Establish all your business costs

Business costs are obvious aren’t they?                                                                       

Having spent some time thinking about you, your business plan, your customers and market place, I’d like to spend just a short time thinking about costs. No I’m not going to give you a list, but what I am going to do is give you the desire and know how to draw up your own.

Physical Costs

We can break these costs down under two specific headings, Fixed Costs and Variable Costs.

Fixed costs – are those costs that will remain the same for your planned level of sales and capacities. E.g. if you have planned to make and sell 4,000 cakes in year one at 80 per week, your fixed costs would increase if your orders became say 200 per week. You would need, perhaps, more mixing, baking, packing, storage and delivery capacity. This could mean another part time member of staff (see Fig. 1).

 FIG 1 - Fixed Costs

Variable Costs – these are the costs that vary with sales volume and other business related activities like travel, marketing and advertising. Costs are not necessarily proportionate to the level of business as they can become less per sales unit depending upon unit sales volumes in any given period. This is due to efficiencies in the supply chain that can be achieved as a result of increased volumes.     Fig 2 - Variable Costs

Adding it all up

Having determined all the costs of running the  business, we can now start to understand what our financial future begins to look like and take actions where it could potentially go into the red (trading at a loss where outgoings are greater than incomings).

So, in previous publications we have spoken about market research, your sales plan and your marketing plan. All of these require some monies to carry out the activity and we also need to understand at what level to set prices and volumes to ensure we have a financially viable business model.

Having a sales plan and established all the costs, we are now well placed to generate a cash flow forecast. This forecast is an estimate of the business outgoings and income over, typically, a 12 month period. This allows actions to be put into place before the business is in trouble.

So, what does a cash flow forecast contain?

This is an example of a cash flow forecast and contains the following: -.

Sales income – month by month sales forecast that can be more than one line

Other income - could be a loan or other form of cash injection

Outgoings – all of the expenses that the business has to allow for including rent, rates, power, marketing, materials, wages/drawings and income tax

Calculation fields – are needed to show totals for each area and then total cash available at the end of each month.

Initially, the figures used are those based on your best intelligence. However, as each month is closed, the figures used are actuals for that month. As your history builds, decisions can be made on the “actual” figures making the spread sheet more and more accurate over time.

Outgoings

The outgoings of the business fall into two main categories in terms of cash flow. These are the fixed and variable costs discussed above. The cash flow forecast will also need to include for tax and national insurnace contributions as well as any wages and/or drawings that will be take each month/week.

Results have a number of templates for the following: -

• Fixed costs

• Variable costs

• Personal survival budget

A personal survival budget is key for sole traders as this will define the minimum that the owner/operator will need to earn through the business to survive. This includes for all their personal bills and commitments.

For further information on this or any other article, contact Results via our web site www.resultsresults.co.uk .

Graham Cripps

Results Consortium Ltd