Is predicting sales an impossible journey?
Forecasting business revenue and expenses when starting a business is one of the most important, yet neglected areas of business planning. Many consider that if you have no basis of being accurate what is the point in being theoretical? However, there aren’t many investors that would consider funding a business that hasn’t given good thought to what level of sales are required? Of course it is also a powerful reality that having reliable financial information will help an owner to make better business decisions.
The measure of business viability and sustainability is often determined by predicting a particular outcome and allowing sufficient time to respond appropriately to your forecasts. Whilst it may not be easy to determine what your sales WILL be – it is possible to reasonably define the minimum your sales will HAVE to be, in order to survive.
Knowing the sales you need to survive is key to sustainability
So when you have little history or experience where do you begin?
Here are some principals to consider that will help you to understand if you can get the best from your business:
- Start with identifying your costs, these are much easier to research and will form the basis for showing what resources will be needed to run the business. Estimate the key categories of rent/rates/telephone/insurance/light & heat/advertising etc. (It is better to over-estimate as costs usually exceed expectations!)
- Estimate how much you will need to draw from the business for yourself (drawings) and for your staff (wages) and opening/replacing stock if appropriate.
- Once your costs are identified you can start to appreciate the level of income necessary to cover those costs which will become your break-even position. However that is only the first part!
Whilst you can predict sales relative to the above it’s pointless to merely take a total figure alone or just to divide it by twelve to get a monthly figure. It is important to consider your trading year and any seasonality that will be represented as the year will have various peaks and troughs relevant to your sector e.g., customer demand, weather, deliveries, competition. What evidence do you have that supports your assumptions? Do you have a contract guaranteeing sales to begin with.
- You will find it helpful to produce two examples, a best and a worst-case scenario to give a balanced view. Each scenario may contain aspirational goals that can be modified once you review the two options. For example you might want to look at a higher against lower pricing model which may affect how many customers will be needed to achieve a given outcome.
Once this part of the exercise is completed it’s helpful to measure against some key ratios for example, gross & net profit margin percentages, number of units or hours required. With gross/net profit it is usually easier to relate to percentages based on expectations, as fluctuations are often easier to spot this way.
Finally get your projections reviewed objectively by a professional and independent business support specialist. This will inject a level of reality and challenge your assumptions. Review your projections regularly, (monthly/quarterly), to give you confidence that you remain on-track. Remember, just because you’ve done the numbers doesn’t mean they will run according to your expectations, but you will be able to quickly see and adapt to any changes. Think big! and the numbers will help you visualise how you can achieve your expectations.