Forecasting Revenues and Costs

Department
Why forecast?
Forecasting is a tool used in planning that aims to support
management or a business owner in its desire to adjust and cope
with uncertainties of the future. Forecasting depends on data from
the past and present and to make meaningful estimates on revenues
and costs. Forecasting revenues and costs is the same as weather
forecasting, though forecasting revenues and costs is in the context
of business. Entrepreneurs use forecasting techniques to determine
events that might affect the operation of the business such as sales
expectations, costs incurred in the business as well as the profit that
the business is earning. Making informed estimates reduces risks
that might be experienced by the entrepreneur in the future.
Checking prior knowledge…
WHAT IS FORECASTING?...
 You have learned in the previous lesson the 4Ms of operations; you now
have the idea on what product/s to manufacture and sell. Now, you also have a
business model. One of the most challenging parts in developing a business
plan is the financial plan. This part allows the entrepreneur to make decisions
based on financial assumptions without even having started the business.
Therefore, these financial projections should be given the most attention by
the entrepreneur.

Let us now examine how the sale of products generates revenues. In this
lesson, we will identify the mark-up and selling price of the product. We will
also project the revenues that the business will make from the sale of products
Have you tried estimating the time that it takes you to travel from
home to school? Try to fill in the necessary information in the table
below. Write your estimate in Estimated Time column, after arriving
to school fill in the Actual Time in the blank provided.
How close were your estimates compared to the actual time?

Did your estimate fall short compared to the actual time?

What do you think were the factors that might have contributed in getting you early
to school?.

On the other hand, does your actual time exceed your estimates?

What do you think were the factors that might have contributed in arriving later than
your estimated time?
 Making informed estimates requires careful considerations on several
factors that might affect the outcome of your travel such as, distance from
home to school, the means of transportation you will be taking, the
number of passengers and etc. Traveling from home to school on a regular
basis had helped you arrive with an estimate that was very close to the
actual time of arrival.

Considering these factors is essential in making informed estimates by

the entrepreneur. Since the business he/she is venturing hasn’t started yet,
it is important that these factors affecting forecasting will be determined
to better help him/her in making the best decisions for the business.
For the entrepreneur, after realizing the potential for profit of his/her
business concept, the next step is to estimate how much the revenue
is on a daily, monthly and annual basis. Before going to forecasting
and projecting the revenues of the business, let us determine first
what revenue is.
Revenue is a result when sales exceed the cost to produce goods or
render the services. Revenue is recognized when earned, whether
paid in cash or charged to the account of the customer. Other terms
related to revenue include Sales and Service Income.

Sales is used especially when the nature of business is merchandising

or retailing, while Service Income is used to record revenues earned
by rendering services.
 The entrepreneur would want his/her forecasting for his/her small business as credible and as
accurate as possible to avoid complications in the future. In estimating potential revenue for the
business, factors such as external and internal factors that can affect the business must be
considered. These factors should serve as basis in forecasting revenues of the business. These
factors are:

1. The economic condition of the country. When the economy grows, its growth is
experienced by the consumers. Consumers are more likely to buy products and
services. The entrepreneur must be able to identify the overall health of the
economy in order to make informed estimates. A healthy economy makes good
business.
2. The competing businesses or competitors. Observe how your
competitors are doing business. Since you share the same market
with them, information about the number of products sold daily or
the number of items they are carrying will give you idea as to how
much your competitors are selling. This will give you a benchmark on
how much products you need to stock your business in order to cope
with the customer demand. This will also give you a better estimate
as to how much market share is available for you to exploit.
3. Changes happening in the community. Changes happening in the
environment such as customer demographic, lifestyle and buying
behavior give the entrepreneur a better perspective about the
market. The entrepreneur should always be keen in adapting to
these changes in order to sustain the business. For example, teens
usually follow popular celebrities especially in their fashion trend.
Being able to anticipate these changes allows the entrepreneur to
maximize sales potential.
• 4. The internal aspect of the business. Another factor that affects
forecasting revenues in the business itself. Plant capacity often
plays a very important role in forecasting. For example, a “Puto”
maker can only make 250 pieces of puto every day; therefore, he
can only sell as much as 250 pieces of puto every day. The number
of products manufactured and made depends on the capacity of
the plant, availability of raw materials and labour and also the
number of salespersons determine the amount of revenues earned
by an entrepreneur.
Now that all factors affecting forecasting revenues are identified, you can now calculate and project
potential revenues of your chosen business. The table below shows an example of revenues forecasted in
a Ready to Wear Online Selling Business.
Example: Ms. Fashion Nista recently opened her dream business and named it Fit Mo’to Ready to Wear Online
Selling Business, an online selling business which specializes in ready to wear clothes for teens and young adults.
Based on her initial interview among several online selling businesses, the average number of t-shirts sold every
day is 10 and the average pair of fashion jeans sold every day is 6. From the information gathered, Ms. Nista
projected the revenue of her Fit Mo’to Ready to Wear Online Selling Business.
She gets her supplies at a local RTW dealer in the city. The cost per piece of t-shirt is 90 pesos, while a pair of
fashion jeans costs 230 pesos per piece. She then adds a 50 percent mark up to every piece of RTW sold.
Mark up refers to the amount added to the cost to come up with the selling price. The formula for getting
the mark up price is as follows:
• Mark Up Price = ( Cost x Desired Mark Up Percentage)
• Mark Up for T-shirt = ( 90.00 x .50)
• Mark Up for T-shirt = 45.00
In calculating for the selling price, the formula is as follows:
• Selling Price = Cost + Mark Up
• Selling Price = 90.00 + 45.00
• Selling Price for T-shirt = 135.00
Table 1 shows the projected daily revenue of Ms. Nista’s online selling business.
Computations regarding the projected revenue is presented in letters in upper
case A, B, C, D, and E.
Table 2 shows the projected monthly and yearly revenue of Ms. Nista’s
online selling business. Computations about the monthly revenue is
calculated by multipying daily revenues by 30 days ( 1 month).
For example, in Table 1 the daily revenue is 3,420.00. To get the monthly
projected revenue it is multiplied by 30 days. Therefore,
Projected Monthly Revenue = Projected Daily Revenue x 30 days
Projected Monthly Revenue = 3,420.00 x 30
Projected Monthly Revenue = 102,600.00
On the other hand, the projected yearly revenue is computed by
multiplying the monthly revenue by 12 months. The calculation for
projected yearly revenue is as follows.
Projected Yearly Revenue = Projected Daily Revenue x 365 days
Projected Yearly Revenue = 3,420.00 x 365
Projected Yearly Revenue = 1,248,300.00
• Table 3 shows the projected monthly revenues covering one year of
operation. The table shows an average increase of revenue every month by 5
percent except June, July to October and December. While the month of June
has twice the increase from the previous month by 10 percent, let us consider
that months covering July to October are considered to be Off-Peak months,
therefore sales from July to October are expected to decrease. It is assumed
that there is no increase in revenue from July to August, while from August to
October the decrease in revenues is 5 percent from previous month. Since
revenues from sales of RTW’s are considered to be seasonal, it assumed that
there is a 10 percent increase in revenue from November to December.
• Computation for assumed increase of reveneue on specific months is as
follows:
• Projected Monthly Revenue (Increase) = Revenue (January) x 5 % Increase  
• Projected Monthly Revenue (Increase) = 102,600.00 x .05
• Projected Monthly Revenue (Increase) = 5,130.00
• Projected Revenue for February = Revenue (January) + Amount of Increase
• Projected Revenue for February = 102,600.00 + 5,130.00
• Projected Revenue for February = 107,730.00
• On the other hand, decrease in revenue is computed as follows:
• Projected Monthly Revenue (Decrease) = Revenue (August) x 5 % Increase
• Projected Monthly Revenue (Increase) = 144,041.14 x .05
• Projected Monthly Revenue (Increase) = 7,202.06
• Projected Revenue for September = Revenue (August) - Amount of Decrease
• Projected Revenue for September = 144,041.14 – 7,202.06
• Projected Revenue for September = 136,839.08
After learning the calculations presented, you can now compute the projected revenue by day, month and year based on
your business concept.

Aling Minda is operating a buy and sell business, she sells broomsticks (walis tingting) in her stall at a local market. She gets her
broomsticks from a local supplier for 25 pesos each. She then adds 50 percent mark-up on each broomstick. Every day, aling Minda can
sell 30 broomsticks.
Use the template below and fill in the necessary figures based on the scenario. Remember to use the factors to consider in projecting
revenues and refer to Tables 1, 2 and 3 as your guide.
Use the calculations you have made in Table 1 to successfully complete the information in Table 2 and calculate the projected monthly and
yearly revenue of Aling Minda’s business. For Table 3, use the following assumed increases in sales every month. From January to May, 5
per cent increase from previous sales. For the month of June, 10 per cent increase from previous sales. For the months July to December,
record the same sales every month.