As a small business owner, you know it’s rare for things to go according to plan. But, without a sense of direction, you’re steering your business blindly into the future. You need to know where you’re headed in order to make smart decisions. To get an outlook on your business, you can learn how to make sales projections.
Knowing how to calculate sales projections isn’t about being able to predict revenue flawlessly. The goal is to make connections between sales and expenses. Look at past patterns and your current conditions to make reasonable forecasts. The patterns help you understand the cause and effect of choices you make.
How to create a sales forecast
Parts of a sales forecast
There are several factors to consider when learning how to estimate sales projections. But first, let’s go over what a basic forecast looks like.
Sales projections are made up of rows and columns, much like a chart of accounts.
Your forecast should have manageable units that offer key insight into your business. To decide which units to measure, split your sales items into categories. The categories depend on the kind of business you run.
Let’s say you own a restaurant. Chances are, you sell a lot of different items. You wouldn’t want to project each plate and beverage you sell. Instead, divide the items into categories, such as lunches, dinners, and drinks. These categories are your units.
Every business’s units are different. Focus on the information that is the most useful and relevant to your company.
Creating a sales projection
Once you choose categories, project how many units you will sell. To forecast sales, multiply the number of units by the price you sell them for. Create projections for each month.
For example, you own a car wash. In April, you project you will wash 800 cars. A car wash is $15.800 cars X $15 per car wash = $12,000 sales projection
800 cars X $15 per car wash = $12,000 sales projection
Your sales forecast will show a projection of $12,000 in car wash sales for April.
As the projected month passes, look at the difference between expected outcomes and actual results. To make comparing easier, organize the forecasts similar to how you set up your accounting books for small business.
How to create a sales forecast example:
Things that affect your sales projections
You now know to make projections in units each month. But there’s still the question: How do I know which numbers to forecast?
Obviously, you can’t pull out a crystal ball and see what the future holds. However, there are clues around you that point to where your business is headed. Consider the following factors when creating a sales forecast.
Past financial results
The first place to start when projecting sales is, ironically, the past. Review your financial statements to determine forecasts. Look at your records over time for patterns. Ask questions like:
- How much did you make last month?
- How much did you make during this time last year compared to now?
You’re not a financial expert, but you know your business. By looking at patterns, you can make reliable assumptions about sales. If you know how fast your company has grown, you have a good idea of how fast it will gain momentum.
Right now, your sales might be climbing at a steady rate. But, you know that could change in an instant. There is an unlimited number of factors that can affect your business.
When creating a sales forecast, consider things that can shift the patterns in your books. Some influencers are out of your control, like changes in the market and business seasonality. Other aspects are results of the decisions you make, such as holding a promotional sale or adding new products and services.
Financial information from similar companies can be helpful for sales projections. You can see if you are above or below industry averages, and make changes based on your findings.
Looking at other businesses is especially helpful if you are a new business owner. You do not have past financial records to base your projections off of. When reviewing other companies, keep in mind details like the location, size, items offered, and age of the business.
Don’t be afraid to ask for advice. Your peers and mentors can offer perspectives on what to expect during upcoming months and years.
As sales increase, so do the direct expenses that go into your products and services. The more you sell, the more you need to spend to keep up with operations. Direct expenses, also called the cost of goods sold (COGS), affect sales projections. Projected sales and direct expenses help you determine profitability.
Projecting the costs of goods sold is similar to projecting sales. Forecast the number of units you will sell. Then, multiply the number of units by the direct expenses it takes to produce them. For example, you expect to sell 100 units. It costs you $5 to make each unit. You can project to spend $500 in direct expenses.
Review and revise
When it comes to creating a sales forecast, expect to make a lot of revisions. Projections need to be adaptable. Start predicting your sales early so you have time to make changes as interruptions occur.
As Tim Berry, Founder & Chairman of Palo Alto Software and BPlans.com, says:
Projections in business plans should be an exercise in identifying the drivers and triggers that make the business work.”
Keep in mind that your sales forecast is a guide to where your business is headed. But, it is not 100% reliable. Be prepared for the unexpected.
Don’t make projections and then leave them to sit and collect dust. Use forecasting as a helpful tool for making business decisions. Schedule a regular time to review and revise your sales projections each month.
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This article is updated from its original publication date of March 23, 2017.This is not intended as legal advice; for more information, please click here.