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.
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 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% |
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.
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 plus materials and labour costs associated with added value such as repackaging, labelling or assembly.
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 is shown in the example below.
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 |
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.