The costs to generate revenue are invariably higher than we expect them to be. A realistic forecast anticipates as many expenses as possible.
Employees and employee-driven expenses are entered separately in the Employees section. Some startup costs and investments should also be entered as Assets instead of Expenses.
Step 1: Direct Expenses
Start by forecasting any expenses that scale with Revenue. These can be:
- Direct Cost of Goods Sold (COGS)/ Cost of Service (COS): the cost to support the revenue. In a subscription, this is applied every month to subscribers.
- Customer Acquisition Cost: every new sale incurs this cost.
Step 2: Overhead Expenses
Once you have built out the unit economics for each sale, add the fixed expenses and investments that are necessary for the business to run. This can include research and development (including software development), rent and occupancy, professional services, and general & administrative expenses and employees.
What to think through:
- What are the expenses needed to support all aspects of your company? For a standard list, purchase one of our prebuilt models.
- Growth is expensive, and supporting large volumes of sales or revenue requires lots of hands. Revenue-per-employee should be less than $500k (around $250k is better). Add expenses so that EBITDA margins are believable. Even the biggest companies in the world usually have less than 30% EBITDA.
- As you add overhead employees, edit the employee expenses popup to adjust the expenses that are automatically calculated based on the number of employees.
Select an Expense Category
Select the category to add an expense item to your model. Direct and Customer Acquisition costs connect to Revenue items. The other categories are forecast independently.
Direct and Customer Acquisition Costs scale automatically with the connected Products/Services.
All other expenses use either the auto forecast or manual entry.
Direct Cost and Customer Acquisition Cost Inputs
This type of expense scales with sales. Select the Products/Services that drive this expense. The model will automatically calculate the total expense amount.
Cost per Unit
Enter the expense in dollars per unit sale.
- Customer Acquisition Costs are only applied once at the beginning of a subscription
- Direct COGS/COS is applied every month to every subscriber.
Cost as Percent of Revenue
Enter the expense amount as a percent of Revenue. For this percent to remain constant throughout the model, the Annual Cost Increase must match Annual Price Increase for the applicable products.
Annual Cost Increase
The cost per unit will likely increase over time due to supplier price increases. If the Annual Price Increase of your products is higher than the Annual Cost Increase for direct expenses, your Gross Margin will increase over time.