Budgeting

3. Forecasting Costs

3.1 Analyse your costs and how they relate to sales.

• Fixed costs are largely independent of the level of sales.
• Variable costs depend on turnover or number of sales.For example, distribution costs might be a percentage of turnover, a cost per sale, or a combination of the two.
• Semi-variable costs contain both fixed and variable components.For example, your power costs might include both a fixed component (for lighting and heating the office) and a variable component (for production).

3.2 Forecast your costs (either as a fixed amount or in relation to sales).

• Analyse historical records or contact suppliers for quotes.
• Take into account any expected price changes.

3.3 Control significant uncertain costs.

• Enter into long-term supply contracts or use forward foreign exchange contracts.
• Insure against possible disasters.