How to forecast your sales and stop the guesswork!

Most business owners rarely accurately estimate their market demand and thus the ability to forecast their sales; funny that, considering that your business is all based upon your sales performance.

Wouldn’t it be nice to know (accurately forecast) what your sales revenue is going to be? (It’s also fundamental in preparing budget and financials – but that’s another topic and one you should discuss with your accountant.) Essentially a sales forecast is based upon an estimate of demand. A key part of the marketing function is to create that demand.

“Becoming wealthy is not a matter of how much you earn, who your parents are, or what you do. It is a matter of managing your money properly.”
Noel Whittaker - Financial Author and Investment Advisor

We’ll assume that there is a demand for your products/services and that you’re meeting some need/desire of a customer (remember that’s what marketing is all about). Now we arrive at the big dirty word that everyone avoids – research.

Without even conducting some basic research, the sales estimates are more likely to be a wish than an accurate prediction of future sales. (And this can cause serious financial problems.)

“When I started out in business, I spent a great deal of time researching every detail that might be pertinent to the deal I was interested in making. I still do the same today. People often comment on how quickly I operate, but the reason I can move quickly is that I’ve done the background work first, which no one usually sees. I prepare myself thoroughly, and then when it is time to move ahead, I am ready to sprint.”
Donald Trump - billionaire

Knowing exactly why your customers buy your products and services (motivation to purchase) will significantly assist in planning the future. Conduct primary research through a simple survey asking clients (and prospective clients) what they think of your products and services, what they would like to have, why they would buy and how often.

Gather secondary research from trade publications, Statistics New Zealand and other government bodies and that have relevant data that will also establish the available market for your products and services.

From the findings you should have an idea of the potential market, i.e.: how many customers would have an interest in what you’re offering. Thereafter the available and target markets need to be defined. Then the segments your company wishes to pursue and concentrate their marketing efforts upon.

Let’s construct a simple example of a start up business - which are generally the hardest to forecast as there’s no historical sales figures to base assumptions upon. (The figures and example below are fictional):

You’re selling premium coffee beans to cafes. There are 2500 cafes in NZ (the total potential market), but you’re only selling to Auckland cafes – there are 1000 in Auckland (the available market) and within this you have identified three segments (target markets) – franchised cafes, individual quality focused, and price orientated small cafes.

Your marketing strategy is a premium product positioning and as such you wish to target the individual quality focused segment of which there are 300 (you also believe that that segment to be the most profitable as well, based upon your current resources and capacity).

The café category is growing at an average of 9 % per year and there’s significant market trend demand for the discerning consumer wanting premium coffee, but it is highly competitive.

Now we can look in detail to your company sales forecast.

“Give a man a fish and he will eat for a day. Teach a man to fish and he will eat for a lifetime. Teach a man to create an artificial shortage of fish and he will eat steak.”
Jay Leno- Talk show Host and Comedian

So now we have clearly defined segments. And having considered the environmental conditions you also need to consider the market demand you can create. The demand is created primarily by the promotional part of the marketing plan.

Using the example above, we’ll assume that (like most categories these days) it’s highly competitive. Overall growth is good however and there are opportunities to penetrate existing accounts with your superior product and service.

Using promotional direct marketing tactics (telemarketing and direct mail) strong branding, sponsorship techniques (merchandise, signage, etc) and highlighting your exclusive unique blend you will create awareness and appointments for your sales team.

Based upon your limited resources (human, financial and time) there will be 15 direct mail packs sent out each week and follow up phone calls. Thus you will be able to contact 15 cafes per week from which you get 6 meetings and acquire 1 new account each week. Each account uses approximately 10 kgs of coffee per week. A kilo of coffee wholesales at $22/kg = $220 per week (your sales revenue)

Now all you need to do is extrapolate the figures on a weekly basis allowing for variances – seasonality, holidays, etc (as are relevant to each industry) to arrive at a sales forecast. Based upon these simple assumptions your sales revenue for year one is $263,120.

This though is not your cashflow summary (again that’s another topic), but you now have an accurate forecast of your sales to create a budget and a cashflow statement (just because you’ve sold it, doesn’t mean to say they’ve paid you.)

“If they don’t fail outright, most businesses fail to fully achieve their potential. That’s because the person who owns the business doesn’t truly know how to build a company that works without him or her... which is the key.”
Michael Gerber - Author and Entrepreneur

This example is a fairly simple process in developing a sales forecast and like any planning tool, the better quality data and information inputs, the more accurate the results. There are a number of variables that will influence the sales level, but with smart marketing and a clear plan, many can be managed and still allow you to achieve sales forecast.

Simple physics states that with action there is reaction, so plan your actions (effectively) and you will achieve the desired reactions.