When it comes to launching a business preparing your sales forecast is vital as you will face face numerous obstacles, including the question of whether the particular product or service is in demand. However, the more novel the concept, the more difficult it is to predict future sales levels. So why bother?
Firstly, cash is the lifeblood of any business and is required to finance working capital in order for a business to operate efficiently. A significant number of business expenses and investments in assets must be paid for in advance, and they must be covered by capital. These expenditures occur against the backdrop of uncertain sales levels and frequently a delay in receiving cash from those sales (which is exacerbated if the majority of your sales are on credit). In order to obtain financial assistance in advance, such as bank overdrafts or loans, businesses must produce cash flow forecasts to determine the magnitude of their cash shortfall.
Even if a company is profitable on paper, it risks insolvency if it fails to satisfy its obligations as they mature. Consequently, it is essential to grasp the nuances of cash flow for your business from the very beginning, as good cash flow management plays a significant role in ensuring continued solvency.
Moreover, investments in businesses are contingent on the firm's ability to generate free cash flows to compensate the investor for taking a risk. The quantity and timing of cash flows are of particular interest to investors, who have a variety of investment options with varying risk/return tradeoffs. Before investing, investors will typically evaluate a business plan, paying special attention to the anticipated sales levels and cash generation capacity of the company (as detailed in the cash flow forecast).
Consequently, these two factors demonstrate why precise forecasting is crucial for entrepreneurs.
Preparing Your Sales Forecast
The approach to take when preparing a forecast is dependent on the business's level of development, but all forecasts should be founded on accurate and current market research.
All businesses are required to base their forecasts on certain assumptions regarding potential future changes. These are quantifiable and may include:
A prediction that the market will expand or contract by a certain percentage, say 10%.
A planned increase in the number of employees is anticipated to increase output by 20%.
A relocation to a new and superior location is expected to increase sales by 50 percent.
In addition, it will be useful to break down projected sales by market, product, or geographic region, as well as to consider the likely inquiry-to-order conversion rate.
New Businesses
A fledgling business will have no historical information on which to base its forecast. Many formal methods of estimating future sales are only useful if the company has been in operation for some time and has a sales trend history to work with. As you will still need to make justifiable projections, accurate market research is essential for a startup company.
Secondary or desk-based market research can be beneficial; for example, a person planning to open a bed and breakfast could obtain historical data on bed occupancy levels or visitor numbers from the local tourist authority or Regional Development Agency. Sales projections can be calculated by multiplying average occupancy levels by price per person per night while accounting for seasonality.
If you do not have access to historical sales records or documentary research, you can still conduct primary or field research among your target customer group. Interviewing prospective clients, obtaining 'letters of intent,' and testing the market with some advanced / prototype products or services can provide valuable information for estimating future sales potential. A person who is establishing a restaurant or café, for instance, could approach potential customers and ask:
How frequently do you dine out?
How much do you spend on average per meal?
Existing Businesses
Existing businesses will have historical sales data on which to base their forecasts, as well as a better understanding of the market as a whole. Monthly, you should keep accurate and up-to-date records of previous sales and compare them to the goals you've established.
Current sales levels can be used to estimate future sales, assuming that existing consumers will continue to purchase from your company for the foreseeable future.
Nonetheless, your company's sales may have been consistently increasing or decreasing. In this situation, you should determine the predominant trend in past sales and then project this trend forward to provide an overall picture of future sales.
You should discuss potential changes in purchasing patterns with key customers and routinely review market trends. In addition, it is essential to consider the probable impact of any adjustments to the sales strategy, such as additional marketing and price increases or decreases.
Existing businesses should not overlook the significance of conducting ongoing market research and incorporating the results into their sales forecasts. This is essential for maintaining a competitive advantage and ensuring that the forecasting process is based on current data and market intelligence.
Developing Your Sales Forecast
A sales forecast is a monthly financial projection of the revenue that a company expects to generate from the sale of its products, services, and/or solutions. It is not merely a quantitative calculation, but also requires careful consideration of a variety of external market factors influencing the company.
Therefore, forecasting is both an art and a science.
Forecasting sales is essential for a variety of crucial reasons:
To establish that the business is viable: to demonstrate that the business is likely to generate sufficient sales to make it a viable proposition, particularly in the case of start-ups, and to provide assurance that it will ultimately achieve profitability, even if this takes some time.
To plan and manage cash flow: to use in a business plan to obtain funding and to avoid unanticipated cash flow issues by determining whether to inject capital or borrow funds.
To plan future resource requirements, such as the number of employees required to meet your sales projections. A precise sales forecast will also aid in ordering the appropriate quantity of inventory.
To organize production and marketing endeavors. It should reveal which products are the most successful, identify sales trends, and aid in deciding where to invest in the future.
To establish objectives and aims for the business.
To enable you to compare your actual sales to your forecast, to comprehend the discrepancies, and to use this information to generate new sales projections.
Your business plan will always be based on solid market research, and this will be a crucial factor in securing financing.
Factors to Think About
A sales forecast in a business plan should include monthly sales projections for at least the next twelve months, followed by annual projections for the next two years. Three years is sufficient for the majority of business strategies.
The sales forecast should be formulated after analyzing the following factors:
Does your product have a well-established market?
How extensive is the market?
Is the market expanding or contracting, and if so, by what annual percentage?
What current factors are influencing this market?
What factors may influence its future marketing?
What effect do periodic factors have on sales of your product or service?
Which fashions or trends are pertinent to the industry?
Customer experience
Create a comprehensive profile of your current and potential customers.
Consider how many of these consumers will actually purchase your product.
Detailed customer profiling can help determine strategy by allowing you to concentrate on niche markets, which in turn influences pricing policy and sales forecasts.
Future production
Ensure that the sales forecast falls within the production capacity constraints.How will potential future changes in personnel or the size of the marketing budget affect future production or sales goals?
Competition
How many rivals do you face? Even if your business appears to be unique, it is likely that new competitors will enter the market once you have laid the framework to increase market awareness. If there are already many competitors, it is likely that the market for your services is already established.
Clarify how your products and services integrate within the market. How can you distinguish your business from those of your competitors?
You may need to be adaptable with regard to pricing and product or service selection.
Political, economic, sociocultural, technological, environmental, and legal (PESTEL) factors, such as energy prices, seasonal trends, interest rates, legislation, and political and health issues, may all influence your future plans.
You should be aware of how the economic climate and other external factors will affect your business and the attitudes and propensity of your customers to purchase your product, service, or solution.