Forecast Costs For A Solid Financial Future
 By B.J. Addington

When it comes to finances, many small-business owners tend to focus on the money that’s coming in, or their revenue. But it’s just as important keep a close eye on the money that’s going out – your expenses.

This starts with clearly identifying all of your business expenses, which are basically any costs incurred in the operation of your business and manufacturing and/or delivery of your products or services.

Once you’ve identified your costs, the next step is to accurately forecast costs you’ll incur in the future. Accurate cost forecasting will enable you to:

• Better price your products and services

• Potentially avoid cash-flow crunches

• Maintain profitability, even during sales slowdowns

• Improve your chances of obtaining bank financing or a line of credit

Expenses can be broken into three main categories:

1. One-time and capital expenses
These consist primarily of startup expenses faced by new businesses just getting off the ground. Business permits and licenses, office furniture, computers, telephones, printers and fax machines, and new signage are a few examples.

By their very nature, these expenses generally don’t have to be budgeted for the future.

However, you may want to factor capital equipment upgrades and replacements (for computers and other technology-related equipment, for example) into your long-term cost projections and budget.

2. Operating expenses
Also known as selling, general and administrative (or SG&A) expenses, these are the primary ongoing expenses involved in operating your business. They can be further divided into fixed and variable operating expenses.

Fixed expenses are the ones you must pay every month, regardless of your level of marketing activity or sales. Overhead expenses like rent, utilities, insurance, professional fees, salaries and wages, payroll taxes, interest and leases are the most common examples.

Variable expenses may change from month to month, based on sales volume, marketing or other factors. Sales commissions, professional and outsourced services, advertising and marketing, travel and entertainment, and office supplies would fall under this category.

3. Cost of goods sold (or CGS)
These are the direct costs incurred in the process of manufacturing and/or delivering your products or services. If you are a newsletter publisher, for example, printing (paper and ink) and shipping/postage would be your primary CGS. Or if you are a house painter, paint, brushes, rollers, etc. would constitute the bulk of your CGS.

Forecasting Your Costs
You should project your future SG&A and CGS expenses for the next one, two and three years, at a minimum.

When making cost projections, it’s usually smart to err on the conservative side. This will leave you some margin for error in case your actual costs end up being higher. Remember that projections are just that – estimates of the future.

If yours is a startup business with no prior history, research your industry to get an idea of what your typical costs may be. If you’ve been in business for a few years, look at prior year’s expenses and then project these forward, making appropriate adjustments to reflect rising or falling costs and anticipated business growth.

Forecasting Assistance
Many sources of assistance are available to help you with cost forecasting, including your CPA or accountant and your banker.

Or get help from the AFS small-business consultants at ProTalk and ProTax. ProTax gives you unlimited access to certified public accountants at no additional charge. The ProTalk advisors are available to answer your questions by phone or via e-mail – at no additional charge.

Small Business Development Centers can also provide valuable assistance. Visit www.sba.gov and click the SBDC link under local resources to learn more.

A computer spreadsheet program like Microsoft Excel or financial software such as Intuit QuickBooks is invaluable in cost forecasting and tracking. AFS members can save up to 20 percent on QuickBooks and get free shipping too. Visit www.afswebsite.org for more information.

But remember that a computer program is only as good as the numbers that are plugged in. You must do the legwork and make the educated assumptions necessary to ensure accurate cost forecasts.

(Posted September 2007)

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