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.

Budgeting......it's not too late!

What are the components to a good budget?

Yes, we are back to budgeting. It is only mid-February so there is still time to create a great budget for 2010. Your company’s budget should really be assembled as a master budget which is made up of an operating budget, a financial budget, a capital budget and finally a sales budget.

The operating budget deals with your basic business operations: what do you need to run your business? Categories in your operating budget will include marketing budgets, staffing (employees costs), as well as other expenses related to running your company. Take the time to talk to vendors and suppliers so you have good numbers to work with.

A financial budget is concerned with where the money is coming from to keep your business running. How are you going to obtain all the resources you need to run your business? This is looking at your cash flow and determining the timing of when money comes into your company through sales and collection of receivables and when money goes out through payment of expenses, purchases of inventory and other assets as well as payments to yourself, the owner. A line of credit from a bank is the best way to deal with timing issues in your cash flow. In light of a continuing tight credit environment, many small business owners are relying on credit cards to manage their cash flow. This can be a dangerous path to take if your balances push you into high interest rates.

Your capital budget is for evaluating and determining the growth of your company. Careful analysis is recommended before purchases of fixed assets are made or a new product or line is launched.

As you can see, a good budget deals with much more than just expenses. Now let’s talk about revenue.

Creating a good sales budget depends on good research and goal setting. This is a good time to look at where you fit in today’s economy. What is your competitive edge and how are you communicating it to your target market? After you have analyzed trends in your market and your industry, you can create a good sales forecast for your business. Next you will want to write down short-term and long-term goals detailing how you will achieve your sales as forecasted. All this work will allow you to set up a workable and helpful sales budget which when placed into your master budget will give you a masterful tool to manage your small business.