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Creating Sales Forecasts

While you can never really predict the future, there are ways to make more educated guesses for your business plan.

If you're like most entrepreneurs, you hate to make forecasts for your business. People don't like forecasting because predicting the future greatly enhances their chances of being wrong. So what can you do? The answer is educated guessing. Like the weather forecaster, you get all the data you can, think about it, absorb it and, eventually, make an educated guess.

A lot of very expensive market forecasting, in fact, is based on the educated guess. And though it's hard to forecast, it's even harder to run a business without forecasting. Here are some tips for making that guess as accurate as possible.

Trust your expertise. Are you an industry expert? Do you have an industry expert on your team? If so, trust yourself or your expert. Don't assume somebody with an MBA or CPA, or somebody whose guess costs you a few thousand dollars, is necessarily better. The savvy industry veteran usually knows more than a new market researcher can find out. When I was a professional market researcher years ago, I found there's rarely an information source as good as somebody who knows the industry.

If you aren't an expert, find one. The title says it all. You should have at least one expert on your team, either as an employee, partner, investor, board member, advisor or consultant. Forecasting for business plan purposes is hard enough without trying to do it blind.

Try building a market research phone tree. Start calling people who might be able to help you. For each person you talk to who can't help, ask for the name of someone who can. Each call gives you either information or a lead on where to get information.

You can also try calling somebody with a similar business in another city. If you live in South Bend, Indiana, for instance, call somebody from Madison, Wisconsin or Ann Arbor, Michigan. Tell them the truth--you're developing a business plan and you'd like to talk to them about it. The shoe store in Ann Arbor doesn't compete with your store in South Bend, so you can ask questions freely. Most people like to talk about their business. Get them started, and it's usually hard to get them to stop.

Get sales data where you can. There are plenty of resources out there. For example, you can do an online search for "sales per square foot." If you're developing a plan for a retail store, you can get some clue as to what sales might be by looking at other businesses' sales per square foot. Remember, this is just an early estimate. Consider why your results might be different from the norm.

Aside from sales information, there's also more general financial information available. You can find other financial profiles like standard gross margins, pre-tax profits and standard balance sheet ratios.

Break your forecast into pieces. Find a meaningful way to break a sales forecast down into smaller variables you can get a hold on. The most obvious example is making sales a matter of multiplying units by average price. That alone makes any sales forecast easier to understand. Even if you aren't selling products, you probably still have unit sales. For years I managed consulting forecasts in units of days of consulting. Attorneys and accountants use hours as units. Taxi drivers use trips.

Breaking forecasts down into component pieces will also help you track what went wrong as you compare actual results to planned results later on. And things will go wrong. What's important is being able to track your plan vs. reality to determine how assumptions should change, what worked, what didn't and why.

The author is an Entrepreneur contributor. The opinions expressed are those of the writer.

Tim Berry is the president of Palo Alto Software Inc., based in Eugene, Ore., which produces business planning software. He is also the author of 3 Weeks to Startup and The Plan-As-You-Go Business Plan, published by Entrepreneur Press.
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