This is a Working Example of our Forecasts
Registered users can produce their own business forecasts in minutes; exactly as is shown here.

Report name: Sample Forecast

Cost of Goods Sold and Gross Profit Forecast

Trading profit plus income from delivery or service charges equals gross profit. This working example shows how we calculate your gross profit forecasts.

forecast for year beginning the 1st.May 2017May 2018May 2019
 Trade sales1,500,0001,650,0002,200,000
 add: Delivery / Service Charges37,50041,25055,000
 Total Sales1,537,5001,691,2502,255,000
    
 Stock / Inventory Bfwd35,000125,000150,000
 add: Purchases - Domestic780,000599,100527,200
 add: Purchases - Imports195,000399,400790,800
 less: Stock / Inventory Cfwd125,000150,000170,000
 Cost of Goods Sold885,000973,5001,298,000
    
 Gross Profit Cfwd652,500717,750957,000
    
 Gross Profit Margin42.4%42.4%42.4%

The Gross Profit Margin

The gross profit margin is where forecasting and planning a successful business begins. Making profits, paying the bills; servicing debt and generating the liquidity and cash to stay solvent are all going to depend on it.

What Constitutes Cost of Goods?

Everything that is associated with getting merchandise onto the shelf is charged to cost of goods sold. That will include inward freight charges, import clearance; import duty and plus materials and labour costs associated with added value such as repackaging. labelling or assembly.

Planning Gross Profit Margins

In this working example gross profit margin on trade sales at 41% plus 2.5% of sales in charges return 42.4% gross margin on total sales of 1,573,500.

Small increases in gross margin though can make a very big difference. In the table below, using the What-If calculator to increase gross profit margin of 41% by degrees of 1% dramatically improves profits, liquidity and the bank.

Trade Sales GP% Year 1 Stock / Inventory Year 1 Net Pre-Tax Profit Working Capital (Liquidity) Operating Cash Flow Bank: Year-End
41% 125,000 94,381 63,022 12,208 -35,439
42% 125,000 109,916 75,606 26,803 -20,309
43% 125,000 125,330 88,091 41,398 -5300


What this illustrates is the importance of doing whatever it takes to negotiate the best possible prices. In this example an increase of just 1% for forecast trade sales margin has improved forecast profits by 14% and crucially reduced bank borrowings by 43%.

Planning Year End Stock Value

Money in the bank beats money on the shelf, which is why efficient stock control will also greatly benefit cash flow as the example below illustrates.

The predicted values of stock / inventory represent serious cash flow issues when forecasting. Using the What-If calculator this time to reduce forecast year end stock value by increments of 10% illustrates how reductions in the value of year end stock / inventory pays off where cash flow is concerned.

% Reduction of Stock / Inventory Stock / Inventory Year 1 Net Pre-Tax Profit Working Capital (Liquidity) Operating Cash Flow Bank Year-End
0% 125,000 94,381 63,022 12,208 -35439
10% 112,500 94,827 63,384 24,371 -22,830
20% 100,000 95,245 63,722 36,533 -10,250

Valuing Stock / Inventory

Auditors have a duty to ensure that the assets listed in the balance sheet represent true and fair valuations.

Stock / inventory will therefore be measured by auditors at cost or current fair market value; whichever is the lowest. This matters a great deal because together with accounts receivable the value of goods for resale on the shelf represents a key cash convertible asset.

For that reason auditors are required to write down the values of slow moving items or in the case of perceived redundancy, write them off altogether in order to preserve the credibility of the audit. It is always a good idea to do whatever it takes to dispose of slow moving stock items well before the end of your financial year.

Written down stock is a direct charge to profits, liquidity and cash flow. When forecasting it is therefore just as important to ensure that its projected year-end value is realistic. If it isn't your forecasts will not be realistic either.

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