Operating Expense Projections for your Business Plan
Operating expenses, sometimes referred to as business overheads or fixed costs, are shown on the income statement. They are all the support costs of a business which are not directly attributable to the goods or services that the business is producing.
Operating expenses are the indirect recurring costs of running a business such as research and development, sales and marketing, and general and administrative costs.
For the purposes of our financial projection template, they do not include depreciation, interest and tax which are shown separately.
We have created a free small business operating expenses spreadsheet to help you understand how to forecast operating expenses, which is available for download at the link below.
How to Start the Operating Expenses Projection
How you forecast operating expenses will depend on whether your business is already established and operating, or is a start up business with no previous expense history.
If you are an established business, the easiest method of forecasting operating expenses is to use historical data from your accounting records as the base figure, and adjust this for any anticipated changes in your business plan.
For example, if the current rent is 10,000, check the rental agreement to see whether any changes in the rent will occur over the next 5 years. If you plan to expand and move to larger premises then you can anticipate that the rent will increase pro rata in the year of the move.
Start Up Business
If this is a new business and there is no historical data, use the examples of operating expense shown in our business overhead calculator as a starting point to identify the types of operating expense relevant to your business.
Having decided on the relevant operating expenses, use one of the methods below to obtain an estimate.
- Information from similar businesses, trade associations, company accounts.
- Industry benchmark data and statistics.
- Contact suppliers for quotations.
- Check whether the expense can be linked to a percentage of revenues, and use a benchmark operating expense ratio to determine the cost.
- For certain controllable costs such as advertising and promotion, decide on the amount you are prepared to spend.
- If all else fails, use a best guess, this is planning not accounting.
Whichever method you use to forecast operating expenses, the important thing is to get a best estimate and start the financial projections; it can always be adjusted later as the business plan takes shape.
Finally a few words of warning when forecasting operating costs for a small business, avoid wishful thinking, (add 10-20% on to the figure you first thought of), avoid too much detail in analyzing the types of operating expenses you have, and make sure the operating expenses are sufficient to provide the capacity needed to support the revenue forecasts for your businesses.
Operating expenses forecasting is an art not a science, no one expects you to be able to predict the future, you are making educated guesses based on the information you have available to give a realistic estimate of what you think the forecast expenses will be.
What’s the Next Step?
The next step in producing a five year financial projection for your business plan using our financial projections template is to decide on the depreciation rate to be used for writing down the long term assets in your business.
This is part of the How to Create Financial Projections Guide a series of posts on how our template is used to produce simple financial model for a business plan.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.