Sales forecasting is the process of organizing and analyzing information in a way that makes it possible to estimate what your sales will be. This document outlines some basic methods of forecasting sales using easy to find data. More detailed information regarding sophisticated techniques of forecasting sales can be found on the internet, in books at libraries and 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.
- Key sources: Competitors, neighboring businesses, trade suppliers, downtown business associations, trade associations, trade publications. Trade directories, sales reps, distributors, census and demographic information are available from the public library, especially the small business reference area, from shopping center developers and from commercial realtors.
- External factors: Seasons, holidays, special events, competition-direct, competition-indirect, external labor events, productivity changes, family formations, births and deaths, fashions or styles, population changes, consumer earnings, political events, weather.
- Internal factors: Product changes, style, quality, service changes, type, quality, shortages, production capability, inventory, promotional effort changes, sales motivation plans, price changes, working capital, distribution methods used, credit policy changes, labor.
Sales Forecasting for a New Business
The steps below for developing a sales forecast can be applied to most kinds of businesses.
Step 1: 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 target markets.
Sample customer profiles:
- 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 Internet, contact the library for business periodicals index and DemographicsNow for articles related to your type of business. Search recent census data here.
Step 2: 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 census data (see website above). The Statistics Family Expenditure Survey can identify what the average household spends on goods and services. Population forecasts for your area and information on planned construction are available from a variety of sources. The Internet and the library’s ReferenceUSA can help identify names of companies located in your trading area.
Neighborhood business owners, the local Chamber of Commerce, community newspapers and the Business Journal from your city are some sources that can give you insight into unique characteristics of your area.
Step 3: List and profile competitors selling in your trading area
Get out on the street and study your competitors. Use the library’s ReferenceUSA database of local businesses. Visit their stores or the locations where their product is offered. Analyze 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 it is feasible, talk to customers and sales staff. You may want to contact a similar business in a different trading area to gain insights.
Step 4: Use your research to estimate your sales on a monthly basis for your first year.
The basis for your sales forecast can be the average monthly sales of a similar-sized competitor's operations opening 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 into 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 market growth over time and 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%.
You can also check against how frequently customers will return to purchase your product or service. How long before the consumer will require additional services, or how long will the product(s) last?
Prepare sales estimates month by month. Be sure to assess the seasonality in your business and consider your start up months.
A spreadsheet to assist you can be found at scoreworks.org/briefs/excel1500
Sales Forecasting for an Existing Business
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. However, month-to-month projections need to recognize fluctuations due to holidays falling on different dates from year to year. You may need to adjust for extraordinary situations that may have occurred.
If you sell through sales representatives and/or distributors, involve them in the forecasting. Approach each rep and distributor about 2 months before the start of your fiscal year and ask for a sales forecast for each product they sell. Challenge your sales reps and/or distributors for an optimistic but realizable forecast. Set incentives for reaching these forecasts.
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 numbers, 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.
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