Business Models 101: Cost Structure

In this part we will discuss the Cost Structure, which includes everything (people, services, material, tax,...) that drains money out of your company.

I have to repeat it on every page but starting something on your own, creating value for you, your family and the world is a totally recommendable thing to do. You want to create your company. This is GREAT. The world has been made by people like you. Entrepreneurs. Self-Made Men, Creators, Builders people that believed an obstacle is just another great challenge to overcome, to solve and put behind them as an achievement. 

The Cost Structure

Costs are the part you do not like to have in a company.

Having no cost is always better. But this is impossible. Producing something will always cost, even the electricity to light your room, the internet service provider to promote your products, etc...

Under cost structure you have to list all the items that are draining your company from its cash. These costs have to be minimized at all "cost".

But do not do the mistake of trying to save where it is not necessary or opposite: save where it is necessary.

For example, let's say your cupcake factory start making money and you need to fill you the tax return. If this takes you too much time, then hire an accountant to make it for you. You should use the rule of thumb that is: every work that takes me away from creating value and that takes more than 5% of my time, should be subcontracted.

cost structure

Example: you work 60 hrs. in a week, which is a lot, then you should not spend more than 3 hours on stuff that is not essential, because there are other essential things in your life currently. And resting a bit is also very important.
Trying to do something yourself instead of using someone else or subcontracting lets you focus on the important actions you have to do for your company.

Here are the questions you have to ask yourself about the Cost Structure:

Which resources are costing the most? Can you save here or not?

Which activity is costing the company money? Is this an essential activity or not? 

How is our cost structure built?  What are the repartition (fixed, variable, franchise cost, etc…)?

What is costing you the most, how useful is it to your business?

Are the revenues higher than the costs? Hopefully so, but may be at the beginning you still are in the red because you need more sales to make break even.

Can investments be paid back? Look at this carefully because banks and investors are usually not lenient and nice and also have no patience.

Typical costs are:

  • Equipment,
  • wages
  • salaries
  • taxes
  • consumables (ingredients, packaging, ....)
  • transportion
  • building
  • uniform, gear
  • cleaning equipment
  • vehicles

Previous: Key Partners

Next: the long term goal, mission, strategy


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