Forecasting

Revenues in Business
Operations
I. Introduction

FINANCIAL FORECAST
❑It gives businesses access to cohesive reports, allowing finance departments
to establish business goals that are both realistic and feasible.
❑It also gives management valuable insights into the way the business had
performed in the past and the way it will be in the future.
❑Financial forecast aims evaluate current and future fiscal conditions to guide
policy and programmatic decisions.
❑It is also a fiscal management tool that presents estimated information
based on past, current, and projected financial conditions.
 Development
FINANCIAL
FORECAST
❑is an estimate of future
financial outcomes for a
company or project,
usually applied in
budgeting, capital
budgeting, and/or
valuation.
Forecasting Most entrepreneurs complain because forecasting
takes a lot of their time which they think could be
business revenue of better use if spent in selling than planning.
and expenses But more investors would be interested in
during the financing your business venture if you could
startup stage are provide them with a thoughtfully prepared
forecast, because they know that these forecasts
more of an art will surely be of help in making your business a
than science success by creating highly effective operational
plans.
(Advani, 2020).
 Start Start with expenses, not revenues.

Simplified
Financial
Forecast revenues using both conservative
Forecasting Forecast reality and aggressive dream.
(Advani,
2020)
Check the key ratios to make sure your
Check projections are sound.
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 Variable Costs
•Rent
•Utility bills
•Cost of Goods Sold
•Phone bills/communication costs • Materials and supplies
•Accounting/bookkeeping • Packaging
•Legal/insurance/licensing fees •Direct Labor Costs
•Postage • Customer service
•Technology
•Advertising & marketing
• Direct sales
•Salaries • 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 conservative
reality and aggressive dream

If you're like most entrepreneurs, Rather than ignoring the audacious optimism and creating
you'll constantly fluctuate between forecasts based purely on conservative thinking, I
conservative reality and an aggressive recommend that you embrace your dreams and build at
dream state which keeps you least one set of projections with aggressive assumptions.
motivated and helps you inspire
others. You won't become big unless you think big! By building two
sets of revenue projections (one aggressive, one
I call this dream state "audacious conservative), you'll force yourself to make conservative
optimism." assumptions and then relax some of these assumptions for
your aggressive case.
 low price point
For example,
your
two marketing channels
conservative
revenue
projections no sales staff
might have
the following
assumptions: one new product or service introduced
each year for the first three years
 low price point for base product, higher price for premium
product

Your three to four marketing channels managed by you and a

aggressive paying employees during the startup stage

marketing manager (Read my column on paying employees

paying employees during the startup stage

during the startup stage to learn how you can afford a

case might marketing manager.)

have the two salespeople paid on commission

following
assumptions 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
 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 you grow sales, but it's not
enough to pay your bills!
3. Check the key ratios to make sure your
projections are sound.

a. Gross margin.
This refers to how much of the total revenue is the total direct
cost during a period (i.e. quarterly, annual, or bi-annual).

Formula:
Gross Margin=Total Revenue-Cost of Goods Sold
Total Revenue
 3. Check the key ratios to make sure your
projections are sound.

b. Operating profit margin.

This refers to how much of the total revenue is the total operating cost—
direct cost, overhead, excluding financial costs—during a period i.e.
quarterly, annual, or bi-annual).

Formula:
Operating Profit Margin= Operating Profit X 100
Net Sales
3. Check the key ratios to make sure your
projections are sound.

c. Total headcount per client.

You must divide the number of your employees by the number
of expected clients. You should consider revisiting your
forecast about revenue and payroll expense as your business
grows.

Formula:
Revenue per Employee Ratio= Net Sales
No. of Employees
Top 5 Forecasting Problems Your Business May
Face

✓Financial planning is the cornerstone of

every business’s continued success.
✓The process of allocating funds and
determining how to best use those funds to
achieve both short- and long-term business
objectives is vital and powerful.
Even though there is a well-prepared financial planning, your
business could encounter some problems like the following:

❑1. Organizational misalignment

❑2. Financial forecasting inefficiencies and lack of data credibility
❑3. Operational data issues
❑4. Cumbersome financial consolidation
❑5. Difficulty with translating foreign currency
Benefits of Financial Forecasting
Financial forecasting is really beneficial and will aid you
and your business to:
❑assess the success of your efforts to determine the long-term
viability or value of an activity
❑take control of your cash flow and purposefully direct your
company
❑develop benchmarks for use in future forecasts
❑perform contingency planning during challenging financial times
❑anticipate the impact of new expenses
❑identify financial problem areas and their causes
❑reduce financial risk
❑create an environment of certainty and stability
❑make future budgeting much easier
Components of Financial Forecasting
These elements feed into a financial forecast:
Monthly financial statements

Risks and opportunities on the horizon

Actions you can take or are taking to minimize risks and capitalize
on opportunities
Resources available to bring the forecast to fruition

Obstacles that can potentially arise and plans for overcoming

them
Engagement
Learning Task 1: Problem Analysis
Directions: Complete the table below by
sharing your insights about possible solutions
to some financial problems or situations
encountered by entrepreneurs. Explain
briefly each item and write your answer on a
separate sheet of paper.
SITUATION/FINANCIAL PROBLEMS SOLUTIONS
1. Organizational Misalignment
2. Financial Forecasting Inefficiencies and Lack
of
Data Credibility
3. Operational Data Issues
Computing for
Profits
Introduction
❑If revenues and expenses should turn out to
be equal, the company will have broken even.
❑Net income is one of the most important
indicators of the financial health of a business.
❑The first is the pre-tax income, which is the
amount the company earned before taking
taxes into account.
In our previous topic, you have learned about forecast revenue and cost to
be incurred, forecasting problems, and the benefits of financial
forecasting.
You were able to explain why these are important in businesses and the
objectives behind a company’s core principles.
To review this, answer briefly the following questions below.

1. What is forecasting revenue? How is it important to entrepreneurs?

2. Why do we need to forecast the cost to be incurred in a business?
3. What are the costs associated with forecasting?

With the knowledge you have right now, we will proceed with our next
lesson.
DEVELOPMENT
PROFIT/ NET INCOME

Profit describes the financial benefit realized when the revenue generated
from a business or activity exceeds the expenses, costs, and taxes involved in
sustaining the activity in question.
Any profits earned funnel back to business owners, who choose to either
pocket the cash or reinvest it back into the business.
What Does Profit Tell You?
Profit is the money a business pulls in
after accounting for all expenses.
Whether it's a lemonade stand or a
publicly traded multinational company,
the primary goal of any business is to
earn money, therefore a business
performance is based on profitability,
in its various forms.
Figure1 https://bit.ly/3vi2XPA
Three major types of profit
The gross profit, operating profit,
and net profit--all of which can be
found on the income statement.
Each profit type gives analysts
more information about a
company's performance,
especially when it's compared to
other competitors and periods.
Figure 2...Profit http://bit.ly/3s5v5UP
 Gross, Operating, and Net Profit
1. Gross profit is the sales minus the cost of goods sold. Sales are the first line item on
the income statement, and the cost of goods sold (COGS) is generally listed just below it.
Formula: Gross Profit=Total Sales−COGs

2. Operating profit is calculated by deducting operating expenses from gross profit.

Gross profit looks at profitability after direct expenses, and operating profit looks at
profitability after operating expenses.
Formula: Operating Profit=Gross Profit−Operating Expenses

3. Net profit is the income left over after all expenses, including taxes and interest,
have been paid.
Formula: Net Profit=Operating Profit−Taxes & Interest

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Computing for Profit
The simplest formula in computing the profit is by subtracting
total expenses from total revenue.
The computation of profit is by deducting direct costs and
indirect costs (also known as overheads) from sales (Informi,
2020).
Direct costs are expenses that directly go into producing goods
or providing services such as labor, materials, and other
manufacturing supplies; while indirect costs are the general
business expenses that keep the business operations such as
rent, utilities, and general office expenses (Blakely-Gray,2018)
This simplest formula is total revenue
– total expenses = profit.

• Figure 3. Net Profit.

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Profit is calculated by deducting direct costs,
such as materials and labor, and indirect costs
(also known as overheads) from sales.

Based on the normal accounting

guidelines, sales and expenses are
included in profit on the day they occur,
not on the day of actual payment so profit
will include credit sales and purchases
even when they are not yet paid.
Here is an example
A business buys 3,000 of stock in October and
agrees to pay for it in three months. It sells the
stock in the month in which it was purchased
(October) for 5,000 cash. The profit for the month
is 2,000. Even the reality that the stock was not
paid for immediately is not important when
calculating profit.
Based on the discussion….

Gross

Explain the similarities and

differences between gross,
PROFIT operating, and net profit.
Operating Net