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How to Write a Sales Forecast: For Start-ups & Existing Businesses

    As we’ll cover below, sales forecasting is crucial to your business for a number of reasons. However, it can also, quite rightly, be a difficult task. This is especially true for start-ups who have no previous data to work off. In addition, you’ll want to know your sales forecast inside and out: when going to a bank or other financier, you will want to be prepared to answer other questions such as:

    • Have you set aside capital in a reserve cash account to balance your cash flow?
    • How will your business grow? Here they’ll want details on how you will invest surplus cash to create more products or sell more products.
    • Where have you sourced your data?

    Questions like these show that you have a good understanding of your enterprise and that you are using your sales forecasts to grow the business. Sales forecasts are there to help plan where your business will be heading. This is why they form a key part of the financials section of both the in-depth business plan and the one-page business plan.

    Why do I Need to do a Sales Forecast?

    • It helps with finding out your startup budget.
      • Knowing how many widgets you sell will allow you to predict how much money you’ll be spending on each individual widget. Including labor, this takes up a large part of your expenses and therefore is a crucial part to budgeting.
    • Helps determine your cash flow.
      • Doing monthly sales forecasts helps you estimate which months you may not meet, or only get a cut above, your break-even point. This will help you pre-empt times of the year where you might need to boost your accounts with funding.
    • Helps determine whether your business will be successful.
      • It will certainly help you determine whether your business will make enough revenue to cover its expenses and enough profit to grow.
    • Encourages investors to invest in your business.
      • Particularly for new businesses, a concrete sales forecast gives banks and other financiers more comfort in their investment.
    • Forecasts your business’ expansion.
      • For example, if your forecast indicates a 27% increase in sales, it will encourage your business to start looking for additional staff or larger warehouses to meet the demand for your product/service.

    Sales Forecasting Methods for New Businesses

    As a new business, you will not have any existing data to work from. This can be a problem for the whole of your financial planning as well as your sales forecast. Below are some tips you can use to try determine your number of sales when starting out.

    Method 1 – Looking at your competitors

    Being a new business, you will not have any live data from your own enterprise to work with. As a result, you should look at competitors who have started up and run your forecasting predictions based on their sales. This will give your business a baseline to start forecasting from.

    The businesses you’ll be looking at, in this method, will be established businesses. As a new business breaking into the market, you will likely not get the same profit returns for about a year. However, as a forecasting tool, this method does give you far more reliable data for long term forecasting. Furthermore, if the information is available, you could look at their sales at the very beginning of their business and work on in time from there.

    This method of forecasting is particularly effective if you have a physical location. This is because the stores around you will be working from the same, very specific, demographics. This will give you more accurate data of how much an individual in your target market spends and possibly what their spending habits are. This will give you an indication of your possible cash flow as well as helping you forecast sales.

    Method 2 – A percentage based forecast

    Only for specific locations, this method relies on reasonable assumptions about the percentage of annual spending someone x miles away would spend on your business. This is likely to be stratified around the location of your business. For example, if you live in a small countryside town and you have just set up a clothes store your forecasting for the annual spending of a customer x miles away might look like this:

    Distance# HouseholdsAnnual Spending / household% of Annual Spending / householdForecasted Sales
    1 Mile15£5 0005% {£250}£3750
    2 Miles25 – 15 = 10£5 0005% {£250}£2500
    4 Miles30 – 25 = 5£5 0003.5% {£175}£875
    10 Miles34 – 30 = 4£5 0002% {£100}£400

    Bear in mind, that cumulative # of households are the leftmost number. While the actual number of households within that strata is the final number.

    Method 3 – Modelling multiple products over time

    If you offer multiple goods or services, you will want to estimate the number of monthly sales revenues for each product. For example, if you are starting a personal wellness business your estimation of monthly sales revenues may look like this:

    ItemUnit PriceMonth’s Sales per UnitMonth’s Revenue
    Personal Fitness Session£6020£1200
    Personal Meditation Session£4516£720
    Personal Yoga Session£6026£1560
    Group Fitness Session per Person£15175£2625
    Group Meditation Session per Person£5100£500
    Group Yoga Session per Person£15200£3000

    Do a forecast like the table above for each month of your business’ first year. Using data from your competitors and accurate trends research from sources such as Google Trends, you should try to model the gradual build of monthly sales and revenue. 

    Sales Forecasting Methods for Existing Businesses

    Sales forecasting for existing businesses should be quite similar in structure, but more reliable in its data.

    When forecasting for your business you’ll want a certain amount of data already taken from running the enterprise:

    • Number of leads per month
    • Lead to customer conversion rate
    • Each lead’s average spending habits

    Next you’ll want to calculate the average sales price per head. Stratify your database by source of lead then calculate the mean average each person spends within that strata. For example, you may find that a website lead spends £80 on average while a social media lead might spend £50 on average. 

    Within each lead strata, calculate the average lead value (ALV):

    ALV = average sales price per head * the conversion rate

    Using the same examples, let’s assume that the conversion rate for a website lead is 35%. The ALV calculation will look like this:

    £80 * 0.35 = £28 – each website lead is worth £28 while each converted person is worth £80

    Finally, you’ll want to find out the minimum number of leads you’ll need to make a profit. The calculation will look like this:

    Break-even point / ALV = leads needed

    You’ll want to compare this calculation with your average and forecasted number of leads per month. This will give your business a baseline to work from and, if you get above your break-even point, and idea of business profits.

    Things to Keep in Mind

    • A good sales forecast depends on reliable information
      • Studying the behaviours of your target market on Google Trends for example can give you an idea of the demographics and the number of people looking for your type of product. 
      • Similarly, using free survey tools to ask the public about what they want to see in a product/service and what they are looking out for can be reliable information to help gauge the number of new leads.
    • Do multiple forecasts
      • Typically doing multiple forecasts includes an optimistic forecast, a pessimistic forecast and a realistic forecast. These will give you a better idea of what to expect as well as giving your business the foresight to prepare for the worst while hoping for the best.
    • Macro market trends
      • Looking at whether the economy is slowing or whether the market for the industry you are in is declining can help in both short and long term forecasting. This macro market information can have big effects on your own target market and factoring these in makes your data more reliable.
    • Legislation
      • Model articles of association: Governed by the companies act of 2006, these regulate how a company is run. Changes like these happen occasionally but it is important to look out for them. When they do happen, they can often have a deep impact on the business structure as a whole, therefore, affecting sales forecasts.
      • Up and coming changes in legislation can affect your business either positively or negatively. For example, in 2008 the UK changed its legislation so that limited companies no longer needed to have a company secretary. This hit company secretarial companies are quite hard as they needed to branch out into other services to manage the smaller demand.
    • Keep an eye on the competition
      • Keep an eye on your competitor’s products/services. Do they have a new product in the making that might reduce your own sales?
      • Similarly, are you launching any new products/services that might increase your own sales?
      • If there is a competitor entering your market, look out for their unique selling proposition. This may highlight what you’ve missed in your own product as well as reducing your customer base – therefore affecting sales.

    Was this helpful? Are you looking for more advice on starting a business? If so, check out our other blogs designed to help small business owners and creators like you.

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