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Today we discuss the modeling of other important P/L’s drivers – the cost drivers. Cost drivers are elements that cause cost to be incurred. It includes various operating and non-operating costs.

Modeling Simple Cost Driver

We can express costs as percentage (%age) of revenue (sales). The basic assumption behind this driver is that the cost would scale to support the scale in revenues!

For example,

Lets say today I have 10 servers supporting a user base of 10,000 unique users, which results in USD 100,000 of revenues.

Tomorrow, if I want to grow my revenues to USD 1,000,000, I would need a unique user base of 100,000, for which I would need 100 servers.

Hence most of the costs scale as per revenue! Please don’t burn me for saying this! I know that this is a simplistic assumption! But then, this is a simple model as well!

Modeling Facebook’s Cost Drivers

Understanding the cost drivers is important as it tells you what affects the total cost the most. It helps you to focus on areas where the largest cost are incurred, because the larger the total cost the smaller the bottom line (profit).

We calculate most of costs drivers as a percentage of revenue. Provision for income tax is calculated as percentage of earning before tax (EBT).

This is a very simple exercise. I am sure, you would quickly get this in place!

Please note: Cost Drivers are NOT growth Drivers! These are derived from Revenue

Next Steps

2moro we would understand modeling techniques for B/S drivers of Facebook. I am sure after knowing how to model P/L drivers you’ll be able to model the B/S drivers of Facebook on your own.