![]() Make sure that you calculate your Direct Expenses correctly, especially when it comes to including a genuine market salary for working directors. Turnover – Direct Expenses = Gross Profit Here’s a very quick refresher on how to calculate your gross profit. A Quick Recap:Īs discussed last week, the starting point for understanding your financials are the three critical figures: More importantly, you’ll see how you can use these figures to highlight key issues in your business and save months, or even years of time wasted by working on the wrong issues. This week we’re looking at overhead percentage and how both these figures determine your eventual net profit. Tyee is also on the faculty at Portland State University where he teaches courses in taxation and financial accounting.Last week we looked at gross profit margin. His focus is on maximizing after tax cash flow used for growth by small to mid-sized businesses. Tyee is a Principal at McDonald Jacobs where he provides Business Advisory Services to entrepreneurs and their accountants. ![]() In future articles I will address forecasting for each of the above indirect cost categories. Other businesses may find the line between marketing and selling isn't quite clear. Some businesses have very clear selling costs like travel and entertainment related to making proposals or visiting trade shows. Selling is the process of converting opportunities into customers. It would also include traditional advertising and promotional activities. For most businesses these days, that includes website and social media spending. I think of marketing as what you do to generate opportunities. If your business hasn't been growing and you really don't spend anything on marketing and selling, the categorization process is already telling you something! So I usually would recommend having at least those categories. It would be unusual for your business to not spend anything at all on marketing or selling. G&A is usually the catch all for the indirect costs of managers, administrative staff, and office related expenses that you don't categorize as one of the other functional areas of your business. Therefore it's not a given that you would have all of these categories. Or, your industry and therefore your business may not conduct much research, if at all. For example you may spend a small amount on notebook computers for your team, but that's all the IT costs you have. ![]() ![]() The amount you spend in a category may be too small for you model it as a separate category. Each of those categories are functional areas of the business. Sometimes companies will refer to the G&A category as Operations. In my experience these categories pretty much cover the various kind of indirect costs your business might have. I recommend using the following categories for your indirect costs. Before we start talking about how to forecast indirect costs, I think it would be helpful to break this large category into smaller subcategories, each of which may have different drivers and accelerate at different rates. I wasn't so ambitious as to title this post, "How to forecast overhead," because there is a wide world of indirect costs your business might have, depending on your industry and size. So now, I'm turning to the remaining expenses, that are not considered, "direct." In my previous article, Forecasting the direct costs of your service business, I share examples of what would be a direct cost in that context. This is sometimes referred to as an indirect rather than direct cost in your business. In general, an overhead cost is any item that isn't directly related to the specific product or service you sold.
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