It is good to know how to make sales forecasts for your business plan. At some point, you will present your business plan to a potential investor/financier. Remember that the investor/financier (venture capitalist, angel investor, bank manager, etc) is probably an experienced investor and will quickly notice any inconsistencies pertaining to how you have come up with sales forecasts for your business plan.
In this post we look at 3 methods of making sales forecasts for your business plan and the merits and demerits of each method. The 3 methods of doing this are: 1) Manual sales forecasts; 2) Automated sales forecasts; and 3) Diffusion curve or sales growth curve.
Please note that these are names that I have chosen to use – these methods may be referred to by other names elsewhere. In this post, I will variously refer to a fictitious company name, ABC Inc.
1. Manual sales projection method
Here, you simply input the number of units that you anticipate to make manually, probably in a spreadsheet such as Microsoft Excel. See the example below:
Table 1 shows that the units sold are added manually in the respective cells. Note: The cost per unit is assumed to be $200.
Advantages – it is possible to make sales forecasts that match the actual expected situation (the reality on the ground). For instance, ABC Inc feels that due to the nature of their business or due to seasonality, the number of units sold will reduce towards December. ABC anticipates that sales will start off slow at the start of the year and increase progressively as the year proceeds – this pattern is repeated over the years. Thus, the advantage of manual input of sales forecast is that it allows one to capture seasonality or anticipated changes within the year.
Disadvantages – this method can be tedious. If in future you have to make some changes to your sales forecasts, you have to go back and change figures manually. While this can be done, you will soon realize that making a few changes in one part of the spreadsheet may cause you to make changes to other sales projection figures. In fact, it is not unlikely that you may have to change all your figures across the period of projection. Indeed, this can be quite cumbersome.
2. Automated sales forecasts method
Here, you can use some simple formulas in Excel to make sales forecasts. Table 2 shows how this can be done.
As Table 2 shows, growth rate can be set in percentage terms from year to year using Excel formula. For this case, I have set it at 100% so that you can see how the sales figures have changed over time.
Please note that this may not represent the actual situation. The reality is that more realistic year-on-year change look like Table 3. Between the 1st and 2nd year, growth may be pronounced as the business grows. The same case may apply between the 2nd and 3rd years. But while overall sales may rise, percentage sales increases may start to decrease between the 3rd and 4th years and 4th and 5th years as competitors increase or as the market saturates.
Advantages – this method allows for fast and easy change to figures. Also, it allows for changes to be made in line with other metrics in the spreadsheet. For instance, you can play around with the year to year percentage increase while looking at how other metrics are changing for instance, the balance sheet, breakeven, etc.
Disadvantages – this method does not capture seasonality within the year (it only captures growth across the years). It assumes that growth is constant, which is not always the case for seasonal businesses.
Diffusion curve or sales growth curve method
Assume ABC Inc wants to enter a market that is growing at 3% per year and the market is worth $6 million. Assume also that ABC intends to capture 20% of this market by the 5th year. In this case ABC has set initial sale amount for the first month to be $20,000. Excel can be used to establish the sales curve – data used to do this is summarized in Table 4. The technicalities of doing this are beyond the scope of this post.
The result of this is Figure 1, which is the resultant sales curve.
Advantages – In my personal opinion, I believe that this is the best method of making sales forecasts. As Figure 1 shows, the sales curve starts from a very low figure, which is very realistic because new businesses usually have low initial sales. I believe that the S-curve nature of the graph is actually what happens. Low sales initially slowly but progressively increase, at some point, sales increase can be quite high (shown by the steep nature of the curve). Unlike what some people may project, any business, no matter how good, cannot continue with steep sales growth indefinitely. At some point, due to market saturation due to competitor activities, amongst other reasons shows that sales will start to plateau off at some point.
Disadvantages – the sales curve method does not still cater for inter year seasonality but this is countered by the realistic nature of the s-curve discussed above.
In this post, we have discussed how to make sales forecasts for your business plan. Trying to suggest that sales will continue to rise in a straight line indefinitely will simply show an investor that you are over zealous. The sales growth curve is discussed above is closer to reality and adopting this method of making sales forecasts shows the investor that you know what you are doing. Making realistic, prudent, and well thought out sales forecasts will take you one step closer to realizing your dream of securing funds for your venture.
I welcome further discussions, insights, and comments regarding the content discussed in this post.