Budgeting Fixed costs Step 5 Fixed cost are

Budgeting Fixed costs • Step 5: Fixed cost are those that are not associated with the direct production of one additional unit of the product. • The major item is normally the cost of having employees, so we look at these first. This means that we must make an organization plan. Our spreadsheet shows one. 08. 00 LMKs method Step 5 Fixed costs and

Spreadsheet for fixed costs 08. 00 LMKs method Step 5 Fixed costs and

Fixed costs 1 • When planning we set up all personell that might be apliccable for our compnay during the 5 year period, and set a 1 for the year when the person starts (and following years) • We estimate the salary costs inlusive employee-tax, vacation benefits, and mischellaneous, all amounting to aprox. 30% of nominal salary • In this case we calculate with a modest salary and increase, counting on shares for atracting good people • Overhead acccounts for all miscellaneous cost like rent, telephone, heating, taxi, transport, modest amount of advertizing, travel, courses, cleaning, magazines and newspaper, office materials etc. • Overhead is estimated as a percentage of personell costs, with a percentage ranging from 50 to 90 %, looking at our profit line, we select the lower figure 08. 00 LMKs method Step 5 Fixed costs and

Fixed costs 2 • Special Marketing costs are estimated in absolute terms, and is of course a most difficult estimate, relating this sum to the wanted sales volume of the product. • Here we are using a modest figure, relying on the “word-of-mouth” marketing, and editorials • Special Product developing costs are in this example extremely modest, designed to decrease the production costs, and to enhance customer value • Depreciation is presently set to 0, as we will later adress the investment needs. (For a first draft of a budget, they are not that important for business not beeing special capital-intensive) • Not yet having any idea of our financial structure, we set Financial costs to 0 08. 00 LMKs method Step 5 Fixed costs and

Fixed costs and profit before tax 1 • Having planned the fixed costs, we can take a look at the bottom line, profit before tax. • Are these figures as we expected? Do we need external finacing at all ? Is the positive result too far out in time ? Is the profit of such a size that it will give a reasonable ROI ? • If we are not content, we can immediately change some of our plans in the lines above, so that we see what limits we have to operate under. • In our present case, we have had to postpone the recruitment of additional employees, making it nessecary for the general manager to perform all planned roles 08. 00 LMKs method Step 5 Fixed costs and

Fixed costs and profit before tax 2 • Now another alternative might be to increase the sales estimates: In this case, remember that the next major step in our planning is a montly budget, from which the investors (and others) will measure the performance, to determine the follow-up of initial funding. Thus it is very short-sighted to increase the sales budget to satisfy the wish for reasonable results • If, however, an increase is made, remember to make an contingency plan, executable in case of sales falling under budget. • Next step is to plan for capital resources used and aquired 08. 00 LMKs method Step 5 Fixed costs and

Evaluation of the plan so far • We now have an income and expence plan, but it does not show ut the capital required. • Does the plan look reasonable? • Can the results be achieved with the costs planned? 08. 00 LMKs method Step 5 Fixed costs and