Sales forecasting is the process of organizing and analysing information in a way that makes it possible to estimate what your sales will be. This Micro Module outlines some simple methods of forecasting sales using easy to find data. Books containing simple and sophisticated techniques of forecasting sales can be found in libraries and business oriented book stores.
If you sell more than one type of product or service, prepare a separate sales forecast for each service or product group.
There are many sources of information to assist with your sales forecast.
Some key sources are: Competitors; Neighbouring Businesses; Trade suppliers; Downtown business associations
Trade associations; Trade publications; Trade directories;
Factors that can affect Sales can be divided into external and internal influences. Examples of these are:
Seasons; Holidays; Special Events; Competition, direct or indirect Competition, External labour events; Productivity changes
Family formations; Births and deaths; Fashions or styles; Population changes; Consumer earnings; Political events
Product changes, style, quality; Service changes, type, quality; Shortages, production capability; Promotional effort changes
Sales Motivation plans; Price changes; Shortages, inventory; Shortages/working capital; Distribution methods used
Credit policy changes; Labour Problems
Creating a sales forecast can be divided into four steps.
Develop a customer profile and determine the trends in your industry.
Make some basic assumptions about the customers in your target market. Experienced business people will tell you that a good rule of thumb is that 20% of your customers account for 80% of your sales. If you can identify this 20% you can begin to develop a profile of your principal markets.
Sample customer profiles:
male, ages 20-34, professional, middle income, fitness conscious.
Young families, parents 25 to 39, middle income, home owners.
Small to medium sized magazine and book publishers with sales from $500,000 to $2,000,000
Determine trends by talking to trade suppliers about what is selling well and what is not. Check out recent copies of your industry's trade magazines. Search the Business Periodicals Index (found in larger libraries) for articles related to your type of business.
Question: What are five customer profiles for your business?
Question: What are some customer trends for your customers/clients?
Look at the area where you will be trading
Establish the approximate size and location of your planned trading area.
Use available statistics to determine the general characteristics of this area.
Use local sources to determine unique characteristics about your trading area.
How far will your average customer travel to buy from your shop? Where do you intend to distribute or promote your product? This is your trading area.
Estimating the number of individuals or households can be done with little difficulty using national census data to be found at your library or town hall. Your local statistics office or chamber of commerce can identify what the average household spends on goods and services.
Neighbourhood business owners, the local Chamber of Commerce, the Government Agent and the community newspaper are some sources that can give you insight into unique characteristics of your area.
Question: What are the statistics on the people in your area?
List and profile competitors selling in your trading area.
Refer back to the data you collected in your market research.
Get out on the street and study your competitors. Visit their stores or the locations where their product is offered. Analyse the location, customer volumes, traffic patterns, hours of operation, busy periods, prices, quality of their goods and services, product lines carried, promotional techniques, positioning, product catalogues and other handouts. If feasible, talk to customers and sales staff.
Use your research to estimate your sales on a monthly basis for your first year.
The basis for your sales forecast could be the average monthly sales of a similar-sized competitor's operations that are operating in a similar market. It is recommended that you make adjustments for this year?s predicted trend for the industry.
Be sure to reduce your figures by a start-up year factor of about 50% a month for the start-up months.
Consider how well your competition satisfies the needs of potential customers in your trading area. Determine how you fit in to this picture and what niche you plan to fill. Will you offer a better location, convenience, a better price, later hours, better quality, and better service?
Consider population and economic growth in your trading area.
Using your research, make an educated guess at your market share. If possible, express this as the number of customers you can hope to attract. You may want to keep it conservative and reduce your figure by approximately 15%.
Prepare sales estimates month by month. Be sure to assess how seasonal your business is and consider your start up months.
Sales revenues from the same month in the previous year make a good base for predicting sales for that month in the succeeding year. For example, if the trend forecasters in the economy and the industry predict a general growth of 4% for the next year, it will be entirely acceptable for you to show each month?s projected sales at 4% higher than your actual sales the previous year.
Credible forecasts can come from those who have the actual customer contact. Get the salespersons most closely associated with a particular product line, service, market or territory to give their best estimates. Experience has proven the grass roots forecasts can be surprisingly accurate.
Sales Forecasting and the Business Plan summarize the data after it has been reviewed and revised. The summary will form a part of your business plan. The sales forecast for the first year should be monthly, while the forecast for the next two years could be expressed as a quarterly figure. Get a second opinion. Have the forecast checked by someone else familiar with your line of business. Show them the factors you have considered and explain why you think the figures are realistic. Your skills at forecasting will improve with experience particularly if you treat it as a "live" forecast. Review your forecast monthly, insert your actual, and revise the forecast if you see any significant discrepancy that cannot be explained in terms of a one-time only situation. In this manner, your forecasting technique will rapidly improve and your forecast will become increasingly accurate.
Ben Botes is an author, entrepreneur and expert speaker on new venture creation. He is also the founder of http://www.my1stbusiness.com a web portal for 1st time business owners and entrepreneurs. Visit my1stbusiness.com today for the most extensive range of small business resources, courses, articles and tools, designed to unleash your entrepreneurial spirit.