9 Tips for Building a Sales Forecast

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 require an accounting degree , particularly when your business is in the early and/or startup stages. 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 either a fixed percentage for growth or a variable one based on seasonality or some other type of analysis that makes sense. Most accounting software allows you to export your actual monthly or more detailed sales data into a spreadsheet which can be your starting point. If you are a new business or are in the early stages, you would use your best estimate which can then be refined as you receive more actual data.

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.  A breakeven calculation is particularly useful for business that sell products and tells you the minimum amount of sales that you need  for your business to generate a profit. This is very important when determining how to price your price your products, based on an estimated number of sales, so that you are able to cover your costs.

3. Break it down:

The more detailed and thorough the estimate, the more likely it is to be accurate.  Each business has a unique set of financial metrics that drive its sales .  For example a business that sells solar panels could break down their projected sales based on an expected success rate for their 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.  An online business such as a subscription based app might estimate their sales based on the number of website visitors they receive per month. They could estimate a conversion rate of a certain percentage that seems reasonable, which is then updated as more data becomes available. This could be further broken down by the type of website visitor - organic search will likely have a different conversion rate than visitors driven by using online advertising. Demographics and analytics can also be used for additional granularity.

4. Know Your Capacity:

Whether you are selling products or services, it is essential to know your capacity, which is essentially the maximum number of output that you can produce given your current resources.  Only a maximum number of solar panels can be produced given your current factory size and number of employees. This of course can be increased, but then a whole other set of projections need to be made to calculate the new breakeven point. If you sell services, then the total number labour hours of your consultants and employees must be calculated to ensure that you can meet demand. This is particularly important for the growth phase of your business as exceeding your capacity, without sufficient planning, can result in cash flow and process flow difficulties and can have a significantly adverse impact on your business.

5. Best Case Worst Case:

When preparing a sales forecast , you should try to incorporate three scenarios – conservative, realistic and optimistic This can help you prepare for the lowest amount of sales as well as the highest and to understand the consequences of each.

6. Set Realistic Prices:

Pricing your products and services is an art in itself. Pricing can be a dynamic process and will likely be tweaked on an ongoing basis. When preparing your forecast, it is important to include discounts as well as any preferred pricing for volume or special customers.  Additionally you might offer promotions to get people in the door, which should also be included. A good forecast spreadsheet will allow you to play around with different prices to see its impact on total sales and the bottom line.

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.  You might be able to get information directly from a competitor or review the financial statements of a company that is in the same industry and is publicly listed. (most publicly listed companies have their financial data in the investor section of their websites). This information can then be reviewed and 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 charge your customers.  A photographer might look at the number of individuals in a specific geographic location that require photography services.  From there, you might further niche down by wedding photography. You would then estimate the number of people who have weddings in the area that you have selected.   Once you have the total number of potential customers, you can further estimate what percentage of the market you need to capture to meet your goals.

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 help you define your objectives with more precision, avoid surprises and be better prepared for opportunities as and when they arise.

Ronika Khanna is an accounting and finance professional who helps small businesses achieve their financial goals. She is the author of several books for small businesses and also provides financial consulting services.

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