Lesson Overview

Revenue gets the headlines, but costs quietly decide whether you survive.
In this lesson, we’ll break down what a cost structure is, the different types of expenses you’ll face, and how to map them so you can manage them effectively.
You’ll leave this session with a clear view of where your money goes and how to track it.

Learning Objectives

By the end of this lesson, you will be able to:

• Define what a cost structure is and why it matters for startups.
• Identify and categorise direct and indirect costs.
• Understand the difference between fixed and variable costs.
• Map your own cost structure using a simple framework.

About You and Your Enterprise

Every startup has costs, even if you’re working from home and running lean.
The earlier you understand them, the better you can control them. Before making your first sale, think about what expenses you’ll face, such as equipment, licenses, or setup fees. Consider which costs you’ll pay every month no matter what, like rent, utilities, or salaries. Also, note the costs that only occur when you sell or deliver more, such as materials, shipping, or extra labour.

1. What is a Cost Structure?
Your cost structure is the complete picture of all the expenses required to run your business.
It answers the question: “What does it take to keep this business operating?”

For start-ups, having a clear cost structure:

• Helps you price your products or services accurately.
• Shows you where you can cut or delay spending if needed.
• Is essential for cash flow planning and funding applications

2. Types of Costs
There are two main ways to categorise your costs:

A. Direct Costs (a.k.a. Cost of Sales or Production Costs)
Expenses directly linked to producing your product or delivering your service.


Examples:

• Raw materials
• Packaging
• Direct labour (production staff)
• Equipment hires for a specific job

Example:


A T-shirt printing startup’s direct costs per order might include blank T-shirts, ink, and part-time printing labour.

B. Indirect Costs (a.k.a. Overheads)
Expenses that keep the business running but aren’t directly tied to one specific product or service.


Examples:

• Rent
• Utilities
• Marketing and advertising
• Office supplies
• Admin salaries

Example:


The same T-shirt startup’s indirect costs could include studio rent, electricity, and online store subscription fees.

3. Fixed vs. Variable Costs
Another useful way to understand your expenses is by behaviour:

• Fixed Costs – Stay the same regardless of sales volume.
Examples: monthly rent, software subscriptions, insurance premiums.
• Variable Costs – Change depending on how much you produce or sell.
Examples: raw materials, packaging, delivery costs.

Example:


A catering business pays £800/month kitchen rent (fixed), plus £4 per meal for ingredients (variable).

4. Why This Matters for Startups
Knowing your costs is critical because:

• It helps set prices that cover expenses and generate profit later.
• It prevents “cost creep” — unexpected spending that eats into your cash.
• It allows you to make quick decisions if revenue drops (e.g., pause certain expenses).

Key Definitions

Cost Structure – The breakdown of all expenses your business incurs.
Direct Cost – An expense directly linked to producing goods or delivering services.
Indirect Cost – An expense required to run the business but not tied to a single product.
Fixed Cost – An expense that doesn’t change with sales volume.
Variable Cost – An expense that changes depending on output.