Lesson 4 of 7 · All lessons in this module
- What to forecast: forecast objects and principles
- Forecast approaches and the forecast horizon
- Forecasting revenue: top-down, bottom-up and non-recurring items
- Forecasting operating costs: COGS, SG&A and segment margins
- Working capital, capital investments and capital structure
- Integrated case: fixed assets class by class and a marketplace cost base
- Scenario analysis: risk factors, cost structure and sensitivityVideo lesson
Lesson 4 of 7 · 14 min
Forecasting operating costs: COGS, SG&A and segment margins
Operating cost forecasts are usually built on aggregated objects (cost of sales as a % of sales, SG&A split into variable and fixed parts, or segment margins), but they must stay coherent with the revenue forecast, including its product mix.
In short
- Cost disclosures are less detailed than revenue disclosures, so analysts use aggregated objects: COGS, SG&A, or summary measures such as segment EBITDA or operating margins.
- Coherence: if a low-margin product, segment or region grows faster, the overall margin should deteriorate, even if exact margins are unknown.
- COGS is forecast as a % of sales (gross margin). Because it is large, a few basis points matter; break it into volume and price components when input costs are volatile.
- Passing on an input cost increase in absolute amount keeps gross profit constant but lowers the gross margin %. Hedging and gradual price increases soften shocks.
- SG&A: selling and distribution costs are largely variable (% of sales); general corporate costs are largely fixed (grow with wage inflation).
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