new business module

88
BUSINESS SKILLS
Entrepreneurs must identify and systematize all costs.
Depreciation
Entrepreneurs have to be aware of the fact that the equipment
they purchase to run the business will deteriorate and have to
be replaced at some point. When the time comes, they need
to have the necessary funds, or they will be unable to maintain
the business.
The continuous value loss of equipment over time is called
depreciation. A simple way of calculating depreciation is to
divide the cost of buying the equipment by the number of years
it is expected to last – the result is the yearly depreciation.
Money spent purchasing equipment
= yearly depreciation
Number of years
The concept of depreciation is generally only applied to equipment
that is expensive and has an economic life-time of more
than a year, such as refrigerators, bicycles, motorcycles, heaters
and ovens. Examples of equipment to which the concept is
not applied include cheap hand tools like a hammer, a stapler
and lamps.
Entrepreneurs should plan for depreciation and set money
aside to replace equipment that has broken down and can no
longer be repaired (at the end of its economic life-time). They
should put the equivalent of the annual depreciation of all
equipment in a savings account or in a pot that is used to save
money until they have saved an amount equivalent to the value
of the equipment. If they save that amount before the equipment
needs replacement, they can stop putting money aside.
Although the participants will receive some or all of their
equipment from the ICRC, they must plan for its depreciation.
If they don’t, they will not be able to replace old equipment
when it reaches the end of its economic life-time and they will
be no longer able to run their business.
In the case of Berthe’s tearoom, depreciation can be illustrated
as follows: Berthe needs to buy a refrigerator to be able to sell