Lessons:

1.Forecasting the Revenues of the

Business
2.Forecasting the Cost to be Incurred
3.Computation for Profits
Learning Competencies:

The learners can:

1. Forecast the revenues of the

business.
2. Forecast the costs to be incurred.
3. Compute for profits.
 Forecasting the Revenues of the Business
HOW TO FORECAST REVENUE AND GROWTH?
 Forecasting business revenue and expenses during the startup stage is
really more art than science.
 Many entrepreneurs complain that building forecasts with any degree of
accuracy takes a lot of time-- that could be spent selling rather than
planning. But few investors will put money in your business if you're
unable to provide a set of thoughtful forecasts.
 More important, proper financial forecasts will help you develop
operational and staffing plans that will help make your business a
success.
Here's some detail on how to go
about building financial forecasts
when you're just getting your
business off the ground and don't
have the luxury of experience.
1. Start with expenses, not revenues. When you're in the startup
stage, it's much easier to forecast expenses than revenues. So
start with estimates for the most common categories of
expenses as follows:

FIXED COSTS/OVERHEAD:
• Rent
• Utility bills
• Phone bills/communication costs
• Accounting/bookkeeping
• Legal/insurance/licensing fees
• Postage
• Technology
• Advertising & marketing
• Salaries
Variable Costs
Cost of Goods Sold
Materials and supplies
Packaging

Direct Labor Costs

Customer service
Direct sales
Direct marketing
Here are some rules of thumb you should follow when forecasting
expenses:
Double your estimates for advertising and marketing costs since
they always escalate beyond expectations.
Triple your estimates for legal, insurance and licensing fees since
they're very hard to predict without experience and almost always
exceed expectations.
Keep track of direct sales and customer service time as a direct
labor expense even if you're doing these activities yourself during
the startup stage because you'll want to forecast this expense when
you have more clients.
2. Forecast revenues using both a conservative case
and an aggressive case. If you're like most
entrepreneurs, you'll constantly fluctuate between
conservative reality and an aggressive dream state
which keeps you motivated and helps you inspire
others. This dream state "audacious optimism” means
often gets applied in situations where someone does
something pretty unusual, like becoming an astronaut
and going to the moon.
For example, a conservative revenue projections
might have the following assumptions:
low price point
two marketing channels
no sales staff
one new product or service introduced each year for
the first three years
An aggressive case might have the following assumptions
low price point for base product, higher price for premium product
three to four marketing channels managed by you and a marketing
manager .
two salespeople paid on commission
one new product or service introduced in the first year, five more
products or services introduced for each segment of the market in years
two and three

Take Note: By unleashing the power of thinking big and creating a set of
ambitious forecasts, you're more likely to generate the breakthrough
ideas that will grow your business.
3. Check the key ratios to make sure your projections
are sound. After making aggressive revenue forecasts,
it's easy to forget about expenses. Many entrepreneurs
will optimistically focus on reaching revenue goals and
assume the expenses can be adjusted to accommodate
reality if revenue doesn't materialize. The power of
positive thinking might help to grow sales, but it's not
enough to pay the bills.
The best way to reconcile revenue and expense
projections is by a series of reality checks for key ratios.
Here are a few ratios that should help guide your thinking:

Gross margin. What's the ratio of total direct costs to total revenue
during a given quarter or given year? This is one of the areas in
which aggressive assumptions typically become too unrealistic.
Beware of assumptions that make your gross margin increase
from 10 to 50 percent. If customer service and direct sales
expenses are high now, they'll likely be high in the future.
Operating profit margin. What's the ratio of total
operating costs--direct costs and overheard, excluding
financing costs--to total revenue during a given quarter
or given year? You should expect positive movement with
this ratio. As revenues grow, overhead costs should
represent a small proportion of total costs and your
operating profit margin should improve. The mistake that
many entrepreneurs make is they forecast this break-
even point too early and assume they won't need much
financing to reach this point.
Total headcount per client. If you're a one-man-army
entrepreneur who plans to grow the business on your
own, pay special attention to this ratio. Divide the number
of employees at your company--just one if you're a jack-
of-all-trades--by the total number of clients you have.
Ask yourself if you'll want to be managing that many
accounts in five years when the business has grown. If
not, you'll need to revisit your assumptions about
revenue or payroll expenses or both.
 Forecasting the Cost to be Incurred

HOW TO FORECAST EXPENSES?

“Proper financial forecasts of expenses will help
you develop operational and staffing plans that
will help make your business a success.”
 FORECASTING EXPENSES
Forecast every expense of the business including:
• Startup Expenses. All the costs of getting your business up and running go
into the start-up expenses category.

• Fixed Costs. All the overhead costs of the business:

• Rent
• Utility bills
• Phone bills/communication costs
• Accounting/bookkeeping
• Legal/insurance/licensing fees
• Postage
• Technology
• Advertising & marketing
• Salaries
• Variable Costs. All of the costs that vary with the
business.
• Cost of goods sold
• Materials and supplies
• Packaging
• Direct Labor Costs
• Customer service
• Direct sales
• Direct marketing
Here are some rules of thumb you should
follow when forecasting expenses:
1. Marketing. Double your estimates for
advertising and marketing costs since they
always escalate beyond expectations.
2. Legal and Insurance. Triple your estimates for
legal, insurance and licensing fees since they’re
very hard to predict without experience and almost
always exceed expectations.
3. Sales and Customer Service. Keep track of
direct sales and customer service time as a
direct labor expense even if you’re doing these
activities yourself during the startup stage
because you’ll want to forecast this expense
when you have more clients.
4. Information about Other Businesses. If you have
experience in the type of business you are
starting—for example, you worked at a similar
business before striking out on your own—you will
probably have some idea of realistic financial
projections, or may be able to talk to someone who
can give you more information.
5. Accountants Can Help. Enlisting an accountant
familiar with small businesses and startups in your
industry such as a professional from an
accounting firm will help. An accountant will know
what type of expenses, sales and profits a well-run
business in your industry can expect, and will be
able to help you come up with realistic financial
projections.
6. Industry Info. Industry associations and
publications can help to summarize the overall
conditions for budget and costing.
 Computation for Profits
DETERMINING THE PROFIT FOR BUSINESS
Making a profit is one of the most important objectives of a
business. Calculating the profit can not only help to determine the
level of success, it also provides information about where a
business is making money and where an entrepreneur spending it.
One can calculate their business profit by subtracting the total
expenses from the total revenue. To identify what the revenues and
expenses are, start by choosing the time period an entrepreneur
wants to study. Businesses generally study a twelve-month period,
such as January 1 to December 31 or July 1 to June 30.
The selection depends upon:
the nature of the business
personal preference
possible tax considerations

Keeping records that are accurate, up-to-date, and

easy to use is essential to obtaining a precise count
of business profits.
CALCULATING YOUR TOTAL REVENUES
In order to determine what your total revenues were
for the period being studied, consider the following
points:
1. What is the amount of gross revenue from the
products or services that were sold? (Gross Sales)
2. What is the amount of the products
returned/credited to your customers?
3. What is the amount of discounts given to your
customer and employees? (Discounts)
CALCULATING YOUR TOTAL REVENUES
4. What is the amount of net sales from products and
services? (Net Sales are your gross sales minus your
returns, rejects and discounts.)
5. What is the amount of income from other sources like
interest on bank deposits, dividends from securities, or
rent on property leased to others? (Non-operating
Income)
6. What is the amount of total revenue? (Your total
revenue is your net sales plus your non-operating
income.)
 CALCULATING YOUR TOTAL EXPENSES
Expenses are the cost of the products sold and the services used in the
process of selling products or services. Some common expenses for
businesses are:
• cost of products sold (Cost of products sold is your beginning
inventory plus your purchases minus the ending inventory.)
• wages and salaries (Include your own at the actual rate you'd have to
pay someone else to do your job)
• rent
• utilities (electricity, gas, telephone, water, etc.)
• costs of web presence (online stores, website hosting, domain name
registration)
• delivery expenses
• insurance
 CALCULATING YOUR TOTAL EXPENSES
• advertising and promotional costs
• maintenance
• depreciation (a decline in the value of assets and allocating the cost of assets to the
periods of time they were used)
• taxes and licenses
• interest charges for money owed
• bad debts (a loss to the business that is classified as an expense because the debt cannot
be collected)
• professional assistance (accountant, attorney, information technology specialist, etc.)
• Understanding your expenses is the first step toward controlling them and increasing your
profit. After you have calculated your expenses, subtract the total amount from your total
revenue and that figure is the profit your business made during the period you studied.