Chapter 5 - Expense Forecasting

• Defining costs - expenses are the costs of being in business and providing a product or service to a customer. The general classifications include:
  • Cost of Goods Sold (COGS) - these represent the actual cost of the product to the seller
    • Manufacturing firm - raw materials, direct labor costs, overhead (rent, utilities, production supervision)
    • Merchandising firm - cost of the product to the entrepreneur when it was purchased
    • Service firm - typically doesnt have COGS
  • Selling, General & Administrative (SG&A)
    • Selling - costs related to selling the product or service which may include advertising, salaries, commissions, travel, entertainment, store operation costs, marketing, etc.
    • General and administrative - entrepreneurs salary, office personnel salaries, office supplies, insurance, accounting, legal and other costs to operate the business
  • Other expenses capture costs incurred outside of those discussed here such as interest expense (or interest income) and any losses (or gains) incurred on the sale of equipment
  • Capital expenditures - purchasing of a piece of equipment or a building
• Cost behavior
• Break-even analysis - the calculation of the minimum number of units of product or service that a firm must produce and sell in order to cover all its variable and fixed expenses (and beyond this level is where the company starts making a profit)
  • This quantity is not an optimum but a minimum!
  • Where your burn rate hits $0
• Expense forecasting: the impact of business type on expenses
  • Manufacturing firms - different products require different proportions of expenditure as some are more automated (small direct labor cost) versus others that are labor intensive (large direct labor cost)
    • Manufacturing firms provide some of the best examples of fixed versus variable costs.
  • Service firms - employee salary or wages is generally the most significant expense
  • Recurring revenue firms - they typically have relatively large expenses at the front end of service and then somewhat lower recurring expenses as the service is provided (cable company for instance)
    • Customer acquisition costs (sales and marketing expenses / new customers) can be higher with recurring revenue
  • Commission-based sales firms - typically require that salespeople take part or all of their compensation in the form of a sales commission (fixed and variable expense)
  • Cyclical or seasonal firms - expenses must be managed to survive the times of year when revenue is down (think summer and spring break on the beach this year)
• Reducing expenses through bootstrapping - due to limited resources or a desire to keep control of their businesses there are often ways you can sharpen the pencil and bring expenses down below your initial forecast
  • Pros - equity retention, full control, reduces interest on debt/loans
  • Cons - running on fumes, limits expansion/growth, higher stress

Review the chapter notes and slides. Share one takeaway from each chapter. This can be something that stood out to you or a new piece of information that you found interesting. Secondly, share three areas that could be improved. These could be sections that could benefit from additional elaboration, topics that may be missing altogether, graphics or sources that you think we could integrate into future classes, etc.

Please be specific and provide as much detail as possible.

Chapter 5

Takeaway:

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Three Areas to Improve:

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