Entering direct costs Follow

Direct costs are the costs you incur to sell your product or service. You might, for example, need to buy raw materials to create a product. You might also have to hire employees to make or deliver the product. Or, maybe you buy a ready-made product wholesale to sell at retail - that purchase is a direct cost, too.

If you sell services, you probably also have direct costs, but they'll generally be fewer than those of a product-based company.

If you're not sure whether a particular cost is a direct cost, here's a good rule of thumb: When your sales increase or decrease, direct costs will increase or decrease at the same time. For example, a coffee shop would include the costs of coffee beans and milk in their direct costs, because those are needed to create the product. But this business would not include overhead expenses like marketing, rent, or Internet access as direct costs. (For more, see What is the difference between direct costs and expenses?)

 

You can add direct costs in one of two ways:

  • As flat amounts, entered manually
  • Calculated as a percent of a revenue stream, so that they scale automatically with sales growth

You can also add direct labor — that is, personnel such as factory workers or servers — whose expenses you want to treat as direct costs. (For more, see What is the difference between direct labor and regular labor?)

 

Why are direct costs important?

If your direct costs are going up, you're earning less profit. It might be time to start looking for new suppliers or cut costs in your business.

Separating direct costs from other expenses also lets you understand your gross margin. This key metric, which appears in the Profit and Loss statement, is calculated this way:

Gross Margin = Revenue – Direct Costs

Gross margin is a good top-line measure of how efficient your company is at delivering its products and services. Not only that, it tells you how much profit your business has on hand to cover its overhead expenses. (A larger gross margin means that after those overhead expenses are paid, you'll still have profit left over.)

Also, on the Benchmarks tab, you can compare your gross margin to other compaines in your industry to see how your direct costs compare to those of your competitors.

  

Entering costs for a specific revenue stream

We recommend using this method whenever possible.

Note: A direct cost can only be linked to one revenue stream at a time.

 

  1. On the Forecast tab, select Direct Costs:
    direct-costs-nav.jpg#asset:1687
  2. Click the Add Direct Cost button:

    adddirectcostbutton.gif#asset:989

  3. Enter a name for the direct cost:
    direct_cost1.gif#asset:1051
  4. Choose Cost for a specific revenue stream:
    direct_cost2.gif#asset:1057
  5. Select the revenue stream that this direct cost applies to:
    direct_cost3.gif#asset:1058
  6. Decide how you want to enter the cost. You can enter a constant unit cost or a varying unit cost, or you can designate a % of the stream's revenue to this direct cost:
    constant_unit-cost.png
    • If you choose constant unit cost, enter the amount of this cost to apply to each month of your plan. (The cost can represent a per unit, per customer, or per hour cost, depending on the revenue stream you selected):
    • If you choose varying amounts, enter the amounts of the unit cost in any months in which you'll incur them:
    • If you choose % of stream's revenue, enter the % of this stream's revenue that should be considered a direct cost:
  7. Click Save & Close

 

Entering an overall direct cost

  1. On the Forecast tab, select Direct Costs:
    direct-costs-nav.jpg#asset:1687
  2. Click the Add Direct Cost button:
    adddirectcostbutton.gif#asset:989
  3. Enter a name for the direct cost:
    direct_cost1.gif#asset:1051

  4. Choose General cost:
    direct_cost9.gif#asset:1064
  5. Choose Constant amount (if the amount of your direct costs doesn't change) or Varying amounts over time (if the amount changes over time):
    • If it is a constant amount, enter the amount and the frequency (per month, or year):
      direct_cost10.gif#asset:1052
      Then, enter when the cost will begin:
      direct_cost11.gif#asset:1053
    • If it is a varying amount, enter the amount of the cost in any months in which you incur it:
      direct_cost12.gif#asset:1054
  6. Click Save & Close.

     

Editing or deleting a direct cost

To edit or delete a direct cost, click on it in the Direct Costs table:
edit-direct-cost.jpg#asset:1688

  • To edit the direct cost, make any desired changes in the overlay, and click Save & Close when you're finished. For more details see How can I edit or delete forecast entries?
  • To delete the direct cost, locate the trash can icon in the lower left corner of the overlay, click it, and then click Confirm:
    confirmdelete.gif#asset:1029

 

Where does this entry appear in the financial statements?

The only financial statement in which you'll see your direct costs listed by name is the Profit and Loss:

direct-costs-pandl.png

The direct costs do calculate into the Balance Sheet and Cash Flow table, but not explicitly. Instead, your direct costs are used to calculate your available cash, which appears in the Assets portion of the Balance Sheet:

expenses-balancesheet.png

In the Cash Flow table, your direct costs are part of the highlighted lines below:

direct-costs-cashflow.png

 

More on forecasting:

Preparing a forecast

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