And by producing forecasts based on that knowledge, you will be in a much stronger position to plan your spending. It’s vital to consider whether your company’s earnings in the months ahead will be sufficient to cover its outgoings and generate a profit.
A comprehensive forecast will include projections on cash flow and profits but you’ll need to start with how much you expect to sell and when.
At the start-up stage, sales projections are notoriously tricky. Market research can tell you whether there is demand for a particular product or service, but until you get the business up and running there is no way of knowing whether the perceived appetite of customers will translate into actual sales.
Once you’ve been trading for a while, you have far more information to go on, not least your sales history.
Let’s say you’re making a forecast for the year ahead. You know how much you sold in the previous 12-month period and that should be the basis of your projections. Starting from that number you factor in:
• Trends - did sales rise, fall or remain flat over the year?
• The overall value of the sector
• Customer knowledge - what are your customers telling you? Are they likely to buy more or less from you in the year ahead?
• Customer churn - how many customers did your business win last year and how many did it lose?
Market knowledge - is demand in your sector rising or falling?
There are additional factors to consider. A new product launch could boost sales, as could an advertising, marketing or sales campaign. On the other hand, a product range that is a bit tired, especially when compared to the competition, may mean a downward trend. You should also look at your prices and margins, compared with competitors, in terms of how they could affect sales.
When breaking your projections down on a month-by-month basis, you’ll also have to consider cyclical factors. Many businesses have quiet periods so if you know that the summer months generally see a percentage slide in revenues, include this in your forecast.
Although there are specialist software tools available, the simplest way to prepare and present a sales forecast is on a spreadsheet. You should include at least two columns. The first for your forecasts and the second for actual sales as they come in month-by-month. This sets up an instant comparison between your expectations and the realities of the marketplace.
The numbers will be more useful if you break them down into categories that reflect the way you trade. For instance, you could project sales for individual product lines or for geographical areas.
Forecasting best and worst case scenarios
A downturn makes forecasting more difficult. If the economy is in a stable condition, last year’s numbers will provide a solid starting point for future projections. But when the economy begins to contract, future turnover becomes much less predictable. Similarly, in a period of economic growth, sales may outperform your forecasts.
That’s why many companies produce forecasts with three sets of projections covering best, middle and worst-case scenarios.
Sales alone won’t give you a full picture of the health of your business. Unless you’re a retail business, the chances are you’ll wait anywhere from one to three months between confirmation of a sale and a customer making good on the invoice.
So it’s worth making some forecasts in cashflow, based on when you expect money to come into the business, set against your own running costs. This will allow you to identify any potential financial pinch points. For instance, if you know you’ll have a large tax bill to pay in a given month and the forecasts suggest that revenues will be barely keeping up with other costs at that point, then there is clearly a need to take action.
Comprehensive forecasts of this kind are more complex to set up on a spreadsheet, so it’s often a good idea to enlist expert help from your bank or accountant.
Forecasts are only useful if you act on them, especially in cases where the numbers don’t add up.
For instance, if your initial projections indicate that money will be in short supply in six months' time, you should consider ways of bringing more cash into the business. This could mean a sales drive, cost-cutting measures or gaining further support from your lenders or investors.
Equally important, if actual sales figures turn down when compared to your forecasts, it is also a cue to take immediate action by raising sales or cutting costs. You should keep any stakeholders, notably banks and/or investors, informed of any potential trouble ahead and of the steps that you plan to take.
On the positive side, by preparing forecasts and making an ongoing comparison with actual sales, you’ll have robust numbers to tell you when the business is exceeding expectations. That can be a cue to take on more staff to help meet demand, invest in new stock or extend the geographical reach of your sales efforts.
Ramping up the business often increases cost, so you need to think carefully about whether expansion is the right thing to do. Once again, it’s time to do some forecasting.
• Visit Business Sense for more helpful guides and information on managing your business.
• Use all available information in order to prepare sales forecasts.
• Use sales forecasts, plus knowledge of your own credit control, arrangements, customer payment. patterns and current financial situation in order to project your cash flow.
• Compare projections, available cash and outgoings over the coming months
• Identify pinch-points where cash may be short. Take action if necessary.
Use projections to plan ahead: staffing, investment in new machinery, expansion and so on.
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