How to Make Accurate Sales Projections in a New Business |A&C Accounting And Tax Services
Being able to accurately forecast sales is important for determining when your business will be profitable and if it will need startup funding. But projecting sales without any historical data to go on is difficult. Here’s what you need to do to figure it out.
How to forecast sales probably isn’t top of mind when you decide to start a business. But it should be. You may want to start a business doing something you love, or to help other people, or because you want to be your own boss. But you want to make money too. So, one of the most important things you need to do is create a sales projection. After 90 days, six months, and one year, what will your sales look like and how will that translate to profit?
This isn’t a question to ask because you’re only about the profit. The answer has some big implications. Your sales forecast dictates how much money you need before you start the business.
If you need funding of any sort, any potential lender, including family and friends will want to know the upside potential of their investment. You can use sales projections to decide a launch date. Knowing how much you will make in the short term helps you figure out how much money you need to save prior to your launch.
It will help with inventory. If you have a reasonably accurate projection, you know how much product or raw materials to order. Finally, marketing. If your 90 day projection looks a little light, you might have to ramp up your marketing budget.
No business can make spot-on forecasts but they can get close. Don’t aim for perfection. Your job is to make the most educated guess possible.
Before digging into your numbers, dig into your industry. These data will help to project based on others who came before you. Looking at the past doesn’t necessarily have any correlation to the future but it’s a fine place to start.
Most trade groups can supply you with massive amounts of data but you’ll probably have to pay for it. If you’re in the restaurant business, go to the National Restaurant Federation, for example.
Before you get too far into planning your startup, quickly identify your trade group. Some of the data will come at a cost but they will also have plenty of resources that can help you open your doors. Part of their mission is to strengthen their sector of economy. To that end, they will give you all the help you need to open your doors.
Small Business Development Centers (SBDCs) and SCORE offices have counselors available free of charge. The people at these two organizations have in-depth experience and knowledge of small businesses and may be able to help you more quickly gather the statistical and anecdotal information you need to make accurate sales forecasts for your business. These two groups are invaluable resources for small businesses (existing as well as startups). Get to know them and benefit from their help. Both organizations have locations in every state in the US.
If you’re looking for statistical data, the fastest way to get directed to the right resources to use – and sometimes to get free access to databases you might otherwise have to pay for –is to talk to the reference librarian at your local library. Reference librarians are trained to know what resources to use and can save you hours of time by pointing you to the specific source of the data you need. The library may also have subscriptions to fee-based databases and make access to those databases available to their patrons.
You can get data from a trade group but talking to somebody in the industry you’re entering is even better. They may not want to give you detailed financials but they’ll probably be happy to give you general figures and current industry trends. You might have to go outside of your geographical area to find a non-competitor but the information is sure to be valuable.
If you’re buying product from a vendor, talk to them about sales. It’s in their best interest to set you up for success. Expect them to have a lot of industry information that can help you make projections.
But be careful. Because vendors are motivated to sell, they may tell you what you want to hear. If things seem a little too good to be true, they probably are.
Now it’s time to dig in to the numbers. Expenses are much easier to forecast than income. If you’re getting close to opening you probably know your rent, utilities, and other fixed costs.
Costs like advertising, legal and licensing fees, and costs of goods sold are harder to forecast but not as hard as sales.
For marketing, double your estimates and for legal, insurance, and licensing, triple your number. These expenses are always higher than you originally thought.
You have dreams and there is harsh reality. Neither is likely accurate but make projections for both. Your conservative projections might assume little marketing, low price points, little or no sales staff, and higher expenses. Your aggressive projections might assume multiple price points, a full-on marketing strategy (with money to pay for it) and a team of salespeople.
The truth lies somewhere in the middle.
Sales are important but profit is what keeps your doors open. If you have no sales, obviously, getting the cash flow going is essential but not far into your growth cycle, start making forecasts for gross margin growth instead of purely sales growth.
Seeing customers walk through the doors feels like success but it’s only success if your margins allow for the growth of your business.
Also address your operating profit margin—the ratio of all operating costs to total revenue. As revenue grows total overhead should become a smaller percentage of total costs.
RELATED: How to Estimate Sales
Your future sales are based on marketing, location, your competition, pricing structure, your business knowledge, weather, economic climate, and much more. Do your research but be on the conservative side. It’s better to aim low and far-exceed the projection than to overpromise and under deliver. After all, Wall Street has followed that formula for more than a century.
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