Operating expenses are where you list all of your regular expenses as line items, excluding your costs of goods sold. If the number after direct costs is smaller than the total of your operating expenses, you’ll know immediately that you’re not profitable. This number is very important because it conveys two critical pieces of information: 1.) how much of your revenue is being funneled into direct costs (the smaller the number, the better), and 2.) how much you have left over for all of the company’s other expenses. This number refers to the difference between the revenue and direct costs on your income statement. Gross margin is also referred to as gross profit. Think inventory and paper reports you deliver to clients. If you only pay for something when you make a sale, that’s a direct cost. Think salaries, utilities, insurance, and rent. Here’s a simple rule of thumb to distinguish between direct costs and regular expenses: If you pay for something, regardless of whether you make 1 sale or 100 sales, that’s a regular expense. If you only sell services, it’s possible that you have no direct costs or very low direct costs as a percentage of sales but even accountants and attorneys have subcontractors, research, and photocopying that can be included in direct costs. A reseller’s direct costs are what the reseller paid to purchase the products it’s selling. A manufacturer’s direct costs include materials and labor. Direct costsĭirect costs, also referred to as the cost of goods sold, or COGS, is just what it sounds like: How much does it cost you to make the product or deliver the service related to that sale? You wouldn’t include items such as rent for an office space in this area, but the things that directly contribute to the product you sell.įor example, to a bookstore, the direct cost of sales is what the store paid for the books it sold but to a publisher, its direct costs include authors’ royalties, printing, paper, and ink. No one can predict the future, but you can make a reasonable plan.Ĭheck out this article about forecasting sales for more information. It’s normal for the financials of a business plan to be your best educated guess at what the next few years of numbers will be. If you’re writing a business plan document and don’t yet have money coming in, you might be wondering how you would arrive at a sales number for a financial forecast. The smaller it is, the smaller the expenses have to be if you’re going to stay in the black. The top line of your income statement is really just as important as the bottom line all of the direct costs and expenses will be taken out of this beginning number. This number should be your initial revenue from sales without any deductions. The top line of your profit and loss statement will be the money that you have coming in, or your revenue from sales. What’s included in an income statement? Revenue
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