This is the first in a two-part series about how to prepare a sales forecast, the first step in putting together your 12-month budget, and the backbone of your business plan. Put simply, your sales forecast is a way of estimating the volume of products or services that you realistically expect to sell over a given period of time. It’s usually prepared on a month-by-month basis and projected over a 12-month period.
If you’ve never prepared a sales forecast before, be assured that you don’t need a business degree, accountant’s certification or any other qualification to do so. What you do need is common sense, research and information about the key factors that impact on your sales. If you sell a lot of products, it’ll take you a bit more time to prepare your sales forecast. But I’ve put together this handy spreadsheet to make the task of forecasting easy for you.
Preparing a sales forecast is mainly educated guess work so you can’t expect it to be perfect or accurate – just a reasonable assessment of what you think will happen, based on your best information. That said, the better the quality of your information, the more accurate and reliable your sales forecast will be. As I said, preparing a sales forecast is a fundamental part of your business plan. It sets out your sales targets for the year. And most importantly, it tells you how much money you’re likely to have available to pay for the costs of running your business, and paying yourself a decent salary.
There are two main methods for forecasting sales:
- Assumption based forecasting – using market research you’ve undertaken.
- Historical based forecasting – founded on past experience.
Start-ups generally have to rely on assumption based forecasting and market research. Analysing competitor activity is a good way of gaining an understanding of what level of sales may be achievable. If you’re starting a new café, you could check out the competition to find out how many customers they typically have at key points during the day and week. And then work out the average value of an order. This will give you an indication of the possible volume of sales. Assumption based forecasting is by no means perfect. But it is nevertheless a good starting point for your sales forecast until you’ve got historical data of your own to work from.
If you’re taking over an existing business, you should obtain a copy of the most recent accounts and trading figures. Do take care because this information may not be accurate or indeed up-to-date. If the seller refuses to provide the accounts, you should be extremely cautious and view this as a ‘red flag.’ It’s important to find out why the business is being sold and if this is, at least in part, due to poor sales.
If you’re running an established business, you’ll have historical sales data to go on. When I’m first working with a new client, I like to map out sales – month by month – for the past 3 years. This tells me whether there are any seasonal variations, and what the growth trajectory has been. We then use this information to prepare our first sales forecast, which is always very conservative. It’s far better to err on the side of caution, and exceed your sales forecast, rather than come up with projections that are far too optimistic, and can’t be delivered. Especially as the money you have to spend on your business is based on you hitting your sales targets.
Sales Forecasting For Products
To make the sales forecasting process for products straightforward, you don’t have to detail every type of product or service. Simply group products together in terms of either product type or price.
I like cake a lot so let’s assume you run a tea shop. You might sell cakes for between £2.50 and £3.50 and a selection of teas for between £1.50 and £2.50. It would reasonable to assume that the average price for cake is £3.00 whilst the average price for tea is £2.00. (The selling price is the price or average price that your market research tells you your customers are prepared to pay for your product).
Next you need to know the Unit Variable Costs. These are those costs that are directly related to sales e.g. if you run a tea shop and you have a supplier make cup cakes for you. The supplier sells these cup cakes to you for £1.00 each and you sell them for £3.00. – your Unit Variable Cost will be £1.00 per cup cake. (If you are charging for your service by the hour, rather than selling goods, you may not have any variable costs).
Let’s look at how we would complete the spreadsheet forecast for a tea shop:
|Unit Selling Price||£3.00|
|Material Unit Cost||£1.00|
|Total Cost of Materials||£20.00|
|Cup of Tea|
|Unit Selling Price||£2.00|
|Material Unit Cost||£0.25|
|Total Cost of Materials||£5.00|
To help you forecast your monthly sales, you ask yourself the following questions – for each product for each month. If you’re a start-up, the answers will be based on your market research:
- How many customers do you expect to buy this product per month?
- How many units do you expect each customer to buy?
- How many units do you expect to sell each month?
- What is the price per unit? (Or the average price where you have a price range).
- What is the material cost of one unit?
Sales Forecasting For Time
If you’re selling time rather than products, it’s usually enough to enter the total hours you expect to work in any given month on the spreadsheet together with the hourly rate you charge. The spreadsheet will then calculate your total income.
Let’s say you have a painting and decorating business like one of my clients, and you charge £20 per hour. You would complete the hourly rate section of your sales forecast as follows:
|Total hours invoiced||£800.00|
The cost of any paint or materials are simply added to the customer’s final invoice. If you do “mark up” the cost of materials, it is easier only to show the time charged as your income.
In How To Prepare A Sales Forecast – Part 2, I’ll explore the different factors that could have an impact on your sales forecasting. Then we’ll move on to look at what this means for your marketing plan, and marketing budget.
Join The Conversation
Question: Reflecting on this article, which of these business growth strategies are you going to use in 2017? I love reading your feedback so please do reply using the comments box below.
Explore These Additional Resources
Did you miss?
- Understanding Business Growth Strategy
- How To Prepare A Sales Forecast – Part 2
- The Secret To Cash Flow Success
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I’m Denyse Whillier, a London based business coach and consultant. I guide entrepreneurs from across the globe to achieve profitable, scaleable growth and create businesses that are Built To Succeed™. Built To Succeed™ is my proven success system, developed during my 8 years in the trenches as a CEO, 25 years’ experience at senior leadership and managerial level and training at Cranfield School of Management, the UK’s leading business school. It’s this background that sets me apart and helps my clients to get BIG results.
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