One of the first questions members bring to us about their business plan is how to forecast.
Your business plan is utterly incomplete without this crucial insight to your business. Some small business owners are hesitant to put one together, either because they are unsure of how to approach it, or are worried that the results look grim.
But we have news for all the business owners who haven't put together a forecast out of fear:
It's not about guessing the future correctly, it's about gauging progress and reevaluating your strategy.
Sales forecasting is actually much easier than most people think. It is not a complex formula on a spreadsheet or economic modeling - it's "connecting the dots" between various factors that impact your sales - sales drivers, events, promotions, your cost, etc...
No matter what, you probably won't exactly predict your business' future but you will have an idea of how your business is doing and be able to recognize the impact of the sales drivers you referred to when creating the initial forecast.
1. Identify Your Revenue Streams
Plan the number of streams of revenue that your business has. Keep in mind that while we may end with a table that looks like an accounting report, this actually doesn't require too much detail. You want to include the right amount of detail.
Grouping your products instead of listing individual products is a more effective way to forecast.
For instance, a print shop would forecast large format, small format, and decals rather than foam core posters, plastic posters, booklets, etc... Or a restaurant would forecast breakfast, lunch, and dinner rather than every item on the menu.
Try to base your streams on your accounting so its easy to review this and gauge where you are vs where you want to be.
2. Pick Your Measure
Pick your how you plan to measure your growth based on your business model.
Unit sales: This follows a simple formula units*average price. You just forecast the units and can adjust average price over time but it gives you flexibility in that you can act on technically two measures - units and price.
Service units: While service firms do not use physical units, they have billable units like hours for consultants, trips for transportation services, and so on.
Recurring charges: This is what it sounds like - subscriptions. This type of forecast requires you to look at new signups, existing monthly/yearly charges, and cancellations. Your estimates are reliant on both new sign ups and cancellations (aka "churn").
Revenue only: It's all about the cash flow! But you lose some information this way - we do not recommend you stick to just this, but it makes sense in cases where you really can't currently break things down into categories.
3. The Numbers Are Not Perfect the First Time Around
How do you pick out the numbers? Start with your current pipeline. Decide how many you are confident will close and use that as your forecast with consistent growth going forward.
Your forecast should be updated every month according to how you actually performed. The more you revise and look at it, the more accurate your assumptions will get.
4. Incorporate Experience
The experience of an employee, mentor, or industry expert can help you accurately forecast. While you may not be experience with technical forecasting - you may know your business and industry like the back of your hand and so can make educated guesses.
Your sales manager also may know more than you do in terms of how long it takes to close a sale. Lean on your team for input before choosing your numbers.
5. Look for Drivers in How You Performed Last Year
There may be trends within the year that drive your sales. If you see a sales spike or drop within certain months, reflect on what could have caused it. For instance, an athletic store may have an increase in sales as the summer season begins and as winter begins while during the fall and spring, sales drop off. Use this to inform your month to month forecast and strategize to see if you can implement a strategy to increase revenue in the down months.
6. Now it's time for some simple math
Go month by month for the first 12 then estimate the next two years.
Start by estimating the units for each month for the next year. Try making this visual so you can recognize trends!
If you are looking at revenue only - you're done! Your units should be dollar amounts!
If you chose one of the other row types, its time to multiply your units by price. It is useful to round up here - if your price per unit is $9.95 - calculate this at $10 to give yourself room for price increases (and make the math a bit easier).
7. Review, Revise, Then Do it Again
A sales forecast is a crucial part of your business plan and a crucial part of your business' health. Without something to compare your growth to - issues that are present may be overlooked long enough to negatively impact your business. This is a fantastic tool to foster growth.
8. Subscribe to Our Technical Assistance Emails to get More Content Like This
Get updates on events, news, and tips and tricks for your business!