104 | HOW TO WRITE A BUSINESS PLAN
One way to derive your average cost
of sales is to estimate your annual sales
revenue for each product or service. Then
calculate each product’s annual cost of
sales. Finally, add up the numbers to get an
annual average.
More Detailed Method to
Determine Average Cost of Sales
Another way to calculate your average cost
of sales is to make a separate monthly sales
revenue and cost of sales forecast for each
of your major product or service lines. If you
complete a separate monthly forecast for
each of your product or service lines, you
will have a very detailed forecast. However,
many people balk at this level of detail in
forecasting and wish to proceed with the
less-detailed method demonstrated in this
section. Either way is acceptable.
CAUTiON
Whether you make one annual cost of
sales forecast or a number of detailed forecasts,
don’t forget about the inevitable percentage
of merchandise you will have to move at
marked-down prices. Whether you’re in the
book business, bake cookies, or are a child
psychologist, chances are you will commonly
sell some of your product or services for less
than standard prices. This may be because you
need to move out last year’s styles or because
you need to sell broken cookies or because
you provide counseling cheaper to low-income
groups.
exAmple:
Antoinette Gorzak plans to sell dresses
for an average price of $250, and her
research shows they will cost $125 each.
Her cost of each sale for dresses before
she allows for labor and other overhead
will be 50% of the selling price. If she
plans to give her customers anything
with the purchase, say a specially
printed shopping bag and an imprinted
dress box, she should include the cost
of these items as part of her cost of
sales. Maybe this will make her cost of
each sale 51% or 52% instead of 50%.
Since Antoinette sells accessories in
addition to dresses she needs to allow
for different gross profit margins for the
additional merchandise.
A cost-of-sales averaging chart for
Antoinette’s Dress Shop might look
like this: