This article serves to simply help you to categorise business costs that you will come across in your business plan cash flow projection or forecast.
1. Once-off costs versus periodic costs
When preparing your cash flow, you will come across costs that are once-off and costs that you would have to pay every month for example.
A once-off cost would be the initial cost to develop an app. A periodic cost would be the maintenance and improvement of the existing app.
A once-off cost would be the cost of incorporating the company – as you only have to pay this once.
A periodic cost could be your telephone costs or your electricity bills.
It is needless to say that a once-off cost should be included once and a periodic cost should be included for each month that it applies in your projection.
2. Decide on what is an optional cost for your business
There are some costs that you could avoid if you choose to. You need to determine which costs these are and what course of action you intend to take.
You could opt to have an outsourced bookkeeper who maintains your financial information. This I would count as an essential cost.
You could then potentially decide to bring in an expert to really help your business grow – like a financial consultant specialized in this field.
They could look at the numbers and identify where you are going wrong and where you can improve. They could assist you in creating a concrete strategy to direct your business into the future.
This would be more of an optional cost because your business can operate without it.
When preparing your cash flow projection, you need to determine which optional costs you are going to expend and which you choose to do without.
We would suggest having a couple of versions of cash flow projections where you have an optional cost included and where you have the optional cost excluded.
Which is more likely to reap the best result for your business? Think long-term here.
3. Fixed versus variable cost
The meaning of these is contained in the name.
A fixed cost would remain the same at whatever frequency. A fixed cost would be for example your rental cost. If you have an online store, this could be your monthly uncapped data cost.
A variable cost will change month on month based on what is driving the cost. Variable costs would be for example the amount of material that you use to manufacture a product. The more products you manufacture, the more it will cost you.
Note: that this is a simplified example and does not take into account economies of scale.
In your cash flow projection, make sure that you include the fixed costs at the amount it is fixed at. Include the variable cost based on the item driving the cost such as the number of goods to be manufactured that month.
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Preparing a cash flow projection requires an in-depth analysis of the costs involved in running the business. Having said that, you don’t have to be a chartered accountant to analyze these costs.
You just need to apply common sense. But be sure to seek help if you feel overwhelmed.