The concept of variable cost is an important component of risk in a company, because generally variable costs are less risky than fixed costs, because variable costs are not incurred unless there are sales and production. See also break-even analysis, fixed costs, and contribution.

For more on this, check out What Is Break-Even Analysis? and Understanding Fixed and Variable Costs and Burn Rate.

The balance sheet is a snapshot of your company’s assets, liabilities, and owner’s equity at a specific point in time. It shows what a company owns (assets), what it owes (liabilities), and how much owners and shareholders have invested (equity).

A balance sheet always has to balance: Assets = Liabilities + Equity

For more, read our article here on Bplans that gives an overview of what a balance sheet is, check out our article on the LivePlan blog to learn how to read a balance sheet, and download our balance sheet example as a PDF or Excel sheet to see a visual representation.

In a standard manufacturing or distribution company, this is about the same as the cost of the goods sold. In a services company, this is more likely to be personnel costs for people delivering the service, or subcontracting costs.

This term is commonly used interchangeably with “cost of goods sold,” particularly when it is for a manufacturing, retail, distribution, or other product-based company. In these cases it is traditionally the costs of materials and production of the goods a business sells.

For a manufacturing company this is materials, labor, and factory overhead. For a retail shop it would be what it pays to buy the goods that it sells to its customers. For service businesses, that don’t sell goods, the same concept is normally called “cost of sales,” which shouldn’t be confused with “sales and marketing expenses.” The cost of sales in this case is directly analogous to cost of goods sold.

For a consulting company, for example, the cost of sales would be the compensation paid to the consultants plus costs of research, photocopying, and production of reports and presentations.

In standard accounting, costs of sales or costs of goods sold are subtracted from sales to calculate gross margin. These costs are distinguished from operating expenses, because gross profit is gross margin less operating expenses. Costs are not expenses.

For more on costs of goods sold, see our article on the LivePlan blog: What Are Direct Costs?

The formula for break-even point in units is: The formula for break-even point in sales amount is: = Regular running costs/(1-(Unit Variable Cost/Unit Price)).

This should not be confused with the recovering initial investment through the regular operation of a business. That concept, often confused with break-even, is called the payback period.

For more detail on the subject, read: What Is Break Even Analysis?

For more on the subject, see our article on the LivePlan blog: What Is Accounts Payable?