to how to calculate total variable costs?

The total variable cost formula

Total variable costs are calculated for a period. It is the sum of all the variable costs associated with each product you have developed. The total variable cost formula 

Total variable cost = Total quantity x Variable cost per unit of output

How to find total variable cost?

To find the total variable cost you first need to identify all the variable costs associated with the specific production of the unit. This includes the cost of labor, material, and overhead costs. Add all of these costs together to get the total variable costs of a single unit. It is not difficult to get total variable costs. 

Common variable costs for production 

  • Production equipment, such as software
  • Employee or labor wages
  • Sales commissions
  • Raw material costs
  • Research and development costs
  • Packaging costs
  • Shipment costs
  • Transaction fees
  • Production materials

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How to calculate the total fixed cost? 

Fixed costs are your expenses that are not affected by business sales or production. Fixed costs are independent of business activity. It is also called overhead costs or indirect costs. Calculating your fixed costs is simple. All you need to add up all the fixed costs. In this section, we elaborate on how to calculate total fixed costs.

The total fixed cost formula

The total fixed cost is calculated over a short period like a month or six months. 

Total fixed costs = F1+F2+F3+F4

or

Total Fixed Cost = Total Cost of Production – Variable Cost Per Unit * No. of Units Produced

How to find total fixed cost?

Here is how to find the total fixed cost. Fixed costs are periodic expenses tied to a schedule or contract. Fixed costs are not permanent but any changes will not be directly related to output.  

Examples of fixed costs 

  • Rent/Mortgage
  • Salaries
  • Insurance
  • Depreciation
  • Taxes
  • Interest
  • Fees/Permits

Option1 

Total Fixed Costs = F1+F2+F3+F4+…

Where Fn is independent of fixed costs

This option is suitable if you have a list of expenses. You need to determine the fixed costs accurately.

Option 2

Fixed Cost = Total Cost – (Variable Cost Per Unit * Units Produced)

If you know the variable costs of production per unit and total production costs, you can calculate the fixed costs.

Also read: Total revenue formula [ With Examples]

How to calculate the average total cost?

The average total cost is the per-unit cost of the number of products that are made. The average total costs include fixed and variable costs. Fixed costs are expenses that do not change with the number of goods produced. Variable costs are costs dependent on the number of goods or services produced. In this section, here is how to calculate average total costs.

The average total cost formula

The average total cost formula is as follows 

Average total costs = Average fixed costs + Average variable costs

Where 

Average fixed costs = Total fixed costs/quantity of units produced

Average variable costs = Total variable costs/quantity of units produced.

Alternatively

Average fixed costs = Total fixed costs/ quantity of units produced.

How to find the average total cost?

Here is how to find the average total cost.  

  • Identify fixed costs from the profit and loss account. It includes items rents, expenses, equipment costs, insurance, salaries, and utilities.
  • Identify all the variable costs. It includes items like costs of raw materials, direct labor, sales commission, and delivery or shipping.
  • Calculate the total cost of production
  • Determine the units produced
  • You can determine average fixed costs from the formula.

Also read: Economic profit – How to calculate economic profit

How to find the cost function?

Saving money is a vital part of the business. A small saving can add up considerably in a period. To begin a realistic saving plan, business leaders need to study the company’s spending patterns. Businesses costs can be broadly classified into fixed and variable costs. The cost function formula calculator helps businesses track expenses. 

The cost function Cx = FCx + VCx

Where FC – fixed costs

VC = variable costs

Average cost function

The average cost is the cost per unit of producing a certain quantity. In accounting terms, we divide the sum of variable costs and fixed costs by the volume of goods produced. The average cost graph is typically U-shaped. Average cost starts high because of the low denominator. The graph gradually goes down before rising again.

Cx = (FCx +VCx)/X

Marginal cost function

The marginal cost function is derivative of the total cost function C(x). To find the marginal cost, derive the total cost function to find C’(x). 

Marginal cost (Q) = dC/dQ

= ΔVC/ΔQ

Where,

 Δ denotes an incremental change of one unit. 

Marginal cost is not the cost of producing the next and last unit. In the short term increasing production requires more variable input, usually assumed to be labor. Adding more labor to a fixed capital cost reduces the marginal cost of labor.

Also read: Fair value accounting – Basics on fair value accounting

Total cost function

The total cost is the total production cost. It is the sum of total fixed costs and total variable costs. Once you have determined your production costs it will be easier to create a realistic budget. You can use the total cost function formula to determine the exact production cost of a fixed number of goods or services within the time frame.

Total cost function formula 

C(x) = FC(x) + V(x)

Where, 

FC = Fixed Costs

Vx = variable costs.

Also read: Tax accounting – Basics on tax accounting & 5 key principles

Variable cost function

The variable cost is unpredictable. They can occur if your order volume has gone down. The variable cost function helps companies determine production volumes. 

TVC = VC(x)

Total cost examples

Company ABC leases office space for $10,000 per month. They rent machinery for $5000 per month. It has a utility bill of $ 1000. Their fixed costs are $16,000 per month.

In terms of variable costs, the company produces 2000 widgets at $10 per unit. It pays $5000 overtime to its employees. The total variable costs are $20,000 (product costs) and $5000 labor costs. The variable costs are $25000.

The total costs formula = total costs of variable cost + total cost of fixed cost

                                     = 16000+25000

Total costs = $41,000

Example 2

XYZ company has a fixed cost $10,000 and a variable cost of $3 per unit. The company produces 1000 units every month.

The total cost formula = total costs of variable cost + total cost of fixed cost

                                   = 10000+3*1000

                                   = 13000

Differentiate marginal cost and average variable cost

The difference between marginal cost and average variable cost is as follows –

Marginal costs

Average variable cost
It is the increase in the cost of production of one more unit product or services. Marginal costs changes with changes in quantity of production. It is sum of total cost of goods divided by the number of goods
Formula to calculate marginal cost = change in total costs/change in quantity Average cost = Total costs/ number of goods

Also read: Best business audiobooks – Top 75 business audiobooks

How to calculate variable cost per unit?

Every business operation has variable costs. These may differ depending on the nature of the business. Some variable costs are

  • Direct labor
  • Raw material
  • Transactional fees
  • Commission for sales
  • Shipping
  • Utilities

The variable cost formula = Total variable costs/ number of units produced.

How to find the total cost from marginal cost?

Marginal costs represent the extra costs that occur when you produce extra units of goods or services. We calculate marginal costs by computing the change in production costs divided by the change in the number of goods produced. 

Marginal costs formula = change in costs/ change in quantity

The change in costs can increase or decrease with the volume change. Change in cost is calculating by deducting original production cost with new production costs. A change in quantity is the increase or decrease in production level.

Also read: Business ideas for college students

What are the economic costs of production?

In economics, the total cost is the total economic cost of production. It has two components the fixed costs and variable costs. Variable costs change according to the volume of goods or services being produced. Fixed costs are independent of the number of goods being produced. Economic costs are the cost of the decision. It depends on factors like the costs of the alternative chosen and the benefits. 

Total cost in economics = fixed cost variable costs + opportunity costs

Fair value accounting – Basics on fair value accounting and 3 examples

Accounting

In this post we take a deep dive into fair value accounting. You will learn everyting from what is fair value, metohods to calculate it & formulas.

Fair value accounting

An accurate valuation is paramount during any accounting exercise. Fair value accounting helps to measure assets and liabilities at their current market value. Fair value meaning is the amount at which an asset or liability is sold at a price, that is fair for both the buyer and seller. In this blog, you will learn what does FMV of account means? What is fair value in accounting? And the difference between market value vs. fair value.

Also read: Mark to market accounting | A beginner’s guide

What is fair value?

Let us begin by explaining what is fair value? Fair value definition is as follows, is the agreed price of an asset by the buyer and seller. We assume there is no coercion and both parties are knowledgeable. Fair value is the estimated value of assets and liabilities as written in the company books.

Fair value is the potential price of an asset or liability. You may need to research to find the selling price or listed price of similar products. You can use the information to calculate the price of your asset. You can determine the price of securities in the share market.

What is fair value accounting?

Fair value accounting helps to measure the assets and liabilities stated on the company’s financial statement. Financial Accounting Standard Board implemented the fair value accounting principle to standardize the calculation of different financial instruments. The following concepts are part of fair value accounting.

  • Current market conditions – You base it on the market conditions on the measurement date, rather than historical transactions.
  • Intention of holder – The intention of the holder might change the measured fair value. E.g. if the owner wants to sell the asset immediately, they may get a lower value. 
  • Orderly transaction – Fair value accounting should be from an orderly transaction. There is no unnecessary pressure like business liquidation.
  • Third-party – We calculate fair value when the sale is to a third party, rather than an insider or someone related to the seller.

Also read: Accounting rate of return | Everything you need to know

Fair value formula

The fair value formula is as follows –

Fair Value = Cash × {1+r(x/360)} − Dividends

Where,

Cash = Current S&P Cash Value

r = Current interest rate paid to a broker to buy all stocks in the S&P 500 index

x = Days to the expiration of the futures contract

Dividends = Amount of dividends until contract expiration expressed in terms of points on the S&P contract.

Also read: What is materiality accounting & 5 practical examples

Fair value vs historical cost

Historical cost is the actual price at which the transaction was done. Fair value is actual value of the asset as on the day. The difference between fair value vs historical cost is as follows. 

Historical costs

Fair Value
Historical costs is the cost at which transaction was done Fair value is the present market price the commodity will fetch
It is not used to for all assets does not reflect true picture It is more commonly adopted and tested method 
It remains stagnant through the lifetime of the asset The value fluctuates when compared with other valuation methods
It is permitted under US GAAP and not under IFRS It is globally accepted and applied making it a more user-friendly method when compare historical cost vs fair value
Used for intangible and fixed assets. Not used for assets like marketable assets. It refers to the actual worth of the asset and is derived fundamentally and is not determined by the factors of any market forces.
It is not tested for impairment loss It is tested for impairment annually.

Also read: What is public accounting & what are the important services offered?

Fair value vs market value

Fair value is the value at which asset changed hands between two parties. Market value is the value of the company calculated from the current stock market price. The difference between fair value vs market value can be summarized in the table below.

Fair Value

Market Value
Fair value is the actual worth of the asset derived by using methods like discounted cash flow methods. It cannot be determined by market forces. Market value is determined by market value or by factors like demand and supply. 
It is commonly used in stock market for valuation. Fair value will help in accurate valuation of the asset.  It is not commonly used valuation method. Companies use it when they want to use loopholes to hide limitation or shortcomings.
Fair value of an asset remains consistent. It fluctuates less frequently when market value vs fair value methods are compared.  Market value is determined by demand and supply and fluctuates more.
Fair value is globally accepted.  Market value method is not used frequently. It is not a globally accepted method.

Also read: 10 Best accounting calculators and how to use of them

Book value vs fair value

In accounting you need to understand the difference between book value vs fair value. Both are used to describe the valuation of an asset, but have different approaches. The distinction between fair market value vs book value is as follows.

Book Value

Fair value
Book Value is the value of an asset is recognized on the balance sheet.  Fair Value is reasonable and unbiased estimate of the intrinsic value the asset.
It is cost paid for acquiring the asset minus depreciation, amortization, or impairment costs applicable to the asset.  Fair value uses factors like utility, related costs, and supply and demand consideration. 
It is based on historical value of the asset. It is based on the value at the measurable date.

Also read: What is fund accounting, key principles, & responsibilities

Futures vs fair value

Fair and future value has impacts the business but deal with different concepts. Fair value helps to determine the value of assets and liabilities. Future value shows how the value of money changes over time. The difference between future vs fair value can be summarized as-

Future value

Fair value
Future value let us know the value of “today’s dollar” will be in the future.  Fair value defines the price that would be paid for market transaction between buyer and seller. 
Future value is used for making business capital decisions. It helps to decide the projects to invest in for growth.  Fair value is used to determine the price of securities. 

Also read: Expanded accounting equation | Key principles and significance in real life

Fair value hierarchy levels

Fair value hierarchy categorizes the inputs used in valuation in three levels. The accounting titles hierarchy rules, give the highest priority to level 1 – the quoted price in the active markets for identical assets and liabilities. While we give the lowest priority to level 3 to unobservable inputs. IFRS looks ways to improve the consistency and comparability in fair value measurement and related disclosures through fair value hierarchy levels. here are the fair value hierarchy levels.

  • Level 1 inputs – are the quoted price in the active markets for identical assets and liabilities that the entity can access at the measurement date. A quoted market price in the active market provides reliable evidence of fair value and is used without adjustment to measure fair value, with limited exceptions.
  • Level 2 inputs – These inputs other than quoted market price include level 1 observable for assets or liability, either directly or indirectly.
  • Level 3 inputs – Level 3 inputs are unobservable inputs for other assets or liability. Unobservable inputs are not available.

How to calculate the fair market value of assets?

You may wonder, how to calculate fair market value of assets? We base the fair market value of assets on the assumption that the seller and buyer are knowledgeable and have entered into the transaction willingly. There are three ways for fair value calculations-

  • Based on market price – you can determine the value of the asset based on the market price. The prices that are quoted on the stock market are liquid and transparent.
  • Use the comparable value of similar assets –To determine the value of the asset, you can use the price of comparable assets. E.g. to determine the price of your house, the price of houses recently sold in your neighborhood will give you a good indication of the valuation of the house.
  • Discounted cash flow method – Use discounted cash flow method if you have unique assets that have nothing comparable or similar. You estimate the value of the asset by future cash flow.

Also Read: Stock Consultant | An ultimate read for best results

Method to determine the fair market value of derivatives

A derivative is a financial instrument that gets its value from another asset. Fair value tries to put an objective price on a financial instrument instead of current market prices. There are different methods used to determine the fair market value of derivatives.

  • Future pricing basics – future contracts are standardized financial contracts that allow the holder to buy or sell an underlying asset or commodity at a certain price in the future. The future contract value is based on the commodity’s cash prize.
  • Options pricing basics – Options are common derivative contracts. Options give buyers the right, no obligation to buy or sell the derivatives at a pre-determined price called strike price before the contract expires.

How to calculate the fair value of a futures contract?

In this section, we elaborate on how to calculate fair value.

Fair value = cash price + cost of carry

The fair value of commodities

The cost of carrying is the supplier’s associated cost with fulfilling that contract and need to be taken into account to calculate the fair value of commodities.

  • Storage cost
  • Insurance cost
  • Loss of interest on funds that could have been reinvested if the asset was sold immediately.

Also Read: Tax Consultant | A how-to guide for everyone

Fair value for financial products

There are no storage costs associated with financial storage.

Fair value = cash price + Interest cost – Dividend payment

The interest costs are based on the Libor interest rate at the time to run until expiry.

Fair value = Cash + [cashx days until Expiry/ (Libor/360)] – Dividend payment

Fair value accounting examples

Fair value accounting example 1

Mr. X is planning to buy a Road Roller. The income from the Road Roller year wise is mentioned below –

  • Year 1: $80,000
  • Year 2: $50,000
  • Year 3: $200,000

The Interest rate running in the market is 5%. The life of the Roller is five years. Calculate the fair value of the asset.

The fair Value of the asset should be its capacity to earn throughout the life after adjustment for the interest rate

Years

Cash Flow

Interest Rate
Year 1 $80,000 5%
Year 2 $50,000 5%
Year 3 $200,000 5%
Total earnings from road roller $330,000

Also read: Self employed jobs | A complete guide

Step 2: Calculate the present Value of future cash flow 

Years Cash Flow Interest Rate Discounted Rate Present cash flow = Cash flow/discounted rate
Year 1 $80,000 5% 1.05% $76,190
Year 2 $50,000 5% 1.102% $45,351
Year 3 $200,000 5% 1.158% $172,768
Total Present value(Fair Value) $294,309

Total Present Value (Fair Value) = $294,309

Fair value accounting example 2

Mr. Y has bought derived contracts at $100,000 in November 2019. The contract is for three months. The accounting year starts in January. At the end of December, the contract value is $90,000. How will Mr. Y show this change if he is following Fair value accounting?

Solution

According to fair value accounting, Mr. Y will need to reduce the value on the contract by $10,000 to show the loss

November 2019

In Balance sheet – Contract $100,000

January 2020

In Balance Sheet – Contract $90,000

In Profit and Loss Statement = Unrealized Loss $10,000

Also Read: How to start business with no money | A complete guide

Fair value measurement disclosure examples

A firm holds an equity instrument for which sale is restricted for a specific period. The restriction is characteristic of the instrument and will be transferred to market participants. In this, the fair value of the instrument measures on the price of the quoted price of unrestricted equity document of the same issuer in the public market, for the instrument in the specified period. The adjustment will depend on:-

  • The nature and duration of the restriction
  • The extent to which buyers are limited by the restriction
  • Qualitative and quantitative factors specific to instrument and issuer.
  • Fair value accounting advantages and disadvantages

Fair value accounting advantages and disadvantages are as follows:-

Advantages

  • Accurate valuation – Accounting fair value provides an accurate valuation of assets and liabilities, as per the company’s financial records. The price indicates the price that would be received if it sold an asset or would have to pay to square up a liability.
  • True income – Fair value accounting limits the tendency of companies to manipulate their net income. It helps to accurately report the losses and gains from the price change of assets or liability for the period in question.

Further Read: What is 9-80 work schedule | A complete guide 

Disadvantages

  • Value reversal – Fair value accounting can be challenging, especially when the value of assets and liabilities fluctuates and becomes volatile. Even if you reevaluate the valuation in volatile market conditions, there are chances of creating large swings.
  • Market information –The fair value method may further affect down market value. Companies when assets are revalued downwards because of current prices it can trigger the selling of assets at more depressed prices.

Business ideas for teens – Top 25 ideas best suited for teen!

Businesses

Are you a teenager looking to start a business of your own? In this post, we put together a list of some of the best business ideas for teens.

Business ideas for teens

You can start a successful business at any age. Starting a business when you are young can teach you valuable skills, that will be useful when you are older. There are several business opportunities for an enterprising teenager. Famous businesses started by young entrepreneurs were Facebook, Dell Inc, and Subway. In this blog, we explore some business ideas for teens.

Also Read: IT Consultant | Critical items that you must know!

How to start a business as a teenager?

Starting a business as a teenager is not impossible. Many have great ideas but have no idea how to start a business as a teenager. With a little help and research, it is possible to turn your idea into a successful business.

What services will you offer? There are several business ideas for teens. Once you have an idea about what you plan to sell, teens businesses need to choose a name. The name should indicate the nature of your business. Find out if the name is being used by a product or business.

Market research will give you information about your competition and target audience. You will need to consider financing the money you have saved may not be enough. You may need to reach out for additional financing. You will need to have a budget and plan how you will repay any investors.

Acquire the equipment and hire people if required. Start marketing your business.

Also Read: Digital Marketing Consultant | A how-to guide for everyone

How old do you have to be to start a business?

A common question asked by teens entrepreneur is, how old do you have to be to start a business? People under 18 cannot form legal business organizations. But their parents can form it on their behalf. Some states in the US allow children to be shareholders and to serve on the board of directors. You need to consult an attorney for guidance. Parents can sign contracts on behalf of their children.

Teens entrepreneurs can run some businesses. Businesses need permits and licenses to operate. But, states and cities are making it easier for teen entrepreneurs to start a business. You need to submit the right paperwork to start your business. Local officials should be able to tell you more about compliance requirements. Businesses must meet the legal requirement and pay taxes if applicable.

Also Read: Stock Consultant | An ultimate read for best results

Top 25 small business ideas for teens

Business ideas for teens need to account for the school schedule. The business should need limited resources including startup capital. Depending on the age of the teen transportation can be a problem. Teens can focus on home-based businesses where the business will be easier to operate. Teenage businesses need to consider the school schedule and extra-curricular of the teen. Entrepreneurship ideas for teens should require a low financial investment.

Let’s now look at the top 25 small business ideas for teens.

1. Affiliate marketing teenage business ideas

Affiliate marketing is a teenage business idea that requires little to no investment. The affiliate earns a commission for marketing another people or company product. They earn a commission or piece of the profit for each sale they make. Affiliate links help to track sales. You can start affiliate marketing from your smartphone.

2. Home tutoring business ideas for teenagers

If you are a good student you can start a home tutoring business. The business ideas for teenagers involve creating a lesson plan and helping students understand and complete their assignments. The startup costs are minimal, you may need to invest in advertising your services. Experienced tutors can charge $30-$40/hour.

3. Soap-making business for kids

Soap-making is a good opportunity to create something from your hand. Soap making is a skill that is easy to acquire but requires practice. Soap-making business for kids requires you to purchasing raw material. You need to spend some money marketing your product. You create your fragrances by combing different scents. The business has a healthy profit margin.

4. Data entry business ideas for kids

If you are comfortable using spreadsheets and working with data, you can start a data entry business. The business ideas for kids have flexible work hours and the chance to learn an important skill. You need to be accurate and complete the work on schedule.

5. Gift wrapping small business ideas for kids

If you are creative you can start a gift wrapping business. Small business ideas for kids can bring in extra money during the holidays. You can set up a booth near the departmental store or work from home. You will need to invest in supplies and booths.

Also Read: Pollyanna gift ideas | A comprehensive guide

6. Test prep teen entrepreneurship

If you are good at cracking exams you can start a test prep business. Teen entrepreneurship can focus on exams like SAT or ACT. High school students can get clients easily. You can use test preparation books and advice the students on how to score better. The investment costs are low you need to prepare some books. Test prepare tutors can charge more than regular tutors.

7. Babysitting teen business idea

Babysitting or child care business is a popular teen business idea. You can complete a course of American Red Cross for babysitting and child care. You can look offer your services after school or on weekends.

8. Lawn care for teens entrepreneurs

Teen entrepreneurs who can mow lawns can start a lawn mowing business. They can contact their neighbours for business. You can help plant new flowers or plants, rake the leaves in the fall, or remove weeds.

9. Housecleaning kids business ideas

Housecleaning businesses are a great business idea for teens. Homeowners will be happy to pay teenagers to dust, mop, and clean houses. The kid’s business ideas require low investment.

10. Make money as a teen as a photographer

Teenagers who have a good camera can become a photographer. You can make money as a teen by becoming a photographer during events or sell photos of local events to local media. You can try retailing your photographs for greeting cards, calendars, or t-shirts. You can take professional photographs for local businesses.

Also Read: Social Media Consultant | A comprehensive guide

11. T-Shirt design best online stores for teens

If you are creative you can start a t-shirt design business. You can sell your products on e-commerce websites. Some of the best online stores for teens are a Facebook marketplace, Amazon, Etsy, or Izzonet. Remember to show your products on your social media platform.

12. Social media influencers good business ideas for teens

If you are skilled with social media become a social media influencer. It is a good idea for teens if you can promote products and services. Becoming a social media influencer required time and patience. You need to post high-quality content and photos for your social media page.

13. Sewing small business ideas for teenage girls

Teenagers who sew well can start a sewing business. If you are a talented seamstress is an excellent small business idea for a teenage girl. The hours are flexible, and the initial investment is low. You can start repairing and alter clothes. You can offer to design clothes for school plays or repair school uniforms.

14. Blogging side hustle for teens

Blogging can help teens earn money online. If you enjoy research and writing, blogging can be an excellent side hustle for teens. Blog monetization requires patience and persistence. It can become a fantastic passive income machine. Remember to share your blog on your social media to increase the number of readers.

15. Sell on Etsy for teens making money online

The internet has opened doors to teens wanting to launch a home business. If you are creative, you can sell your products on Etsy, ArtLife, or e-Crater. You can sell handmade jewellery, crafts, etc. You can sell your products at the local flea market.

Also Read: Security Consultant | Everything you must know

16. Car washing kid businesses that make money

Car washing is one of the kid businesses that make money. Everyone likes to drive a clean car, but not everyone has the time to clean it. To start your car washing business you need to invest in a bucket, microfiber cloth, window cleaner, and elbow grease for polishing. It is a job you can do over the weekend.

17. Graphic seller best side hustles for teens

If you are a skilled designer, you can become a graphic designer. It is one of the best side hustle for teens. You can create printable or online graphics and sell them in a downloadable format.

18. Lifeguard or swim instructor summer projects for teenagers

Teenagers who swim well can become a lifeguard or swim instructor job. For these summer projects for teenagers, you will need to clear water safety and life-saving exams. You can earn a steady income at public pools, private clubs, swimming pools, and pool parties.

19. Cooking and baking teen entrepreneur ideas

If you are a talented cook or baker, you can use your skill as a base for teen entrepreneur ideas. You can make cookies, muffins, or cooked meals. Use social media for advertising your products. You can start catering to small events. If you decorate cakes you can offer cake decorating services to local bakers.

20. Get paid for playing games young entrepreneurs ideas

Many teenagers enjoy playing games online. Young entrepreneur’s idea is getting paid to play games. Remember not to get addicted to playing games on your smartphone or PC. Websites like VeryDice, Long Game Saving, and App Cents are some games that offer payment.

Also read: Remote video game jobs | Everything you must know

21. Making jam kid-friendly business ideas

Creating jam is a great kid-friendly business idea if you like cooking. The investment cost of the business is low. You can try selling your products in local markets or bazaars. You can sell your products to local restaurants.

22. Tech support kid entrepreneur ideas

If you are tech-savvy, a great kid entrepreneur ideas are giving tech support. You can set up your business at home, businesses can call or chat with you to help them solve their tech problems.

24. Delivery service money-making ideas for teens

Service providers like Uber Eats, Door Dash, UPS, and Postmates are always on the lookout for delivery executives. Many service providers allow you to use your car, and you can make good tips. It is a good money-making idea for teens.

25. Candle making things to sell to make money as a teenager

If you are creative, one of the things that makes money as a teenager – candles. It is a business you can start at home. You can sell your candles to friends and family, craft fairs, online on your website, or through Etsy. The investment costs are low. Growths and profits will depend on your volumes.

Also Read: Best business audiobooks | Everything you must know

How to make money online under 18?

There are several options to make money online if you are under 18. Here are our top three suggestions for things you can do when you are 18.

  • YSense (over 16 years)– You get paid for viewing advertisements. Premium members get more benefits with the chance to get paid more. You get paid via PayPal.
  • Fiverr (over 13 years) – There are several business ideas for teens available on Fiverr. You can create Gig for services you want to provide – commenting on blogs, advertise on social media, and write articles. 
  • Global Test Market (over 14 years) – Global Test Market is a survey website that lets users earn, “Market Points” for completing surveys. The points can be redeemed for Amazon vouchers, PayPal, and Argos vouchers.

How to make money at 16?

Here are the best teenage job ideas for 16-year old –

  • You can look for part-time jobs in retail and food service.
  • If you are creative and can make something that others want to buy, you can sell your craft on Etsy. 
  • You can tutor or coach younger students.
  • You can offer pet-sitting and house-sitting services. You can look for potential clients on websites like care.com.
  • You can buy a few car cleaning supplies and start a car detailing business.

Also Read: Small business titles | An ultimate read for best results

How to make money as a 14-year-old?

14-year-olds are old enough to get working permits in most states. Babysitting is a popular job for teenage girls. American Red Cross offers babysitting classes to prepare 11 to 15-year-olds for babysitting. You can work in a restaurant or a store. If you are energetic and enjoy the outdoor, you can consider yard work and shovelling. If you love animals, you can take dogs for walks every day and looking after them if the owners are unavailable. Summer jobs like junior counselors are a great way to make some money. You will work under the supervision of the counselor.

How can 12-year old make money?

Legally 12 years old are not eligible for after-school jobs like working in a supermarket. Parents need to assess the maturity of their children to ensure they are suitable. Here are ways for 12-year-olds to make money –

  • Babysitting is a popular job for 12 years old. Red Cross has classes to prepare kids for babysitting training them in CPR and first aid.
  • Yard work tasks such as planting flowers, pulling out weeds, shovelling, and raking leaves in the fall are great ways to earn cash. 
  • If they can handle dogs, they can become a dog walker. 

 Accounting rate of return – What is the accounting rate of return explained with 3 real-life examples

Accounting

Want to learn more about the Accounting rate of return? In this post, we go through the basics of accounting rate of return.

Accounting rate of return

When someone invests capital in your company, they expect returns. The accounting rate of return measures the expected profitability for capital investment. Businesses, analysts, and accountants use accounting rate of return or ARR capital budgeting. It indicates profitability from simple estimates to evaluate capital projects. We divide the net income from the investment by the total amount invested.

Investors use ARR to decide on the viability and profitability of a capital project before investing. Investors can analyze the risk involved in the investments. Businesses get a snapshot of the potential earnings power of a particular investment. In this blog, we elaborate on what does arr mean?

Also read: A guide to expanded accounting equation

What is ARR?

What is ARR?, ARR is an acronym for Accounting Rate of Return.

ARR’s definition is as follows, ARR is the average net income an asset should generate divided by the capital cost. We express ARR as an annual percentage.

The accounting rate of return is an important measure for investors and management. Companies use ARR to decide on the viability of a project or acquisition.

ARR = average annual profit / average investment

Significance of accounting rate of return

The accounting rate of return is a vital metric used by companies before investing. The significance of the accounting rate of return is as follows-

  • ARR is easy to calculate and understand. The method considers total profits or savings over the entire project life.
  • Analysts factor in depreciation and expenses while appraising a project.
  • Companies use ARR to allocate funds. They can compare multiple projects. Companies decide on expansion or acquisition based on figures in accounting rate of return.
  • The accounting rate of return gives a clear picture of the profitability of a project.
  • ARR considers the profit earned for calculating the rate of return. Accounting profit is easily available from the accounting records.
  • ARR helps owners and investors learn about the return on their investment. 
  • ARR helps to measure the current performance of the company.

Also read: Fund accounting | A complete guide

Accounting rate of return formula

The accounting rate of return formula is as follows:

ARR = average annual profit/ average investment

Where,

Average annual profit = total profit over the investment period/number of years

Average investment = (Book Value at Year 1 + Book Value at End of Useful Life) / 2

If you calculate the average rate of return and it equals 10%. It means the annual rate of return is 10 cents for every dollar invested per year.

The ARR should be greater than or equal to the company rate of return for the project to be viable.

How to calculate ARR?

The concept of ARR is simple, but how to calculate ARR? We calculate ARR by dividing the total contract value by the number of years.

  1. The first step will be calculating the annual net profits of your investment. Accountants calculate profits after deducting operating expenses, taxes, and interest associated with the project or investment.
  2. If the investment is a fixed asset, such as property, you need to calculate the deprecation and expenses. 
  3. To get the annual net profits we deduct depreciation expenses from the revenue figures. 
  4. In the last step, you divide the annual net profit from the initial cost of the investment. You multiple the net profit by 100 to see the percentage return.

If, you find the arr calculation cumbersome, there are readymade average annual return calculators available online.

Also read: 10 Best accounting calculators and how to use of them

Example of accounting rate of return

ABC Company wants to invest in some capital equipment to replace the old machine. The new machine cost $42 0,000 and would increase the revenue by $200,000. The annual expenses are $50,000. The machine should have a useful life of 12 years and have zero salvage value.

Step 1 Calculate Average Annual Profit
Inflow, year 1-12

(200,000 x12)

 $2,400,000
Less Annual expenses

(50,000×12)

 -$600,000
Less deprecation  -$420,000
Total Profit $1,380,000
Average Annual Profit 

(1,380,000/12)

 $115000
Step 2 Calculate Average Annual Investment
Average Investment

((420,000+0) /12)

 $210,000
Step 3 Calculate Annual Recurring Revenue
AAR formula average annual profit/ average investment
Annual Recurring Revenue

(115000/210000)

 54.76%

This means for every dollar invested, the investment will return a profit of about 54.76 cents.

A capital equipment costs $350,000 would increase the annual revenue by $100,000. The company’s expenses of the company are $10,000. The equipment has life of twenty years with no salvage value. 

Step 1 Calculate Average Annual Profit
Inflow, year  $100,000
Less Annual expenses

(10,000)

 -$10,000
Less deprecation 

(350,000/20)

 -$17500
Total Profit $72500
Average Investment $350000
Step 3 Calculate Annual Recurring Revenue
AAR formula average annual profit/ average investment
Annual Recurring Revenue

(72,500 / 350,000 )x100

 20.71%

This means for every dollar invested, the investment will return a profit of about 20.71 cents.

Also read: Accounting Ratios | All you need to know

How to calculate ARR in excel?

Excel has long been used for accounting purposes.  To keep track of ARR you can use annual rate of return excel. Here are the steps you can use to calculate ARR

Let us take the example of a company that has recently invested $60 million in setting up a new plant. The company expects to generate revenue of $15 million in the first year while operating expense is likely to be 30% of the revenue. The asset is expected to be scrapped after 10 years of estimated life with zero salvage value. Calculate the accounting rate of return for the investment based on the given information.

A B
5 Particulars Amount (in millions)
6 Revenue $15
7 Initial investment $60
8 Estimated life of Asset $10
Operating Expenses is calculated as
Operating Expenses 30% x Revenue
9 Operating Expenses Formula 30% *B6 = 30/100*(15)
10 Operating Expenses $4.5
11 Depreciation is calculated using the formula 
12 Depreciation  (Initial Investment –Salvage Value)/Estimated  Value
13 Depreciation Formula (B7-0)/B8
14 Depreciation $6
15 Incremental Accounting Income is calculated  using formula 
16 Incremental Accounting Income Revenue – Operating Expenses –Depreciation
17 Incremental Accounting Income Formula = B6-B10-B14
18 Incremental Accounting Income $4.5
19 Accounting Rate of Return is calculated using the formula
20 Accounting Rate of Return  Incremental Accounting Income/Initial Invesment*100
21 Accounting Rate of Return Formula =B18/B7*100
22 Accounting Rate of Return 7.5%

This means for every dollar invested, the investment will return a profit of about 7.5 cents.

Also read: A complete guide to Public accounting 

What is required rate of return formula?

Investors expect return on investment when they invest in a company.  The required rate of return is the minimum return of investment an investor expects for investing the company stock. There are two methods to calculate the required rate return formula

Capital Assets Pricing Model (CAPM) method

RRR = RRR = rf + ß(rm – rf)

Where

  • RRR – required rate of return
  • rf – risk-free rate
  • ß – beta coefficient of an investment
  • rm – return of a market

Weighted Average Cost of Capital (WACC)

RRR = wDrD(1 – t) + were

 Where:

  • wD – weight of debt
  • rD – cost of debt
  • t – corporate tax rate
  • we – weight of equity
  • re – cost of equity

Also read: 3 steps on how to setup a successful tax consulting business

What is simple rate of return?

Simple rate of return is an estimated return of investment. We calculate it by calculating profit before taxes and interest. The simple rate of return is easy to calculate. The drawback of simple rate of return is that it does not focus on cash flow but on net operating income.  

We estimate the revenue that will be generated from the proposed investment and deduct projected expenses from the project. The simple rate of return formula

Simple rate of return = (Incremental revenues − Incremental expenses, including depreciation

= Incremental net operating income) / Initial investment]

Simple rate of return = (Cost savings − Depreciation on new equipment) / Initial investment*

*the investment should be reduced by any salvage from the sale of old equipment.

Also read: Materiality accounting – What is materiality accounting & 5 practical examples

What is expected rate of return formula?

The expected return definition is as follows is the profit or loss that an investor expects on an investment. Expected rate of return or return on investment is calculated by multiplying the potential outcomes with the chances of the event occurring and then adding the results.

Investments are inherently is a risky the return on investment help companies and investors consider the risk factors linked with the investment. The rate of return helps investment companies develop model portfolio. Those who trade in the stock market examine stock history and market trends to calculate expected rate of return. 

The expected rate of return formula =  Sum (Returni x Probabilityi)

ER= R1P1+ R2P2 + R3P3 +…..+RnPn

What is annual rate of return formula?

The annual rate of return or yearly rate of return or nominal annual rate is the amount earned on a fund during the year. The annualized rate of return works by calculating the money gained or lost at the end of the year dividing it by the initial investment at the beginning of the year. 

The annual rate of return formula

Annual rate of return =(BYPEYP−BYP​)×100

where:

EYP=End of year price

BYP=Beginning of year price

Investments in different firms are difficult to compare. Since the annual rate of return calculates the return of return every year, we can compare different types of investments and judge which investments gave the best returns.  A major drawback of the nominal annual rate is it does not consider the potential of the investment compounding over a period.

Also read: How to set up your startup consultancy?

What is ARR stock dividend?

Companies use ARR stock dividend to distribute  wealth to the shareholders.  The dividend is made company shares rather than cash. Stock dividend are made in lieu of cash,  when company is low on liquid cash. The company can reward its investors without reducing its cash reserves, but can reduce the earning per share.

Investors are paid a fraction of their existing shares. Stock dividend is not taxed till the shares are sold. When companies issue the shares it dilutes the value of existing shares because of the increase in the number of shares.

What is rate of return on asset?

Return of assets (ROA) measures the profitability of a business in a relationship with its total assets. Investors, managers or analyst use the ROA to find out how the company are using  its assets to generate revenue.  ROA is displayed as percentage. Companies try to achieve higher return on assets.

Businesses operate for profits while using all resources available to them. Stakeholders and analyst calculate the ratio of profit to resources available to find out feasibility of a project. You can use ROA to find out how quickly you will get returns on your investment.

Return on Assets formula =Total Assets/Net Income​

Also Read: Independent Consultant | A comprehensive guide

What is accrual accounting rate of return?

Accrual accounting rate of return is the percentage of rate of return on an investment or assets, for the initial investment. The ARR formula divides the average revenue of the company by its initial investment cost.  You can derive the ratio or return on investment over the life of the assets or related to the project. 

This accounting rate of return calculates the profit related to the project using accrual and non-cash expenses and depreciation. The accrual accounting rate of return formula is as follows –

Accrual accounting rate of return = Average annual accounting profit/ Initial investment.

What is ARR dividend?

ARR dividend is the total expected dividend payment from an investment fund or portfolio expressed annually plus any non-recurring dividend received in the period. Companies may choose to offer their subscribers a fixed or adjustable dividend. Dividend rate and dividend yield are used interchangeably. 

ARR dividend is a financial ratio that shows how much the company pays out in dividends each year relative to its stock price. Companies should aim to generate a healthy dividend to pay out dividend.

You can use dividend rate to estimate the dividend only return on investment. Dividend amount is unchanged, the dividend rate improves if a company stock prices falls. The converse is also true the dividend rate falls if the company stock prices rises.

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