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The Definitive Business Plan, 3rd Edition by Sir Richard Stutely

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176 CHAPTER 8 GETTING TO GROSS PROFIT
How does your forecast look? Was it what you expected? Have you made any artificial
assumptions? Will the economy perform as expected? Will your competitors play by the
rules? Will your customers remain loyal? You will review these issues in Chapter 11 and
perhaps modify the forecast or produce best- and worst-case forecasts, etc. For the
moment, assume that you have one perfect forecast. Now look at how you move on to
forecast your gross profit.
Cost of sales
Cost of sales is sometimes called cost of goods sold, but I am sure that you can cope with
this complex variation in nomenclature. Cost of sales is, how can I put this simply, the
direct cost of what you sell in any one accounting period.
For a re-seller, the cost of sales is the price paid to acquire the goods that are to be
re-sold.
In manufacturing, the cost of sales is raw materials and other supplies consumed
in making the product, plus directly attributed production wages and factory
overheads such as heat and light.
For a software company, the cost of sales might be determined as one-hundredth
of the original R&D cost for each unit sold (if lifetime sales are expected to be 100
copies of a program).
Simple services
Perhaps from time to time you will begin to think that this chapter is all about noisy
production lines and oily machines. This is because it is useful to consider the more
complex situations. If you are re-selling goods that you buy elsewhere or providing
services, your forecasting will be much more simple. Cost of sales might be nothing
more complex than your buying price including shipping or so-many hours of
your consultants time at their hourly employment costs.
Some people are notoriously poor at making these calculations. If you add up
all the hours invoiced by certain professionals during their lifetimes, you might
conclude that they each must live to be several hundred years old.
t
COST OF SALES 177
It makes sense to run through a more complex example. You can modify this or scale it
down for your own business. Figure 8.5 shows an example manufacturing account. To be
pedantic, the penultimate line perhaps belongs in a trading account but it is included to
show the final cost of sales.
It is not too hard to follow the logic. The manufacturing of a single product takes place
at a dedicated facility. It is easy to identify all the costs directly associated with produc-
tion. These comprise variable costs (such as raw materials) which vary directly with the
volume of production, and fixed costs (such as rent paid for the factory).
COST OF MATERIALS
In just the same way as you explored sales, you can analyse your raw materials, com-
ponents and other supplies. Again, look for relationships between these and various
economic indicators. This time, you are looking both at volumes – for the way that supply
and demand affect prices – and at price indicators.
Economic forecasts usually include retail or consumer price and GDP deflators – which
are indices of inflation at the consumer and national level and exchange rates. You will
also usually find indicators of labour costs. Obviously, you can use any or all of these to
help forecast price movements in your supplies. Trade and commodity producers associa-
tions sometimes produce useful data also.
OTHER PRODUCTION COSTS
Some other production costs are shown in Figure 8.5. These are projected in exactly
the same way as any other operating costs. To avoid duplication, I will defer discus-
sion of these production and operating costs until Chapter 9. When you read it you will
understand my logic. Skip forward now if you want to get straight down to forecasting
production costs. The remaining discussion in this chapter assumes that you have already
done this.
Indirect costs cannot be directly attributed to the cost of the product. They
include R&D, marketing and sales, and other administrative costs. These
are shown sep arately in trading or operating accounts which we look at in
Chapter 9.

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