Business Plan Tutorial Preface & Credits
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LET’S CONTINUE, PART 2
SELLING EXPENSES: For “Sample Start-Up Company”
You will note on Exhibits C and D that Selling Expenses are expressed as both a variable percent of sales as well as a fixed, monthly expense. That is because a business is likely to have both types of Selling Expenses.
Part 2: Understanding Expenses
Variable Selling Expenses: For example, in the case of the Custom Blotter Company, the business owner has hired a salesperson, Gwen, on straight commission, paying her 12% of the sales price on every blotter she sells. This is a variable expense for the business because the commission dollars paid to Gwen each month will vary, based on her sales for that month. The owner cannot “budget” this figure. Instead, it is a “projection.”
- Royalty Payment (6%) for Franchised Operations
- Advertising Fee (2%) for Franchised Operations
Just as it sounds, these are the same every month, no matter what your revenue may be. In our Exhibits, the fixed selling expenses are shown as: Advertising and Brochures; Travel Expenses; and Public Relations & Exhibitions. The Custom Blotter Company would budget a fixed amount each month to these expenses.
- Advertising and Brochures
- Travel Expenses
- Public Relations & Networking
- Exhibitions & Trade Shows
The only difference between Exhibit C and Exhibit D is the calculation of a 6% royalty + 2% ad fee in one, and a fixed expense for advertising in the other. We will call this the “Franchise Factor.”
THE FRANCHISE FACTOR:
In Exhibit C, you will note that the “Variable Selling Expense as % of Sales” assumes a 12% commission paid out to a sales person, plus 8%, for a total of 20%. The added 8% reflects the most common franchise royalty and advertising fee structure: Six percent (6%) is a “royalty payment” (an ongoing fee for owning the franchise), plus two percent (2%) mandatory advertising fee (paid to franchisor or franchisor’s advertising entity).
In Exhibit C, an adjustment in fixed selling expenses is made: It is assumed that the franchisee will not budget any other monies to advertising and brochures, having already allowed 2% of gross sales to go to an outside advertising fund. In Exhibit D, where the 8% franchise charge is not included in Variable Selling Expenses, a compensating fixed expense is allowed for advertising and brochures, in this case $200 per month, or $2400 per year. A larger operation could budget more, as in the established operation depicted in the later section of this Tutorial. Let’s continue to see how general and administrative overhead come into play to yield a surprising outcome!