Business Start Up For Dummies Three e-book Bundle by Colin Barrow

Author:Colin Barrow
Language: eng
Format: epub
Publisher: Wiley
Published: 2012-03-24T16:00:00+00:00

Anticipated costs

When you complete your revenue projection, you’re still not quite finished. You still have to look at anticipated costs – the price tag of doing business over the next several years. To make life a little easier, you can break anticipated costs down into the major categories that appear in a pro-forma profit and loss account: projected cost of goods sold, projected sales, general and administration expenses, projected interest expenses and projected taxes and depreciation. The following list defines these categories:

Projected cost of goods sold (COGS): COGS, which combines all the direct costs associated with putting together your product or delivering your service, is likely to be your single largest expense. If you’ve a track record in the industry, you’ve a useful starting point for estimating your company’s future COGS.

Even though the following formula may look ugly, it’s actually a simple way to calculate your projected COGS. Based on the assumption that the ratio of your costs to your revenue will stay the same:

Projected COGS = (Current COGS ÷ Current revenue on sales) × Projected revenue

If you haven’t been in business long or if you’re just starting a company, you won’t have access to this kind of information. But you can still estimate your projected COGS by substituting industry averages or by using data that you find on other companies that have similar products or services.

Although this ratio approach has the advantage of being simple, you can get into trouble if you don’t confirm the COGS that you come up with. At the very least, you should sum up the estimates of the major costs looming ahead (materials, labour, utilities, facilities and so on) to make sure that the projected COGS makes sense. This method is tougher, but it gives you a chance to make separate assumptions and projections for each of the underlying costs. You may be pleasantly surprised; you may discover that as your company gets bigger and you’re in business longer, your projected revenue goes up faster than your costs do. The effect is called the experience curve (explained thoroughly in Chapter 13), and it means that your COGS-to-revenue ratio will actually get smaller in the coming years.

Sales, general and administration (SG&A): SG&A represents your company’s overheads: sales expenses, advertising, travel, accounting, telephones and all the other costs associated with supporting your business. If your company is brand-new, try to get a feel for what your support costs may be by asking people in similar businesses, cornering your accountant, or checking with a trade association for average support costs in your industry. Also come up with ballpark numbers of your own, including estimates for all the major overhead expenses that you can think of.

If you’ve been in business for a while, you can estimate a range for your SG&A expenses using two calculations. The first method projects a constant spending level, even if your company’s sales are growing. In effect, you assume that your support activities all get more efficient and accommodate your additional growth without getting bigger themselves.

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