Ask a VC: how to model a P&L — Part 3/6: Fixed Costs

8 min readNov 6, 2023
Photo by carlos aranda on Unsplash

Note: the content of this post was taught in a 7-hour class at HEC Paris Business School in May 2024.

After discussing Revenue models (Part 1/6), we discussed Variable costs (Part 2/6) last time. Let’s continue with our example of a T-shirt printing factory.

Fixed costs are costs that you incur, even when there are no sales. Every month these costs are subtracted from whatever you have in your bank account, eventually drying up the cash. So you need to counterbalance this cash out with revenue every month, so as to become cash flow positive.

(unit margin) x (quantity) > Fixed costs.

Obviously, in most cases, you will have costs before you make revenue. By increasing the number (quantity) of sales, optimizing your unit margin to make it as large as possible, and reducing your fixed costs (and making some of these costs variable), you will have a sound business model and start making money.

In the startup world, it’s convenient to use 4 big buckets to categorize these costs.

  1. everything that has to do with Sales & Marketing.
  2. everything that has to do with Technology: building it, running it.
  3. everything that has to do with People/HR. Usually, a person is not linked to a sale, as it’s not what you sell.
  4. everything else should go into General and administration.

Let’s dive into it.

Sales & Marketing

I tend to take out all people in the People/HR that are linked to Sales & Marketing, IT, and G&A. What is left is all other kinds of people. We’ll address it there. For now, just add here the costs of your Marketing people and your Sales people.

We could also add here the cost of hosting a marketing website, a domain name, etc. but we will move it to Technology, as this site will be the technical eshop frontend.

Other costs here could be flyers, posters, swag, etc. You could also have hired an agency for market research, focus groups, A/B testing, etc.

But, I’m not assuming any more costs here at this stage.

At the start of your business, let’s say you only need 1 sales & marketing person until you reach 300 T-shirts sold per month. Then you will need another person for every 300 T-shirts/month. To keep it easy, I’ll assume all salespeople can do marketing. I’m adding a productivity growth factor so that in 5 years, a person can sell up to 4x more.

I’m also assuming the SEO/SEM is managed by the people above. 80.000 T-shirts in year 5 is probably not worth hiring a specialized agency, or a dedicated person.

In addition, I’m assuming the availability of employees every day of the year, with no holidays. You would need to adjust the number for this (multiply the number of FTEs by (available days/365)). All arbitrary of course, but you have to start somewhere! And remember that we included the CAC (Customer Acquisition Cost) already in the variable costs, which is the sales cost we are calculating here.

I’m assuming a 40.000€ salary for each, with 50% extra of social security, benefits, computer equipment, etc. so 60.000€ cost for each.

Calculating the number of sales & marketing people necessary

Over the years we ended up with 7 salespeople, costing up to 35K€/month. A quick look at revenue in the yearly columns shows me that sales & marketing over revenue is significantly improving but will still be more than my usual 20% rule-of-thumb number.

Now assuming that 1 T-shirt = 1 customer, with no repeat purchase, we can calculate the real customer acquisition cost that I had assumed before in variable costs (again this does not take into account SEO/SEM that we could calculate in addition here).

Let’s reintroduce now the real CAC in variable costs (we are making a fixed cost become a variable cost), as to not count sales twice. No other cost will be left here in Marketing costs, but you get the idea. We would still have the marketing people, the corporate website, the swag, maybe the cost of agencies helping with SEO, design, branding, etc.

Reintroducing the CAC based on the sales people cost

My model takes a direct hit in terms of gross margin, and you realize the need for economies of scale… As in you can’t really have mega costs when you have no sales, unless you are properly venture financed.


As we have a simple business, we are going to keep it very simple.

Cost of technology based on a market solution.

Let’s assume we use a market solution for the front end, such as Shopify. I’ll assume costs based on the number of accounts needed, ie the number of sales people calculated above.

We also probably need a domain name.

I included the costs of laptops for employees (sales) above. But here it would be a good idea to include laptops, other hardware (printers), etc. and software (Microsoft Office, Adobe Photoshop, antivirus, etc.) used by the team. Let’s just assume a budget of 2000€/month for this for the moment.

Let’s assume there are no other Technology costs at this stage.


There are different types of people working in a startup.

I have moved the sales & marketing people to that section. To some extent, we could also have account managers there and customer account executives there as well, as they contribute to the anti-churn policy.

If I had developers, system administrators, quality control, etc. I would put them in the Technology section.

So here we are left with the remaining C-suite (CEO, COO, CFO), the support staff if any (secretaries, office managers), and other functions, such as Procurement.

You have to include all costs, including employee benefits (social security, medical care, retirement, etc.)

Modeling HR costs

Here let’s assume we have only 3 roles left: Founder & CEO (80.000€ per year), Finance & admin person (60.000€ per year) starting in year 2, and Procurement person starting year 3 (45.000€ per year). As before, let’s assume 50% for employee benefits. And I’m adding a 5% salary increase/year, to account for inflation.

To oversimplify, I’m assuming that the costs of the people ironing the T-shirts, and the costs of the irons themselves are already included in the variable costs.

General & Administration

This category should have everything else, but no HR.

We can sub-split it in many more categories:

Office space.

We could rent a warehouse, and expand with volume. I’ll just assume that we rent something for 8000€/month, with a 3-month deposit.

Let’s assume 500€/month in electricity bills, 100€/month in Internet access, and 500€ more in office expenses (toilet paper, cleaning, water, etc.).

For simplicity, I’m not changing the monthly budget with a growth rate.

Professional services:

Let’s assume we will use a law firm to set up the company, employee contracts, terms & conditions for your site (20.000€). And that you have a budget of 5.000€ every other year to review supplier contracts when necessary.

Also, you have an accounting firm charging you a flat 4.000 /year for doing all your paperwork, charged every 3 months.


Let’s say you signed up for membership to the startup association of your country (3.000€ / year), and subscribe to “T-shirt magazine” for all trends in your market (this could maybe go under research in the Marketing section actually) for 300€ / year.

Other costs, such as Phone expenses could go into HR, the HR section of each person, or if you have a centralized account, under Technology. The choice on where to allocate costs is yours, just make them very legible to the reader, and realistic.

Let’s assume the company pays for nothing else after all these expenses..

It might be useful to summarize the subtotals again if you have a very large spreadsheet. Ideally, you would move all calculations to new tabs and only have the S/T in the main sheet though.

Calculating all the Fixed Costs

Now that we have the sum of all fixed costs, we can subtract them from the gross margin, and calculate profits (or losses), also called EBITDA (Earnings Before Interests, Taxes, Depreciation and Amortization).

Since we do not really care about non-cash calculations, EBIT is the same as EBITDA.

There’s a nice concept that allows us to calculate the variation of working capital requirements. For example, if you get money in one period (here one month), and pay your suppliers 2 months later, then you produce cash for 2 months. On the contrary, if you incur costs now, and are only paid in 2 months, you will suffer 2 months of cash burden and will need to finance it. I’m not including this here. But it’s very similar to the calculation of VAT In European countries, where you collect VAT from clients, and pay it back to the government the next month.

Warren Buffet explaining the importance of CAPEX before FCF

I’m also going to assume you have no investments in your business here, what we call capital expenditure (CAPEX). If you buy heavy machinery to print the T-shirts for example, you would have a big cash out now, but would use the machine over the NEXT 60 months, therefore you could depreciate it over those 5 years, meaning you would take 1/60th of its costs as a non-cash expense every month (almost as if you rented it from yourself). In cash terms, you need to pay for it now.

What you are left with now is the Free Cash Flow (FCF) of the period (used in the valuation article), ie. the cash produced or consumed every month. Here, to simplify, FCF = EBIT = EBITDA (assuming CAPEX = 0, var (WCR) = 0, Depreciation = 0, Amortization = 0).

Getting to FCF

As a final note in this article, we see that the business is not profitable for 4 years, but turns a positive FCF in year 5. Hurray! We’ll look into how to analyze a business plan next time.

Just keep in mind that it’s pretty simple to calculate all these costs, you just need to write them all down, add payment schedules (monthly, yearly, quarterly), and make a lot of assumptions that will impact your model.

The important part here is that you are building the business logic of your venture, thinking about all costs, and relationships between costs, and identifying optimization opportunities very early on.

I consult with corporates and startups and help them address issues like this and many more. Don’t hesitate to reach out at or book a video call with me on




Expert in digital growth strategies. Investor in 50+ startups and scale-ups, Board Member, 5x Founder, Consultant, Podcaster.