Module 4 • Financial feasibility study Example:


If a small business is selling shirts of R 50-00 each, and the business sells 100 shirts for a particular month then the sales for the month is:


R50-00 (SP) × 100 units = sales of R5000 Other names for sales are:


1. 2. 3.


2.2 Costs


Total costs refer to all the costs in your business. There are two main categories of costs namely Fixed Costs and Variable Costs.


Variable Costs are those costs that change or ‘vary’ with your sales volumes. In other words, what you paid for your products plus all other costs you had to incur that can be linked directly to the sales of your products.


In the example of selling shirts, the cost of buying the shirts from a factory and then delivering them to your customers will be considered Variable Costs. This is because, if you sell more, you will have to buy more stock and deliver more shirts which means your Variable Costs go up. If you sell less then you can buy less and will spend less on delivery costs meaning that your Variable Costs will go down.


These Variable Costs are often referred to as “Cost of Sales” since they are directly linked to your sales volumes and directly represent “how much your sales are costing you”!


Fixed Costs, on the other hand, are those costs in your business that stay the same every month regardless of the changes in your sales volume. Salaries, rent and electricity are all examples of Fixed Costs.


Add your own examples to the following table: Fixed costs


Rent Salaries


Electricity (unless you manufacture) 1. 2. 3. 4.


Cost can be a “fixed cost” in one business, but a variable cost in a different type of business. For example, electricity could be a variable cost if you are a manufacturer using a lot of electricity and therefore the more you manufacture, the more electricity you use. However, it is likely to be a fixed cost in most retail businesses since it stays more or less the same every month.


Turnover Income


Sales revenue DEFINITION


Sales is the selling price of products (or services) times (x) the number of those products sold for a particular period of time.


Variable costs


Raw materials Petrol for transporting goods


1. 2. 3. 4.


PAUSE FOR THOUGHT


Variable costs are those costs that vary with your sales volume level i.e. raw materials and transport costs. Fixed costs are those costs that stay the same every month.


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