A Sales Projection for your Business Plan
A sales projection of your product or service is the starting point and the key to preparing financial projections, so it is important to use a realistic estimate.
To carry out a sales projection, you need to find an estimate of your total annual sales for the first year (don’t worry about the monthly split or if you are starting part way through a year we will deal with that later), simply get your best estimate for the total annual sales for year one.
Most businesses have different types of sales e.g. product lines, departments, customer groups etc. so you’ll eventually need an estimate for each main type for your sales projection. We would suggest no more than seven types and perhaps a final one for sundry sales. If you can’t breakdown into types at this stage of your sales projection then work with the total sales figure.
How do you get the Estimate for the Sales projection?
The problem is how do you get the estimate for the sales projection, there are numerous ways depending on the stage of your business and the type of business you are in, here’s a few to be going on with.
- If you have historical annual sales information for your business use that as your starting point. If you have a number of years then average them, but try and take into account unusual fluctuations e.g. particularly bad weather, economic climate, new products coming on line etc.
- Use information from companies in the same or similar type of business, trade associations, company accounts of similar businesses to give you an idea of the level of sales for your industry and location.
- Use market data and statistics, if you’re in retailing for example its usually possible to get an idea of the typical sales volume per square foot of space for shops in similar locations and sizes. This sales volume multiplied by your average price should give you an estimate of sales.
- Use national government demographic data and average spend data to estimate the total market for the product in your area and then calculate your market share by dividing this estimate by the number of competitors plus one in your area. You’ll need to use your own judgment and adjust this figure (probably downwards, for the first year)
- If you are in a business with a fixed capacity use a bottom up method by calculating your available capacity (e.g. in a restaurant use the available seating and multiply this by the average meal price), and then estimate a likely usage, say 50% to give a sales estimate for the year.
The important thing is to get a best estimate and start the sales projection; it can always be adjusted later as the plan takes shape.
Finally a few words of warning, avoid wishful thinking, (take 20-30% off the figure you first thought of), avoid too much detail in analysing the types of sale you have, and make sure the sales are within your businesses capacity, for example if you are manufacturing widgets with a given capacity, there’s no point in a sales projection well above this unless you have plans to expand.
Our free revenue projection template can be used to help estimate sales for up to 5 years.
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.