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.
Whatever stage your business is in, it is important that you learn to set up a cost structure, since financial management is essential to optimize the development of your business and professionalize your brand.
In this article we are going to tell you how to put together a cost structure and, in the end, you will be able to download your own spreadsheet for free so you can do it yourself.
🎯 Extra tip: if in addition to learning to organize the costs of your business you are looking for ways to reduce them, keep in mind that by creating an online store you will save on rental costs and physical premises services. and invest your resources in what will produce more profits.
What is a cost structure?
The cost structure is a document in which the expenses of a company are organized in a practical way.
It must include all the necessary costs for the company to function and to fulfill its proposal to the consumer, for example: raw materials, commissions, salaries, taxes, packaging, rent, internet service, among others.
There are two ways a company can target its decisions: by cost or by value. Cost-driven companies are those whose goal is to spend less, in order to offer a more accessible proposition to the public.
On the other hand, value-oriented companies are those in which the focus is on quality, although this sometimes translates into more expensive products or services, but considered more valuable.
Choosing one of these models will guide the way of planning costs in a company.
Why is it important to have a cost structure?
A cost structure is one of the aspects that must be considered when defining the cost, its importance lies in these reasons:
- It is useful for evaluating overall cost increases or decreases.
- 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
We can distinguish at least nine types of costs:
- direct costs
- Indirect costs
- Fixed costs
- Variable costs
- Operating or running costs
- opportunity costs
- Sunk costs
- Controllable costs
- Uncontrollable costs
Let’s talk briefly about each of them to avoid doubts.
direct costs
Here come the labor, raw materials and expenses involved in the production of a product or service.
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 the ones that do not depend on the sales of your business, for example the rent of a physical premises, 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.
📈 Speaking of fixed and variable costs, Do you know what he is? If not, we invite you to click on that link to continue working on the finances of your business and improve its profitability.
Operating 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 left 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 you have control. Bonuses, donations and raises to collaborators are examples of them.
Uncontrollable costs
They are exactly the opposite of the controllable ones and a good example could be the , which varies depending on the value of the keywords at a given moment.
Despite the variety in the types of costs to make a simple and useful structure for a business, there are two in particular that can be considered: fixed costs and 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.
Components of a cost structure
In general, there are two types of costs: fixed and variable.
- Fixed costs are those that do not depend on the sales of your business (for example: office rental, internet connection, maintenance of your online store, salaries, accountants, etc.).
- Variable costs are those that do depend on your sales volume (for example: cost of merchandise, fee charged by means of payment, cost of shipping, etc.).
Let’s see each type in detail so that you can elaborate your cost structure without having any doubts about these concepts.
Fixed costs
To understand your fixed costs, it is key to ask yourself what are all the expenses you would have in a month even if you had no sales.
Some typical cases are:
- Office, warehouse or local rental (I always included expenses, electricity, gas, water, cleaning and taxes).
- Internet connection.
- Landline and mobile phone (if you have an exclusive one for your business).
- Wages (I included all taxes on wages and not just the value “on hand”).
- Accountants.
- Lawyers.
- Bank account maintenance.
- Online store maintenance.
- .
- Other operating costs (monotax, for example).
The important thing is that you can plan these expenses monthly and understand what investment you need to maintain your basic operation.
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Fixed costs example
Suppose you want, your list of fixed expenses could be the following:
- You work from home, so you don’t need to pay office rent.
- You have a cost of $4,000 per month for the internet connection.
- You hardly use the landline phone, but it costs $1,000 a month.
- You don’t have employees yet: it’s just you and your partner who want to earn $150,000 per month each.
- You have an accounting firm that charges $10,000 per month.
- You have a law firm that works by the hour. You estimate that you need them little, which would imply approximately $6,000 per month.
- You have a simple bank account, with a maintenance cost of $2,000 per month.
- You have an online store in Tiendanube with a cost of $1,499 per month ().
- You are monotributista and you pay $5,000 monthly.
In total, your fixed costs would be $329,499 per month.
Variable costs
For each product you sell, you have to know the associated costs. Surely you have many costs that are independent of the product and others that depend a lot on it.
For example, the manufacturing cost of the product is likely to be very different for a t-shirt, a dress, or a belt, but the packaging cost has to be similar for all.
Some cases of variable costs are:
- Product manufacturing.
- Packaging.
- Shipment.
- Payment method commission.
- Taxes (VAT, gross income, income tax).
Example of variable costs
Now that you know the meaning of the , let’s analyze an example in which you have a clothing brand and you sell a shirt:
- You have a manufacturing cost of $1,500.
- For shipping, you place the shirt in a transparent plastic bag and deliver it in a plastic bag with a handle, stamped with your brand’s logo, your store’s web address and contact telephone number: all this has a cost of $300.
- Shipping is paid by the buyer, which does not represent a cost to you.
- He charges 4% of the sale. If you sell the shirt for $7,000, you have a cost of $280.
- You do not have to pay VAT separately because you are a monotributist and the monthly fee is already considered in the fixed costs.
Your selling cost for each shirt is $2,080. If you sell the shirt for $7,000, you will make a marginal profit of $4,920 per shirt.
Steps 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 have to follow to make the cost structure of a company:
- Break down fixed costs (just as we did in the example in the previous section).
- Break out variable costs (just as we did in the example in the previous section).
- Obtain the marginal profit, that is, the extra or additional benefit obtained from the sale of a product or service. In the shirt example above, the selling cost for each piece is $2,080. So, if you sell the shirt for $7,000, you will have a marginal profit of $4,920 per garment.
- Make an analysis of the evolution of sales and even create an annual projection of the total profits of your business.
🎯 Keep in mind that all these steps are automated in the free spreadsheet that we share with you at the end of the article.
I already have my cost structure, and now?
Continuing with the example of the cost structure for a business, we already know that you have fixed costs of $329,499 per month and that each shirt you sell generates $4,920 in profit.
With a division we can understand how many shirts you need to sell per month to cover your costs: selling 67 shirts every month you can cover them (including your salary and that of your partner).
The important thing is to understand how you can sell those 67 shirts and when you are going to sell them. You have two paths!
- : here you will have to analyze how many sales that investment in advertising generates and consider it as part of your variable costs.
- for free: in this case you will have to understand what efforts you have to make and how long it will take you to reach 67 monthly shirts.
Create your profitable business today!
A free cost sheet to organize your finances
To facilitate your work, we share one that can help you make all your accounts. We hope you find it useful and that you can plan your business more clearly!
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