202 CHAPTER 9 GETTING TO NET PROFIT
Operating expenditure
After the complexities of dealing with capital spending, operating expenditure is delight-
fully simple. There are occasional timing difficulties – but these are easy to deal with as
already discussed under accruals and prepayments earlier (see Chapter 7). The following
commentary covers both production costs (part of the cost of sales) and operating cost
(costs not directly attributable to the cost of sales), because they are both treated identi-
cally from an accounting and forecasting point of view.
When looking back at your past performance, all you have to do is copy out the num-
bers. When looking forward, it is really just a matter of making forecasts for each time
period and entering the amounts in your spreadsheet. If you do have a history, the past
will help you understand future costs.
If you are starting a new business or new business unit, the forecasting might require
a little more thought. If you do not have experience of your likely costs, you need to do
some intelligent enquiry. You can check prices with trade associations, utility companies
and suppliers. You could also talk to other business owners and advisers to get a feel for
what you should expect.
Other intellectual property
The cost of acquiring patents, copyrights, trademarks and other licences is written
off over their expected useful lives – which are often much less than the statutory
protection afforded. A copyright, for example, generally lives for 50 years after the
originator’s death. Will the works have such a long life? You would probably write
off the advance for the copyright on a fleetingly famous celebrity’s novels over a
much shorter period.
Land and building
Generally accepted accounting principles do not allow you to stand depreciation
on its head and increase steadily the book value of assets that appreciate. Usually,
land and buildings are left in the books at their acquisition costs and revalued from
time to time only as an extreme exception (such as when the chief executive wants
to make the balance sheet look better).
Natural resources
Natural resources such as oil and gas reserves are depleted rather than depreciated
using a units-of-production approach.
OPERATING EXPENDITURE 203
TETRYLUS BUSINESS PLAN Doc 20110136 Annex A. Financial Projections
TETRYLUS Inc Financial plan
Total capital outlays and depreciation, first six months
Dollars
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 H1
CAPITAL OUTLAYS
C-11 Office fittings 6 500 0 0 0 0 0 6 500
C-12 Office furniture 5 000 0 0 0 0 0 5 000
C-13 Office equipment 0 0 750 0 0 0 750
C-14 Telecoms equipment 0 0 0 0 0 0
0
C-15 Computers, etc. 20 000 1 500 0 1 000 0 0 22 500
C-16 Software 5 000 0 0 0 0 0 5 000
C-17 Motor vehicles 0 0 0 0 0 0
0
C-00 TOTAL CAPITAL OUTLAYS 36,500 1 500 750 1 000 0 0 39 750
DEPRECIATION SCHEDULE
D-11 Office fittings 0 542 542 542 542 542 2 708
D-12 Office furniture 0 83 83 83 83 83 417
D-13 Office equipment 0 0 0 13 13 13 38
D-14 Telecoms equipment 0 0 0 0 0 0
0
D-15 Computers, etc. 0 556 597 597 625 625 3 000
D-16 Software 0 208 208 208 208 208 1 042
D-17 Motor vehicles 0 0 0 0 0 0
0
D-00 TOTAL 0 1 389 1 431 1 443 1 471 1 471 7 204
Notes to the accounts: depreciation policy
Fixed assets are written off over their projected working lives using the straight-line method. Office
fittings are depreciated over the 12-month term of the office lease; office furniture and equipment is
depreciated over 60 months, computers over 36 months and software over 24 months.
Copyright © 2011 TETRYLUS Inc Page A4 of A10
Figure 9.2 Capital outlays at the back of the business plan
204 CHAPTER 9 GETTING TO NET PROFIT
BREAK IT INTO SMALL PARTS
As always, the key to dealing with any problem (in this case predicting future costs) is to
split it into smaller pieces.
Divide spending into the functional areas identified in your organisational analysis
(see Chapter 4) – R&D, marketing and sales, etc.
For each functional area, separate spending into employee and non-employment
costs.
For each of employee and non-employment, separate spending into related sub-
categories – bonuses, premises, office travel and so on.
Then work through each heading at the lowest level of detail, identifying spending
requirements month-by-month to meet your operating plan. When you tackle it in this
way, what might have seemed to be an obstacle becomes a logical process.
‘It is not the employer who pays the wages; he only handles the money. It is the product
that pays the wages.’
HENRY FORD
EMPLOYEE COSTS
Employee costs are probably the easiest operating overhead to project. Your operating
plan already contains detailed human resource requirements. Just derive the associated
expenditure. Some of the employee costs to consider are listed on page 206. You might
have others, maybe industry-specific categories such as uniforms. It is a good idea to
copy the appropriate headings into a column on a spreadsheet table, and fill in figures
for each month working across. Essentially, enter one-twelfth of the annual total under
each month, allowing for pay increases, amendments in social security rates and other
changes. You might also expand the categories vertically to include details by job title or
employee. Figure 9.3 shows an example extracted from a business plan – see also Figure
9.5 later for a commentary.
OPERATING EXPENDITURE 205
TETRYLUS BUSINESS PLAN Doc 20110136 Annex A. Financial Projections
Tetrylus Inc Financial plan
Staff costs, first six months
Dollars
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 H1
STAFF NUMBERS
Directors/managers 3 3 3 3 3 3 3
Technical staff 2 4 4 4 4 4 4
Marketing staff 0 1 1 2 2 2 2
Administrative staff 2 2 2 2 2 3 3
Total 7 10 10 11 11 12 12
STAFF COSTS
Staff salaries
S-1 Technical staff 1 1 200 1 200 1 200 1 200 1 200 1 200 7 200
S-2 Technical staff 2 1 200 1 200 1 200 1 200 1 200 1 200 7 200
S-3 Technical staff 3 . 1 200 1 200 1 200 1 200 1 200 6 000
S-4 Technical staff 4 . 1 200 1 200 1 200 1 200 1 200 6 000
S-5 Sales/distribution manager . . . 1 250 1 259 1 250 3 759
S-6 Marketing assistant . 750 750 750 750 750 3 750
S-7 Book-keeping, etc. . . . . . 750 750
S-8 Receptionist/secretary 600 600 600 600 600 600 3 600
S-9 Messenger/security 300 300 300 300 300 300 1 800
S-00 TOTAL (sum S1 to S9) 3 300 6 450 6 450 7 700 7 709 8 450 40 059
S-11 Directors’ stipends 10 000 10 000 10 000 10 000 10 000 10 000 60 000
S-13 Contract staff 10 000 10 000 10 000 10 000 10 000 10 000 60 000
S-14 Staff social security 92 162 162 185 185 208 992
S-15 Staff temporary 0 0 0 0 0 0 0
S-10 TOTAL DIRECT (11 to 19) 23 392 26 612 26 612 27 885 27 894 28 658 161 051
S-21 Staff pension fund 417 417 417 417 417 417 2 500
S-22 Staff termination fund 0 0 0 0 0 0 0
S-23 Staff rent allowances 0 0 0 0 0 0 0
S-24 Staff transport allowances 0 0 0 0 0 0 0
S-25 Staff other allowances 0 0 0 0 0 0 0
S-26 Staff group insurance 0 0 0 0 0 0 0
S-27 Staff medical insurance 500 0 0 0 0 0 500
S-28 Staff other benefits 0 0 0 0 0 0 0
S-20 TOT. BENEFITS (21 to 29) 917 417 417 417 417 417 3 000
S-31 Staff medical expenses 0 0 0 0 0 0 0
S-32 Staff recruitment 0 0 0 0 0 0 0
S-33 Staff relocation 0 0 0 0 0 0 0
S-34 Staff legal expenses 1 500 0 0 0 0 0 1 500
S-36 Staff training 0 0 0 0 0 0 0
S-38 Staff entertainment 70 100 100 110 110 120 610
S-39 Staff sundry 0 0 0 0 0 0 0
S-30 TOTAL OTHER (31 to 39) 1 570 100 100 110 110 120 2 110
S-00 TOTAL STAFF (10+20+30) 25 879 27 128 27 128 28 411 28 420 29 194 166 161
Copyright © 2011 TETRYLUS Inc Page A5 of A10
Figure 9.3 Employee costs at the back of the business plan
206 CHAPTER 9 GETTING TO NET PROFIT
NONEMPLOYEE COSTS
Other costs, those not associated with employees, are generally fairly simple to forecast.
Again, it is a case of working through categories of spending and making sensible fore-
casts for each month. Over 50 areas of spending that you might want to consider tracking
are listed on page 208. You probably will not use all of these, but there will be other cat-
egories specific to your business.
HOW MUCH DETAIL?
You need to decide how much detail to include. In part, this depends on the intended use
of the business plan. A forecast that will become an operating budget might have a great
many categories of spending for each functional area (marketing, R&D, etc.). A simple
projection for review purposes might have all employee costs lumped into one category
(although as I have said before it makes good sense to separate out and review separately
from other costs those associated with marketing and sales).
Twenty-four categories of employee-related costs
(Read down, prefixing each item with the words ‘employee-related’)
Direct Benefits Other costs
Salaries Termination benefits Recruitment
Wages Pension plan Relocation
Overtime Rent allowances Legal expenses
Shift allowances Transport allowances Training
Bonuses Other allowances Secondment
Employers’ social welfare Medical cover Medical expenses
Employers’ payroll taxes Accident insurance Professional
subscriptions
Contract and temporary staff costs Life assurance Entertainment
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