• Forecasting Expenses

    Cost of Goods Sold

    Cost of goods sold is estimated as a percentage of revenues. Look in the MD&A (Management Discussion and Analysis) for signs that management is consolidating operations, divesting unprofitable businesses or acquiring more technology.

    To build more detail in your model, think about the drivers of products and what you need to forecast. Some possible inputs include the wages of factory staff, delivery costs, raw material costs, component costs and forward pricing of commodities.

    Exercise

    You have been tasked with determining the cost of goods sold for a company that manufactures LCD monitors. What information will you need?

    • Factory costs (wages, depreciation)
    • Raw material costs
    • Delivery fees
    • Packaging costs

    SG&A

    This line item will usually scale linearly as a company grows or shrinks. Though staff and buildings are fixed costs in the short run, they are variable in the long run. R&D in firms tends to be the exception as companies that rely heavily on intellectual capital are required to continuously innovate lest they be left behind. In an absence of any other information, scale this with revenues.

    Example: Cisco’s Expenses

    Step 1: Forecast each line as a percentage of revenues. Assume a straight-line forecast and use the previous year’s numbers.

    Step 2: Link the margin forecasts to the actual numbers.

    Step 3: Insert the checks at the bottom to make sure that your numbers seem reasonable.

    Step 4: Forecast the income tax rate for Cisco.

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