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.
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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.