9 Tips for Building a Sales Forecast

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Having a dynamic, regularly updated sales forecast can be essential to the success of a small business.   By forecasting your sales revenue you are helping to control for its unpredictability, an inherent risk in any business venture, and prepare for the decisions that are essential to your business profitability.  Whether your sales are increasing, decreasing or static , it is always better when decisions are made proactively rather than reactively. 

Building your small business sales forecast can be as simple as you want it to be and does not necessarily require an accounting degree (or construction materials), particularly when your business is small (although an experienced accountant can certainly help refine and streamline the process).  Below are some tips to help you create your sales forecast:

1. History Repeats Itself:

Having some sales history to draw on can greatly facilitate the process and is a good foundation for building your forecast.  A basic sales objective for the current year can be established by using prior year sales and adding a percentage for growth.

2. Calculate Your Break Even Point:

The total sales revenue that you need to generate to cover all of your fixed and variable costs is referred to as your breakeven point.  This is essentially the minimum amount of sales that you need  for your business to be viable.  See how to calculate your break even point.   

3. Break it down:

The more detailed and thorough the estimate, the more likely it is to be accurate.  Each business has its own individual metrics that drive its sales .  For example a vacuum cleaner sales forecast can be a multiple of the number of door to door sales reps.  This can be further broken down by the expected sales by neighbourhood, which could be adjusted for the level suburbanization and affluence.  Additionally some sales reps might be better performers and have higher conversion rates, which would also need to be incorporated into the sales forecast.  A service based business like a tax preparation business might estimate their sales based on its source eg. Word of mouth, advertising campaigns and recurring customers.

4. Know Your Capacity:

Whether you are selling products or services, knowing how much capacity you have is a key consideration.  Capacity can be measured as the total number of units that can be produced over a period of time or by adding up the total number of hours of consultants/employees.  This is particularly important for the growth phase of your business as you need to be able to calculate the maximum number of orders that you can service at any given time.    

5. Best Case Worst Case:

Preparing a sales forecast that incorporates three scenarios – conservative, realistic and optimistic can help you prepare for the worst while expecting the best. 

6. Set Realistic Prices:

When pricing your products and services it is important to reflect what you expect to get rather than what you hope to get.  Discounts and inflation should be incorporated as well as any preferred pricing for volume or special customers.  To get a better idea of what you need to sell to achieve your sales goal it can be helpful to establish each type of product and/or services and corresponding sales prices.

7. Research Market and Industry data:

Pertinent market and industry data can be very helpful in getting a better sense of the sales environment, pricing, margins (costs of production) and size of the market etc.  This information can then be incorporated into your sales goals and prices.

8. Define Your Target Market:

Knowing who you are selling to is critical to defining your sales goals and how much you can price.  A tax preparer might look at the number of individuals in a specific geographic location that require tax returns.  From there, she will need to determine what percentage of the market would require the services of an independent tax preparer.   Finally she will need to estimate what portion of this market she will be able to capture.

9. Make it Interactive:

Although, all of this can be done on a sheet of paper, it is much more advisable to use a spreadsheet program like excel.  Ideally you want to have a separate worksheet for assumptions, while the forecast itself feeds off the formula page.  The beauty of this is that minor changes to the assumptions will update the forecast.  It is then very simple to incorporate a variety of scenarios and update the assumptions as more detailed information is available.

A sales forecast is a blueprint for your business that needs to be updated regularly to reflect new information.  Using a combination of methods, both top down and bottom up as described above, can you help you define your objectives with more precision, avoid surprises and be better prepared for opportunities as and when they arise.

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