Forecasting sales for new businesses

Sales forecasts are crucial at all stages of business. For new start-ups, they form a vital part of your business plan that can help secure lending, and for established businesses, it can help predict short and long-term performance and thus the capabilities of the business to invest and grow.

In an existing business, sales forecasting uses past figures to predict business performance. However, brand new businesses do not have this luxury. There are however key sources of information and data that can be used to form your initial sales forecast.

1. Gather knowledge about similar businesses

Look at the performance of your competitors or companies operating in a similar market to you. Companies House is where the accounts are published for most British companies and will give you a good indication of business performance. Equally, if you have friends or connection with founders of similar ventures talk to them about their sales patterns.

See also: What’s the importance of a cash flow forecast?

2. Profile your customer

Draw up a profile of your typical customer. Consider how many customers and potential customers are likely to buy from you and how much they may buy. You could gather this by looking at census data forming a picture of the local demographics, running a market research campaign or interview some prospective customers to gather information that you could statistically upscale.

3. Understand market share

How big is the market for your product or service? Is it growing or contracting and at what rate? What is the economic and competitive position? Having this knowledge may mean you can provide a solid market share basis for your forecasts.

4. Seasonality

Depending on the product or service, make sure you factor in the potential seasonality of sales. For example, Christmas may be a very busy time for those in the craft industry, and the start of the new tax year may be busy for consultants as businesses confirm their budgets for the coming year. This understanding will also help forecast additional labour and material requirements for example.

See also: Feasibility budgeting for new businesses

Several factors such as economic stability, and consumer trends and fashions can impact the accuracy of sales forecasts and are unfortunately out of our immediate control. Forecasts should be as accurate as possible but they are only as good as the information they’re based on. The more research you can do to help estimate sales projections and produce reliable forecasts, the more favourable lenders will view you.

Getting started with sales forecasts

Realistically sales forecasts are simple to calculate once you have the relevant information available. What you will need for the calculation are:

Selling products

• An estimate of the number of sales broken down for each product or product group per month for a year (this should mirror what you have in your accounts)
• An estimate of the number of sales returned or cancelled if applicable
• An estimate of the unit cost of product or service

Once you have this information the mathematical formula to use is:

Forecast sales = (Number of sales – returns) x Unit price

Selling services

• An estimate of the number of hours or days you will be able to invoice your clients for broken down month by month. Identify your quieter or busier periods, such as Christmas or the summer holidays, pre and post conferences/exhibitions, particular months etc.
• Remember to exclude the time it takes to generate the business, particularly in the early days; networking, exhibiting, pitching, computer downtime, invoicing and marketing are all non-billable activity
• Incorporate a contingency figure to account for work which may take longer than quoted or requires an additional subject matter expert or more research than you initially accounted for

Most accounting packages, such as Xero or Sage, have the option to add in projected sales figures. However, if you are operating a manual system download our sales forecast template to help get you started. Remember, the key is to ensure some time and thought goes into a realistic projection of income along with periodically reviewing past and future demand.

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