Sales Forecasting and the Business Plan
Summarize the data after it has been reviewed and revised, for your goal is to integrate sales forecasting and the business plan. The summary will form a part of your business plan. The sales forecast for the first year should be monthly, while the forecast for the next two years could be expressed as a quarterly figure. Get a second opinion. Have the forecast checked by someone else familiar with your line of business. Show them the factors you have considered and explain why you think the figures are realistic.
Your skills at forecasting will improve with experience particularly if you treat it as a “live” forecast. Review your forecast monthly, insert your actuals, and revise the forecast if you see any significant discrepancy that cannot be explained in terms of a one-time only situation. In this manner, your forecasting technique will rapidly improve and your forecast will become increasingly accurate.
Forecasting Sales and Gross Profits
Development of your profit plan should usually begin with a forecast of your expected sales and gross profit for the coming year.
The sales and gross profit must be considered together since they are so closely interrelated. Gross profit percentages are determined by pricing policy, which also affects expected sales volume. A decision to increase the expected gross profit percentage will usually tend to decrease expected sales, while reducing the expected gross profit percentage should increase sales.
A second major reason for beginning the profit plan with a sales forecast is that the volume of expected sales often determines a number of other factors such as the following:
Expected changes in variable expenses, those expenses that tend to change in direct proportion to changes in sales. These could include expenses such as sales commissions or delivery costs.
The impact of the added sales volume on the various fixed costs of operating your business. These costs, by definition, do not tend to vary in direct proportion to changes in sales volume. However, substantial increases in sales over an extended period can force an increase in many fixed expenses. For example, a sales increase realized through the addition of many new accounts could affect bookkeeping and credit costs.
The ability of present resources such as storage space, display area, delivery capability, or supervisory personnel to accommodate the added volume.
The need for funds to invest in increased inventory or accounts receivable to accommodate sales increases.
Cash generated from operations to meet current operating needs as well as expansion requirements, debt repayments, and owners’ compensation.
A realistic sales forecast must rely on careful analysis of market potential and the ability of your business to capture its share of this potential. The forecast should not be based upon “what you would like to do” or “what you hope to do.” It must be “what you can do” and “what you will do.”