What is a good ratio between indirect & direct costs?


4

We have made a calculations in a business plan and our indirect costs are greater than direct costs. It looks so wrong... does it exist any standards what is the max. for indirect costs?

Business Plan

asked Sep 17 '11 at 21:31
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Stanislav
21 points

4 Answers


1

I don't think there is any rule that direct costs must exceed indirect costs. It all depends on what you are making.

As well, I don't think there is a max for indirect costs. It all depends on what you are spending for administration. It is possible to have high indirect costs but low direct costs, especially if you make something simple in low quantity.

All that said, you should dig into things when you see this. Are you spending a fortune on brand (as opposed to product) marketing? If so, you will have high indirect costs.

answered Sep 17 '11 at 22:43
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John
1,194 points

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OK. This is a gross generality but I have always felt that direct costs, which usually vary with sales (in other words they are variable costs) are preferable to fixed costs for a startup because the biggest untested assumption in most business plans is volume. If you could design your business model so that you had only variable costs and you weren't losing money on every sale, you would be guaranteed to make a profit even if your sales were much lower than you expect.

answered Sep 18 '11 at 02:04
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Jack Rodenhi
607 points

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It depends entirely on the business. Higher direct costs vs. indirect costs mean there is less profit increase as sales increase, but it also means there is less overhead to maintain when sales decrease (or before they increase, as in a startup).

answered Sep 18 '11 at 07:45
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Xpda
652 points

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A good way to get the answer to this question is to run a break-even analysis. If the revenue forecast is more-less realistic and the company turns into profit in foreseeable future then the proportions of fixed/variable costs and gross margin are okay.

answered Sep 18 '11 at 16:48
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Taat
1 point

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