No one knows what the future will bring, but with some knowledge and experience to draw upon you can make informed predictions, which offers more value than simply guessing. In business, predictions are more commonly called forecasts and they’re used to predict sales and cash flow.
WHY ARE FORECASTS IMPORTANT?
They enable owners and managers to plan for the future with greater certainty and make better-informed decisions. Just as a weather forecast helps us to predict whether rain or glorious sunshine is heading our way, financial forecasts enable businesses to prepare for what lies ahead.
Although forecasts can turn out to be better or worse than predicted, they’re less likely to be totally wide of the mark. Making business decisions based purely on guesswork or simply hoping for the best can backfire spectacularly.
SALES FORECAST DEFINITION AND KEY BENEFITS:
A sales forecast is simply an informed prediction of likely sales during a given period, whether that’s a week, month, quarter, six months or year. Sales forecasting is the process of creating a sales forecast.
Being able to predict how much revenue you’re likely to bring in can offer value. If you know how much revenue you’re likely to make, you can compare it against your likely costs so you can produce a cashflow forecast.
This lets you identify times when your business risks running out of cash – the lifeblood of all businesses. Accurately forecasting your sales can help you to avoid serious cash flow problems, for example by reducing your costs or finding a business or start-up loan. You may even predict a cash surplus, so you can plan what you’ll do with it ahead of time.
Forecasting gives you more control over your business’s future; you’re not simply left to react to events as they happen.
Sales forecasting allows your business to deal with peaks in demand, so that you’re properly resourced and able to maximise sales. They can also prevent your business from tying up valuable cash in stock or materials because you’ve over-ordered.
Sales forecasting also helps you to set budgets for the year, along with targets for your sales staff. When starting up, sales forecasting can help you to work out the viability of your business idea. Will you make enough money from sales to sustain your business in its vital first year or two – or will you need a start-up loan?
Cash is king and effective cash flow management is essential if your business is to survive and thrive. Forecasting your sales and costs is key to cash flow management. Sales and cash flow forecasts are also essential when producing a business plan, which can enable growth.
SALES FORECAST CHALLENGES FOR SMALL BUSINESSES:
As an owner of a small business you may struggle with sales forecasting if you lack previous trading experience. Sales forecasting is easier if your business can base assumptions on sales figures from previous years.
Then, not only can you predict sales for specific weeks, months or quarters, but you may also be able to accurately predict how many current leads will convert to sales. Sales data contains valuable insight – from who your customers are and what they buy to when they buy and how much they spend – all of which can help you to improve your marketing.
Predictions can be wrong, of course, no matter how much knowledge or historic sales data you have. Circumstances in one year can be wholly different to another year. A key competitor may have entered or left your market, or your products or services may be more or less attractive, or wider economic conditions may be better or worse.
There are many factors to consider when forecasting sales, which is why having up-to-date knowledge of your customers and competitors is vital. Your forecasted figures will be based on assumptions. The key is to make sure they’re realistic.
SALES FORECAST - CHALLENGE FOR START UPS:
Predicting sales when you’re a start-up can be challenging, especially when you’re offering innovative products or services. Once you have a few months’ trading history you can be much better placed to forecast subsequent sales, while forecasts for the rest of the year can be adjusted to make them more realistic.
Having at least a year of sales to look back on can make your forecasts more reliable. Many businesses must contend with seasonal fluctuations in demand, and these must be built into yearly sales forecasts. Businesses without trading history may be able to base their forecasts on others that do or published market data.
When starting your business, you should have researched your market fully, giving you essential information about your customers, competitors and key market trends. The best market research comes from speaking directly to potential customers, asking them what they think of your products, services, prices and brand. Such information is essential when producing a start up sales forecast.
HOW TO FORECAST SALES:
Some businesses may need weekly sales forecasts, but for most a monthly sales forecast for the year ahead is ideal. So, how do you create a sales forecast?
STEP 1:
Create a landscape-format spreadsheet breaking down the year ahead into months along the top of the page.
STEP 2:
Down the left-hand side, break down your products and/or services in to categories or named items, giving each a line. Rather than products or services, you might segment your sales by channel (for example offline and online), or type of customer (trade, consumer) or area/territory.
While total revenue works for some businesses, others detail sales by unit volume in their sales forecasts. Some businesses list the names of individual salespeople in their forecasted targets. A food business might list food sales alongside headings for breakfast, lunch and dinner, possibly with a separate heading for drinks. Use whatever works best for you and provides most insight.
STEP 3:
Save time by ensuring that totals automatically appear in prominent boxes on your spreadsheet.
STEP 4:
Working with your historic sales data and/or market research/knowledge, input your forecasted sales into your spreadsheet for the year.
STEP 5:
Set up the spreadsheet so that, at a glance, you can see forecasted figures for monthly, quarterly and yearly sales. Also include a column so you can input actual sales into your spreadsheet. Store your spreadsheet safely and encrypt to restrict access if necessary.
Set aside time each month to input actual sales figures into your forecast. Compare your forecasted figures with actual sales. If they are wholly different, make sure you understand why. If you’re not selling enough, re-visit your sales and marketing plans.
SALES FORECAST EXAMPLE: COFFEE SHOP
In the high-street location where the prospective owner plans to open their new coffee shop, there is only one nearby competitor. Observing outside reveals the existing competitor coffee shop gets ten customers per hour on Saturdays and six an hour on other days, giving a total of 320 customers a week.
Research suggests people spend an average of £9.62 per coffee shop visit (about 30% of this on coffee; 10% on other drinks; and 60% on food). That means the competitor could be taking 320 x £9.62 = £3,078.40 a week.
Being in a superior location, on a busier road with greater footfall and offering a more modern “coffee shop experience” to win customers away from the competitor, the start-up forecasts sales of £583 a day, £3,500 a week and £14,000 a month:
Forecast sales (example figures)
These figures can be input into a start up sales forecast, broken down into days, weeks and months, for sale of coffee, other drinks and food. For the warmer months when coffee sales usually fall, figures are adjusted, also accounting for greater sales of other drinks.
The forecast is updated when the business opens and real sales become apparent. Saturday sales were under-forecasted, however, sales on Mondays were less than forecasted. The business owner adjusts their sales forecast, making it more reliable for the rest of the year.
Reference: British Business Bank. 2021. Record levels of smaller businesses sought external financial support in 2020, with further significant demand expected in 2021, finds British Business Bank research - British Business Bank. [online] Available at: https://www.startuploans.co.uk/business-advice/sales-forecasts-definition-and-guide/