This is the second in a multi-part series to  
ensure that your new business is successful.
This article concerns business plans. We
previously covered how to estimate revenue for
the first three years.     

The next step in the process is to estimate your cost
of sales. Your cost of sales for many businesses is the
cost of goods sold, or the cost of the products and
other direct expenses that you actually sold to your
customers. This would be appropriate for a
manufacturer or distributor. So let’s say selling
headlight bulbs is part of your business, and you plan
to sell 10,000 of them in year 1 (as per your previous
revenue/volume projections).  Estimate what the
average cost of the bulbs to you is. You may sell many
different kinds so you need the weighted average.  
Let’s say it’s 10 dollars. And this includes any direct
cost involved with readying them for sale. Multiplying
this out you can see your cost of sales is projected to
be $100,000 for year one. Estimate and cost changes
you anticipate for years two and three. Multiply to
arrive at your direct expenses for those years.     

You may have many items that you intend to sell. You
should repeat the above for all of them and add
together for a cost of sales total. This total can be
deducted from your total Revenue figure for year one
to produce your gross margin amount. Gross margin
is the amount left after deducting direct costs from
revenue. You should then continue this calculation for
years two and three, making any adjustments to your
direct expense that you may anticipate.

We should look at the business plan as a more
strategic document. The concept of cost of customer
acquisition is important, even if it doesn’t explicitly
show in your P & L statement. This is the cost that it
takes to acquire your customers, both in total and
broken down to a per customer basis. This is
important to know as far as general profitability, unit
profitability, and in a marginal cost sense. Marginal
cost is that associated with producing one additional

Components of customer acquisition cost may
include advertising, direct sales expense including
sales commissions, and affiliate marketing expense.
If we make an assumption on how many products a
customer will buy or dollar value spent per customer,
we can calculate the cost per product. So if we plan to
spend 10,000 dollars in those three categories to
acquire our customers from the previous example,
then we would have a one dollar per unit acquisition
cost. A related concept is LTV or lifetime value of a
customer which is the estimated lifetime dollar
amount spent per customer.    

Of course, one can see how different marketing
programs might influence what total revenue the
acquisition expense might be. I’ll discuss this
separately when we examine scenario analysis.

We can now take a look at the remaining expense
items in your projected Profit & Loss statement.

The next general expense category is called S, G & A,
or Selling, General and Administrative expense. This
includes important items such as compensation
(salaries and fringe benefits), rent, travel, office
supplies. It also includes marketing expenses that we’
ve quantified above. The largest component is usually
compensation. Carefully analyze what personnel you
will need.  Determine what the average salary is and
the number of people. A good rule of thumb is to add
30% for fringe benefits, but this will vary depending on
the benefits you offer and what jurisdiction you
operate in (ex: state workers compensation).       

Please see the next article in the series where we will
continue with the S, G & A discussion and beyond.

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Small Business: Setting Up a Business
Plan (Part 2)                    
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