Cost is the counterpart to your revenue. They are caused by material and service use, as part of your operations.
A basic distinction exists between variable, fixed and mixed cost:
- Variable costs: are expenses that occur in production. If one bicycle is being produced, variable costs for two bicycle tubes occur.
- Fixed costs: occur regardless how much is produced. These include e.g., salaries and rents.
- Mixed costs: are costs that cannot be clearly defined as the other two, but possess elements of both expense categories. E.g. electricity and telephone costs.
Importance for starting your Business Plan
Adding the most important items, will help to bring clarity about what is needed to get your business up and running, thereby ensuring its survival. In contrast to the sales prediction, expense projections for your startup are relatively easy to plan. List all the positions and then determine their market value. If you work precisely, you can reverse calculate, how much (or if it is a fixed amount, at what price per piece) you need minimum to get a positive result. The keyword is break-even. You can find several examples of calculations on the internet. It is a bad idea to take the break-even as a basis for your sales forecast. But it is an important indication what goals you need to achieve in the medium term. If the result is unrealistic amounts and/or prices, then it is a clear message that you need to revise your business idea.
In SmartBusinessPlan you use the respective tables and assistants for calculating expenses (e.g. for employees, direct costs, operating costs etc.). The costs will then automatically be added up, divided and transferred to the profitability and liquidity planning.
- Plan your sales realistically, independent of the costs. Use the breakeven analysis to define a minimum objective.
- The planning accuracy for a cost position is always based on the risk that arises when a deviation comes into play. For a craftsman, shipping is certainly a minor concern, so a roughly calculated fixed cost position is sufficient. For mail-order companies postage costs are an essential part of cost and certainly need to be calculated carefully. For many entrepreneurs, it is advisable to create two business plans: One with minimal cost to get a company up and running. The second with investment that would be needed for a more ambitious development. The decisions should be made based on the conservative plan, or as the saying goes “Plan for the worst, hope for the best!” In SmartBusinessPlan you create first conservative plan first and then duplicate it, to make the appropriate adjustments.
- Don’t copy rubbish! Many business plans have standard positions like 50 € per month for literature or 100 € per month for education. If these positions don’t apply to your business, don’t list them. These are old-fashioned ideas that persisted over generations of entrepreneurs. The position “retirement” is economically doubtful as well, if a loan is requested simultaneously. Who wants to save and loan money at the same time? Pension contracts can and should be “non-contributory”. This means you don’t have to make payment for the first 1-3 years. If your bank wants you to add these points, reject confidently.
- Talk to your startup advisor or your bank counsellor about the subject and ask for an evaluation of your cost section. Thanks to our new team function, you and your advisor can work on your business plan together.