Cost structure in a business plan refers to a section in the business plan where all the necessary costs or expenses expected to be incurred to attain the desired objective noted in the business plan are explicitly outlined.
Depending on the objective of the business plan, these costs may include the cost of purchasing the raw material, the cost of marketing, or even the cost of packaging the finished products. Note that starting or running a business will involve some kind of cost, and this is what is noted in the cost structure of the business plan.
It is imperative to note that cost structures differ between retailers and service providers, therefore the expense accounts noted in a business plan will depend on the cost objects, such as a product, service, project, customer, or business activity.
Even within a company, note that cost structure may vary between product lines, divisions, or business units, owing to the varying types of activities they perform. Howbeit, the primary components of any cost structure are variable and fixed costs.
Variable costs refer to costs that alter in direct proportion to production/selling activities. These costs may include sales commissions, product costs, cost of labor and raw materials used in manufacturing, etc. Fixed costs refer to those that stay the same regardless of the volume of sales or business activity.
They are costs that accumulate owing to the passage of time such as insurance, salaries, and rent. A good number of individuals believe that as long as a business makes the same amount of profit as another business with similar operations, the cost structure they leverage makes no difference.
However, an analysis of what occurs to a business’ break-even point when there are alterations to its cost structure reveals the difference. Therefore, when making financial projections for a new business, it is advisable you keep the fixed costs at the barest minimum so that the break-even point can be reached much sooner.
How to Write the Cost Structure in a Business Plan
To ensure you can maximize the profits of your business, it is imperative you understand all the costs associated with starting and running your business, and also seek ways to reduce them to the minimum. Below is a detailed guideline on how to write the cost structure section of your business plan.
Make a Summary of Your Costs and Expenditure
While you will most often note your costs in your financial tables, it is recommended you give a summary of your main costs and timescales for expenditure. This will help buttress how your business will function within the next few years. To do this, take your time to analyze all attributed ‘fixed’ costs and ‘variable’ costs as they can help plan your cash flow.
- Fixed costs: These are the regular or one-off payments that have been concluded in advance, for example, rent, insurance, and subscriptions. You can review these annually to validate that you’re getting a good deal.
- Variable costs: Note that these are predictable costs that can change owing to your business activity and volume of sales. For businesses selling products, variable costs might include direct materials, commissions, and piece-rate wages. For service providers, variable expenses are composed of wages, bonuses, and travel costs.
While making a summary of your cost and expenses, it is recommended you show that your costs align with your activity – costs will most likely increase as your activity increases or as your sales volume goes up. Also note that you may have to employ more staff, move to a larger business facility or obtain more supplies.
Also note that things like insurance will be more costly as you employ more staff and more customers, therefore take heed that it is reflected in your cost summary and your cash flow.
Make a Concise Description of Your Main Sources of Income
The next step will be to declare whether you have secured the income (for instance, a grant or contract that has already been concluded) or if it is an income forecast (for instance, sales of your new product or service).
If you intend to depend on one source, then you must note any plans you have to diversify your income or what you intend to do if you lose that income source. If you have or are applying for loans or social investment, make sure you describe in clear detail your plans for repayment.
Describe Your Pricing Strategy
Depending on the type of business or your objective for putting together the business plan, consider using this section to note your pricing strategy. Have in mind there are numerous ways to set a price for your product or service.
- Mark up: Understand the price the product or service costs you, then add a percentage to get the final price (e.g. cost + 10%).
- Going rate: Take your time to research the competition to understand what a typical price is and try to match it.
- Market-oriented: Set the price based on research with your target market and what is obtainable in your market.
- Perceived value: Consider the value the consumer places on a product. Note that this may be more than the product is actually worth. For instance, people are known to pay more for branded goods even though the product is more or less the same as a non-branded item because they perceive it to be better or higher quality.
- Pricing schemes: You may also choose to make available discounts for certain groups, or for early-bird payment, bulk purchases, or off-peak use.
It is important to note that expensive items are seen to be more valuable, and a good number of voluntary organizations underestimate the value of their work. Any successful business activity will have to give a surplus between the price and the cost, and your costs may be higher than what is common in the market. Also, take your time to work out how much it costs to deliver your product or service before you set your price.
The cost structure is mostly attributed to all the costs that can be incurred while working on the goal of the business plan. Always remember that the aim of a cost structure in your business plan is to note the funds you need during the business process or for the business as a whole. It is primarily to allocate the costs in such a way that the costs would be minimized and the profits earned effectively maximized.