How much will it all cost? 

There are two kinds of operting expenses you will need to understand. For our purposes, these operating expenses will be direct costs and other operating expenses. 

Direct costs are calculated separately so that we have a good understanding of how much each unit of product or service costs

Most likely you are making/acquiring/providing more than 1 unit of product or service. This means you will create/acquire/provide a batch of your product or service - this is your inventory. Your goal is to figure out the following: 

We call these direct costs and this is your initial inventory. 

# 1 

Direct Costs: The actual cost of making/acquiring/providing the product or service you are selling. "directly related" to being able to offer the product or service, you need this expense in order to provide value to your customer. 

# 2

Other Operating Expenses: The costs "not directly related" to making/acquiring/providing the product or service you are selling, but are still necessary in order for the business to run. Think of them as everything else related to being able to offer the product or service, you need them in order to operate

Direct Costs

Direct costs are related to the making/acquiring/providing of the product or service. Think of direct costs as going out the door once the product or service is sold to the customer. You will no longer have that material once purchased. 

For example, let's say you are selling cookies. The if you buy to make them create a batch. That batch makes 12 cookies. The cost to make one batch divided by the amount of cookies is the cost for 1 unit. The ingredients to make cookies are part of your direct costs. Once they are sold, you no longer have the ingredients because the cookie leaves you, you don't keep it. 

We separate direct costs from other operating expenses so that you can more closely understand the profitability of your product or service. When you are able to see the cost to make 1 unit of product or service, it helps you to know what you should charge the customer, if you should reduce your expenses, or if you should charge more to make more. 

Direct Costs Example 

A company is selling sarongs for $10 each to put over bathing suits at the beach or pool. They are making them and not purchasing to resell. They plan to sell 50, so make the initial inventory 50 sarongs. To the right is a breakdown of the cost to make all 50, called a batch, and the cost for 1 unit.

They will need to buy 20 yards of fabric, 40 yards of thread, and 100 yards of trim to make 50 sarongs. These are just costs directly associated with making the product. Notice it does not include a website or signage for the company. Those costs will be included as operating expenses. 

First get the batch cost, then divide the batch by the number planning to make to figure out 1 unit cost. 

Each item is then divided by 50. This is why all 50 cost $85, but 1 only costs $1.70. 

Direct Costs are also called cost of product, cost of goods sold or COGs 

Example of direct costs: 

Watch this video for a custom ring, you'll see that the ring also comes with a lot more items. Would these items be direct costs? Why or why not? 

Beads by Becky Direct
Direct Costs

Use this template to help you figure out your direct costs. Video on how to use the template:  

Other Operating Expenses

Other operating expenses are all the things, activities, and action that cost you money and which you have to do in order to properly run the business. 

Each week as you operate the business, keep track of all your expenses. 

For example, let's go back to selling cookies. I need a pan to put them on when they go into the oven. Once the cookies are sold, I keep the pan, it doesn't go with the customer. It is part of my doing business, and since I needed the pan to get started, I would include it as part of supplies under my operating expenses. 

Other Operating Expenses Example 

The sarong company knows there are other expenses they will incurred in order to sell their products besides the actual cost of the product. They make a list of the expenses:

The total operating expenses are $165, including the direct costs which are listed as initial inventory

Expenses to consider: 

Think about your channel for selling. There are expenses directly linked to your channel. Think about what they may be.  

If you are selling at school, you will need:

If you are selling at a farmer's market or craft fair:

If selling online: 

If you take credit cards via Square or Pay Pal, you will need to show the fee taken out of the transaction. 

All of these will show up as operating expenses. 

Everyone will need marketing in some way. Some of that may cost money. Be sure to update the bookkeeping for your operating expenses each week so you know how you are doing. 

Profit & Loss, AKA P&L or Income Statement 



Revenue (sales) - Expenses = Profit or Loss

*remember, revenue is not profit 

Key Takeaway

The Profit and Loss helps you to understand the health of your business. 


Revenue - Expenses = Profit or Loss 

Those Expenses are direct costs & other operating expenses

Break Even Point

It is essential that you understand the Break Even Point for your microbusiness. The break-even point is when total expenses are even with the amount of sales. This tells you exactly how many you have to sell in order to cover the money you put into the business. 

You can also think of it as how many units do you have to sell to recoup investment? 

The break-even point is when total expenses are even with the amount of sales. 


The sarong company had total expenses of $152. We then divide that by the selling price of 1 unit of product, $10. This comes out to 15.2, meaning they have to sell 16 (because you can't sell less than a whole sarong) to recoup the initial investment. Everything after that starts to be net profit.

total expenses / 1 product selling price = # need to sell

This is useful info to understand because it helps you to see if you will make a profit. If you are not, you need to either reduce your costs, sell the product or service for more, or sell more. It's that simple. 


Total Expenses divided by 

1 unit of product or service's Selling Price (Retail) 

# Need to Sell to Cover Expenses 

Your hustle point! 


Bookkeeping is keeping track of your operating expenses and revenue each week, to understand your financial situation at any given moment. 

For our purposes, we will use a P&L to keep track of everything and it will include the following: