How to project expenses in your Economic Feasibility Study

Economic Feasibility Study
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Economic Feasibility Study Sheet
Economic Feasibility Study Sheet

Types of Spending

O economic feasibility study consists of projecting future cash flows from a business idea or an investment. That is, it analyzes the potential of your project to generate revenue and, deducting expenses, to generate profit.

Therefore, it is correct to say that the quality of your economic feasibility study is directly proportional to the accuracy of your projections. It is common for people to think that all expenditures are the same and try to project in the same way. But there are different types of spending and this makes a big impact on how you will design them for the future.

Types of Spending - How to Design Spending on Your EVE

What are costs?

The costs are the expenses that have quantity and value directly linked to the revenue, or, better, the quantity of units sold, that is, the production of the company. Let's think together about some examples of products or services:

a) Production of mineral water bottles - when selling only an additional unit of mineral water, what are the expenses that will necessarily increase? The very raw material (water), the plastic to make packaging and cover and taxes proportional to the sale are good examples of costs in this case. To sell an additional unit, I will not pay more rent, nor will I increase the team. So these are not costs.

b) Consulting services - let's say I now have a consulting firm and work with freelance consultants who charge me for hourly projects. In that case, the time of my consultants becomes a direct cost. The more projects I sell, the more hours I have to allocate them and the cost increases. It is also very common for consulting firms to pay commissions as a percentage of the value of the project to commercial employees who sell the projects. This is another example of cost that will grow whenever a new project is sold.

c) Beauty salon - although it is also a service model, the cost composition is different in this case. If the manicure is a company employee, with fixed salary every month, no matter how many nails she will paint, her expenditure will be the same. Therefore, by its fixed nature, the salary will never be projected as cost. The only costs I can see in this situation are the enamel and other types of raw material, but since the expense is extremely low, in the projection it might be better to imagine a periodic expense to change the stock of enamels and treat this expense as an expense.

Beauty Salon - How to Design Spending on Your EVE

What are expenses?

Expenses are fixed or quasi-fixed expenses, which are practically independent of revenue or production for a change. The salary of an employee and the rent of a shed are good examples of expenses. If you sell 0 drives or 100 drives, it does not matter. Your spending on this salary will be the same.

But when will expenses vary? This will depend on your productive capacity. Therefore, you should think about the milestones that will make your expenses grow. Can a care clerk handle how many people a day? How many daily sales do you believe you need to reach to reach this volume of calls? This is a good example of the way to start your spending projection.

The point of doubt in this question is the expenses of almost fixed nature, like the electricity. If we were talking here about an in-depth study of costs for the purpose of pricing analysis, it might be worth studying which part of this cost is a cost and varies with output and which portion is more administrative. In short, how much would you spend on light without producing anything?

But as we are talking about feasibility study with all its projections already uncertain, my vote will always be for simplification. I prefer to treat it as an expense and consider a fixed monthly amount for it.

Economic Feasibility Study Sheet
Economic Feasibility Study Sheet

What are investments?

Before studying cost accounting, whenever I was told about investments, I was referred to the financial market, stock purchase, etc. Today I know that any asset purchase or increase in the capacity of a company should be considered an investment in your projection of expenses.

Investments are specific expenses directed to the purchase of equipment, works, software with the purpose of increasing the productive capacity of your company. To make your projection, you must differentiate the initial investment - expenditures necessary to start your operation that will enter the moment zero - of investments that will be needed throughout the development of the project.

Cost Projection

Cost projection is much more a pricing and forecasting exercise than spending budget. You need to understand what your direct costs are and set the profit margin you are going to work with. Maybe you need a pricing sheet to begin this work of direct cost discrimination before designing.

Absolute Direct Costs - Projection of Expenses in the Economic Feasibility Study

In the example above, we are dealing with a company that creates simple websites for other companies. In every project she delivers, she needs to purchase a domain (site address), a ready-made template (preformatted design structure), and some plugins (pre-made functionality to improve website performance).

Direct Costs - Projection of Expenses in the Economic Viability Study

In addition, this company has the policy to pay 5% of commission to the person responsible for the sale and has a fee of 5% payable to the credit card flag in case the customer pays for this form of payment. It does not matter if they are absolute or percentage, they are all direct costs that they incur in all projects.

The only issue there is the credit card fee, since not every project will be paid that way. In this case, we can search for an average - add 2,5% of cost in the projection - or, for simplicity, as any projection is uncertain, protect yourself by putting the maximum cost of 5%.

Pricing - Direct Costs Projection

If you expect to sell each site for R $ 2.000,00, with the cost of R $ 575 and R $ 400 of commissions and taxes, we are working with an 51% margin. For simplicity, I used a tax rate of 10% targeting revenue directly and I'm going to work with a margin of 50% in the projection.

The time has come to design. To design the direct costs, you will have to necessarily design revenues. To design them, you'll need to think about growth assumptions, but that's not the purpose of this article, so let's start with 5 sites sold in the first month and growth of 20% per month by the end of the first year. Our projection will have the following face:

Projecting Revenues and Costs - How to Project Expenses in Your Economic Feasibility Study

The projection of costs does not have much secrecy. They will always track the revenue percentage, unless you want to see gains / losses in scale. Scaling gains happen when you can produce more without increasing inputs. An example of this type of occurrence is when the company gains sufficient size to negotiate lower prices per unit with the major suppliers.

You can even predict this in your plan, as long as it is a well-explained premise. I prefer not to count on this kind of detail in my financial planning, because the chance of not happening is great and it is always worth having the most pessimistic scenario.

Another thing that can give complexity to your plan is when you are planning a company with several different types of products. If their profit margin is the same, okay, just keep the percentage on the revenue. Otherwise, it is worth separating the products into different groups and designing the recipes separately and then adding them together.

Economic Feasibility Study Sheet
Economic Feasibility Study Sheet

Expense Projection

The expenses have 3 natures: fixed, quasi-fixed and punctual. To make a simple plan that does not require a crystal ball, I recommend that you try to turn all types into fixed expenditures by month or quarter. The logic is to budget the expenses and "normalize" the variation of the quasi-fixed and punctual. Some expenses that should be considered:

  • Facilities and utilities - rent, electricity bill, water bill, telephone, internet - all expenses to keep the office operating
  • Marketing and commercials - advertising, meetings, graphic materials - anything that is committed to promoting the brand and / or selling
  • Payroll - wages, charges, benefits, bonuses - expenses to keep staff
  • Other people expenses - training, training, awards - more punctual expenses with the team
  • Services - accounting, legal, technology - expenditure on contracting services for the company's consumption
  • Other - maintenance, office supplies, other materials

Expense Projection - How to project expenses in your economic feasibility study

To design, you can start by separating expenses between fixed and variable. Budget the fixed from the premises of your project seeking the answer to questions that you should ask yourself to your project:

  • How much does a commercial room rent in the area I want?
  • How much is the average salary of a senior technology professional? What about a commercial manager?
  • How much does a monthly accounting service cost? And legal advice?
  • How much do I want to invest in marketing per month? How will this impact revenue?

Note that some expenses will vary according to the size of the team. The rent that you will pay for a team of 10 people will not be the same rent that you will pay for a team of 100 people. Your payroll will also evolve according to the need to increase your operation. Set milestones for these changes.

For example: "We'll start doing home-office. When the team reaches 5 people, we will open a small office for up to 15 people. When we reach that number, we will open a second branch and grow somewhere else. We expect to achieve these numbers 3 months and 1 year after the start of operation respectively. " Plan your hiring from the need to produce more and sell more.

The more uncertain your spending, the more you need to prepare for the worst case scenario. A salary is fixed, so you can seal an almost accurate expected value from it with annual readjustments. However, how much to place for maintenance provision? There is no right answer to that. Ideally, you should use old experiences and / or talk to people who have a similar company to try to figure out how to budget for it.

If you expect to spend $ 12.000 per year, design $ 1.000 per month. Just remember that the larger the company, the more spending you must have with those accounts. Consider gains in scale over time.

Projection of Fixed Expenses - How to project expenses in your economic feasibility study

Investment Projection

Investments are the most punctual expenses. If you have already planned to expand your physical space correctly in revenue and expense projections, as the team grows, it will be easier to know when you will have expansion investment.

In the case of investments, I believe that it is not worth trying to "normalize" the value per month. It is worth more designing when you expect them to actually happen to already go counting on the need for cash. A valuable tip, is to link some investments to the entry of new members into the team. Every new member needs a computer, some software and a place to sit, that is, plan to spend a certain level of investment with each entry.

Investment Projection - How to project expenses in your economic feasibility study

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