Join Rudolph Rosenberg for an in-depth discussion in this video Operating expenses (OPEX) projection basics, part of Financial Analysis: Making Business Projections.
- In this chapter we will be learning how to project operating expenses which, out of all the P and L elements, is without a doubt the one you have the most control of. And having control over something goes a long way to being able to project it. There can be expenditure surprises, of course. But, there are fewer surprises than for revenue, for example. We will look at Opex in two steps. First, we will look at the expenditures that are there every month whether your business actually is soaring or tanking.
Those expenditures are called fixed Opex, and include elements such as rent and salaries, for example. Then we will look at variable Opex, which are expenditures that are linked to your business performance and go up and down based on your performance. This category of expenditures covers elements such as sales commissions, marketing, and more. Most of the variable costs of a company are usually related to production and are therefore part of COGS, or costs of goods sold, which is the cost of production for a company.
Therefore, most variable costs relate to gross margin. To get started on your Opex projection you need to have a data set which is the list of all your expenses. Ideally, you need to have them both on a summary format where you can tell what the nature of the expenses are, as well as the full detail of the individual expenses. If you are unsure as to how to get that set of data for your company, check out the Financial Analysis course series, and in particular Financial Analysis: Analyzing the Bottom Line with Excel.
There is a chapter on operating expenses that will get you through that process.
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- Distinguish between forecasting and planning.
- Recall the pros and cons of bottom-up projection.
- Explain how a finance manager can utilize a sales pipeline in business projections.
- Describe how a company can forecast its gross margin by product.
- Identify the pros and cons of using top-down projection.
- Recognize how business plans utilize forecasts.
- Summarize how to develop a set of worst-case scenarios.