174 CHAPTER 8 GETTING TO GROSS PROFIT
IT IS SIMPLE REALLY
Do not be terrified by the idea of forecasting sales. It really is quite straightforward. There
is no black magic or sorcery involved. Let me take you through an example.
Recall that Tetrylus Inc has developed a computer system that tracks the activities of
workers in hazardous industries – mining, oil and gas extraction, construction, accounting
(just kidding about this last one).
Tetrylus is playing the numbers game. The planners have identified the number of
sales-channel business partners that they can support and the number of sales that the
partners are expected to make in a year. They have also projected the average number
of components that will be included in each sale (one software package and up to 2500
identity badges). Simple arithmetic produces sales volumes. From volume, costs and
prices are built up. These are shown in Figure 8.4. Inventories, sales, cost of sales and gross
profit are calculated automatically in Figure 8.6 (later). A descriptive extract from the busi-
ness plan is shown in Figure 8.8 (later) – and the example is continued in Chapter 9.
This is a simple and consistent forecasting. You might not agree with the numbers, but
you can alter the assumptions and produce a range of possible outcomes that you can
believe in – which is where our friend what-if comes in (Chapter 11).
Pulling it all together
Having arrived here, you have:
understood your market (Chapter 5);
developed a strategy and an operating plan (Chapter 6);
laid down assumptions for the planning period;
used an economic/environment forecast to predict the path of leading indicators;
used leading indicators to forecast demand for your product class, category or
product itself;
allowed for changes in the pattern of demand for product class and category; and
estimated the effects of your strategy and plan on final demand for your product.
Now you need to pull together all of this analysis. Make a table with a row showing fore-
cast sales volumes for each month (or quarter or year). Put your projected sales prices for
each period into another row. Multiply one by the other and you have a forecast of gross
sales revenue per period. An example is shown in Figures 8.4 and 8.6. Note that all the
figures in the second half of the example (Figure 8.6) are calculated automatically. Change
a forecast or assumption in the first half, and you see the effect ripple through. This will
make your what-if modelling in Chapter 11 very easy.
PUTTING IT ALL TOGETHER 175
Figure 8.4 Playing the numbers game (1)
A B C D E F
1 TETRYLUS Inc Financial plan
2
3 Sales, costs and prices, first five years
4 Dollars
5 Year 1 Year 2 Year 3 Year 4 Year 5
6 Channel arithmetic
7 No. of channel partners 4 7 11 15 20
8 No. of sales per partner 1 3 12 12 12
9 Total no. channel sales 4 21 132 180 240
10 Direct sales 0 0 0 0 0
11 Total no. sales 4 21 132 180 240
12
13 Average volumes per sale
14 Hardware 960 2 000 2 500 2 500 2 500
15 Software 1 1 1 1 1
16
17 Total sales volumes
18 Hardware 3 840 42 000 330 000 450 000 600 000
19 Software 4 21 132 180 240
20
21 Cost of production per item
22 Hardware 25 23 12 11 10
23 Software 500 500 500 500 500
24
25 Channel price per item
26 Hardware 80 50 45 41 36
27 Software 3 500 2 500 3 000 3 000 3 000
28
29 Markup, %
30 Hardware 220 122 275 275 275
31 Software 600 400 500 500 500
32
33 Price per package
34 Hardware 76 800 100 000 112 500 101 250 91 125
35 Software 3 500 2 500 3 000 3 000 3 000
36 Total 80 300 102 500 115 500 104 250 94 125
37
Notes:
Line 7 x line 8
Line 9 + line 10
One package per sale
Line 11 x line 14
Line 11 x line 15
The step reduction in
year three reflects new
production techniques
made viable by higher
volumes
Licence fees
[(Line 26 + line 22) –1] x 100
[(Line 27 x line 23) –1] x 100
Line 14 x line 26
Line 15 x line 27
Line 34 + line 35
Extract from a spreadsheet summarising the first part of a sales forecast.
This company has projected the number of sales partners that it will be working with, the average
number of sales that each partner will make, and the average number of hardware components
(identity badges in this instance) that will be included in each sale. The company has also calculated
cost and sale prices, based on expected volumes. The remainder of the forecast is shown in
Figure 8.6 and described in Figure 8.8.
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