T
he main objective of this chapter is getting to gross profit (sometimes known as the
gross margin) – trading income from sales less directly attributable costs. These are the
cost of sales such as the spending directly associated with producing your product – raw
materials, components, production costs. If you have a simple product, sales costs might
be no more complicated than so-many hours of a consultant’s time or the buying price of a
gizmo that you re-sell. If you run a manufacturing plant, cost of sales will have a few more
elements to take into account – machinery, electricity and so on. Later, you will also deduct
indirect costs to arrive at net profit. Indirect costs are expenses (such as those associated
with running an office) that cannot be directly attributed to a specific product.
But we are getting ahead of ourselves. Start by looking at how you arrive at a viable
sales forecast. Then consider the costs. From these figures, you can calculate gross profit,
which is simply sales less the cost of sales. Always start with quantities (volumes) and then
consider the effect of pricing policies to derive sales values.
Breathe easily
Sales revenue is the air supply for your business. Without air, you suffocate. Put another way:
no sales = no revenue = no business.
The exception, of course, is if you are running a cost centre or non-profit organisation that
does not make sales in the conventional sense, such as the legal department of a large
corporation or a charity providing relief work.
In the case of the charity, there will be some fund-raising or other revenue source
which equates to sales revenue. For the legal cost centre, it is sensible to look for some
proxy measure of activity (number of contracts reviewed or number of litigations in prog-
ress). Better still, cost these activities and charge the department being serviced. In these
pages, sales and such proxies can be taken as synonymous.
For nearly all business plans, forecasts of sales revenue are the key to understanding the
future. Existing businesses and products have track records which assist with crystal ball
gazing – and sometimes give false credibility to the forecasts. If you are launching a new
business or new product you have to start from scratch. In each case, the approach is similar.
For most of this book you and I have pretended that you have just one product. We do
the same here. You will need to repeat this forecasting exercise for each of your goods
and services. In some cases they will be closely related – for example, maybe you always
sell a maintenance contract when someone buys one of your machines.
BREATHE EASILY 161
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