184 CHAPTER 8 GETTING TO GROSS PROFIT
Gross profit
I saved the best for last. The final step is to subtract cost of sales from sales value – to
arrive at gross profits. Like this:
Money
Sale 900,000
Less cost of sales 750,000
Gross profit 150,000
You can feel justifiably proud of having arrived at this point. We are almost there. By now,
your knowledge and self-confidence should be growing. If you were doubtful of mas-
tering the complexities, you should by now realise that business planning is a matter of
simple organisation and logic. It is not an awesome task beyond explanation. You will
soon be in a position not only to write a clear plan and explain your financial plans but
also to understand and question figures presented to you. Take a break. Then write a sum-
mary of all this work for your business plan.
Writing it up
The complexity of acquiring your product dictates the amount of detail required in your
business plan. Obviously, there is less descriptive work to do if your sale is a haircut or if
you buy widgets and re-sell them. A giant aircraft manufacturing company has a bigger
task when calculating cost of sales.
The box on page 187 takes you through the ten steps to writing up your sales forecast.
The final step, reviewing risks, is covered in Chapter 11. Figures 8.8 and 8.9 show simple
ex amples from a business plan. This is continued in Chapter 9, where we do a little more
work to get to net profit.
WRITING IT UP 185
Some of the background work for this business plan is shown in Figures 8.4, 8.6 and 8.9.
TETRYLUS BUSINESS PLAN Doc 20110136 Sales Projections
SALES
Introduction
Tetrylus ONE reduces the number of accidents at work and cuts the cost
of complying with health and safety legislation. Companies will recov-
er in ten months their entire initial investment in buying the hardware,
licensing the software and implementing the system. Moreover …
Sales volumes
The limiting factor on sales volumes might be our ability to imple-
ment enough systems in a given period of time. We can solve this
by selling through ISPs and using their technical staff to implement
our systems for end-users. This cuts our resource requirements and
reduces the sales cycle (since ISPs will leverage existing customer
relationships). Moreover, we are increasing the incentive for ISPs to
re-sell Tetrylus ONE by allowing them to earn a high margin on the
product while also earning from sales of their consulting and imple-
mentation services.
….
We have already appointed three ISPs, and we expect to recruit
one more this year. We will continue to add ISPs – until we have
20 in year 5. We are working with current ISPs to develop specific
prospective sales. We have three pilot sales at contract-negotiation
stage, and we will make a total of four sales during this year …
Our target is to sell an average of 2500 Tetrylus ONE identity badges
with each sale by year 3. Initial sales will be smaller because …
Production costs
Identity badges will be produced for us by TechnoWhiz. This will
reduce the resources that we require and limit our manufacturing
risks – TechnoWhiz have already produced prototypes that meet or
exceed our quality specifications. Initial costs of $50 a badge will fall
to $23 in year 2. Our projected volumes allow …
Selling price
Longer-term, sales will average a little over $100,000 per package.
Pilot sales aimed at establishing references sites will be smaller
amounts. The following table shows the composition of a Tetrylus
ONE package …
Copyright © 2011 TETRYLUS Inc Page 14 of 20
Figure 8.8 Sales forecasts from the business plan
This report starts
with a compelling sales
proposition. Note how
it focuses on benefits.
This word implies that
the plan was written by
a sales executive (and
sales are the bottom
line). Your customers
invest – they don’t
spend money.
A good paragraph, but
it is wrong to assume
that the reader will
know that ISP means
independent service
provider. Always define
acronyms and jargon
when they are first
encountered in a new
section of the plan.
How high is high? You
might not think that it
is relevant, but read-
ers will ask about such
unstated quantities.
Another indication
of the way that
risks and costs have
been minimised. This
appeals to capital
providers.
This section of
the business plan is
building a logical
understanding of
the sales forecasts.
186 CHAPTER 8 GETTING TO GROSS PROFIT
TETRYLUS BUSINESS PLAN Doc 20110136 Annex A. Financial Projections
TETRYLUS Inc Financial plan
Production and sales, first six months
Dollars
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
G-1 Costs and prices
G-2 Production cost, per unit 0 50 50 50 50 50
G-3 Sales price, per unit 0 78 78 78 78 78
G-4
G-5 Inventory volume
G-6 Opening stock (prev 9) 0 0 300 800 350 850
G-7 Addition (production volume) 0 500 500 0 500 0
G-8 Reduction (sales volume) 0 –200 0 –450 0 –600
G-9 Closing stock (6 + 7 + 8) 0 300 800 350 850 250
G-10
G-11 Inventory value
G-12 Opening stock (prev 15) 0 0 15 000 40 000 17 500 42 500
G-13 Addition (line 2 x line 7) 0 25 000 25 000 0 25 000 0
G-14 Reduction (line 2 x line 8) 0 –10 000 0 –22 500 0 –30 000
G-15 Closing stock (12 + 13 + 14) 0 15 000 40 000 17 500 42 500 12 500
G-16
G-17 Gross sales
G-18 Hardware (line 3 x line 8) 0 15 600 0 35 100 0 46 800
G-19 Software 0 4 400 0 4 900 0 3 200
G-20 Total sales (lines 18 + 19) 0 20 000 0 40 000 0 50 000
G-21
G-22 Cost of sales
G-23 Hardware (line 2 x line 8) 0 10 000 0 22 500 0 30 000
G-24 Software (from software account) 0 3 591 0 4 683 0 3 979
G-25 Total cost (lines 23 + 24) 0 13 591 0 27 183 0 33 979
G-26
G-27 Gross profit
G-28 Hardware (line 18 – line 23) 0 5 600 0 12 600 0 16 800
G-29 Software (line 19 – line 24) 0 809 0 217 0 –779
G-30 Total (lines 28 + 29) 0 6 409 0 12 817 0 16 021
G-31
G-32 Gross profit, %
G-33 Hardware (line 28 / line 18) 0 36 0 36 0 36
G-34 Software (line 29 / line 19) 0 18 0 4 0 –24
G-35 Total (line 30 / line 20) 0 32 0 32 0 32
Copyright © 2011 TETRYLUS Inc Page A2 of A10
Figure 8.9 Sales forecasts from the back of the business plan
WRITING IT UP 187
Ten steps to writing a successful sales forecast
1 Describe the logic underlying your forecast.
2 Show any historical proofs for your methods – such as a chart similar to Figure
8.2 illustrating intimate relationships.
3 Introduce any assumptions that you have made – such as about the level of
interest rates.
4 Develop your forecast.
5 Explain how you have modified the forecast to take account of industry trends,
your marketing, etc.
6 Show sales forecasts.
7 Show how you arrive at your cost of sales and therefore gross profit.
8 Include a summary table in the text and details in the annexes to your plan.
9 Explain the key risks and indicate alternative sales scenarios if these risks
become dominant.
10 Keep it simple, clear and concise.
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