12

Accountancy Business and

Management (ABM)
ENTREPRENEURSHIP
Quarter 2 – Module 6
Financial Forecasting (Part 2)
ABM 12 – Entrepreneurship
Alternative Delivery Mode
Quarter 2 – Module 6: Financial Forecasting (Part 2)
First Edition, 2020

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 What I Need to Know
This module was designed and prepared for you. It is here to help you to know
more about business. The objectives of each lesson will serve as your gauge as to the
knowledge you will hone upon completing this module. Pre-assessment and post-
assessment are included which deal with the topics that are covered. It will measure of
how well you have learned the module.

This module was aligned with the DepEd Senior High School curriculum.
The module has one lesson namely:
Lesson 6 – Financial Forecasting Part 2

After going through this module, you are expected to:

1. Forecast business revenues;
2. Calculate production costs;
3. Project at least five-year financial statements.

What I Know
Perform the following mathematical exercises that will enable you to analyze and
enhance your calculations skills.

QUESTIONS ANSWERS
1 What is 5 + 10 - 7.5 + 35?
2 If you sell 15 hamburgers for P150, how much
would you have?
3 Is this called sales (benta) or profit (kita)? (refer to
question #2)
4 What is 7 x 5 x 2 -5?
5 You bought a book for P50 and sell it for P75, how
much is your sales (benta)?
6 How much is your profit? (refer to question #5)
7 What is (3 +10 + 5) x 6?
8 What is 10% of 100?
9 What is 15% of 200?
10 What is 150 ÷ 3?
11 One day, you sell 50 hamburgers for the price of
P15 each. How much is your sales (benta)?
12 You paid P500 to your supplier of hamburger
ingredients. How much is your margin (tubo)? (refer
to question #11)
13 You paid P80 for transportation and P50 for other
expenses. How much is your profit (kita)? (refer to
question #12)
14 What are the possible ways to generate a business
idea?
15 I have no bones and no legs, but if you keep me
warm, I will soon walk away. What am I?

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 Lesson
Financial Forecasting
6 (Part 2)
Forecasting means estimating or predicting future business performance. A
revenue forecast includes the income source such as sales, services interest on bank
deposits, dividends and commission.

Below are the examples of some taxpayers and their sources of income:

TAXPAYER INCOME SOURCES

Bakery Owner Sale of bread, cakes or biscuits
Physician, Lawyer, Accountant, Engineer Professional fees
Depositor Interest on savings and time deposits
Stockholder Cash Dividends
Salesperson Salaries, commissions
Apartment Owner Rental Income

What’s In

Below is a picture of a sumptuous Chocolate Cake. Identify all the possible ingredients,
efforts, materials, tools, equipment, and workforce that were used and exerted before
this meal was made available to the market. (Think of everything that you think
constitute a cost).

__________________ __________________
__________________ __________________
__________________ __________________
__________________ __________________
__________________ __________________
__________________ __________________
__________________ __________________
__________________ __________________
__________________ __________________
__________________ __________________
__________________ __________________
Processing Questions: __________________ __________________
__________________ __________________
1. How did you come up with those answers?
2. With these ingredients, how much __________________ __________________
would you sell this cake?
__________________ __________________
3. Do you think you can recover the cost of your expenses with this amount?
4. What did you learn with this simple task?
__________________ __________________
__________________ __________________
__________________ __________________
__________________ __________________
__________________ __________________
2__________________ __________________
______________ ______________
 What’s New

PROJECTED REVENUES FROM SALES

Projected revenue refers to the estimated money a company will generate during
a specific period. The projections often refer to monthly, quarterly or annual accounting
periods. Companies project revenue using a combination of research and internal
knowledge. For example, a business might review its previous sales for the same period,
contact customers to ask about their future purchasing plans, review trade association
research that projects consumer trends and ask sales staff what they estimate they will
sell during the period.

Forecast Your Expenses

Predicting your expenses is perhaps the easiest part of your revenue forecast
because you’ll be working with past expense records if you’re an existing business and
researched forecasts if you’re a startup. You’ll need to calculate two types of expenses:
- Fixed costs: These are the expenses that remain the same every month. They
include things such as rent, fixed salaries, utilities, insurance, phone, internet
and technology costs, advertising and marketing expenses, and legal, accounting,
and bookkeeping fees.
- Variable costs: Your variable costs are those expenses that change every month,
depending on your sales volume. They include the cost of the goods sold
(including materials and supplies), packaging costs, sales, cost of labor,
marketing, and customer service costs as they directly relate to the sale of your
product.
Forecast Your Sales
Forecasting sales may seem intimidating, but it is simply the act of looking for
some raw data and making some logical assumptions. If you own an existing business,
look at your past sales figures, and then consider the following factors.

Your customers: Identify your customer base and determine which ones you’ll include
in the forecast.
Your service area: Do you have plans for expansion? If so, include your current
geographical area as well as the area you plan to include.
Market conditions: Talks about the steadiness or fluctuation of the market.

Business position: Consider the position of your business within your industry, and
factor in your growth expectations.
Seasonal adjustments: Many businesses have increased and decreased sales in a
cyclical seasonal cycle. You may be one of those.
If you own a startup and don’t have historical records to work from, forecasting
your revenue won’t be as simple. It will take meticulous research on your part, and the
outcome should be based on this research, rather than guesswork. Here are some good
sources of information. Next, you’ll take all of your research and mold it into a prediction
for your future sales.

Create a profile of your ideal customer. For regional businesses, use the data from
the Census Bureau to determine how many of them live within a reasonable radius of
your business.
Estimate your market share. Do this by determining the total number of available
customers and then predicting how many of them will buy from you.

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Determine how often your customers will buy from you. For example, if you own a
beauty salon, you can count on your customers booking a service every four to six
weeks. Predict the average amount of each purchase for each of your product or service
categories.
To arrive at your projected sales volume, take all the figures you have and input
them into this formula:

NUMBER OF CUSTOMERS X AVERAGE SALES PRICE X NUMBER OF

Forecasting Costs
YEARLY PURCHASES = YEARLY PROJECTED SALES

Costs refer to expenditures incurred in generating revenues. Forecasting costs

incurred in manufacturing and trading businesses have two components:

• Cost of goods sold;

• Selling and administrative expenses.
In the manufacturing business, the cost of goods sold is computed as follows:

1. Add the cost of raw materials, direct labor (salaries and wages), and indirect
materials (items needed in the manufacture of goods, such as nails and paint) to
arrive at the cost of goods manufactured.
2. Deduct ending inventories of raw materials, work-in-process, and finished goods
from the cost of goods manufactured to arrive at the cost of goods manufactured
and sold. Note that ending inventories for the current year becomes the
beginning inventories for the incoming year.
Selling Expenses include the salaries, commissions, and entertainment
expenses of salespeople and representatives.
Administrative Expenses usually consist of taxes; licenses and fees; electricity,
water and telephone expenses; salaries/wages of accountants, clerks, janitors; and
transportation expenses.
The table below illustrates the cost of goods sold and selling and administrative
expenses. Total costs are determined by adding these two components.

PARTICULARS YEAR1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Cost of Goods Sold
Beginning Inventory 0 36,000 49,225 71,607 69,000
Purchases 360,000 456,250 547,500 620,500 803,000
Total Goods Available for Sale 360,000 492,250 596,725 692,107 872,000
Ending Inventory 36,000 49,225 71,607 69,000 95,920
Total Cost of Goods Sold 324,000 443,025 525,118 623,107 776,080
Selling and Administrative Expenses
Wages 30,000 30,000 31,200 31,200 36,000
Transportation 1,200 1,500 1,300 1,400 2,000
Rent 36,000 36,000 36,000 38,000 38,000
Light and Water 25,200 26,400 28,800 27,600 30,000
Total Selling and 92,400 93,900 97,300 98,200 106,000
Administrative Expenses
Total Costs 416,400 566,925 622,418 721,307 882,080

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 What is It
HOW TO PROJECT REVENUE COST

Ready-made templates are great, but sometimes you need to create your own. A
few of the steps involved in creating your own sales forecast include determining the
purpose of your sales forecast, examining your historical sales, reviewing industry data
that will influence your forecast, and deciding the time frame you want to cover. Below
are more details on the six steps involved in creating your own sales forecast:

- Determine the purpose of your sales forecast: Once you’ve decided why you’re
creating a sales forecast; it is easier to create it so that it gives you and senior
managers the answers you need.

- Examine historical sales: When you have an understanding of your past sales,
it’s easier to predict future sales. Example, you see that sales increase in the
summer months, you can factor this increase into your sales forecast.

- Collect industry data: Industry data and trends often influence sales. Factoring
this in makes your sales forecast more accurate. For example, if industry sales
are going down by 3% yearly, factor this into your sales forecast if you think it
will impact your business.

- Identify key business activities: If your company will invest in lead generation,
factor this into your sales forecast by showing an increase in sales as a result.

- Define your scope: Your sales forecast should only include the information
you’re interested in. For example, if you’re interested in sales for only the next
year, you won’t need to forecast sales into the next five years because that would
be out of scope.

- Create your layout and calculate your forecast: Sales forecasts can take on
a variety of layouts. Create one that works best for you and build formulas to
calculate your forecast.

Forecasting Business Profits

The projected incomes from operations refer to the difference between revenues and
costs.

PARTICULARS YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Revenues 440,400 566,925 658,418 763,307 932,080
Costs 416,400 536,925 658,418 721,307 882,080
Profit 24,000 30,000 36,000 42,000 50,000
Let us take the sales of goods as an example. The illustration below shows the
estimated annual revenues derived from the sales of goods over a five-year period.

Projected Revenues from Sales

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

P440,400 P566,925 P658,418 P763,307 P932,080
Estimated sales are based on the results of the sole proprietor’s interviews with
small trading businesses in the neighborhood. TO attract customers and still make
a profit, the mark-up should range only from 5.59% to 5.82%. To compute for the
mark-up, divide Revenues (Sales) by Costs. Estimated daily cash sales range from

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 PhP1,206.58 to PhP2,553.64. The daily figure is multiplied by 365 days to arrive at
the yearly revenue.

Creating the Enterprise’s Five-Year Projected Income Statement

Using the forecasted date found on tables 6.1 to 6.3, the prospective entrepreneur
can now prepare the enterprise’s five-year projected income statements. Just follow the
steps shown below

1. Start with the sales.

2. Deduct the cost of goods sold to arrive at the gross profit.
3. Subtract selling and administrative expenses and depreciation from gross profit
to determine net profit from operations.

Projected Income Statement (Year 1 to Year 5)

PARTICULARS YEAR1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
Sales 440,400 566,925 658,418 763,307 932,080
Cost of Goods Sold
Beginning Inventory 0 36,000 49,225 71,607 69,000
Purchases 360,000 456,250 547,500 620,500 803,000
Total Goods Available for Sale 360,000 492,250 596,725 692,107 872,000
Ending Inventory 36,000 49,225 71,607 69,000 95,920
Total Cost of Goods Sold 324,000 443,025 525,118 623,107 776,080
Gross Profit 116,400 123,900 133,300 140,200 156,000
Selling and Administrative Expenses
Wages 30,000 30,000 31,200 31,200 36,000
Transportation 1,200 1,500 1,300 1,400 2,000
Rent 36,000 36,000 36,000 38,000 38,000
Light and Water 25,200 26,400 28,800 27,600 30,000
Total Selling and 92,400 93,900 97,300 98,200 106,000
Administrative Expenses
Net Profit 24,000 30,000 36,000 42,000 50,000

To obtain the trend in revenues, costs, and profits for a five-year period, data
from tables above were presented on an annual basis using a spreadsheet/worksheet.
If incomes, expenses, and profits consistently increase each year, the trend is said to be
upward. However, its incomes, expensed, and profits consistently go down each year,
then the trend is considered downward. But if incomes, expenses, and profits go up in
one year, drop the following year, then move up again in the next year, the business
trend is described as irregular.

In our example, the figures for revenues, costs, and profits all show an upward
trend. Hence, the entrepreneur can implement the business plan.

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 What’s More
Processing Questions: Answer the following questions on a separate sheet of paper.

1. What are the implications of an educated financial forecast to the enterprise’s

future?
2. How would it help the company achieve its business goals?

What I Have Learned

Activity: Below is the enterprise’s Financial Statement. Fill in the blanks with the
necessary figures to complete the table.

PARTICULARS YEAR1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Sales 440,400 566,925 658,418 763,307 932,080
Cost of Goods Sold
Beginning Inventory (1) _____ (3) _____ 49,225 71,607 (9) _____
Purchases 360,000 456,250 547,500 620,500 803,000
Total Goods Available for Sale 360,000 492,250 596,725 692,107 872,000
Ending Inventory 36,000 49,225 (5) _____ 69,000 95,920
Total Cost of Goods Sold 324,000 443,025 525,118 623,107 776,080
Gross Profit 116,400 123,900 133,300 (7) _____ 156,000
Selling and Administrative Expenses
Wages 30,000 30,000 31,200 31,200 36,000
Transportation 1,200 1,500 1,300 1,400 2,000
Rent 36,000 36,000 36,000 38,000 38,000
Light and Water 25,200 26,400 28,800 27,600 30,000
Total Selling and 92,400 (4) _____ 97,300 (8) _____ 106,000
Administrative Expenses
Net Profit (2) _____ 30,000 (6) _____ 42,000 (10) ____

What I Can Do
Direction: Write your answer on a separate sheet of paper.
1. Research a 5-year financial Statement of a known business enterprise and answer
the following questions.
a. Are the trends in expenses upward, downward or irregular?
b. Given these figures, how would you forecast this company’s future?

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 Assessment

Choose the letter of the best answer. Write the letter on a separate sheet of paper.
1. What do you call the estimating or prediction of future business
performance?
a. Budgeting c. Planning
b. Forecasting d. Financing
2. Which of the following expenses include the salaries, commissions, and
entertainment expenses of salespeople and representatives?
a. Selling Expense c. Manufacturing Expenses
b. Administrative Expenses d. Rent Expenses
3. The following are the factors in forecasting your sales, EXCEPT:
a. Your Customers c. Seasonal Adjustment
b. Market Condition d. Your Personal Preference

4. If the Ending Inventory of the enterprise for Year 1 is P40,000, what will be its
beginning inventory for Year 2?
a. P36,000 c. P40,000
b. P50,000 d. P20,000

5. What do you call the estimated money a company will generate during a specific
period?
a. Projected Revenue c. Projected Sales
b. Projected Expenses d. Projected Cost
6. Which of the following processes relates to understanding of your past sales
to predict future business decisions?
a. Determining the purpose of your sales
b. Collecting Industry Data
c. Identifying Key Business Activity
d. Examining Historical Sales
7. Which of the following costs refer to those expenses that change every month,
depending on your sales volume?
a. Fixed Cost c. Sales Cost
b. Variable Cost d. Administrative Cost
8. What do you call the expenditures incurred in generating revenues?
a. Cost c. Revenue
b. Sales d. Income

9. Which of the following expenses usually consist of taxes; licenses and fees;
electricity, water and telephone expenses; salaries/wages of accountants, clerks,
janitors; and transportation expenses?
a. Selling Expenses c. Manufacturing Expenses
b. Administrative Expenses d. Rent Expenses
10. If the gross profit for Year 3 is P116,400 and the total expenses equals P92,400,
what will be the company’s Net profit for the said year?
a. P24,000 c. P30,000
b. P28,000 d. P36,000