A business needs to understand its distribution channel and in particular how the total margin made on its products are allocated between the various partners. Understanding the channels allows a business to for example calculate a required manufacturing cost from a retail price or a wholesale price from a given cost.
This free Excel channel margin calculator can be used to calculate the margin at each step with the distribution process.
This free production capacity template can be used to estimate the machinery, production facilities and labor resources required by a manufacturing business to enable it to make sufficient product to satisfy its forecast sales demand and inventory levels.
A manufacturing business needs to review its draft financial projections to ensure that they include sufficient capital investment to provide the production capacity needed to meet the sales demand forecast and the required inventory levels.
The term cost of revenue is used by a business to refer to the total costs necessary to generate a sale. It is similar in nature to the cost of goods sold except that cost of goods sold only includes costs prior to the sale, whereas cost of revenue also includes some additional costs necessary to complete the sale transaction.
Knowing how to calculate cost of goods sold is important to any business. Cost of goods sold is the cost of manufacturing or obtaining the products which have been sold and is used in the calculation of the real income (gross margin) of the business.
The inventory purchases budget shows a business how much inventory it needs to purchase each period to maintain the required inventory levels and ensure the availability of products in appropriate quantities and costs to meet anticipated demand.
There are two major cost items to take into account when preparing financial projections, manufacturing costs, and non manufacturing costs.
Manufacturing costs are the costs incurred in the manufacture of a product for sale to customers and are included under cost of goods sold and inventory in the financial projections. Non manufacturing costs are costs not related to the product and are included in operating expenses in the income statement of the financial projections.
To simplify the process of expense forecasting there are various techniques which can be employed to link each type of expense to other variables (cost drivers), such as revenue or headcount, which have already been forecast in the financial projections. Of course there will always be expenses which are fixed in nature, which cannot be linked to other variables and need to be estimated in absolute monetary terms.
Markup on cost and gross margin ratio are useful for monitoring trends and making comparisons with other businesses. In addition, depending on whether your starting point is cost price or selling price, they can be used as a management tool to control buying and pricing decisions within the business.