If you’re making a financial plan, chances are a big concern is…
“How much money will the business make?”
But answering this question can be daunting. Where do you start, and how can you forecast your sales realistically? This is especially difficult if you are a new business with little or no existing sales data to go on.
When I started forecasting, I felt like planning was an arena for professionals and that it took a great deal of training and advanced knowledge to do it right. But the truth is if you know your business, then you are perfectly qualified to start making financial forecasts. All you need is some research, common sense and a simple tool to take care of the calculations and presentation.
Sales forecasting is based on facts
So is sales forecasting just a dangerous and arbitrary guessing game? Because this is how I saw it initially. But the truth is if you are planning for the future, you need to have some information to begin with. All sales forecasts are based on facts. Even brand new startups have information to draw on for their forecast, it just may not be obvious at face value.
Inevitably though, there will come a point in your planning where you run out of facts and have to start making some assumptions about what will happen. Some businesses reach this point sooner than others – and this is often down to how much existing sales data they have at their disposal.
You could say financial forecasting boils down to an educated guessing game at this point – and if it helps you to think about it that way, by all means, do. But these guesses should be based on as much reliable data as you can get your hands on. And, crucially, it’s a game in which you need to make more than one educated ‘guess’ about how the future will pan out.
Forecasting steady growth of an existing business
If you are already in business and are not making major changes to your sales methods or sales volume, using existing data provides a firm basis for forecasting your ongoing sales. If you are aware of any seasonal dips or peaks in sales around certain events or periods of the year, you can build these into your sales forecast.
But it’s not all plain sailing. The conditions that prevailed last year may have changed, there may be new competition or changing consumer needs. Or you may be reaching the maximum customers you can reach with your current sales strategy, or reached market saturation – where you can’t get any more customers because there are none to be had!
To forecast effectively, more information is needed than just the business’ past performance. Even well-established businesses need to think like a startup in terms of market research and forecasting.
Forecasting for startups and businesses undergoing rapid changes
Obviously, an entirely new business has NO sales data of its own, while businesses undergoing changes or pivoting to new business models may have some past data, but it is likely not as relevant to the new arena the business finds itself in.
Nevertheless, even if a business has never opened its doors, some of the financial facts you need to base your forecast on are quite easy to come by. You can get quotes for most of your business’ costs up front and the largest cost for most businesses, salaries, should be a known quantity.
Putting all of these known figures into your Brixx plan is a good start – as then you know what costs the business needs to overcome through its sales activities. But what is trickier is predicting sales themselves.
How to make realistic sales forecasts as a startup
We are going to look at a method known as a bottom-up forecast. This involves looking at the number of customers you can realistically reach through your marketing efforts and then judging how likely they are to purchase your product or service after you have made contact. The alternative is a top-down forecast where you look at the total size of a market and work out how much of that market you can capture. Top-down forecasts can lead you down a misleading path which is why we will focus on the bottom up method.
There are 3 steps to making your first bottom-up sales forecast from scratch:
- Step 1: Research your competition and your customers.
- Step 2: Use this data to predict a stable sales volume and price points that work.
- Step 3: Now, how do we get there?
Step 1: Market research – your competition and your customers
Market research should be your primary source of data if you don’t have existing sales of your own to base your forecast on. There are broadly two kinds of market research – competitor research and customer research. Both have impacts on the price and volume of sales you will be forecasting.
Finding out about your competition
Your competitors include anyone whose products and services customers are spending money on instead of yours. So if you are a bakery, you are not just in competition with other bakeries, but cafes and supermarkets.
- The prices your competitors are selling their products/services at.
- Roughly how many of each product/service your competitors sell or have sold.
- How your competitors differentiate their offering from others in the market (price, quality, convenience)
- Find out how your competitors approach their customers.
Finding out about your customers
You probably have a good idea of who your customers are – but if not customer research is doubly important. Your customers are anybody who might buy from you, but it’s generally best to concentrate your research efforts on 2-4 groups of customers that have certain identifiable qualities that cause them to act in similar ways when purchasing products. For example, if your customers are micro-businesses or ‘one man bands’ they will have more in common with the purchasing habits of members of the public than large businesses or public organisations.
- What groups your customers fall into – the more specific the better.
- What they want. Ahh, the golden goose of market research!
- How much they are willing to pay for your product or service.
- What they are currently doing instead of buying your product or service.
There are many more nuanced questions as well that will depend on the type of business you are running.
Step 2: Predict stable sales volume and price points
You can learn a lot from both types of research, but for now, let’s just think about sales. The core questions of the sales forecast are:
“How many Things will you sell each month?”
“What’s the price you will sell each Thing for?”
There are two ways to go about this. I advise trying both to get a fuller understanding of the figures you are playing with.
Start with an assumption based on your competition
If they have a similar product or service to yours and they sell 100 a month for £200 each, then as long as the costs of the business can be supported by this income alone, you know their business model is viable.
Many other factors may lead to this £20,000 a month your competitor generates though. Do they have a 12-year history of loyal customers, ultra-competitive prices or hard to replicate expertise? And will you be competing for the same customers, or is there is wide enough market for both of your businesses to flourish without having to actively compete with one another (are you in different but similar sectors, for example)?
How to calculate customer numbers based on conversions
The idea behind conversions is simple. Here is an example – there are 100 potential customers for your business out there in the world. 20% of them come into your ‘shop’ (or equivalent), and 10% of these shoppers actually buy. This results in a 2% overall conversion rate.
By estimating the number of customers you can attract (and the cost of attracting them!) you can get an idea of the kind of sales volume you could achieve. Here are the questions you need to consider:
- How many customers for your product or service are there that you can reach with your marketing/advertising strategies?
- How many of these potential customers per month can you attract to your store/website/practice? Estimate the cost of attracting each potential customer.
- How many of these potential customers will actually buy from you? Is there an additional cost to this in terms of time or money?
How to decide on a price for your product or service
Your pricing needs to fulfil three goals simultaneously:
- Keep you in business
- Be a price your customers are willing to pay for what you are offering
- Be favourable to your competitors’ pricing
The first place to start is to look at what similar competitors charge. They have already done their own market research and have carefully chosen price points that they can successfully sell at. Your competitors’ pricing also gives an indication of what customers are willing to pay for similar products or services to your own. Further information could be gained by surveys, interviews of from existing data if you are lucky enough to have any.
Do you want an easy tool for planning your sales forecast?
Step 3: Now, how do we get there?
The sales forecast you can create with the research above is the forecast you can expect when your business is up and running. Along with the expenditure and purchases from other parts of your Brixx plan, they prove the prices and volume the business will need to be successful.
Make several different predictions for your sales volume and pricing – and see where the danger points lie for the business. If your sales are 25% lower than you expect, does the business run out of money at any point in your plan? Can you keep up with demand if sales are 25% higher than you expect? Experimenting with different assumptions like this will ensure you can predict the kind of performance that could hinder or harm your business, and allow you to make cost-saving, marketing or fundraising preparations in advance should they occur.
But getting your business to this stage is another matter. At some point in every business’ life, it has no customers and no revenue. Ramping up from this point to being the self-sustaining, profitable business you have forecast can be quite a journey. But knowing where you are heading is half of the battle.
Now you have goals to achieve and a realistic sense of what your business needs to look like in order to be successful.
Now you can start the next stage of your forecasting… answering the question “how do we get there?” I’ll be covering this in a future article. Suffice to say for now – predicting growth is a discipline fraught with over-optimism! But by modelling your whole business, rather than just a sales forecast, you’ll be well equipped to make good predictions about the costs and speed of growth.
We’ve gone on a rollercoaster tour of market research and sales assumptions in the article. There’s more depth to each of the sections I’ve talked about. But at its heart, the message for if you are new to financial planning is simple:
You can do it.
To start with, plan in general terms. Start a forecast, and put some figures in that are similar to your closest competitors, or drawn from industry standard conversion rates. You can change them and in fact, you will, as you refine your research and learn more and more about your business and others like it. But it is a realistic starting point, in a very real sense. Another business has achieved this, and so, in time could you.