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The first half of this class will be run workshop style using data from a real social enterprise and using Microsoft Excel to develop a basic costing analysis. The second half will focus on identifying key financial considerations unique to social enterprise.
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APS 1015: Social Entrepreneurship
Class 5 (Part 2): Conducting a Costing Analysis for Social Enterprise
Saturday, October 20, 2012
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Instructors: Norm Tasevski ([email protected]) Karim Harji ([email protected])
© Norm Tasevski
© Norm Tasevski
Agenda
• SoCap 2012 • Part 1 - Financing Considerations (Separate Slide
Deck) • Part 2 - Conducting a costing analysis for your social
venture – Constructing the financial model – Scenario analysis (break-even, best-worst)
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© Norm Tasevski
A caveat…
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• We will construct a real-world costing analysis using your social enterprise ideas
How do you do a costing analysis for for social enterprise?
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© Norm Tasevski
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Remember this?... Step 1: Identify Cost Drivers and Revenue Sources for your Business Model!
-???!
-???!
© Norm Tasevski
…And this? Step 2: Calculate your margin!
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-???!-???!
© Norm Tasevski
Costing Analysis Step 2a: Calculate your margin
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• Use Excel (not financial analysis software) – Why?
• List your assumptions (in terms of cost drivers and revenue streams) – Be comprehensive! – List what data you know (in “white” cells), and what data you don’t know
(in “blue” cells)
• Calculate your costs – Use the “here’s how it works…” method
• Calculate your revenues – Again, use “here’s how it works…”
• Determine your margin
© Norm Tasevski
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Break-Even Analysis – “Unit Sale” Method:
• Breakeven Sales = Total Fixed Costs / Gross Profit per Unit Sale (Note: Gross profit per unit sale = price – per unit variable costs)
– “Percentage of Sales” Method: • Breakeven Sales = Total Fixed Costs / Gross Profit Percentage
(Note: Gross profit percentage = 100% - total variable costs as % of sales)
Best-Worst Scenario Analysis – “What if…” Analysis: Compare your “perfect scenario” (i.e. your baseline)
to various real-world scenarios. For example: • What if… sales volume is 75% of what we projected? 90%? 110% 125% What
would happen to our profit margin? • What if… the # expected customers was 75%/90%/110%/125% what we
projected? What would happen to our profit margin? • What if… there is a change to a cost driver (e.g. transportation costs double, or
a new cost driver is added)? What would happen to profits? • What if… there is a change to a revenue stream (e.g. an expected investor
backs out, or grant funding is smaller than projected)? What happens to profits?
Costing Analysis Step 2b: Conduct Sensitivity Analyses
© Norm Tasevski
Exercise…
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What Next? Step 3: Turn “blue” cells into “white” cells (i.e. Research!!)!
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Break
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Now…
…On to Part 2 – Financing Considerations for Social Enterprise
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© Norm Tasevski
Appendix A: Some Definitions • Cost: The monetary measure of resources used
Canadian Institute of Chartered Accountants (CICA)
• Standard Costs: The cost of a cost object, such as a service output, on the basis of what the cost ought to be, given normal operating circumstances
CICA
• Fixed Asset Costs: Those costs necessary to a service, and which are expected to be used over a number of years (e.g. buildings, vehicles, equipment). Fixed asset costs need to be valuated (e.g. acquisition price), then a useful life is determined (for depreciation calculations)
CICA
• Marginal Costs: The amount by which total costs are increased by the last unit of output at any given volume of production
CICA
• Direct vs. Indirect Costs: Direct costs are those costs incurred as a direct result of producing the cost object (e.g. salary of someone working 100% on a project), while indirect costs are costs that are not incurred exclusively for the purpose of producing a cost object (e.g. a % of salary allocated for someone working 50% on a project)
CICA
• Fixed vs. Variable Costs: Fixed costs do not vary with the level of outputs, while variable costs do vary. Variable costs need not increase in a linear fashion – e.g. insurance costs often increase in a “stepped” manner (e.g. same coverage provided in 100 customer increments)
CICA
• Full Cost: The cost of a product/service that includes all direct and indirect costs, as well as imputed costs
CICA • Imputed Costs: The cost estimations of the economic impact of a chosen alternative. This could be an
“opportunity cost” (i.e. the cost of opportunities foregone when using assets to provide product/service) or the “cost of capital” (i.e. the cost of having capital tied up)
CICA 15
© Norm Tasevski
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Job-Order (or Project) Costing – Allocates a cost to a discrete output or project – This method is used if your venture produces inconsistent outputs (for professional
services, research services, repair work, etc) • E.g. if providing professional services to a client, the cost allocated to a client would be
based on the actual time spent with the client
Process Costing – Total costs for a period are aggregated, then divided by the total output (to
determine cost per output) – This method is used if your venture is producing consistent/continuous outputs, where
each step in the creation of the product adds value to the final product (e.g. manufacturing on an assembly line) • E.g. if manufacturing a textile, determine the costs incurred in each step of manufacturing for
a given period, then divide the number of units produced in that period by the incurred cost for that same period
Activity-Based Costing (ABC) – Determines the costs based on an activity (i.e. amount of work done) – This method is used in combination with other methodologies (e.g. allocating
purchasing costs on the basis of total value of orders placed) • E.g. If purchasing costs are $5M, and one client is responsible for 25% of the value of the
orders placed, the cost allocated to that client would be $1.25M (i.e. $5M x 25%)
Appendix B: Costing Methodologies
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The “Blue Cell”/”White Cell” Method – When undertaking a costing analysis, it is extremely rare to have “full information”.
Either you haven’t fully researched actual costs/revenue sources, or the data is not available
– The “blue cell”/”white cell” method is an approach to keeping track, in a spreadsheet, of data that you know (white cells) and data that you don’t know (blue cells)
– The process • When entering a data point into a spreadsheet (e.g. transportation cost), ask
yourself, “is this data that I know (i.e. that I have evidence for)? Or data that I don’t know (i.e. I am making an assumption)?”
• If it is data that you know, colour the cell white • If it is data that you don’t know, colour the cell blue
• Your goal: to convert as many blue cells into white cells as you can! – How? Through both primary and secondary research – Keep track of your research, and sources, in your “raw data” tab (see next slide)
Appendix C: Structuring A Social Enterprise Costing Analysis in Excel
© Norm Tasevski
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Excel Tabs Required – “Raw Data” Tab
• Use this tab as a data dump from your research. You can pull data from this tab into the rest of your spreadsheet
• Keep track of all data you acquired in your research. Ensure you properly document the source of the data (e.g. in a “data sources” section of the tab)
– “Assumptions” Tab • Use this tab to record all of your cost drivers and revenue streams, broken down
by each element of the Business Model (value proposition, customers, etc) • Make sure you provide details for each item (i.e. explain each item) • If a cost driver/revenue stream overlaps two or more elements of the business
model, allocate that item to one element only • Use this tab to pull the cost drivers/revenue streams into the other tabs in your
spreadsheet – “Costs” tab
• Use this tab to group similar cost drivers together (pull these drivers from the Assumptions tab)
• Separate fixed costs from variable costs – calculate these separately
• Once grouped, identify the data points you need to calculate costs. Make these data points the columns in your analysis
• Calculate total fixed costs and per-unit variable costs
Appendix C: Structuring A Social Enterprise Costing Analysis in Excel (Continued)
© Norm Tasevski
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Excel Tabs Required (Continued) – “Revenue” Tab
• Use this tab to group similar revenue streams together (pull these from the Assumptions tab)
• Separate revenue (e.g. from sales, from other sources) from financing (e.g. equity, debt, donations)
• Once grouped, identify the data points you need to calculate revenues. Make these data points the columns in your analysis
• Calculate revenue and financing levels – “Margin” Tab
• Use these tabs to determine your gross margin • Calculate three year projections (e.g. using estimated sales volumes) • Note: for the purpose of this analysis, do not calculate tax
– “Sensitivity” tab • Use this tab to calculate your break-even points and What if… scenarios
Appendix C: Structuring A Social Enterprise Costing Analysis in Excel (Continued)