Q: How do I forecast annual retail sales revenue for my small business?

A: Think of your sales forecast as an educated guess. Forecasting takes good working knowledge of your business, not advanced degrees or complex mathematics. It's much more art than science.

The research for a good forecast is almost always harder than the final process of actually making the educated guesses. Your business size can determine whether your forecast may be simple or detailed. When the research is already done, the mechanics of sales forecasting are relatively simple.

Forecasting is usually easier when you break your sales down into manageable parts and then forecast the parts. Estimate your sales by product line, month by month, and then add the product lines for all months. Typically you'll need to project monthly sales for the next 12 months and annual sales for the following three years.

Consider a forecast that projects $1,000 in sales for the month, compared to one that projects 100 units at $10 each for the month. In the second case, when the forecast is price times units, as soon as you know the price is going up, you know the resulting sales should also increase.

A narrative contained in your business plan or similar document should summarize and highlight the numbers you've entered in the sales forecast table. Make sure you discuss important assumptions in enough detail and that you explain the background sufficiently. Try to anticipate the questions your readers will ask.

Somewhere near the sales forecast, you should describe your sales strategy-how and when to close sales; how to compensate salespeople; how to optimize order processing and database management; and how to maneuver price, delivery and conditions. Explain the details of how you'll achieve these numbers you've forecasted.

Steven K. Baker, M.B.A., is a financial management expert, helping entrepreneurs and early-stage companies manage their operations against the primary financial statements, provide key guidance in operational management areas, develop strategic business plans and analyze and monitor performance against those plans. Contact Steven at sbaker@entrepreneur.com


The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.