This article is a modified excerpt from the new ebook “Get More Sleep by Seeing the Financial Future of Your Business, An Introductory Guide to Financial Projections for Small Business”
Forecasting Sales
The first and biggest hurdle we see when beginning the process of forecasting revenue is a profound reluctance or uncertainty in trying to predict the future. There may also be an element of realization that putting your goals on paper will force you to live up to them (and the possibility of seeing and admitting failure if the goals are missed). We often hear the plaintive question, “how can we possibly know what is going to happen in the future?”
This is no secret, you can’t predict the future. No one can with any certainty. However, that is missing the point entirely. Projections are a critical, essential tool to reflect on paper your goals, plans, strategy and expectations.
These goals are tempered by your available resources, capabilities and the marketplace, and are all assembled to reflect your vision of the future of your business.
There is real value in going through this exercise. You may very well be surprised at the insight gained during the process and what the numbers will reveal to you. In a previous article, we told you more about how good financial forecasting will benefit your business and make your (business) life easier.
“If you don’t know where you are going, any road will get you there.”
– Lewis Carroll, author, “Alice’s Adventures in Wonderland.”
As any philosopher, high achiever, pilot or Lewis Carroll will tell you, you will be far more likely to achieve your goals (or reach your destination) if you have a plan on how to get there. The financial projection is simply your road map outlining your route of business travel toward your business goals.
Forecasting Sales (Revenue) is an Art which Improves with Practice
While projecting expenses is relatively straight-forward, developing revenue projections is a bit more of an art.
For small businesses, there may not be much change from year to year, or even month to month. However, larger or rapidly expanding businesses are more complex animals. They will tend to offer more products or services, may have multiple offices (or divisions) in multiple geographic territories, and their products or services may be growing (or shrinking) at different rates. All of this needs to be reflected in the revenue projections.
Now how about your business? Do you expect to grow? Do you want to grow?
If you are a very small or young business, look at what you did this past year. A quick way to get started is to take your total revenue for last year, divide by 12 (months) and the result is your average monthly sales.
Plug this number into your monthly projections for next year and see how that looks to you.If you are growing, you can take the monthly number for January and gross up by whatever rate of growth you hope or plan to achieve (perhaps 10 or 15% or more?).
Growth Tip: Another way to think of this monthly revenue projection is your sales goal.If you set big goals for yourself (and your team, if you have a team), you will have to think up a plan to achieve your goals. Take this process seriously, hold yourself (and your team) accountable, and make it happen. Put your team on a commission bonus to incentivize their focus on sales and their success.
Here are a couple more tips to keep in mind when projecting revenue:
Consider breaking down your revenue (sales) by region, products, staff, store, etc. (here again it’s appropriate to think of revenue projections as sales goals).
Be conservative with your revenue projections, especially the timing of when you project to see the revenue in your bank account. Remember that revenue tends to come in slower than you expect. Even if you want to project 50% sales growth (and you will hold everyone to that goal), project sales growth in your actual model to something less than that (perhaps 35%). Why? Because exceeding your revenue target is fine (it’s great), but coming up short of your projections will cause all kinds of problems in cash flow and paying your bills. That is not acceptable, and should not be acceptable in your business.
The strength of your financial model depends on sales projections. Describe your logic and your plan for achieving your projections. Put these plans, goals and details down on paper. This is important.
Consider outlining the strategy you will use to meet your sales goals. Do this in 1-2 pages if you can and keep this with your model.
A good tip is to include target market (clients), competitors, reasons for success, challenges and goals. Notice here we are starting to get into elements of your business and marketing strategy, and that is precisely the point.
About the Author: Erik Bunaes is President & Principal of Endorphin Advisors an Albany, New York-based marketing and management consulting firm. Learn more at www.EndorphinAdvisors.com.