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

A business plan showing successful profits, cash flows liquidity and balance sheet forecasts starts with your predicted gross profit margin.

Figurewizard produces all of those forecasts and more. If it turns out that your margin calls for changes to overheads, investments and financing or all perhaps all three, the Interactive What-If Calculator / Planner makes that possible.

All that is needed are single clicks of a mouse to make changes to your original figures for the above and all of the forecasts will update in real time.

Reduced Gross Profit Margins

In our working example shown here, gross profit margin on trade sales is set 41% plus 2.5% of extra sales volume from delivery or service charges brings that up to 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.

Increased Gross Profit Margins

Again using the What-If Calcualtor / Planner, this time assuming higher higher gross profit margins tells a very different story. This emphasises the importance of successful negotiations with suppliers of goods and services for resale.

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.

Year End Stock Value, Liquidity and Cashflow

Money in the bank beats money on the shelf, which is why efficient stock control will greatly benefit the balance sheet.

Using the Figurewizard What-If-Calculator to reduce year-end stock by 10% and 20% respectively may do little for net profit but the improvements in operating cash flow and the bank balance are dramatic.

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.