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Another type of expense is a variable one. In budgeting, this is known as a variable “cost,” which is a cost that increases with level of sales or income. They are variable because more income you generate, greater costs you will incur (this just means more you sell, you more you have to buy).
If you have others working for you, sales commissions are an example of a variable expense—the greater sales revenue, greater sales commissions.
You need to be sure to do research before starting your business to determine what comprises your fixed and variable costs.
Certain types of businesses have an established profit margin. This information may be available by simply asking other professionals in your field. Your accountant sees thousands of tax returns and may be able to give you an idea of average “cost of sales” or “profit margins” for your type of business. The averages for certain industries are also compiled by financial ratings organizations such as Dun & Bradstreet, Moody’s and Standard & Poor’s. For example, if you are starting a coffeehouse, you could compare your sales, gross profit ratio, and net income to averages for retail sales/coffee industry compiled by Dun & Bradstreet.
It’s amazing how many home based and small-business owners don’t know if they’re making a profit on service, parts or sales. Others don’t know whether they’re making or losing money on a particular job. The purpose of accounting and budgetary process is to help you answer these questions and make right management decisions. You can’t plug leaks in your revenue ship if you don’t know where holes are.
Again, using a program like Quickbooks allows you to see where time is spent for a particular project, what your costs are, how many employees were needed to complete project and time it took them (which gives you an idea of salary differential for certain projects).
If for example you are running a consulting business, Quickbooks allows you to track number of hours you work on a project and what your costs are. In most consulting businesses your time is your valuable commodity. You need to be compensated for time you spend on a particular project or with a client.
Copyright 2003 DeFiore Enterprises
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