The class will use data from a real social enterprise and using Microsoft Excel to develop a basic costing analysis, and will also focus on identifying key financial considerations unique to social enterprise. http://www.socialentrepreneurship.ca/

1. APS 1015H: Social Entrepreneurship
Class 5: Conducting a Costing Analysis for
Social Enterprise
Wednesday October 19, 2011
Instructors:
Norm Tasevski (norm@socialentrepreneurship.ca)
Karim Harji (karim@socialentrepreneurship.ca)
1

2. © Norm Tasevski & Karim Harji

3. © Norm Tasevski & Karim Harji
Agenda
• SoCap 2011
• Developing a financial model for your social
venture
– Constructing the financial model
– Scenario analysis (break-even, best-worst)
• What did we learn?
3

4. © Norm Tasevski & Karim Harji
A caveat…
• We will construct a real-world costing analysis using
your social enterprise ideas
4

5. How do you do a costing analysis for
for social enterprise?
5

6. © Norm Tasevski & Karim Harji
Remember this?...
Step 1: Identify Cost Drivers and Revenue Sources for your
Business Model!
-???!
-???!
6

7. © Norm Tasevski & Karim Harji
…And this?
Step 2: Calculate your margin!
-???!
-???!
7

8. © Norm Tasevski & Karim Harji
Costing Analysis
Step 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. © Norm Tasevski & Karim Harji
Costing Analysis
Step 2b: Conduct Sensitivity Analyses
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?
9

10. © Norm Tasevski & Karim Harji
Exercise…
10

11. © Norm Tasevski & Karim Harji
What Next?
Step 3: Turn “blue” cells into “white” cells (i.e. Research!!)!
-???!
-???!
11

12. © Norm Tasevski & Karim Harji
12

13. Break
13

14. © Norm Tasevski & Karim Harji
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) 14
CICA

15. © Norm Tasevski & Karim Harji
Appendix B: Costing Methodologies
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%) 15

16. © Norm Tasevski & Karim Harji
Appendix C: Structuring A Social Enterprise
Costing Analysis in Excel
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)
16

17. © Norm Tasevski & Karim Harji
Appendix C: Structuring A Social Enterprise
Costing 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
17

18. © Norm Tasevski & Karim Harji
Appendix C: Structuring A Social Enterprise
Costing 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
18