Over the years, through working on a lot of different custom financial modeling projects it has become clear to me that there is not 1 simple way to project expenses for most businesses. In general there are 3 types of expenses for any business:
1. Fixed Monthly Expenses – Expenses that are just the same every month no matter what your revenue is. For example, maybe your internet bill is going to be the same no matter what.
2. Variable Expenses Tied to Revenue – Expenses that scale with revenue. These are typically a percentage of revenue. As an example from a different type of business, if you operate a restaurant your food cost will typically always be X% of revenue. For your business maybe marketing, or payroll is going to be a % of revenue.
3. Variable Expenses Tied to Inflation – Some expenses basically stay the same, but should just plan on increasing maybe 2 to 3% each year. This could be things like Rent, Phone bill, Utilities, Office Supplies.
A lot of people like to create year 1 of expense projections and then just add X% across the board for the following year. The problem is that it just isn’t that easy. To give yourself the most realistic set of projections I encourage you to think about each expense and put it into 1 of these 3 buckets and then base your modeling on the expense type. If you have any questions about a particular expense and how to model it, please don’t hesitate to reach out at email@example.com. Good luck!
Leave a Reply