Knowing how to make accurate sales projections is important for determining when your business will be profitable and if it will need funding. But projecting sales without any historical data to go on is difficult.
Forecasting Sales: Getting Started
Forecasting sales probably isn’t top of mind when you decide to start a business. But it should be. You may want to start a business doing something you love, to help other people, or because you want to be your own boss. Making money is important, too. One of the most important things to do is create a sales projection.
After 90 days, six months, and one year, what will your sales look like and how will that translate to profit? The answers have big implications. Your sales forecast dictates how much money you need before you start the business.
Understanding how to make accurate sales projections is important for multiple reasons:
- Funding: If you need funding of any sort, any potential lender, including family and friends will want to know the upside potential of their investment.
- Launch Date: You can use sales projections to decide a launch date. Knowing how much you will make in the short term also helps you figure out how much money you need to save prior to your launch.
- Inventory: It will help with inventory. If you have a reasonably accurate projection, you know how much product or raw materials to order.
- Marketing: If your 90-day projection looks a little light, you might have to ramp up your marketing budget.
No business can make spot-on forecasts, but they can get close. Don’t aim for perfection. Your job is to make the most educated guess possible.
There are various resources available for you to learn how to make accurate sales projections. You just have to know where to look.
Use Trade Publications
Before digging into your numbers, you should dig into your industry. Industry data will help project sales based on others who came before you. Looking at the past doesn’t necessarily have any correlation to the future, but it’s a fine place to start.
Most trade groups can supply you with massive amounts of data, but you’ll probably have to pay for it. For example, go to the National Restaurant Federation if you’re in the restaurant business.
Before you get too far into planning your startup, quickly identify your trade group. Some of the data will come at a cost, but they will also have plenty of resources that can help you open your doors. Part of their mission is to strengthen their sector of economy. To that end, they will give you all the help you need to open your doors.
Talk with an SBDC or SCORE Counselor
(SBDCs) and offices have counselors available free of charge. People at these organizations have in-depth experience and knowledge of small businesses and can likely help you gather statistical and anecdotal information to make accurate sales forecasts for your business.
These two groups are invaluable resources for small businesses (existing as well as startups). Get to know them and benefit from their help. Both organizations have locations in every state in the US.
Visit Your Public Library
If you’re looking for statistical data, the fastest way to get directed to the right resources – and sometimes free access to databases you might otherwise have to pay for – is to talk to the reference librarian at your local library.
Reference librarians are trained to know what resources to use and can save you hours of time by pointing you to the specific source of the data you need. The library may also have subscriptions to fee-based databases and make access to those databases available to their patrons. Public libraries are often underused tools for learning how to make accurate sales projections.
Talk to People
You can get data from a trade group, but talking to somebody in the industry you’re entering is even better. They may not want to give you detailed financials, but they’ll probably be happy to give you general figures and current industry trends. Travel outside of your geographical area to find a non-competitor if needed. The information is sure to be valuable.
Talk to Vendors
If you’re buying product from a vendor, talk to them about sales. It’s in their best interest to set you up for success. Expect them to have a lot of industry information that can help you make projections.
Keep in mind that vendors are motivated to sell, and they may tell you what you want to hear. If things seem a little too good to be true, then they probably are.
Focus First on Expenses
Now it’s time to dig into the numbers. Expenses are much easier to forecast than income. You probably know your rent, utilities, and other fixed costs if you’re getting close to opening.
Costs like advertising, legal and licensing fees, and costs of goods sold are harder to forecast.
For marketing, double your estimates, and triple your number for legal, insurance, and licensing. These expenses are always higher than you originally think.
Make Two Sales Projections
There are dreams, and there is harsh reality. Neither is likely accurate, but make projections for both. Your conservative projections might assume little marketing, low price points, little or no sales staff, and higher expenses.
Your aggressive projections might assume multiple price points, a full-on marketing strategy (with money to pay for it) and a team of salespeople. The truth lies somewhere in the middle.
Sales Aren’t as Important as You Think
Sales are important, but profit is what keeps your doors open. If you have no sales, getting cash flow is essential. Not far into your growth cycle, start making forecasts for gross margin growth instead of purely sales growth.
Seeing customers walk through the doors feels like success, but it’s only success if your margins allow for the growth of your business.
Don’t forget to address your operating profit margin, which is the ratio of all operating costs to total revenue. As revenue grows, your total overhead should become a smaller percentage of total costs.
RELATED: How to Estimate Sales
Your future sales are based on marketing, location, your competition, pricing structure, your business knowledge, weather, economic climate, and much more. Do your research, but be on the conservative side. It’s better to aim low and far-exceed the projection than to overpromise and under deliver. After all, Wall Street has followed that formula for more than a century.