Report name: Sample Forecast
Cost of Goods Sold and Gross Profit Forecast
Successful profit and cashflow forecsts begin with a strong gross profit. The key is to maintain a gross profit margin capable of delivering that success.
Successful profit and cashflow forecsts begin with a strong gross profit. The key is to maintain a gross profit margin capable of delivering that success.
| forecast for year beginning the 1st. | May 2017 | May 2018 | May 2019 |
| Trade sales | 1,500,000 | 1,650,000 | 2,200,000 |
| add: Delivery / Service Charges | 37,500 | 41,250 | 55,000 |
| Total Sales | 1,537,500 | 1,691,250 | 2,255,000 |
| Stock / Inventory Bfwd | 35,000 | 125,000 | 150,000 |
| add: Purchases - Domestic | 780,000 | 599,100 | 527,200 |
| add: Purchases - Imports | 195,000 | 399,400 | 790,800 |
| less: Stock / Inventory Cfwd | 125,000 | 150,000 | 170,000 |
| Cost of Goods Sold | 885,000 | 973,500 | 1,298,000 |
| Gross Profit Cfwd | 652,500 | 717,750 | 957,000 |
| Gross Profit Margin | 42.4% | 42.4% | 42.4% |
Forcast profits, overheads, investment, taxes and being able to pay the bills on time all start with the gross profit forecast.
Because gross profit depends entirely on projected gross profit margin, its level will have to be defended throughout the forecast year(s). A drop in the margin can be seriously damaging but on the other hand if it turns out to be higher, the benefits to profits and cashflow can be enormous - As follows:
In this working example, gross profit margin on trade sales at 41% plus 2.5% of extra sales volume from delivery or service charges is returning 42.4% gross margin on total sales of 1,573,500.
Using the What-If Calculator / Planner and assuming that better prices can be negotiated from suppliers, increases by degrees of 1% on that 41% gross trading margin dramatically increases 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 |
Visitors are invited to try making these changes to gross trading margin and a lot more for themselves.
All of the Figurewizard forecasts and calculators are interactive working examples including the What-If Calculator and Planner.
Delivery / service charges calculated as a % of sales are added to gross profit but exceptional profits arising from the sale of fixed assets or income from investments not connected to core trading are not. These are only added after operating profit has been calculated in the Profit and Loss Forecast
Everything associated with getting merchandise onto the shelf is charged to cost of goods sold.
That includes inward freight charges, import clearance; import duty plus materials and labour costs associated with added value such as repackaging, labelling or assembly.
Money in the bank beats money on the shelf, which is why efficient stock control will also greatly benefit Cash Flow as is shown in the example below.
Again using the What-If calculator this time to reduce forecast year end stock value by increments of 10% forecast cash flow and the bank improve as follows.
| % 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 |
All costs associated with getting goods to the point of sale must be included when calculating the gross profit margin.
These will include additions or other work such as repackaging, labelling, assembly and so on plus the cost (if any) of transporting goods from your suppliers into your premises (i.e. carriage inwards). If imported, all shipping costs including insurance, cutoms clearance and import duty have to be included too.
When importing goods from overseas by sea freight, the prices you will have been quoted will be qualified by the sellers terms concerning the delivery of your orders.
These are known as "Incoterms" and their job is to define how much of the costs involved in shipping will be covered by the seller and by you. They can be a significant cost factor, depending of their weight / cubic capacity to cost.
For example shipping costs should be a lot lower for a consignment of watches than for mattresses (weight) or suitcases (Cubic capacity). The most common terms are as follows:
| EXW | Ex Works: You are responsible for shipment from the seller's premises. |
| FAS | Free Alongside Ship: Seller delivers to the port of despatch. You are responsible for everything else. |
| FOB | Free on board: As FAS plus the seller is responsible for your goods to be loaded on board. |
| CFR | Cost and freight: As C & F plus the seller is responsible for all shipping charges to your home port. |
| CIF | Cost Insurance and Freight: As CFR plus the seller undertakes to insure your order to your home port. |
Note that if your goods are subject to import duty, that will be calculated on the cost of the goods plus all of the shipment charges incurred from the seller to your home port. That will include the cost of unloading the shipment for which you will be responsible.
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.