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Fortune Telling

Your sales forecast is key to a solid biz plan. Here's how to divine future sales without an advanced math degree.

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Your sales forecast is the backbone of your business plan.People measure a business and its growth by sales, and your salesforecast sets the standard for expenses, profits and growth.

When it comes to forecasting sales, don't fall for the trapthat says forecasting takes training, mathematics or advanceddegrees. Forecasting is mainly educated guessing. So don'texpect to get it perfect; just make it reasonable. There's nobusiness owner who isn't qualified to forecast sales--youdon't need a business degree or accountant's certification.What you need is common sense, research of the factors, andmotivation to make an educated guess.

Your sales forecast in a business plan should show sales bymonth for the next 12 months--at least--and then by year for thefollowing two to five years. Three years, total, is generallyenough for most business plans.

If you have more than one line of sales, show each line of salesseparately and add them up. If you have more than 10 or so lines ofsales, summarize them and consolidate. Remember, this is businessplanning, not accounting, so it has to be reasonable, but itdoesn't need too much detail. Here are some tips to get youstarted:

  • Develop a unit sales projection. Where you can, start byforecasting unit sales per month. Not all businesses sell by units,but most do, and it's easier to forecast by breaking thingsdown into their component parts. Product-oriented businessesobviously sell in units, but so do a lot of service businesses. Forexample, accountants and attorneys sell hours, taxis sell rides,and restaurants sell meals.
  • Use past data if you have it. Whenever you have pastsales data, your best forecasting aid is the most recent past.There are some statistical analysis techniques that take past dataand project it forward into the future. You can get just about thesame results by projecting your two most recent years of sales bymonth on a line chart and then visually tracking it forward alongthe same line. Statistical tools are a nice addition, butthey're rarely as valuable in a business plan as human commonsense, particularly if it's guided by analysis.
  • Use factors for a new product. Having a new product isno excuse for not having a sales forecast. Of course you don'tknow what's going to happen, but that's no excuse for notdrafting a sales projection. Nobody who plans a new product knowsthe future--you simply make educated guesses. So break it down byfinding important decision factors or components of sales. If youhave a completely new product with no history, find an existingproduct to use as a guide. For example, if you have the next greatcomputer game, base your forecast on sales of a similar computergame. If you have a new auto accessory, look at sales of other autoaccessories. Analysts projected sales of fax machines before theywere released to the market by looking at typewriters andcopiers.
  • Break the purchase down into factors. For example, youcan forecast sales in a restaurant by looking at a reasonablenumber of tables occupied at different hours of the day and thenmultiplying the percent of tables occupied by the average estimatedrevenue per table. Some people project sales in certain kinds ofretail businesses by investigating the average sales per squarefoot in similar businesses.
  • Be sure to project prices. The next step is prices.You've projected unit sales monthly for 12 months and thenannually, so you must also project your prices. Think of this as asimple spreadsheet that adds the units of different sales items inone section, then sets the estimated prices in a second section. Athird section then multiplies units times price to calculate sales.The math is simple--the hard part is making that estimated guess ofunit sales.

A fourth section of your projected prices will set the averagecosts per unit. You want to set costs because a lot of financialanalysis focuses on gross margin, which is sales less cost ofsales. For financial reasons, cost of sales, also known as costs ofgoods sold and direct costs, are different from the other expensesthat come out of profits.

The cost of sales isn't what you pay salespeople or foradvertising. It's the amount you pay to buy what you sell. Thisis usually easy to understand. In any retail store, for example,the cost of goods sold is what the store pays for the products itsells. In service businesses, the costs of sales can be lessobvious, but it can still be figured out.

Finally, in a fifth and final section, you multiply unit salestimes average cost per unit to calculate your cost of sales. Thisgives you a sales forecast that you can use for the rest of yourfinancial projections. The first place you'll use it is at thebeginning of your profit and loss statement, which normally startswith sales and cost of sales.

Of course, not all businesses fit easily into the units salesmodel. Some business plans will have sales forecasts that projectdollar sales only, by line of sales, and then direct costs, byother factors. For example, a taxi business might simply estimatetotal fares as its sales forecast and gasoline, maintenance andother items as its cost of sales. A graphic artist might stick withthe simple dollar-value sales forecast and project cost of sales asphotocopies, color proofs, etc. In the end, it's alwaysyour plan, so you have to make the decisions that are bestfor you.

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