Sales Forecasting
There are many different types of marketing that work. You will need to experiment to find what will work for your business. You will also have to determine what success is for your industry and your business, and if you don’t meet it, which of the variables might be responsible.
Ideally, your business plan will describe your short and long term expectations for your revenue - increasing your sales over time, increasing profit levels, market share, customer retention, or all of the above. Objectives should be stated in clear, measurable terms, such as “$25,000 in sales this quarter, 20% growth per year, 10% market share over the next five years”
If your goal is to increase revenue by 20% this year, and your revenue was $400,000 last year, then you are looking for an increase of $80,000 annually or approximately $6,500 to $7,000 a month. How much more marketing will you need to do to increase your sales by this amount, based on your results in the past?
Once your strategies and activities are established, you will need to monitor the results of your actions on a periodic basis, and compare them to your forecasts. Any failure to meet objectives should be examined carefully and changes made to try some different activities. Describe in your business plan how you will monitor and evaluate the results of your marketing efforts. These are your tracking methods for knowing what marketing tactics are working. Ideally, you can crate a reporting mechanism to look at each activity, setting goals for each and comparing these to actual results.
If you have been in business for a while, you will need to include in your plan your sales volume in units (such as numbers of products sold of each type, and/or numbers of customers) and in dollars for the past few years to set a context for what you want to do next. If your business is new, you will still need to do a forecast (or projection) for what you expect to sell.
To arrive at this forecast, make some educated guesses at how well your marketing efforts to bring in new customers will work, and what the average size sale will be per customer.
In order to set up your company’s financials projections (which we will discuss in the next few chapters), you will need to have an idea of what your sales will be (month by month for the first 12 months, and at least quarter by quarter after that). One of the most common mistakes of business planners is to overestimate the sales for the first few months of business.
The reality is that no one knows what kind of revenue your business will have. And there is no way to project this other than to create a mathematically logical equation based on what you do know about your own planned marketing efforts and the capacity of your business. Some business plans include as many as three possible scenarios – best, most probable, and worst. This may be a good exercise for your own thinking, but you need to include the most probable for your business plan.
An example of sales forecasting assumptions for a consulting business:
“We are assuming that our direct mail effort will be 500 pieces sent a month, and at a 1.5% return, we will get 7 new customers a month. Each customer will buy an average of $2,000 in services, resulting in $14,000 of sales each month.”
One suggested way to show your three-year sales forecast in numbers after discussing your assumptions is to put them in a chart. Two examples follow:
For a restaurant:
“Patty’s Bakery will be serving breakfast, lunch, and dinner, seven days a week. Our maximum seating capacity is 60. We will assume for our sales forecast that we will be at 85% of capacity at all times, and that we have turnover of each table twice at breakfast and lunch, and three times at dinner. We have calculated our average per person bill to be $6 at breakfast, $9 at lunch, and $16 at dinner. Therefore, our average days’ receipts would be as follows:
Meal # of Customers Average bill per person Total Receipts
Breakfast 50 x 2 $6 $600
Lunch 50 x 2 $9 $900
Dinner 50 x 3 $16 $2400
Total $3900
At approximately 30 days per month, average monthly receipts would be estimated at $117,000, and yearly revenue at $1,404,000.
Sales Forecast for Patty’s Bakery
2008 2009 2010
Location 1 $1,404,000 $1,474,200 $1,547,910
Location 2 x x $800,000
Totals $1,404,000 $1,474,200 $2,347,910
We anticipate a growth rate of 5% per year based mainly on price increases, until we open our second smaller location in year three where our revenue increases dramatically.”
For a manufacturer:
“ABC Manufacturing sells two types of products. Product A is our higher priced product sold to large corporations at $500 per unit, through our own 10 sales reps. Product B is sold through retail distribution and 20 catalog companies for $99 per unit to consumers. The following are our unit and dollar sales projections for these two products.
Sales Forecast for ABC Manufacturing (units)
2008 2009 2010
Product A 1200 2400 4800
Product B 18,000 21,600 25,920
Sales Forecast for ABC Manufacturing ($)
2008 2009 2010
Product A $600,000 $1,200,000 $2,400,000
Product B $1,782,000 $2,138,400 $2,566,080
Totals $2,382,000 $3,338,400 $4,966,080
Of course, it is unlikely that either of these scenarios will play out in exactly the way it is written. But remember, your banker doesn’t know what will happen either. You must describe the logic behind your thinking and convince your financers that based on all your hard work, this is the probable outcome.
