I do not know about you but costing was very difficult for me. Inteco’s financial projections were very depressing. Costing is unfortunately a necessary evil. It allows you to know to the last shilling how much you will need. I was very ambitious at the beginning. I wanted a lot of machines all at once. It came down to almost 2 million. I later realized that my costing was inaccurate. There were some costs that I hadn’t factored in like legal costs.
To avoid my mistake categorize your costs into 3:
Production Costs: This is also applicable for service companies as well. These are costs that you shall incur to produce the service or product.
“Delivery” Costs: These are costs that you shall incur when delivering the product or service to your customer. In other words the costs of taking the product or service to your customers’ “door step”.
Operation Costs: These are costs that enable the business to run every day.
There after you can decided within these categories which costs are fixed and which are variable costs.
The academic books focus on a business plan for external use. Therefore, they require you to have a profit and loss statement, a balance sheet and a projected cash flow. In my experience (and I could be wrong) these statements are completely useless when you are starting out. For better clarity I shall define what I mean when starting out. All you have is an idea in your head. They are useless because they will never reflect the true nature of business. You may want to start a restaurant and you use the data of the restaurant next door for your statements. When you finally start out you will notice that your projections were wrong. Why? The restaurant next door has been in business for longer, it might have a strong brand, customers may be loyal etc. There are many factors that you have not taken into consideration.
I would suggest that you hold off this segment of the business plan until you start business. Unless it is for external use then try and get accurate information. Once the business has been running for a while then you have a better ability to project.
I almost forgot this. When working on your financial statements and even costs you need to state your assumptions. It gives the reader a better understanding of how you came up with the figures. You could say assuming inflation is increasing at 10% per year then my costs will be like this. It also gives you the opportunity to go back once you have set up to gauge if your assumptions were right or wrong.
Until next time