The Formula For Calculating Cost Of Goods Sold Is Reinforce Your Business Plan With Sound Financial Projections

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Reinforce Your Business Plan With Sound Financial Projections

As surprising as it may sound, the creation of financial concepts is more important and complex, than the actual results. More than just numbers, it’s planning that matters. Or to repeat, it is the means to the end that is more important here than the end.

Without a financial forecast, a business is like fumbling in the dark without a lamp and a map and you will not win the confidence of an investor or get funding. Whether you are self-funded, or have a family-run business, you need financial forecasting as a guide and barometer to measure your company’s performance.

You will need to follow these steps to get to your destination financial forecast:

Develop your 3- to 5-year forecast: You can make your own predictions, based on past sales data, competitive comparisons, and current economic conditions. Usually it’s an individual combination and you have to understand that your lenders of choice won’t believe you anyway! We all want to believe that our sales will increase but always remember that your investors will hold you accountable in the future. Keep in mind that if you need more money 3 years from now, these same investors are a great source of more money but they will measure your current progress against your initial projections.

Create an Expense Budget: This includes your cost of goods, but also your operating costs such as equipment, wages, rent, sales, insurance, depreciation and so on. Usually after estimating cost of goods, we break down operating costs into broad categories such as: Marketing & Sales, Administration & Research & Development or Misc. Cost of Production.

Get the Cash Flow Statement: This refers to the cash inflows and outflows of your business and exposes your availability, or ability to use cash when needed. (and important for lenders, the ability to repay!) The Cash Flow Statement is of primary interest to investors and lenders as they will want to ensure that your business plan includes sufficient funds to sustain operations.

Build your Income Estimate: This refers to your financial position, resulting from revenue, and cost of goods sold, gross profit and operating expenses. The amount of revenue you project is important from a long-term performance perspective but in some cases like internet marketing, sometimes growth and number of customers are equally important.

Check Your Assets and Liabilities: Assets are things you own that have value, while liabilities are amounts you owe others. When creating your concepts, you need to make sure that you include the buildings, equipment, vehicles and the like that you will need to support your business plan.

Get to your Break Even Analysis: The most profitable part of the forecast is when you are ready to make a profit for your business based on a combination of fixed costs, variable costs per unit of sales, and revenue per unit of sales. This is the last stage in your business where costs equal sales.

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