The financial future of your business begins with your projected sales. This is just your best guess at how much revenue your business will generate in the coming years. Think of your forecasted sales as the pay check for your company. Just like at home, you can't really dial in your budget until you know roughly how much money you'll have to spend. That's what the forecast provides.
The future is uncertain, of course. No one knows exactly how your business will do. You are predicting the future, and you aren't going to get it all right. There are no right or wrong answers with a sales forecast so don't over think it. Don't be afraid of it and keep these two things in mind:
- You are qualified. You don't need an MBA or CPA to create a sales forecast; all you need is some simple data and your best educated guess.
- Forecasting is more art than science. Don't worry too much about being wrong. There is no magic formula. Your actual sales and costs probably won't match your forecast, but they will tell you where your assumptions were wrong, which is crucial to keeping your business on track.
Creating a Sales forecast
To create a sales forecast, click on the Business Planning tab on your Smarta Business Builder dashboard. This will take you straight into LivePlan Business Planning tool.
Once in LivePlan, under the "Plan" tab, click on "Financial Plan" then the "Sales Forecast" section.
Click on "edit" to uncover the Sales Forecast Table.
The table builder will walk you through the details you need to fill in one step at a time. Be realistic here. Your business plan does not need to shoot for the sort of ambitious targets that you might share with your sales staff (if you have any) as motivational goals. The numbers in the sales forecast should be reasonable, maybe even a bit conservative, so that you can achieve them and stay on plan.
What goes in this table
The Sales Forecast is really flexible, to allow you to project whatever sales categories make the most sense for your business. The main thing is to have enough sales categories to cover the variety of goods and services you offer, without drowning in detail. This will help you later to track which sales lines are doing better than projected, and which worse, and why.
- The most common breakdown is item type: a restaurant might project breakfast, lunch, dinner, and drink orders separately. This lets you incorporate what you already know about seating capacity, average price, and table turnover to reduce uncertainty. It also prevents you from planning to sell 50 dinners per hour when you have only 15 seats.
- You could group items by price, especially if different price levels are aimed at different segments of your market (budget cars vs. luxury cars, for example).
- You could group items by sales channel: retail sales vs. wholesale vs. direct (online or catalog)
- If you sell both products and services, you can create separate forecasts for each, since they will likely have different direct costs.
What else this affects
The numbers from your Sales Forecast table fill in the first part of your Profit and Loss statement (also called Income Statement). The Income Statement also shows your gross margin, what you get when you subtract your direct costs from your sales.
Basic Sales Forecast Concepts
If you feel you need to know a little more about sales forecasting before you start with your table, have a look at the overview below:
Basically, sales is the money that people will pay you for what you are selling. We usually get to it by projecting number of units (products or hours for service businesses), and the price you charge for each unit. Sell two hours of consulting at $100 each and you have $200 of sales.
Costs of Sales
These are the costs that go up or down in direct proportion to how much of your product or service you sell. They are also called direct costs, unit costs, and costs of goods sold (COGS) depending on your type of business. If you drive a taxi, gas is a direct cost of sales. If you run a bookstore, then the direct costs are what you paid to buy the books you sell. Manufacturers' direct costs include materials and assembly or manufacturing labour.
Don't include expenses here. Expenses don't change month by month depending on how much you sell. For example, rent, insurance, utilities, advertising, and so forth. These belong in your expense Budget (which ends up as operating expenses in the Profit and Loss), not here.
Costs are tax deductible, of course.
Accounting standards require that both sales and direct costs are listed in the month when the product or service is delivered (or sold), regardless of when you paid for buying what you sell (inventory), or when you actually got paid for the sale.
For example, if you buy a dress as inventory in May, hand it over to the customer in June, and then issue an invoice for payment that's due in July, you record both the Sale and the Direct Cost in June. The money going out and coming in for those other months will affect your cash flow, but not your Profit and Loss.
How do I know how much to forecast?
The short answer is basic research and educated guessing. If you're already running your business, you base your forecast on what happened last year, plus any changes you plan to implement. If you're just starting, you should learn enough about the industry and similar businesses to feel comfortable making a forecast. And you break your guess down into assumptions for units and price to make it easier. To educate your guess, you might…
- Spend some time outside a similar business and count how many people go in per hour, and how many leave with bags of stuff they've purchased.
- Contact a similar business that doesn't compete with you (maybe one in another state), tell them who you are, and ask for some basic information about sales and costs that the store owner wished she had known when starting.
- Use industry data you can purchase or find online.
- Find somebody with more industry knowledge and ask for help.