The Profit And Loss Forecast - Step 3
COST OF GOODS SOLD
The next item to be considered in the forecast is the cost of goods sold—how much you will pay for what you sell.
I have listed two basic methods for determining the cost of goods sold. Pick the one you find the simplest and use it.
Method 1: The Percentage Method. Let's assume that over the years your business has been operating on a consistent cost of goods sold percentage. Let's further assume that you would like to continue to operate at the same level for the coming year and believe you will. Simply multiply that percent by each month's sales; the result becomes the cost of sales for the month. This method may prove to be the simplest way to forecast cost of goods sold; however, its major weakness will be discovered when the actual costs are more or less than what was forecasted, and you try to find out the reasons why.
Unlike most of the expenses of your business, the actual cost of goods sold can vary depending on several factors: an incorrect beginning inventory, sales recorded in the wrong period, purchases recorded in the wrong period, an incorrect ending inventory, improper valuation of the inventory, and an inaccurate count of the items in the inventory. There-fore, if you have a variance between the actual percent of cost of goods sold compared to the estimated percent used in the forecast, pinpointing the reason for the variance can be quite difficult.
In general, a company will not compute the actual cost of goods sold until an accurate physical inventory is taken or reliable perpetual inventory records are maintained. Therefore, management may prepare their actual financial statements using the forecasted cost of goods sold and often- times will not compute the actual cost of goods sold more than once or twice a year when inventories are taken.
Only when the actual costs are computed can meaningful comparisons between actual and forecasted cost of goods sold take place.
Method 2: For a more precise method of determining your forecasted cost of goods sold, begin with the number of units of a particular product that you anticipate selling (see Sales Forecast, Method 2) and price the units to be sold.
Do this for each product line of sales.
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Example: |
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Units to be Sold |
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Anticipated Cost of Each Unit |
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Cost of |
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Product A |
50,000 |
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7.80 |
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390,000 |
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Product B |
35,000 |
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12.75 |
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446,250 |
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Product C |
100,000 |
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1.25 |
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125,000 |
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Cost of Goods Sold |
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961,250 |
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Source: Harvey A. Goldstein, CPA , Granville Publications