Forecasting the Revenues of the Business

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Forecasting Revenues and Costs

Forecasting the Revenues of the Business

Introduction

One of the most challenging aspects of developing a business plan is the financial plan. It allows entrepreneurs to make decisions based on financial assumptions before the business even starts. Therefore, these financial projections require careful attention.

Revenue

Revenue occurs when sales exceed the cost to produce goods or render services. Revenue is recognized when earned, regardless of whether payment is received in cash or charged to the customer's account.

Sales & Service Income

  • Sales: Used when the business is in merchandising or retailing.
  • Service Income: Used to record revenues earned by providing services.

Factors in Forecasting Revenues

  1. Economic Condition of the Country

    A growing economy generally leads to higher consumer spending. Understanding the overall health of the economy helps in making informed estimates, as a healthy economy supports business growth.

  2. Competing Businesses or Competitors

    Observing competitors can provide insights into market demand, the number of products sold, and available market share. This helps determine how much stock to maintain and the potential revenue to generate.

  3. Changes in the Community

    Shifts in customer demographics, lifestyle, and buying behavior can impact market dynamics. Entrepreneurs should adapt to these changes, such as trends influenced by celebrities, to maximize sales potential.

  4. Internal Aspects of the Business

    Factors such as plant capacity and operational efficiencies play a role in forecasting revenue.

Mark Up

Mark Up is the amount added to the cost of goods to determine the selling price.

  • Formula for Mark Up Price: Mark Up Price = (Cost x Desired Mark Up Percentage)
  • Formula for Selling Price: Selling Price = Cost + Mark Up

Projected Revenue

  • Projected Monthly Revenue: Projected Monthly Revenue = Projected Daily Revenue x 30
  • Projected Yearly Revenue: Projected Yearly Revenue = Projected Daily Revenue x 365

Assumed Increase of Revenue

To calculate the assumed increase in revenue for specific months:

  • Projected Monthly Revenue (Increase): Projected Monthly Revenue (Increase) = Revenue (January) x 5% Increase

Forecasting the Cost of the Business

Forecasting Costs of Goods Sold (COGS)

This represents the cost of merchandise or goods sold during a specific period. COGS is calculated by adding the beginning inventory to the net purchases, then subtracting the ending merchandise inventory.

Merchandise Inventory

  • Beginning Inventory: Goods available at the start of the business or accounting period.
  • Purchases: The cost of acquiring goods, such as t-shirts or jeans, from suppliers.
  • Ending Inventory: Goods remaining at the end of the accounting period.

Freight-in

The cost paid to transport purchased goods from the supplier to the business.

Operating Expenses

Operating expenses are essential costs for business operations, such as:

  • Internet connection
  • Utilities (e.g., electricity)
  • Salaries and wages
  • Miscellaneous expenses

Operating expenses are incurred regularly to keep the business running and are typically paid at the end of each month.

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