The [[cost structure]] describes all the costs incurred to operate a business model. This element is critical because, for a business to be sustainable, its revenue streams must eventually exceed its costs. Costs can generally be categorized into two types: [[fixed costs]] and [[variable costs]]. Fixed Costs are expenses that remain relatively constant regardless of the volume of goods or services produced, such as rent for buildings or fixed employee salaries. Variable Costs, on the other hand, fluctuate in direct proportion to the volume of output, such as raw materials for manufacturing or sales commissions. Understanding the balance between these is key to managing the financial health of the business.   A startup must identify its most important costs inherent in its business model. Are the most expensive resources physical assets, R&D, or talent? Are the most expensive activities related to production, customer acquisition, or research? By totaling all fixed and variable costs associated with key resources and key activities, a startup can understand its overall financial requirements and ensure that, over time, costs are less than revenue. While it's acceptable for costs to exceed revenue in the early stages (especially with investor agreement), a clear path to profitability is essential.   Beyond traditional financial accounting like [[income statement|income statements]] and [[balance sheet|balance sheets]]—which are primarily execution metrics for established companies—startups need to focus on Metrics That Matter. These are specific, actionable indicators that help a startup search for and validate its business model. Examples include product cost, market size, [[customer acquisition cost (CAC)]], conversion rates, [[customer lifetime value (LTV)]], operating costs (fixed and variable), channel costs, average selling price, and [[burn rate]]. Founders need to intimately understand the 5-15 key metrics that truly drive their business, rather than getting lost in hundreds of numbers or relying on speculative long-term financial projections.   An [[operational financial timeline]] is an important tool for both startups and established businesses. It provides a structured overview of financial activities and milestones over a defined period. This timeline assists in planning and managing [[cash flow]], ensuring that the business can meet its financial obligations while allocating resources strategically for growth. By mapping out expected revenues, expenses, and key financial events, startup founders can anticipate potential cash shortfalls and make informed decisions to mitigate risks. Additionally, an operational financial timeline aids in aligning financial goals with business objectives, facilitating better coordination between departments, and ensuring that activities are financially sustainable. For startups, this timeline is particularly useful for demonstrating to investors a clear path to profitability, highlighting when the business expects to reach the break-even point and how it plans to scale efficiently. The [[operational financial timeline tool]] is a spreadsheet designed to help teams plan and assess the financial needs required to achieve key project milestones over 36 months. It aims to provide a clear understanding of the financial trajectory of a business venture by aligning resources with operational and strategic goals. It allows users to simulate the financial impact of decisions like staffing and product development. Visual plots within the tool illustrate financial indicators such as cash flow, offering a graphical view of monthly financial evolution. This tool aids the team in anticipating needs, identifying shortfalls, and making informed adjustments, ultimately serving as a robust planning aid for forecasting and strategizing. Back to: [[What Resources and Activities Will You Need, and How Much Will They Cost?]]