Operating model
Forecasting costs
Forecast COGS and operating expenses with the driver that really moves each cost.
Learning objectives
- Classify costs as variable, semi-fixed or fixed and pick a driver for each
- Forecast COGS from a gross margin and operating costs from store, revenue and inflation drivers
- Explain operating leverage: why EBITDA moves more than revenue
Forecasting every cost as a percentage of revenue is quick, and usually wrong. Rent and store staff follow the number of stores, not sales. Head-office salaries follow inflation and hiring plans. Only some costs, such as card fees and delivery, really scale with revenue. Getting the driver right matters most when revenue moves: in a downturn, fixed costs don't fall, and margins compress faster than a "% of revenue" model shows.
This lesson splits Rawdah Home Retail Co.'s FY2025A operating expenses of 419.2 into three cost pools and forecasts each with its own driver.
COGS = Revenue × (1 − gross margin) · Store costs = Average stores × cost per store · Variable costs = Revenue × % · Head office = Prior year × (1 + growth)
- Cost per store
- FY2025A store costs ÷ FY2025A average stores, then grown with cost inflation
- Semi-fixed
- costs that step up with capacity (stores), not with sales in existing stores
Included with a Formula Quest membership
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