Report name: Sample Forecast

Cost of Goods Sold and Gross Profit Forecast

A successful profit and cashflow forecast starts with a successful gross profit. That’s why you need a gross profit margin that can deliver that success.

Planning The Gross Profit Margin

Forecast profit and loss, liquidity and cashflow all start with the gross profit forecast.

That is regulated by your forecast gross profit margin. When producing forecasts using Figurewizard, everything that follows will depend on that margin being readily achievable. A fall in .gross profit margin would be seriously damaging, whereas an increase would be enormously beneficial to profit and loss, liquidity and cashflow forecasts - For example: 

Reduced Gross Profit Margins

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 the table below shows how falls of 1% and 2% respectively of gross profit margin will affect pre-tax profits, liquidity, operating cash flow and the bank.

The sample forecast bank overdraft limit is £50,000. As this illustrates, a 1% drop in gross margin does not seriously embarrass that but operating cash flow, which is where cash to service debt has to come from going negative would definitely represent an amber light for a bank.

A 2% drop on the other hand would be a disaster. The profit forecast would never be achieved because the business would have run out of cash long before the year-end.

Improved Gross Profit Margins

Again using the What-If Calcualtor / Planner and assuming this time higher selling prices can be achieved or lower purchase prices from suppliers resulting in increases by degrees of 1%, gross trading margin dramatically improves those figures instead.

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.

Qualifying Sales for Gross Profit

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.

How is Cost of Goods Sold Calculated?

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.

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 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.

If it is possible put an improved gross profit margin together with reduced year-end stock levels, the subsequent improvements in liquidity and cashflows would be enormous.

Cost of Goods Sold - Added Value 

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.

Incoterms - Terms of trade (Sea Freight)

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:

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.

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.