Shop costs: predict next month's bills in 5 steps

Key takeaways

• Sort past bills into fixed and variable costs.
• Match each variable cost to an activity you can count.
• Update wage amounts within the existing cost totals so you count labor once.
• Set a cash target before you reorder stock.

Before you place your next stock order, you need to know how much cash the shop will need for the month ahead. Rent, utilities, wages, and the goods you sell do not all move together. A rough guess at next month can easily miss, and a missed guess can leave you short when a bill comes due, or tie up money you could have used somewhere else. The good news is that your past bills already hold the information you need. With some sorting and simple arithmetic, you can turn them into a forecast you can plan around.

This guide covers 5 steps. The method comes from managerial accounting, where textbooks show how to build a cost equation from past results and use it to predict costs for a future period. The OpenStax managerial accounting text says that the same approach can be used to predict costs for service and merchandising firms. A shop that buys stock and resells it is a merchandising business, so the same approach can be applied to your shop's bills.

You do not need special software for this. A notebook or a spreadsheet is enough. Keep your past bills nearby, along with your sales or order records for the same months, because the forecast depends on matching each cost to the activity that caused it.

Work through the steps in order. Each one builds on the one before it.

Step 1: Sort every past bill into fixed or variable costs

Put every past bill into a fixed-cost or variable-cost group before you do any math. Fixed costs are costs that generally stay the same from month to month, such as a lease payment. Variable costs rise and fall with activity, such as the materials and hours you use to fill orders. The sorting is the foundation for everything after it. A cost filed in the wrong group can throw the whole forecast off.

Gather several months of bills, not just the latest one. A single month can be unusual. A busy holiday month, or a month with a one-time repair, can make a cost look bigger or smaller than it normally is. A longer history also makes it easier to see which costs move with your activity. If you have a year of bills, use it. If you have less, use what you have and note that the forecast rests on a shorter record.

Build a simple table. Give each bill its own row, and record the month it covers, the amount, the type of cost, and the group you assigned. Keep a notes column too. When you come back to the table later, a note such as "one-time repair" will save you from guessing why a month looks odd.

Some bills are harder to sort. If a bill has a set part and another part that depends on how much you use, split it into two rows so each part can be treated correctly. When you are unsure, ask this question: if you sold noticeably more next month, would this cost rise? If the answer is yes, it belongs in the variable group. If the cost would stay about the same, it belongs in the fixed group. Write down any bill you are still unsure about, and come back to it after the later steps, when you have a clearer picture.

Check your totals before moving on. Add up each group for each month. Those totals are the numbers you will use in the next steps, so a mistake here carries through the whole forecast.

Step 2: Work out a cost rate for each variable cost

A cost rate is what one unit of activity costs. You get it by dividing past variable costs by the past activity that produced them. Once you have the rate, you can scale it to whatever level of activity you expect next month. The OpenStax text works through this with a manufacturer called Waymaker. In March, Waymaker produced 1,000 units and used 2,000 hours of production labor. ( OpenStax)

Those numbers show why the activity measure has to match the cost. Materials are tied to units produced in that example, and labor is tied to hours. If the measure does not match the cost, the rate will not track the bill.

For your shop, choose the unit that matches how your activity changes. Depending on your business, that might be orders filled, cases shipped, or dollars of sales. Your choice does not have to match the textbook's units. It has to be something you can count for past months and estimate for the coming month.

Work out the rate for each variable cost separately. Take the variable total for a past month, divide it by the activity for that same month, and write the result down. Repeat this for several months. Rates that swing a lot from month to month may point to an unusual month, an activity measure that is off, or a cost that is partly fixed. Any of those is worth checking before you rely on the rate.

Then combine the months. You can average the rates across the months you chose, or use the most typical months and leave out the unusual ones. Either way, write down which months you used, so you can explain the result later when someone asks where the number came from.

Step 3: Estimate next month's activity in rate units

Estimate next month's activity in the same units you used for the rate, because variable costs depend on that count. The equation predicts total cost for a planned level of activity, so the activity figure is the input that drives the result. If the count is wrong, the cost prediction will be wrong, even when your rates are right.

The OpenStax text gives two examples of this. J&L wants to predict their total costs if they complete 25 corporate tax returns in the month of February. ( OpenStax) In a second example, the text says:

> Using this equation, the Beach Inn can now predict its total costs (Y) for the month of July, when they anticipate an occupancy of 93 nights. ( OpenStax)

In both examples, the planned activity comes first, and the cost prediction follows from it. Your forecast works the same way. You settle on the count, then you let the rates turn that count into dollars.

For your shop, base the estimate on sources you can point to. Orders already placed or promised are a good starting point. Sales from the same month in earlier years can show a seasonal pattern, if your business has one. Any event you know about, such as a scheduled promotion, a new product line, or a planned closure, should be reflected in the count. Write the number and where it came from in your table, so you can compare it with the actual result after the month ends.

Keep the activity count honest. It is tempting to plan for the best month you have ever had, but the forecast is meant to show what the shop will likely need, not what you hope for. If you are unsure between two counts, run the cost prediction for both. The gap between the two results shows how much the uncertainty could cost you in cash.

Once you have the count, multiply it by each variable rate from step 2. Add those results together to get the variable total. Keep that total separate from the fixed costs, because the next step changes only the fixed side of the forecast.

Step 4: Change fixed costs only for known changes

Change your fixed-cost total only when a known change will start during the month. Fixed costs are not fixed forever. When something in the shop changes, the fixed total in your forecast may need to change too. The OpenStax text gives a clear case: if they must hire a second supervisor in order to produce 12,000 units, they must go back and adjust the total fixed costs used in the equation. ( OpenStax)

The same idea applies to your shop. A new hire, a new lease, a renewed contract, or a new insurance policy can change the fixed side of the forecast. When you know the new amount and the date it starts, use it. A renewal notice or a signed agreement gives you a figure you can point to, which is better than a guess.

Be just as careful about changes that have not happened yet. A proposed increase is not the same as a confirmed one. If you are weighing a change, run the forecast twice: once with the current fixed total and once with the proposed one. That gives you a range for the cash you may need, and it shows how much the decision affects your reorder plan.

Also watch for costs that are fixed in name only. A bill can look fixed on paper while its amount depends on how much you use. If you find that pattern in step 1, move the bill into the variable group and give it a rate. Re-sorting a bill may feel like going backward, but it keeps the forecast honest.

When you finish this step, you should have two numbers: the fixed costs for the month and the variable total from step 3. Keep them on separate lines of your table. The next step needs both. Separate lines also make it easier to see which part of the forecast moved if the actual bills come in different from the prediction.

Step 5: Update wage amounts and set your cash target

Apply any known wage change to the existing labor line, then recalculate the fixed or variable total containing it. Wages can change because of rules you do not control, so they deserve a separate check. Under Minnesota's rule, the minimum-wage rate will be adjusted for inflation to $11.87 an hour for all employers in the state, starting in 2027. ( Minnesota Department of Labor and Industry)

The same Minnesota source says that minimum-wage rates apply to all hours worked, whether part time or full time. ( Minnesota Department of Labor and Industry) If you have part-time staff, count those hours in the labor forecast.

This is Minnesota's rule, and it applies only there. If your shop is in another state, check that state's rules instead of assuming they match. Even where a wage rule does not apply to you, a wage change is still worth reviewing, because labor is part of the forecast you are building.

Add the updated fixed total from step 4 to the updated variable total from step 3; do not add labor again. The result is your predicted cost for next month. Write that number at the top of the page, with the date you made the forecast.

Decide how much of that total to hold in cash before you reorder. The predicted cost is a starting point, not a guaranteed amount. Consider when your sales bring money in, since a bill can come due before the cash from a sale arrives. Also consider how sure you are of each input. Where an estimate is uncertain, hold a margin above it. Where it is firm, a smaller margin may be enough. Keep the margin as a separate line so you can see what it is protecting against.

Then reorder with the forecast in hand. Plan stock purchases against the cash target, rather than against whatever balance happens to be in the account on the day you order. That keeps the reorder decision tied to next month's costs. Use the shop replenishment checks to review the order, then review your reorder settings.

Illustrative example: add the cost totals

Suppose illustrative fixed costs are $1,000 and the variable rate is $1 for each order. At 1,000 orders, variable costs are $1,000. Add the fixed and variable totals: $1,000 + $1,000 = $2,000 in predicted costs. These illustrative totals already include labor at the expected wage amounts. Any cash margin sits separately above the prediction.

Check the forecast against the bills that arrive

Compare each month's forecast with the bills that arrive, and adjust your rates when the gap keeps growing in the same direction. One month's miss is information, not a verdict on the method. Several months in the same direction are a signal that a rate, an activity count, or a fixed total needs attention.

When an actual bill differs from the forecast, find out why before you change the method. A changed price, a one-time repair, a late delivery, or an unusual sales month can each explain a gap, and each explanation calls for a different fix. Adjusting a rate because of a one-time repair would carry that one-off cost into every later forecast.

Keep the table from step 1 current. Every new bill should go into it as it arrives, with its group and its month. Rerun the five steps before each reorder, starting with the sorting and ending with the cash target. Once the table exists, each new run mostly means adding new rows and updating the inputs.

The method is only as good as the bills you feed into it, so the habit that matters most is recording them promptly. A forecast built on last year's bills and a few guesses will not reflect how the shop runs today. With a current table and a clear activity count, the forecast can show you how much cash to hold before you reorder stock.

Start with your latest bills today

Gather your latest bills and matching activity records today, then sort the bills using step 1 before placing your next stock order.

Related guides: Avoid 5 resale certificate errors on shop supplies · Cash drawer reconciliation: 4 steps from float to close · Check 7 items before charging sales tax in your shop.

Questions about predicting shop costs

Can I use a notebook?

Yes, a notebook or spreadsheet is enough to record bills, activity counts, rates, and predicted costs.

What if I am unsure about next month's activity?

Calculate costs for both activity counts you are considering, then compare the results before choosing your cash target.