SALES Forecasting

Why have Sales Forecast?

How to develop a Sales Forecast

Value Based Sales Forecast

Market Based Sales Forecast

Resource Based Sales Forecast

Ideas for Overcoming Limitations of Resources

Factors that Influence Sales

Start Up Adjustments

Seasonal Adjustments

Sales Forecasts for Established Businesses

Example of Final Sales Forecast

Why have Sales Forecast?

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.

Without a Sales Forecast how do you know what you need to do?

Without a Sales Forecast the target is zero!

Without a Sales Forecast you cannot build a Cashflow Forecast and Cash is King!!

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How to develop a Sales Forecast

There are Three basic Methods of forecasting Sales for new start businesses

Value Based - in other words what the business has to sell

Market Based - in other words what the business could sell

Resource Based - in other words what the business can produce to sell

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Value Based Sales Forecast

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.

For Example

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.

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Market Based Sales Forecast

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:

How often do you eat out?

On average how much do you spend on a meal?

Then you have worked out:

How many clients, who fit your customer profile, live in your area?

How often will your product be bought?

How much can you charge for your product?

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)

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Resource Based Sales Forecast

This is based on the resource limitations of your business to provide the service or product.

Examples of this type of limitation could be:

If you are in manufacturing and your production capacity is limited by machinery and/or staff

If you could produce a certain amount work in 5 days per week but you are only able to work 4 days at what you are paid to do

If Cashflow is such that you are unable to stock sufficient for potential turnover

If, as in the example above, you need to serve 50 meals per sitting but only have 20 places at table.

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.

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Ideas for Overcoming Limitations of Resources

If your business is based on selling time, or time is the limiting factor, and you find yourself working too hard but still not satisfying demand. Consider putting up your prices - this may be the greatest fear of many new start businesses. However a little courage can see you more profitable and working less hours.

If cashflow is your problem consider the following: developing stricter credit control, factoring (or Invoice Discounting) through your Bank, taking out a loan to finance expansion, buying on credit / lease / hire purchase to spread the load.

Consider the implications of hiring more staff - first look at part time and then expand from there. Bring in people who can either release you to do more paid work or who's time and effort you can sell - In other words the first new staff should be productive (that doesn't just mean on the shop floor) and should benefit the profitability of the business.

Consider the implications of expanding in terms of equipment or building area - but be careful! Every action as an equal and opposite reaction, will this cause problems with the cashflow - Remember Cash is King!

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Factors that Influence Sales

These are just a few of the several factors that can influence sales

Seasons

Holidays

Special Events

Competition

External Labour

Births and Deaths

Fashions and Styles

Population Changes

Consumer Earnings

Political Events

Weather

Product Changes

Style & Quality

Service Changes

Shortages

Production Capacity

Promotional Effort Changes

Sales Promotion

Sales Motivation Plans

Price Changes

Shortages in Working Capital

Distribution Methods Employed

Credit Policy Changes

Labour Problems

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.

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There are, however, two factors that we can plan into the sales Forecast and these are:

Start Up Curve

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:

A slow build up with marketing and sales support, that develops into a successful, profitable business

A massive surge of business, based on an existing, given, or stolen, contract which gradually dwindles away and, with lack of marketing and sales, ends up disappearing completely

A subsistence business, based on poor market research and misdirected marketing and sales, that eventually fails (39% of businesses do this in their first year)

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:

Month 1spacespace£300

Month2spacespace £600

Month3spacespace £900

Month4spacespace £1200

Month5spacespace £1500

Month6spacespace £1500

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Seasonal Adjustments

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.

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Sales Forecasts for Established Businesses

For established business a Sales Forecast should be based on market intelligence:

What did you do last year in the same month and what realistic growth could you expect to achieve? (inflation should be added)

Market intelligence should be gathered from the grass roots:

Who are the people dealing with your customers?

What are your customers budgets?

Are your customers growing or declining?

All of this will allow a fair estimate of monthly / quarterly / annual sales to be forecast.

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The Final Sales 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 £.

Month

Forecast

Start Up

Adjusted Sales

Seasonality

Final Sales

January

1,500

-80%

300

+50%

450

February

1,500

-60%

600

+25%

750

March

1,500

-40%

900

+25%

1,125

April

1,500

-20%

1,200

-

1,200

May

1,500

-

1,500

-

1,500

June

1,500

-

1,500

-

1,500

July

1,500

-

1,500

-20%

1,200

August

1,500

-

1,500

-20%

1,200

September

1,500

-

1,500

-

1,500

October

1,500

-

1,500

+10%

1,650

November

1,500

-

1,500

+30%

1,950

December

1,500

-

1,500

+10%

1,650

Totals

18,000

15,000

14,595

 

 

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