APS1015H Class 5 - Conducting a Costing Analysis for Social Enterprise


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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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APS1015H Class 5 - Conducting a Costing Analysis for Social Enterprise

  1. 1. APS 1015: Social Entrepreneurship Class 5 (Part 2): Conducting a Costing Analysis for Social Enterprise Saturday, October 20, 2012Instructors:Norm Tasevski (norm@socialentrepreneurship.ca)Karim Harji (karim@socialentrepreneurship.ca) 1
  2. 2. © Norm Tasevski
  3. 3. © Norm TasevskiAgenda•  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) 3
  4. 4. © Norm TasevskiA caveat…•  We will construct a real-world costing analysis using your social enterprise ideas 4
  5. 5. How do you do a costing analysis forfor social enterprise? 5
  6. 6. © Norm TasevskiRemember this?...Step 1: Identify Cost Drivers and Revenue Sources for yourBusiness Model! -???! -???! 6
  7. 7. © Norm Tasevski…And this?Step 2: Calculate your margin! -???! -???! 7
  8. 8. © Norm TasevskiCosting AnalysisStep 2a: Calculate your margin•  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 8
  9. 9. © Norm TasevskiCosting AnalysisStep 2b: Conduct Sensitivity AnalysesBreak-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? 9
  10. 10. © Norm TasevskiExercise… 10
  11. 11. © Norm TasevskiWhat Next?Step 3: Turn “blue” cells into “white” cells (i.e. Research!!)! -???! -???! 11
  12. 12. © Norm Tasevski 12
  13. 13. Break 13
  14. 14. © Norm TasevskiNow… …On to Part 2 – Financing Considerations for Social Enterprise 14
  15. 15. © Norm TasevskiAppendix 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) 15 CICA
  16. 16. © Norm TasevskiAppendix B: Costing MethodologiesJob-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 clientProcess 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 periodActivity-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%) 16
  17. 17. © Norm TasevskiAppendix C: Structuring A Social EnterpriseCosting Analysis in ExcelThe “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) 17
  18. 18. © Norm TasevskiAppendix C: Structuring A Social EnterpriseCosting Analysis in Excel (Continued)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 18
  19. 19. © Norm TasevskiAppendix C: Structuring A Social EnterpriseCosting Analysis in Excel (Continued)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 19