The cost structure is a document in which the expenses of a company are organized in a practical way. Here we tell you what it is for and how to make one with a practical template in Excel. It will make your life easier!
Whatever stage your business is in, it’s important that you learn how to make a cost structure of a product. Why? Because that of an ecommerce is essential to optimize the development of your business and professionalize your brand.
In this article we are going to explain how to make a cost structure and, in the end, you will be able to Download a spreadsheet with examples for free, so you can create your own cost structure. Shall we start?
What is the cost structure?
The cost structure is a document in which the expenses of a company are organized in a practical way. This structure must include all costs necessary to run the business and can comply with its proposal to the consumer, for example: raw material, commissions, salaries, income taxes, packaging, rent, internet service, among others.
There are two ways a company can target its decisions: by cost or by value. The cost-driven companies are those whose objective is to spend less, in order to offer a more accessible proposal to the public.
For their part, the value oriented companies, on the other hand, are those in which the focus is on quality; although this sometimes translates into more expensive products or services, but considered more valuable. The choice of one of these models will guide the way of in a company.
It is important to highlight that a cost structure is one of the aspects that should be considered when defining a company’s cost.
Why is cost structure important?
A cost structure is one of the aspects that must be considered when defining the business model of a company, its importance lies in these reasons:
- It is useful for evaluating increases, decreases and fixed costs.
- It helps to calculate the utility and benefits in the sale of a product or service.
- It facilitates the projection of total, monthly and annual profits.
- It supports the total control of the finances of a business.
- Indicates if a venture is profitable or not.
Types of costs
In order to plan cost structures it is important differentiate the types of costs that may arise and classify them correctly, so you can understand the role that each one plays in the business. We can distinguish at least nine of them:
- direct costs
- Indirect costs
- Fixed costs
- Variable costs
- Operating costs or running costs
- opportunity costs
- Sunk costs
- Controllable costs
- Uncontrollable costs
Let’s talk briefly about each of them to avoid doubts.
direct costs
This is where labor, raw materials and all the expenses involved in the production of a product or service come into play.
Indirect costs
Unlike the previous ones, they are not directly related to production, for example the internet or electricity service. Although they can be useful services when producing, they are not used only for that.
Fixed costs
They are those that do not depend on the sales of your business, for example the rent of the office, the maintenance of your business, salaries, payment to accountants, etc.
Variable costs
They are the ones that do depend on the sales volume of the business, for example the cost of the merchandise, the rate charged by the means of payment, shipping costs, among others.
Operating costs or running costs
It is a category in which the necessary expenses are considered so that a company can operate daily, an example would be the rent of the office or workshop.
opportunity costs
It is not such a common classification but there are times when it is necessary to consider it. Refers to the benefit foregone by choosing one alternative over another. For example, if the money is kept in the bank, generating 2% interest, vs. if we leave it in cash, without any growth.
Sunk costs
They are the expenses that have already been made and will not be able to be recovered in the future, a very simple example is time.
Controllable costs
This is a classification by consumption and, as its name says, it refers to those figures over which we have control. Bonuses, donations, and employee raises are examples of these.
Uncontrollable costs
They are the exact opposite of the controllable ones and a good example could be advertising or renting a store.
These that you see above are some of the most common types of costs. But to make a simple and useful cost structure for a business there are two in particular that can be considered: fixed costs and the variable costs.
Below we will explain in detail what they are, how you can identify them and how to consider them when putting together your document.
What should a cost structure have?
In any cost structure of a company, some elements that must be included at the time of elaboration are these five:
- Fixed cost record
- Record of variable costs
- Total cost record
- sales amount
- Record of expenses of your company
As a company grows and its needs expand, it is likely that more factors come into play and it is possible to include them, achieving greater precision in financial projections, however these five elements are essential to have greater control in the company. If your company is just beginning, these data will be basic to keep a historical record of your venture.
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How to make a cost structure?
To make a cost structure, a breakdown of fixed and variable costs must be made. The ideal is to avoid approximations and use real data in order to obtain correct results. These are the steps you must follow to make the cost structure of a company:
- Break down fixed costs.
- Break down variable costs.
- Get the marginal profit.
- Do an analysis of the evolution of sales.
- Project your future earnings.
To make things clearer, let’s talk about each step, giving cost structure examples, fixed cost examples, and variable cost examples. Below you will find a downloadable cost structure template to apply to your company. Making it even easier!
1. Break down fixed costs
As we said before, Fixed costs are the ones that you cannot avoid paying.. To identify them, it is key to ask yourself what all the expenses you would have in a month, even if you did not have any sales.
Among the most common fixed costs are the following:
- Office, warehouse and/or local rental. It always includes services such as electricity, gas, water, cleaning, maintenance, etc.).
- Internet service.
- Landline and/or mobile phone, the latter only applies if you have an exclusive one for your business.
- Salaries. It includes all taxes on wages and not just the value “on hand”.
- Accountants.
- Lawyers.
- Bank account commission.
- Online store maintenance.
- Advertising in social networks.
- Other operating costs.
The important thing is that you can plan monthly these expenses and understand what investment you need to maintain your basic operation.
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Examples of fixed costs of an online clothing store
Suppose you have an online clothing store, your list of fixed expenses could look something like this:
- You work from home, so you don’t need to pay rent for an office.
- You must pay $899 per month for internet connection and telephone service.
- You don’t have employees yet, it’s just you and your partner who want to win $40,000 per month each.
- You work with an accounting firm that charges $2,000 per month.
- You work with a law firm that charges by the hour. You estimate that you need them little, for which it would imply approximately $1,000 per month.
- You have a simple bank account, with a commission cost of $150 monthly.
- You have an online store in , for which you pay $599 per month.
If we add the quantities in this example, your fixed costs would be $84,648 per month.
2. Break down variable costs
Variable costs are those that they change every period, depending on the providers and the actions you take. you will surely have many associated coststhat are independent of the product and other costs that depend entirely on it.
For example, the cost of manufacturing the product is likely to be very different for a T-shirt, a dress, or a belt, but the cost of packaging has to be similar for all.
Among the variable costs we can find some such as:
- Product manufacturing.
- Packaging.
- Shipment.
- Payment method commission.
- Taxes (VAT, ISR).
Examples of variable costs of an online clothing store
Let’s continue with the example of a clothing brand. To understand variable costs a little better, let’s review what they would look like in a specific product: a shirt.
- The cost of manufacturing the shirt is $300.
- Shipping is paid by the buyer, so it does not represent a cost to you.
- the charge one 4% commission for sale. If you sell the shirt for $1,200, then it would be $48.
- To send it to your client, you place the shirt in a transparent plastic bag and deliver it in a plastic bag stamped with your brand’s logo, your store’s website and a phone number to contact via WhatsApp. All this has a cost of $30.
3. Find the marginal utility
The refers to the extra or additional benefit obtained from the sale of a product or service. In the example of the shirt, the cost of sale for each piece, if we add the production, commission and packaging, is $378. So if you sell the shirt for $1,200, you’re going to have a profit or marginal utility of $822 per shirt.
4. Make an analysis of the evolution and projection of your business
After you have broken down fixed and variable costs, you are going to make a analysis of the evolution and even create an annual projection of the total sales and profits of your business, as you can see in the following graph (which also comes in the downloadable spreadsheet that you will find in this post).
I already have my cost structure, and now?
If we continue with the example of the cost structure for a clothing store and we know that the fixed costs are $84,648 per month and that each shirt you sell generates $822 in profit, with a division we can understand how many shirts you need to sell per month to cover your costs: By selling 103 shirts every month you can cover your costs (including your salary).
The important thing is to understand how you can sell those 103 shirts and when you are going to sell them. We propose two ways:
1. Invest in advertising
If you decide to invest in advertising, you will have to analyze how many sales that advertising investment generates and consider it as part of your variable costs. There are a lot of channels where you can pay for advertising, for example Google,…
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