A sales forecast is a way of estimating the value of your sales/work undertaken in a given period of time. This is usually shown on a month-by-month basis. The forecast looks at how much income you are expecting to generate.
There are two main methods of forecasting:
- Assumptions – based on the market research you have undertaken
- History – based on past experience
New businesses generally have to rely on basic assumptions and market research. Competitor activity is a good way of gaining an understanding of what may be achievable, although this may not be easy to establish for certain types of business.
If you are taking over an existing business you should obtain a copy of the most recent accounts and trading figures. Care should be taken, as this information may not be accurate or indeed up-to-date. If the seller refuses to provide the accounts you should be extremely cautious. It is important to establish a genuine reason for why the business is being sold.
If you are selling products
In order to ease the process, and provide maximum clarity, it is not necessary to detail every type of product or service you offer. It will be easier to group products together in terms of product type or price.
For example, a ladies fashion shop may sell a range of accessories priced between £5 and £10, a range of t-shirts between £10 and £20, shoes priced between £20 and £30 and dresses between £30 and £50. So taking accessories as an example, it is reasonable to assume that the average price is £7.50.
The selling price is the price or average price that your market research tells you your customers will be prepared to pay.
Variable Costs are those costs that are directly related to sales e.g. if you are a florist and buy bunches of flowers in at £3 per bunch and sell them for £5 per bunch – your Unit Variable Cost will be £3 per bunch. Remember, if you are charging for your service by the hour, and not selling goods, you may not have any variable costs.
Let’s see how we would complete the spreadsheet forecast for the ladies fashion shop;
|unit selling price||7.5|
|material unit cost||4|
|total income invoiced||15|
|total cost of materials||8|
|unit selling price||15|
|material unit cost||7|
|total income invoiced||45|
|total cost of materials||21|
|unit selling price||25|
|material unit cost||12|
|total income invoiced||100|
|total cost of materials||48|
- The spreadsheet is completed with the name of the product line. eg “Accessories”.
- The unit price is taken as the average sale price.
- The corresponding “unit cost” is the cost of the product to you. This is known as the variable cost as your cost varies in direct proportion to the number sold. For example, if you double your sales, your unit cost would also double.
- An estimation of the number sold is then entered.
- The spreadsheet will calculate the total income and cost for each product.
It is useful to ask yourself a number of questions to help you to forecast the monthly sales. These need to be asked for each product for each month. The answers to the questions should be based on the results of your market research and should cover the following points:
- How many customers do you expect to buy this product per month?
- How many units do you expect each customer to buy?
- How many units do you expect to be sold each month?
- What will be the price per unit? (Or average price in the case of price ranges)
If you are selling your time
If you are selling your time, as opposed to products, then it is usually sufficient to enter the total hours you expect to work in a given month. You would also enter your anticipated hourly rate. The spreadsheet will then calculate the total income.
If a painter and decorator proposed to charge £20 per hour, then he would only need to complete the hourly rate section as below;
|Total hours invoiced||800|
The cost of the paint/materials would simply be added to the customer’s final invoice. Even if you did take a “mark up” on the materials, it is easier only to show the time charged as your income.
Factors affecting sales forecasts
All new businesses grow at different rates. One of the best ways to forecast growth is to set a growth rate percentage on the number of units sold by product. e.g. the sales of products will grow at a rate of 10% per quarter, or the number of consultancy customers will grow at a rate of 5% per month for the first six months. The growth rate you decide upon forms part of your business aims and assumptions.
Even if you think you are not subject to seasonal variations, there are trends that have an effect on almost every business. One of these is the reduction of sales immediately after Christmas and in August for both retail and commercial businesses. Don’t forget the building trade closes down almost completely for two weeks or more at Christmas and this has an effect on many other businesses.
This recognises the fact that products and services have a definite lifespan. All products or services pass through four phases;
Where do your products and services fit into the cycle? If you are starting a business with products or services that are reaching maturity or are in decline, you should have made contingency plans for when the market for your business starts to diminish.
Your market research will help to confirm that your projections seem realistic – if they don’t, think again. Pay attention to the messages your market research is telling you and adjust your forecasts accordingly.