Entering direct costs

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 unsure 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 simultaneously. 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, and these costs fluctuate alongside sales. But this business wouldn't include overhead expenses like marketing, rent, or Internet access as direct costs.

For more details, see: 

If you need help with what to add, the LivePlan Assistant can help you by suggesting Direct Cost entries based on your company description. 

Direct Cost AI Suggestions.png

For more information on using LivePlan Assistant, please see this article.

You can add direct costs in one of three ways:

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

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 cutting 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 an excellent top-line measure of how efficiently your company delivers its products and services. It also tells you how much profit your business has on hand to cover its overhead expenses. (A larger gross margin means you'll still have profit left over after those overhead expenses are paid.)

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

Entering costs for a specific revenue stream

We recommend that you use this method whenever possible.

Note: A direct cost entered for a specific revenue stream can only be linked to one revenue stream at a time.
  1. In the Forecast section, select Direct Costs:
    Forecast -> Direct Costs.png

  2. Click the Add Direct Cost button:

    Add a Direct Cost.png

  3. Enter a name for the direct cost:

    name_direct_cost.png

  4. Choose Cost for a specific revenue stream:
    cost_for_specific_revenue_stream.png

  5. Select the revenue stream that this direct cost applies to:
    which_revenue_stream.png

  6. Decide how you want to enter the cost. You can enter a constant or varying cost or designate a % of the stream's revenue to this direct cost. The cost can represent a per unit, per customer, or per hour cost, depending on your selected revenue stream.
    how_do_you_want_to_enter_it.png
    • If you choose constant cost, enter the amount of this cost to apply to each month of your plan:
    • 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 the stream's revenue, enter the % of this stream's revenue that should be considered a direct cost:
  7. Click Save & Exit:
    save_and_exit_highlighted.png

Entering a direct cost as a percentage of your overall revenue

  1. On the Forecast section, select Direct Costs:
    Forecast -> Direct Costs.png

  2. Click the Add Direct Cost button:

    Add a Direct Cost.png

  3.  Enter a name for the direct cost:
    name_direct_cost.png

  4. Choose General cost:
    what_sort_of_cost.png

  5. Choose % of overall revenue:
    how_much_will_it_cost.png

  6. Enter the percentage of your overall revenue this cost represents:what_percentage_of_overall_revenue.png

  7. Then, choose when the cost begins:
    when_will_it_start.png

  8. Click Save & Exit:
    save_and_exit_highlighted.png

Entering an overall direct cost

  1. On the Forecast section, select Direct Costs:
    Forecast -> Direct Costs.png

  2. Click the Add Direct Cost button:
    Add a Direct Cost.png

  3. Enter a name for the direct cost:
    name_direct_cost.png

  4. Choose General cost:
    what_sort_of_cost.png

  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):
      how_much_general_cost.png
      Then, enter when the cost begins:
      when_will_it_start_cost.png
    • If it is a varying amount, enter the amount of the cost in any month in which you incur it:
      direct_costs_varying.png
  6. Click Save & Exit:
    save_and_exit_highlighted.png

Editing a direct cost

To edit a direct cost entry, click on the entry name:
edit_direct_cost.png

To edit the direct cost, make any desired changes in the overlay, and click Save & Exit when you're finished. For more details, see How can I edit or delete forecast entries?

Changing a direct cost to an expense

If you have created a line entry for a direct cost and need to move it to the expense category, you can move the line item from one page in the Forecast to another using the Change Item option. 

  1. From the Forecast section, go to the Direct Costs page
  2. Click the box of the line entry that you’d like to move
  3. Select Change Item from the menu that appears at the bottom of the screen
  4. Then Confirm the change 

You’ll see that the line entry is now on the Expenses page of your forecast and can be edited and adjusted there. 

change forecast direct cost to expense

Deleting a direct cost  

To delete the direct cost, mouse over the direct cost that you wish to delete and click on the three dots:

direct_cost_detail.png

 

Select Delete from the drop-down menu:

delete_selected.png

 

Confirm the deletion, or click Cancel to return to your forecast:
confirm delete forecast item.png

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:

pandl_direct_costs_highlighted.png

The direct costs are calculated in 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:

balance_sheet_cash_highlighted.png

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

cash_flow_net_cash_highlighted.png

More on forecasting:

Preparing a forecast

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