From idea to business idea
How the market supports my business idea
Getting ready for the market
Financing - Profit analysis
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Tools & References
Types of costs to allocate in Financial Planning
There are different kind of costs that you should allocate in your Financial Planning:
We must plan these types of costs to be able to undertake these investments furing the life of our business.
- Launching costs: resources required to finance the acquisition of infrastructure and the set-up of the operative activities needed to get ready to produce/serve the market. The business launching costs must be borne primarily by the seed money, own or from credits or other financial sources, which we can count on. That's because sales revenues do not yet exist, or are too low to cover all costs.
- Infrastructure (Capital Expenditures): Resources required to build the organization needed to support the value proposal generation. Usually, they are Fixed Assets, also called long-term assets; non-liquid assets that are important to the day-to-day business operations; examples include plants, computers and manufacturing equipment, furniture and real estate.
- Operating Costs / Fixed costs: They are costs that do not depend on the volume of production such as rentals, or amortizations of facilities and equipment, staff costs, licenses, etc. They are routine business costs that are contracted or agreed to, such us salaries, insurance, lease expenses, and utilities. The total operating costs of your company include all costs except those directly related to the product you sell. These costs include sales and marketing costs, rent, office supplies, salaries for the office workers and utilities. This is how much your company would spend if it didn't make any products. The total of these costs, over a given time, are the operating costs for that period. If you want to calculate the break-even volume for the next month, you need the total operating costs for that month.
- Variable Costs. Your company spends money on making the product or delivering the service. These are variable costs, because they depend on the volume of products manufactured, and they consist of materials, parts, and labor. You can calculate the variable costs by adding the cost of materials used, the amount spent on buying parts and the wages paid out over a typical period. You divide the total by the number of items produced in that period. The result is the average cost per item.
- Break-Even Volume. At the break-even volume, the total profit from the sale of your products covers the total operating costs for that period. To calculate the break-even volume for next period, you divide the projected total operating costs for that period by the profit per item. If your projected total operating costs for a period are $10,000 and your average profit per item is $10, you must sell 1,000 items in the period to break even. This means your marketing department must target period sales of perhaps 1,200 or 1,500 items to make a reasonable profit.
- Working Capital costs: Resources required to finance the stocks that the value proposal compromised service/delivery time implies, and the cost of financing the difference between the payment time term to providers and the get paid term or income from the customers.Understanding the impact of different ways of managing your working capital can be particularly important. You may be able to reduce your financing needs significantly by limiting the credit you offer to customers and negotiating extended credit from suppliers. Actively managing the way, you collect payments from customers, for example by chasing up overdue debts, is likely to be essential. At the same time, you need to consider the broader business impact of your terms of trade. You might need to be willing to offer credit terms that match those of your competitors, or find that you are forced to accept a major customer’s terms if you want to do business with them. Your financing plans need to take into account customers’ real behavior – for example, in some countries late payment is almost routine. Working capital can be a significant limiting factor as sales volumes grow. You may need to identify ways of financing this, such as by using factoring to borrow against outstanding invoices. Taking out a long-term loan might be a better option than continually relying on an overdraft. Any financing method you use to increase your working capital must be carefully evaluated, in the same way as your other financing needs. If profits are not high enough to cover any extra costs, you may need to take deliberate measures to limit your speed of growth.
- Sustainability costs: resources needed to maintain the competitiveness of the Value Proposal through product/service improvement or innovation. Sustainability of the Value Proposition works with a similar logic that underlies the calculation of allocations of funds to replace and renovate facilities and equipment of the company. Over time, it will be more or less depending on the sectors and the conditions of competition, the Value Proposition must be updated to maintain competitive advantage. This update will require investments in R & D, product development or new market development.
We must plan these types of costs to be able to undertake these investments furing the life of our business.
