Business Plan Help

Projected Sales Help

Explanation of Terms: Projecting your business Sales, Cost Of Goods Sold, and Income

Overview

Financial projections are critical to planning what the business is anticipated to produce in the future during given time periods. These time periods will become “benchmarks” to a business owner, allowing the owner to review and follow how closely the actual figures are (once they have occurred) compared to the projections listed in the plan. Most business plans will project forward for a period of five years, projected by months for the first two years and annually for the last three years.

Projections are based on “assumptions” that are carefully prepared by doing research on the industry, market, and competitors. If you have reviewed and followed the advice in earlier sections of this CD, you should have worksheets to use during the preparation of the financial section of the business plan. Much of the research information is also used in other sections of the business plan such as Background Information, The Marketing Plan, and the Competitive Analysis. If you have not performed this research, you should do so before entering numbers into the projections. “Assumptions” should be based on available facts obtained through that research, and for the business plan to be credible these assumptions should be backed by information to document where the information came from, and how the figures were arrived at. These documents are usually placed in the Appendix of the completed business plan for reference to those reviewing the plan.

Note: Simply “guessing” at what the business will do in the future is a recipe for failure. Properly researching your industry, your customers, and your competition provides a factual framework that allows educated estimates, not “guesswork”.

Projections work best when performed in a certain order. The first step is to project the sales (or revenues) the business is expected to produce. Once the sales are projected, the next step is to determine what those sales will cost to produce, so the second step will be projecting the Cost Of Goods Sold. Those two projections will allow us to determine the “Gross Profit” of the business (Sales – Cost Of Goods Sold = Gross Profit). The third step will be to subtract the “Operating Expenses” of the company to project “Net Profit” (Gross profit – Operating Expenses = Net Profit). You will find this as the actual formula used in the income statements.

Explanation of Terms: Projected sales

Most companies sell more than one product or service. Because the selling price and the cost to purchase or produce each individual item varies, there are seven different entry lines for the various items. If your business is a “Service Based” business, the items you are selling are probably “billable hours”, or the amount of time (on an hourly basis) that you can charge customers for. If different rates are charged for different services, each should be on a different entry line. The “quantity” will be the amount of hours charged for that particular service. An example: Bill’s Yardwork Inc. performs many types of service, and charges different prices depending on the service. In the projection that follows he is using the following: Raking @ $15 per hour; Tilling @ $30 per hour, and Weeding @ $35 per hour.

If your company is selling goods, then each item will be listed. In the following example Bill now owns a bakery and he is selling: Pies @ $10 each, Tarts @ $4 each, and Cakes @ $13 each

Sometimes companies will break down sales by the various profit margins for particular type products. You may need to configure the amounts on a worksheet, then enter in the figures. These lines will correspond to the same lines under the Cost Of Goods Sold projections during the next step to help accurately project income. Bill has now purchased an appliance business and has grouped the following because of the various profit margins: Stoves @ 40% profit margin, Refrigerators @ 25% profit margin, and Dishwashers @ 20% profit margin: