[This article is a piece of part 8 of our Smart and Simple Guide to Starting a Business - scroll to the end to see the other parts]
For any business, it’s important to accurately estimate supply and production costs. If cost estimates are inaccurate, you can’t price your product correctly, which will lead to a faulty prediction of your potential profit. Don’t let this chain reaction be the kiss of death for your new company.
Understanding the fixed and variable costs of your business
When building a financial model for your business, you’ll have fixed and variable costs to consider. Make sure to list out both types of expenses, doing your best to predict them accurately right from the start. As you adjust this list, you’ll need to modify your financial model and price point.
Fixed costs, or operating costs, don’t fluctuate much as they don’t depend on daily sales figures. Some examples of fixed costs might be:
- Lease of office or warehouse space
- Rental of equipment and vehicles
- Loan payments