The sales forecast sometimes referred to as the revenue forecast or revenue projection, is one of the most crucial set of numbers used in the business plan. Many of the numbers developed later in the financial projections such as inventory levels, staff costs, cash flow, funding requirements, and ultimately the business valuation, depend on the numbers used in the sales forecast.
Investors and lenders pay a lot of attention and will challenge the sales forecast, so it is important that time and effort is put in to developing a robust sales forecast which will withstand these challenges.
Most sales forecasts will be wrong. Investors are not looking to see whether you can predict the future (you can’t), they are looking for you to demonstrate that you understand the issues that will impact on your forecast and to show that even in the worst case scenario, your business can survive.
A sales forecast is best done from the bottom up. Simply stating that the worldwide market for widgets is 100 million and your business will be able to get 1% of that market so sales should be 1 million will not stand up to scrutiny.
Sales Forecast for New Business
A bottom up sales forecast should take into account many factors including the following:
If possible, start the sales forecast by looking at how others in the same industry (competitors) have performed over the past few years by obtaining copies of their published annual accounts. This will show at the very least whether the market for your product is growing or declining, and if the business is of a similar scale to your intended business, will show you the level of sales achievable, and how fast the sales can grow.
So for example, if you plan to open a retail outlet, monitor the number of customers passing, entering, and purchasing goods at a similar retail premises over say a period of a week. Using these estimates, and estimates of the average sale value per customer from sources such as trade magazines, it is possible to forecast the weekly sales for a typical retail outlet at that location.
Suppose from observation the number of customers making a purchase in a week was 400, and the average value of a sale is 3.50, then an estimate of the sales for the week would be 400 x 3.50 = 1,400 or assuming all weeks in this particular month are similar, approximately 1,400 x 52/12 = 6,100 per month,
If trade magazines and websites reveal the seasonality for the industry and show that this month normally represents 6% of annual sales, then the annual sales forecast might be 6,100 / 6% = 102,000 per year.
Business Operational Limitations
All businesses have operational limitations due to such factors as the number of staff, the size of the available premises, or the availability of finance. When producing a sales forecast it is important to check whether the forecast arrived at is achievable within the operational capabilities of the business.
For example, a restaurant has a given number of tables, seats and therefore covers available. The sales forecast needs to be developed such that the number of available covers is not exceeded. This can be seen in operation in our restaurant revenue projection template.
The sales forecast can be improved using market research and customer surveys. By attending trade shows, interviewing a selection of potential customers, or placing a small advert for the product, it is possible from the numbers of positive responses, to estimate the number of customers your business is likely to get when it opens for trade. With this information, using the average sales value for the product, an estimated opening sales forecast can be developed.
The sales forecast needs to take into account the seasonality of the industry in which you operate. Few businesses have steady sales throughout the year. Many businesses are dependent on the weather or holiday periods such as Christmas, others are dependent on major trade show activity.
Rules of Thumb used in the Industry
Research in trade magazines and websites or discussion with people already in the industry will reveal any useful rules of thumb which can be applied to the business. For example it might be possible to estimate the level of repeat business using a rule of thumb.
One final approach, if information is not available, is to work out the sales forecast needed to generate the owner a required level of net income. While this approach will not have any foundation on which to support a financial projection, it will allow the owner of the business to decide whether the level of sales required is achievable before investing too much time and effort in the new venture.
Forecasting Sales and the Financial Projections Template
A good sales forecast should look five years ahead with the first year sales forecast on a monthly basis. How you forecast sales will depend on the type of industry in which it operates. We have created simple forecast templates for a number of industries, some which are listed below.
- Golf Course Business Revenue Projection
- Bed and Breakfast Business Plan Revenue Projection
- Search Engine Business Revenue Projection
- In-App Purchase Revenue Model
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.