1. Financing expenses on monies borrowed for expansion.
2. Salaries and benefits
3. Premises rent.
The second major category of variable expense is that which is a constant function of some driver and for which the mathematical relationship does not change over time, or changes very infrequently as the business expands. Examples include:
1. Income taxes on the first $500,000 of business profits in Canada, which stands at about 15%.
2. Office supplies which is a function of the number of employees currently working for the business.
3. Hydro and gas expenses which are a function of the amounts of power and gas consumed for heating the business premises.
4. Cellular telephone costs which are a function of the number of minutes used by the employee pool. This, in turn is a function of the number of employees working for the business.
5. Payroll taxes such as CPP and EI contributions, which are a function of both the number of employees and the level of salaries being paid by the business.
6. Employee Health Tax (in Ontario), which is a function of salaries paid.
7, Inventory cost of sales, which is determined using either a specific identification of items sold, or some kind of averaging method. Usually for forecasting purposes, you will have determined an average profit margin for the business and conversely an average cost of sales percentage, so all you really need to know to estimate cost of sales is the volume of sales itself.
8. Vehicle expenses, which are a function of the number of employees working for the business mostly. The actual expense per employee will vary according to the number of KM each employee drives for business, but a large component of automobile expenses are fixed in nature, and so the overall level of expense depends more on the number of employees than it does on distance travelled.
10. Travel and trade show expense which varies according to the number of shows or conferences attended and the number of employees who attend.
As you can see, there are very few of the above expenses that you can estimate based on sales alone. Most all of the expenses require you to know how many employees will be working for the business in the period you are forecasting.
Even something fixed like premises rent is tricky because each employee requires a certain amount of space to work productively - something like 50 square feet. Plus they have to have a lunch room, places to hang their coats, washrooms, meeting rooms etc. So as your business expands, you are going to find that you will need to expand the size of your office. The difficulty with that of course is that most commercial leases are for 5 years or more and you cannot simply acquire an extra 5,000 square feet in the period that your forecast says you need it. So what you will find yourself having to do is forecast the growth of the business over the period that a lease would cover and then acquire a space large enough to accommodate the number of employees your business will eventually hire. In the meantime you would have to configure the space so that you can sublet the space you don't need to other tenants to recover some of the rent paid.
So clearly in order to produce a meaningful forecast of most variable expenses, you are going to need to know how many employees the business will require in each period. Determining that with reasonable accuracy will require you to know:
- what positions you will need to hire for;
- what the target level of productivity is for each position;
- what the job description is for each position
- How much inventory I have running on E-bay
- How much marketing effort is expended to drive traffic to my listings.
- Opening my mail and sorting inventory purchases into the right place
- Listing new items on E-bay
- Picking orders, preparing them to be sent and actually mailing them
- Recording sales in the books of account