So, how do you do forecast sales realistically?
Every startup benefits greatly from making a cash flow forecast. But if your business hasn’t opened its doors yet, how is it possible to estimate the kind of sales you will get in your first month, let alone year of trading? We asked Robin Booth of Brixx.com to explain.
Most forecasting tools rely on existing data – having an established sales pipeline that further months and years of sales forecasts can be extrapolated from. But in order to make your first ever forecast, before you have sold a single thing, you will need to do some research.
Once you have data from your competition or information from potential customers, the next stage begins – forecasting how much you will actually sell based on this information.
In this article, I’m going to describe how to make realistic forecasts and the kind of considerations you should have when forecasting sales.
It all begins with market research. “Build it and they will come” is not a sales strategy. Find out who your competitors are, and;
- What prices are they selling at and how does their product compare to yours?
- What could encourage customers to purchase your product instead of theirs?
- How many new customers do you think you can acquire each month?
- What sort of advertising bill would you have to foot in order to do so?
That’s a lot of questions – questions that require time to answer – but once armed with this information you can start to think seriously about a realistic forecast.
Whether you gather data that is annual, monthly or weekly it is usually best for build your forecast as a monthly forecast. This is a good level of detail for the first few years of a business, especially one that is breaking into a new area.
Decide how to split up your income forecast
First, decide how much detail you want to go into in your forecast. You could just have one assumption for your total income each month, or split this income out into different products or services you offer, or different clients you do business with.
What you decide will depend on what is important to you, but also what is easy to estimate figures for.
Price your products/services
Your market research will have likely identified some competitors who you can either beat on price, convenience or quality. Decide on an initial price point for your product or service. It doesn’t matter if you change this later, and in fact it is likely that you will.
Do you get paid immediately?
Unless customers always pay at the point of the transaction, you may not get the cash owed to you immediately. Sometimes there will be a delay before you actually get paid for the goods or services you offer – for example a plumber invoices a client once the work is complete – but sometimes clients can take a long time to pay…
Estimate how long your customers will take to pay you. As we are working in months, an estimate in months is fine at this stage.
Estimate sales volume for each product/service
How much of your product or service will you sell each month? Be wary of forecasting selling more than your fledgling business can cope with.
Base your estimates on your market research – how many customers can you attract away from competitors, and how many customers do you hope to attract with your marketing activities each month?
Bear in mind that your business is just starting out – on your first day you will begin with 0 sales!
Don’t assume you will immediately achieve the same levels of income as your competitors – it takes time to break into a market and attract customers. For some businesses it’s reasonable to start small with sales assumptions but assume that your sales will gradually grow over time.
Consider seasonal variations and sales events
Think about how your sales may ebb and flow throughout the year. Also, consider how you could boost sales, for example;
- Will you have a big launch event or events for your business?
- Do you expect to gradually ramp up sales?
- Are there particular times of year that are better or worse for other businesses like yours?
- Will you take any steps to shore up sales in bad periods, and can the business cope with supplying the demand in good periods?
The best way to organise this is to plot out your monthly sales in a grid. This way you can easily vary how many you expect to sell each month and experiment with different estimates…
Make several forecasts
If you make just one forecast, you are only preparing for one future. Anticipate higher, or (more likely) lower initial sales volume than your initial estimate allows for.
Make at least three versions of your sales forecast to represent;
- Best case,
- Average case, and
- Worst case sales.
The business you build will need to be able to survive each case (yes, even the worst).
Making the rest of the plan
Following these steps should give you a set of products or services with a price and number of items sold each month for each one. Dividing up these sources of income into different groups will allow you to easily compare them.
The next stage is adding all of the other financial consequences of running the business – costs – assets and funding. In general these are more predictable than your sales, which are highly dependent on your unique business and the financial ecosystem it trades in.
Tools like Brixx are available to help you build this full picture of your business, including a detailed sales forecast.
This article has been written exclusively for ByteStart by Robin Booth of Brixx.com the financial forecasting app that turns your ideas into numbers.
Last updated - 10th September, 2018