Getting ready for the new year: sales forecast

Now that you have talked to your major customers and compared your year-to-date actual sales to your budget, you are ready to determine your sales forecast for 2012. While it is tempting to take the easy way and just bump up this year's sales by a set percentage, you will get more meaningful results if you put some additional thought and effort into the project. There are several techniques for arriving at a sales forecast and you will want to use all three and then set your budget where they intersect.

Technique number one for a retail business is to look at market statistics and see what the average sales volume per square foot of retail space.  You can then apply this ratio to your own store.  For other business types, the process is similar: look at average sales for the latest period available for your business sector.  This will give you a baseline for your sales, but you don't want to stop here as you may be comparing sales in Chicago to Boston to Kalamazoo and that isn't accurate enough.

The next step in forecasting your sales is to determine for your specific location, how many households needing your goods live within say, 5 miles. How much will they spend on these items annually, and what percentage of their spending will you get, compared to competitors? Do the same for within larger distances (with lower sales forecast figures). (Use distances that make sense for your location and business type.)  This step takes some time and research, but gives you additional accuracy.

The final technique is to set a sales budget for each product or service you offer. Use categories of products if you have a larger number and variety offered. If you offer say, four types of goods plus two types of extra cost services, estimate sales revenues for each of the six product/service lines. Make an estimate of where you think you'll be in six months (we should be selling four of these items a day, plus three of these, plus two of these) and calculate the gross sales per day. Then multiply by the number of days you will be open for each month in question. Now scale proportionately from month one to month six; that is, build up from no sales (or few sales) to your six month sales level. Now carry it out from months six through twelve for a complete annual sales forecast. You will be using the numbers from the first two techniques as a guideline as you develop this forecast.

Congratulations.  you have now completed the sales portion of your 2012 budget.  You will want to check actual to budget at least once a month to see where you are and what adjustments need to be made. 

Next week, we will work on the expense side of the budget.

Sales variances and what they mean.

Last time we talked about what steps you should be taking to close out the year with style.  Expanding on the subject of comparing actual results to your budget, today we will talk about sales variances.

It is easy to compare actual sales results with what you had budgeted, the trick is to determine what caused the variance.  Was it bad budget assumptions? (You always want to leave good notes with your budget as to what your assumptions were for sales and expenses).  Was it a change in overall sales levels or a change in the sales mix?  Sales mix means the combination of products or services you are selling.  Most businesses have at least two different products or services they sell and the actual mix may be different from what you assumed when established your budget.  Our first year of business saw our overall revenue exceeding our budget, but the mix was much different that we expected.  We have gotten better every year at estimating our overall revenue and the mix.  It is important to watch this mix as you may have different margins for different products/services.  You need to understand the market potential for all your products and services and determine if your pricing and marketing is adequate.

Doing this analysis is what hones your understanding of your business and improves your ability to budget and to run your company.  The more you understand your industry, your market and your business, the more successsful you will be.

What Do You Need to Do Before Year End?

Yes, we know it is only the beginning of October, but this is the time of year we like to get our clients starting to think about the end of the year.  Some procedures take time and others require setting up meetings so it is good to get a jump on the process.  This is the time to compare your actual results to your current budget.  This will give you some of the information you need as you create next year's budget.  Consider what the variances are and what caused them. After you get an understanding of where you are now, think about where you are going next year.  This is a good time to touch base with your major customers and find out that their plans are for the next year.  Do they anticipate purchasing the same amounts next year or more? Or less? Based on the results of these conversations, you will want to update your marketing plan.  This will help you set your milestones and metrics so you can achieve your sales goals. The next step is to create your budget for next year. A good budget is like a good map and it will help you navigate through the next year. 
You  also need to meet with your tax advisor. This is the perfect time for your advisor to see where you are so you have time to make decisions and adjustments before the end of the current year.
Getting these projects done now will allow you to concentrate on the end of this year and start 2012 with a bang!