Sales forecasting is key to cash flow control, but it can be difficult for new businesses, because they don't have any past sales figures to go on. Alan Gleeson provides the answers in his beginner's guide to sales forecasting
Why do so many start ups struggle with sales forecasting?
Most lack experience, and not being able to look at past sales and base predictions on these can make forecasting seem impossible. If your product or service is new, it is even harder to make predictions of demand. However, there are methods you can use to give you a fairly accurate idea of likely sales.
Why is forecasting important?
Cash is the lifeblood of all businesses – it provides working capital. Many costs must be paid up front, which can create cash flow problems if you're waiting for money from your customers. Consequently, businesses need to prepare forecasts so they can predict when problems are likely to occur. Then they can arrange an overdraft extension, loan or other finance. Effective cash flow management is crucial.
Does forecasting get easier?
Once you have just one month of trading history, you can use that information to forecast subsequent monthly sales with greater accuracy. Then you can use month two's sales to make things even more accurate, then month three, and so on. Predicting sales becomes much easier once you have 12 months of trading behind you. Most businesses face fluctuations in demand during the year.
How can I estimate demand?
It can be tough, but you need a thorough knowledge of your market – its size, spending habits, your product's market position, level of competition, your prices and external factors such as the state of the wider economy. These are all crucial factors. There's no better way to gauge demand than speaking to potential customers, of course. And it's not about finding out whether they like your products, it's about whether they will pay your prices and buy in sufficient volume – otherwise your business won't survive.
Tell me more about forecasting...
Well, once you have worked out your costs and prices, you have two options: you can base your forecasts on facts if you have them, or subjective assessment if you don't. The more sales you make, the more you'll be able to base your projections on facts, but in the meantime you'll have to settle for well-informed assumptions based on knowledge of your market. This will give you a good idea of likely demand, although the reality could be greater or smaller.
Can I learn from other businesses?
Sales information about other businesses in your market, if you can access it, can be highly beneficial. Many will not want to reveal such information. For some types of high street businesses, simply going and observing the number of shoppers entering a competitors' premises can be useful, although it won't tell you how much people are spending or what products they are buying, of course.
Should I be optimistic or pessimistic with my forecasts?
It doesn't pay to be overly optimistic. I'd recommend accuracy, if not caution, then you won't be faced with any unpleasant surprises. If you base your business on over-inflated sales forecasts and revenue falls short, you're in for trouble. The whole point of sales forecasting is to produce realistic estimates, not to get carried away.