When you start your new business there is a tendency to say "Why bother with a Sales Forecast?" After all, it's only guesswork, isn't it? Even well established businesses don't forecast sales and they may be missing out on a vital part of business planning since It has been shown that businesses with a written Sales Forecast are more likely to achieve it than those without.
There are Three basic Methods of forecasting Sales for new start businesses
This is calculated by dividing the estimated Annual Overheads by the Gross Profit Margin as a percentage - this will then tell you what the 'breakeven' sales figure is for your business. For most types of business there is a recognised Gross Profit Margin - for example Carpet Wholesalers make 20-23% GPM, Newsagents approximately 17% and Guest Houses approximately 47-75% - the key to business success is when your Gross profit covers your Overheads and leaves a little Net Profit for you.
Businesses that are successful make sure they do this. Businesses that fail, fail to cover their Overheads. If you're not sure what this means look at the Profit and Loss section, later.
You can calculate your Gross Profit Margin as a percentage using the following formula
Selling Price - Direct Cost /Selling Price x 100 = GPM%
If you are buying a product in at £21.30 and marking it up by 180% you will sell it at £21.30 + 180% = £59.64
Therefore your Gross Profit Margin is £59.64 - £21.30 / £59.64 x 100 = 64.28%
If your Overheads are: £12,000 you divide this by 64.28% to give you a sales figure of £18,668
If your Overheads are: £18,000 you divide this by 64.28% to give you a sales figure of £28,003
This is what the business must sell to break even.
So you can see that one of the major keys to a successful business is to control your Overheads - the higher they are the more you have to sell just to break even!
If your business is selling time and you have no Direct Costs, then your Gross Profit Margin is 100%, because all of the money you take in sales goes to pay off the Overheads of the business.
This is a Sales Forecast based on the results of the Market Research that you have carried out,
For Example: Imagine you are opening a Restaurant / Diner and you have identified your customer profile. You now approach them and ask:
Then you have worked out:
From this you can estimate the total number of sales per week / month / year for your business. This figure must be safely above the Value Based Sales forecast (otherwise you cannot sell as much as you have to, and you will go broke)
This is based on the resource limitations of your business to provide the service or product.
Examples of this type of limitation could be:
In order to be financially viable your Resource Based Sales Forecast must, again, be greater than your Value Based Sales Forecast. In other words you must be able to produce more than you have to sell and your market research should show that you can sell as much, or more, than you have to. If your Resource Based Forecast is lower than the market Based forecast it means that you will not be able to supply the demand. if they are the other way around it means that you will be able to easily keep up with demand.
The weeks / months / annual Sales Forecast then becomes a realistic balance between all three and should be something which you feel comfortable with and feel is achievable, with effort.
These are just a few of the several factors that can influence sales
This is often the reason that people give for not bothering to forecast sales. After all, you have no control at all over almost half the items listed above, do you? - However, if you don't know what you're supposed to be aiming at. how will you know whether you're winning or losing?
Business is not a matter of chance, since it doesn't really matter what happens to you, or your business, it's the way you react to what happens that makes you successful or not.
There are, however, two factors that we can plan into the sales Forecast and these are:
Once you have worked out your Sales forecast it is highly unlikely that you will start from day 1 and achieve the maximum sales figure. Usually new start businesses go one of three ways:
Ignoring the last two (because you don't want to do that otherwise you wouldn't be here), we'll consider the first example. For each type of business the start up curve ( and how the business grows) will be different, for example: A Christmas shop will have a rapid growth curve if it is to be profitable at all, whereas a Plumber may take 6 - 12 months to gain a strong client base and a writer may take 4 - 5 years (or more) to break into the marketplace.
If you look at an example of a Plumber it should give some indication of how a start up curve can be calculated:
Let's say the Plumber can develop sales of £1500 when they are working 5 days per week with a well developed client base. Would they achieve this in the first month? Maybe not - they may, realistically, settle for 1 days work per week - therefore their sales for month 1 will be £300.
Now let's say they decide they can develop enough clients to work 2 days per week in month 2. This would bring their month 2 sales figure to £600. If they continued to add a days work per month then their sales forecast for the first 6 months would look like this:
The second form of adjustment you can calculate is known as the Seasonal Adjustment and is different again, for each type of business. For example a business that sells Christmas Trees has few sales from January to October and then they start, as a trickle, in November and end with an explosion in December.
The Plumber will have most of the emergency work to cope with in the winter and relatively slow business during the summer months.
If you have spent some time in the trade, or profession, in which you are starting a business, then you may have some idea of the seasonality that affects your business. If not then talk to other people who are in the business you are going in to. Florists have a boom on Mother's Day, Computer Sales are down just after Christmas, Retails sales take a downturn after Christmas, Kennels have a boom when people go on holiday - every business (even the business of starting a business) has seasonality.
For established business a Sales Forecast should be based on market intelligence:
Market intelligence should be gathered from the grass roots:
All of this will allow a fair estimate of monthly / quarterly / annual sales to be forecast.
Now that you have gathered all of the information, you are in a position to prepare the Sales Forecast in a format which any Bank Manager, or Investor, will understand - see the example below.
The information in the Sales Forecast can then be used to provide information for the Cashflow Forecast and should be referred to on a regular basis to make sure that the sales you are actually making throughout the year are the same, or greater, than those you have forecast. If not then you may have to recalculate things like cashflow, profit, etc. If things are not going as well as planned, don't simply ignore the situation - there are many things you can do.
Here is an example of a completed Sales Forecast (for the plumber we looked at in the examples above). Note that you do not use pence in a Sales Forecast and all figures should be rounded up (or down) to the nearest whole £.