How to identify financial requirements to support an enterprise

  • Identification of variables that affect financial performance
  • Cost behaviour and identification of various cost types


This section introduces the concept of ‘cost behaviour’. If we can understand how costs behave, it allows us to plan and prepare our finances with more accuracy. This will give the solopreneur peace of mind while reassuring the stakeholders that the business has assessed the costs and is prepared for potential future outcomes. Examples of the main cost behaviour types include:

1)     Fixed costs
2)     Variable Costs
3)     Semi-fixed costs
4)     Semi-variable costs

Here is a videoclip explaining the difference between Fixed and Variable Costs:



It is important to predict costs and revenues at different activity levels for many decisions. Variable costs vary in direct proportion with activity. Fixed costs remain constant over wide ranges of activity.

Semi-fixed costs are fixed within specified activity levels, but they eventually increase or decrease by some constant amount at critical activity levels. Consider the cost of a production supervisor. The supervisor may be paid a salary and have responsibility for supervising a certain number of activities, for example people; equipment; projects. If the business decides it wants to increase to a new level of activity, it will have to recruit an additional supervisor. So, the cost will increase by that amount. It is often called a ‘stepped cost’.

 

 
Semi-variable costs include both a fixed and a variable component (e.g. electricity charges). Most electricity providers will charge a base cost. So, even if you do not use any electricity in a given period, you may still incur a small base cost. This is the fixed cost element. As you use more electricity, your bill will increase. The electricity charges can be considered a semi-variable cost as it includes both a fixed and variable element. 

TIPS

It is important to know that not all costs are easily measurable.

Consider getting a fresh perspective and ask your accountant for views on where costs may have increased or decreased. How does your cost model compare with others in the industry? Remember that fixed costs will have to be paid each month/week so it is useful to make a list of these costs types and include them in your cashflow forecast.
MyVA Project number: 2020-1-SE01-KA226-VET-092491
This project has been funded with support from the European Commission. 
The European Commission's support for the production of this publication does not constitute an endorsement of the contents, which reflect the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein.
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