While conventional wisdom dictates that cash flow and revenue projections are the key to taking control of your business, sales will drive many of the other numbers. Sales forecasting is a key element of any business plan, which you must compose if you’re starting a venture or making significant changes within an existing business.
Established small-business owners can rely on figures from prior years to estimate sales. They will need to take into account sales growth expectations. However, for new small-business owners, using sales forecasting requires studying the industry, compiling a consumer profile and getting a sense of the competition’s sales to gather enough information to do some simple sales projections.
Do Your Homework
Like all financial estimates, sales forecasting needs to be based on research and data rather than guesswork. If you don’t have a sales history of your own, you can research sales figures for your industry, via industry associations and by inquiring of comparable businesses outside your area. This research will help you determine your company's revenue potential and pricing.
The Small Business Administration, your local chamber of commerce and other entrepreneurial organizations may also be able to provide resources. While small businesses are rarely publicly held, you can try to research sales figures for comparable businesses through Securities and Exchange Commission filings.
You will need to find out how sales are calculated for your industry. For example, psychologists and consultants are paid by billable hours, while sales forecasts for restaurants and retailers are based on sales per square foot.
If you're buying into a franchise, the franchisor will provide you with a uniform franchise offering circular with financial details and store listings. Talk to your franchisor about sales forecast and ask store owners in the franchise about their sales figures.
Using Sales Forecasting
Sales forecasts are an inexact science, especially when you’re a new business with no previous sales figures of your own to use as a guide. You can begin to get a feel for what the local marketplace will bear by studying your target industry, doing the legwork to find out what people are willing to buy and examining your competition. Check with state and federal agencies for relevant data. The state of Washington’s Department of Revenue, for example, provides retail sales statistics broken down by city. The U.S. Census Bureau provides a wealth of demographic information that may also be helpful in estimating your target market, while the U.S. Bureau of Labor Statistics provides reports on consumer expenditures.
Estimate your market share in terms of customer numbers; calculate how often they will buy per year; and project the average dollar amount of each purchase. Multiply those three numbers to project sales volume for each target market.
Small owners frequently overestimate or underestimate their sales forecasts, so you’ll want to have three different sales projections: One as a best-case scenario, another as a worst-case scenario and a third that is in between.
"Revenue growth is always going to take longer than you expect," warns Raman Chadha, executive director of the Coleman Entrepreneurship Center at DePaul University. "It's smart to be more conservative, to err on the side of caution" in your sales projections, he says.