Build a conditional forecast · printable packet

A conditional forecast builds its volume from the records, works out contribution, profit, break-even volume and the margin of safety from stated volume, price, variable cost and fixed cost, and labels each input as evidence or assumption.

Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.

1. What you will learn

You will build a month's forecast from volume, price, variable cost and fixed cost, build the volume from the records, compute contribution, profit, break-even volume and the margin of safety, write the profit rule, and label each input as evidence or assumption.

2. What you already have

You can write a goal, watch a leading measure, and work contribution and break-even from the costing course. A forecast asks what the month will look like in money, if things go as assumed — and makes those assumptions visible.

3. Words for this lesson

4. Four inputs, three results, every assumption labeled

What follows: contribution a lunch, 10 − 4 = 6 dollars; profit, 6 × 1,200 − 5,400 = 1,800 dollars; break-even volume, 5,400 ÷ 6 = 900 lunches; margin of safety, 1,200 − 900 = 300 lunches.

$$\text{profit} = (\text{price} - \text{variable cost}) \times \text{volume} - \text{fixed costs}$$

Term	What it means
Conditional forecast	A statement of what follows if its assumptions hold, not a prediction.
Evidence	An input taken from the records: invoices, the menu, past sales.
Assumption	An input that is hoped, guessed or estimated, labeled so it can be tested.
Break-even volume	The volume at which the month's profit is zero.
Margin of safety	The forecast volume less the break-even volume: how far sales can fall before a loss.

The 1,800 dollars is not a prediction that the month will make 1,800. It is what follows if 1,200 lunches sell at 10 dollars with those costs. Every figure here rests on stated assumptions about volume, price and cost. It says what follows if those assumptions hold; it is not a prediction, and it is not advice about what any real business should do.

Another way: table

Neighborhood Kitchen's forecast, labeled.

Input	Figure	Evidence or assumption
Volume	1,200 lunches	Assumption
Price	10	Evidence (menu)
Variable cost	4	Evidence (invoices)
Fixed costs	5,400	Evidence (bills)
Profit	1,800	Follows from the above

Another way: steps

Build the volume from the records, and add any assumed change.
Take price, variable cost and fixed costs from the records.
Label each input as evidence or assumption.
Work contribution, profit and break-even volume.
Read the margin of safety, and compare with the actual month later.

5. The method, step by step, and how to check it

Build the volume from the records. Start from the average of the last few comparable months, not from the best one. Then add, as a separate labeled line, anything expected to change it: a new office block, a lost customer, a price change. Keeping the two apart means the owner can see how much of the forecast is record and how much is hope.

Take the other inputs from the records. Prices from the price list, variable costs from recent invoices, fixed costs from the bills that come every month. Where a figure is estimated, label it.

Work what follows. Contribution a unit, profit, break-even volume, margin of safety.

Check the arithmetic by working the profit at the break-even volume: it must come out at zero. Check the forecast at the month's end by putting the actual figures beside the assumed ones. Each gap is information: a volume that keeps coming in below the forecast means the volume assumption is too hopeful, and the next forecast should start lower.

6. Why the labels matter

Labeling each input tells the owner where the forecast is weak. In most small businesses, costs and prices are evidence — they are on the invoices and the menu — and volume is the assumption. That is where the next lesson will push, because a forecast that only works at exactly the assumed volume is a fragile one.

Labels also protect against a common slide: a hopeful figure written into one month's forecast, copied into the next, and a quarter later treated as if it had been measured. An input marked 'assumption: new office block' stays visibly an assumption until the office block's orders prove it.

7. The margin of safety

Break-even volume gives a first sense of how fragile a forecast is. The kitchen forecasts 1,200 lunches and breaks even at 900, so volume could fall by 300 — a quarter — before the month loses money. A business forecasting 950 against a break-even of 900 has almost no room at all: a wet week could take it into a loss.

The margin can be read in units, in revenue — 300 lunches at 10 dollars is 3,000 of sales that could be lost — or as a share of the forecast. A small business with a margin of safety below a tenth of its forecast volume should treat every month as a test and hold a larger cash buffer; one with a margin of a quarter or more has room to absorb an ordinary bad month.

8. Keep forecasts short and compare them

A month or a quarter ahead is as far as most small-business forecasts deserve to be trusted, because the volume assumption rests on recent months and recent months stop describing the future quickly. A forecast for a year is best built as twelve monthly forecasts, each revisited when its month comes into view.

The comparison at the end of each month is where forecasting skill comes from. An owner who writes down the forecast, then the actual, then one sentence on the gap, learns within a year which of their assumptions run hot and which run cold. That record is worth more than any forecasting method.

9. A forecast is not cash

The forecast profit is a figure for the month's trading, and the money course showed how far that can be from the month's cash: customers who pay later, stock bought ahead, a loan repayment. A forecast profit of 1,800 is not 1,800 to spend. Where cash matters — and in a small business it always does — the profit forecast sits beside a cash forecast built from the same assumptions, with every payment on its date.

10. Seasonal businesses

A forecast built for a single month hides the shape of the year. Most small businesses have one: a café is busiest in the cooler months and on weekdays, a garden business in spring, a gift maker in November and December. A forecast that uses the average of the last three months for next month is sound in a steady business and misleading in a seasonal one, because the last three months may belong to a different season.

The fix is to build the volume from the same months last year, adjusted for the trend. If Maya sold 420 mugs last November and her sales have run about ten percent above last year's all autumn, next November's volume assumption is about 460, labeled as 'last November plus the autumn trend'. That label carries two assumptions — that November behaves as it did, and that the trend holds — and both can be checked when November arrives.

Seasonal forecasts also change the margin of safety. A café whose break-even is 900 lunches a month may clear it easily in winter and fall below it every August. The year's forecast then has to show that the good months carry the bad ones, and the cash forecast has to show that the account can survive the bad ones before the good ones arrive. A single average month would have shown a comfortable business and hidden both problems.

Finally, a seasonal owner should keep a simple record of each month's volume for at least two years, so that next year's forecast starts from evidence rather than memory. A notebook or a spreadsheet with twelve columns and a row a year is enough. After two years the shape of the year is visible at a glance, and the forecast becomes a matter of reading the shape and asking what is different this time.

11. In the world: a bakery's first forecast, and its second

A bakery opening a second counter in a grocery store wrote its first monthly forecast from the owner's hopes: 2,400 loaves a month at 6 dollars, 2 dollars of flour and packaging each, and 6,000 of fixed costs for the counter's rent and a part-time baker. That gave 4 × 2,400 − 6,000 = 3,600 of profit, a break-even of 1,500 loaves, and a comfortable margin of safety of 900.

The first month sold 1,650 loaves. The profit was 4 × 1,650 − 6,000 = 600, and the owner, who had planned a new oven on the strength of the forecast, was glad she had waited. For the second month she rebuilt the volume from evidence: the first month's 1,650, plus 150 she expected from a promotion the store had agreed to run, labeled as an assumption. The forecast became 1,800 loaves and 1,200 of profit, with a margin of safety of only 300 loaves — a sixth of the forecast.

That thin margin changed her plans more than the lower profit did. She kept a larger cash buffer, asked the store for a shorter first lease, and compared each month's actual volume with the forecast. By the sixth month the counter was selling 2,100 loaves, the forecasts were landing within 5 percent, and she ordered the oven.

12. In the world: why lenders ask for assumptions

A lender reading a small business's forecast looks first at the assumptions, especially volume, and asks where each came from. A forecast with every input labeled and the volume built from the records is read as a serious plan; one with a single hopeful number at the top is read as a wish.

13. Where this goes wrong

All forecast figures are equally solid. Some are evidence, some are assumptions; label them.

Profit is price times volume less fixed costs. Take off the variable cost of each unit too.

Start the volume from the best month. Start from the average of recent comparable months.

A forecast should be as precise as possible. A figure to the dollar looks more certain than it is; round forecast inputs to what the records can honestly support.

The forecast is finished once written. It is finished when the month's actual figures have been set beside it and the gap explained, which is what improves the next one.

A forecast once written is finished. It is checked each month against what actually happened, and the next months are redrawn from the new evidence.

14. Maya's month

15. Neighborhood Kitchen builds its volume

16. Bright Home Cleaning, checked a month later

17. Your turn: Monica's stall

18. Guided practice

Neighborhood Kitchen forecasts next month on these assumptions: $1200$ lunches at $10$ dollars each, a variable cost of $4$ dollars a unit, and fixed costs of $5400$ dollars. Fill in the contribution a unit and the month's forecast profit, in dollars.

19. Guided practice

Complete the worked solution: Neighborhood Kitchen sold $1290$, $1320$ and $1290$ lunches in the last three months. It assumes $10$ more a month from a new office block, a price of $9$ dollars, a variable cost of $5$ a lunch and fixed costs of $5200$. Build next month's forecast.

20. Guided practice

Neighborhood Kitchen forecasts next month on these assumptions: $1200$ lunches at $10$ dollars each, a variable cost of $4$ dollars a unit, and fixed costs of $5400$ dollars. How many lunches must it sell in the month to break even?

21. Practice

Bright Home Cleaning's forecast notes. Mark every figure that comes from the business's own records.

22. Practice

A business sells $v$ units at price $p$, each with variable cost $c$, and has fixed costs $F$. Write the month's profit $b$.

23. Practice

Maya's Ceramics forecasts next month on these assumptions: $300$ mugs at $28$ dollars each, a variable cost of $10$ dollars a unit, and fixed costs of $3600$ dollars. Fill in how much room the forecast has before the month loses money.

24. Somewhere new

A dog groomer forecasts $90$ grooms next month at $35$ dollars each, with $13$ of shampoo and supplies a groom and fixed costs of $1760$ dollars for the van, insurance and phone. Fill in her forecast, in dollars and grooms.

25. Lesson test

Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.

26. Test question

Northside Repairs forecasts $180$ repairs next month at $44$ dollars each, with parts and other variable costs of $20$ dollars a repair and fixed costs of $2261$ dollars. What is the forecast profit, in dollars?

27. What you can do now

You can build a forecast and say exactly what it assumes and how much room it has. Tell someone why a forecast profit is not a prediction. Next: what happens to it when an assumption moves.

Working for the steps left to you

	Dollars
Contribution a unit
Forecast profit

	Amount
Break-even volume
Margin of safety, units
Margin of safety, revenue in dollars

	Amount
Contribution a groom
Forecast profit
Break-even grooms
Margin of safety, grooms

$3500 \div 5 = 700; \quad 1000 - 700 = 300$